Businesses of all sizes in a regulated environment may wonder why compliance matters and why they should spend money for regulatory compliance especially if they can get away with not complying with any aspect of regulations. To answer the questions of why companies should care about compliance, we have to look at the compliance types, the underlying objectives of compliance requirements, and their effects on the business.
To start, compliance with internal policies and client requirements often contribute to improved financial results and businesses may voluntarily engage in activities which implement, enforce and monitor policies which satisfy compliance in both areas. Certain aspects of internal policies are designed to make business operations more effective and efficient while they manage fraud and reduce liabilities such as lawsuits although some internal policies also deal with regulatory aspects. Client requirements which also have the objective of making sure that the client business is protected against many risks are also part of the business objective to attract and retain customers. As you can see, compliance with internal policies and client requirements contribute to improved revenues and profits which justify the compliance costs. This is one reason why compliance matters.
On the other hand, regulatory compliance is meant to protect consumers by requiring companies to incorporate certain policies and procedures in their product quality, security, privacy and other aspect of business operations. This type of compliance also has cost implications but offers less financial incentive until there is an audit. For example, privacy of customer information and Anti-Money Laundering (AML) laws are just a few compliance aspects which have no positive impact on business financials but require effort and money to comply with. The only financial consequences are the negative ones which include fines, penalties and bad publicity from not complying with these laws. That being said, businesses are still better off proactively addressing these regulations because the cost of not complying is often higher than the cost of compliance and if the cost of non-compliance is lower, businesses will ignore them and will defer the cost until audits are completed and fines are submitted (this may be a takeaway point for my regulator colleagues). Everyone probably remembers the recent news about some banks not complying with Anti-Money Laundering (AML) rules for monitoring, logging and reporting certain financial transactions to the regulatory agencies. These government audits and their highly publicized findings have tremendous consequences on the organizations in terms of hiring skilled employees, training, managing perceptions, as well as developing and implementing compliance programs. In addition, government audits impose deadlines for remediating the findings which place a huge stress on the entire organization and their employees whereas if businesses take their time to implement effective compliance programs before government audits are initiated, they can alleviate the stress and reduce compliance costs. This is another reason why compliance matters.
With some advanced planning when there are no pressures of remediation deadlines, businesses can think through their internal business objectives, as well as the needs of their clients and regulators to design and implement a compliance program which satisfies all parties while reducing costs, increasing revenues, and eliminating the overall compliance burden. When an organization has the luxury to take its time as it addresses the risks and everyone’s requirements, it can be much more effective and efficient in its compliance efforts because duplication and gaps will be eliminated through a thoughtful compliance program. This is especially true for larger organizations where there are many groups and sometimes these groups may implement redundant compliance programs which would not be necessary if compliance is managed centrally and organization-wide as much as possible.