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By Ajoy Gonsalves
Compliance refers to conforming with laws, regulations, rules, policies, standards or ethical norms that apply to an organization. For a business, compliance means operating legally and ethically by meeting all mandatory requirements imposed by regulators and following best practices.
Compliance is a critical aspect of running any successful business today. Organizations that fail to comply can face major consequences like legal penalties, lawsuits, fines, and damage to their reputation. On the other hand, businesses that prioritize compliance position themselves as ethical, trustworthy companies in the eyes of customers, employees and regulators.
Compliance refers to adhering to the laws, regulations, codes, standards, and policies that apply to a business.
At its core, compliance means operating ethically and legally within the rules that govern a particular industry or jurisdiction. Companies must comply with a diverse array of requirements that vary based on location, sector, products, and business activities.
Some of the key areas that compliance regulates include:
At its core, compliance boils down to operating transparently and ethically while meeting the expectations of regulators and stakeholders.
As the What is Compliance in Business? article on ADP states: "Compliance in business is adherence to all local, state and federal jurisdictions that govern your operations." (Source)
Compliance is crucial for businesses for several reasons:
First, being compliant helps companies avoid fines, penalties, and lawsuits that can have major financial consequences. Violating regulations like the Sarbanes-Oxley Act or General Data Protection Regulation can result in hefty fines. Lawsuits from injured parties can also cause reputational damage and large settlement costs.
Second, compliance helps maintain a company's reputation and build public trust. Consumers today expect businesses to follow ethical and lawful practices. News of compliance violations spreads quickly and can severely damage a company's reputation. However, organizations that consistently demonstrate integrity by complying with regulations tend to be viewed more positively by the public.
Third, achieving compliance can provide a competitive edge. By going above and beyond minimum compliance standards, companies can differentiate themselves. Their amplified commitment to ethics and security makes their brand more appealing to customers.
Fourth, ingraining compliance into corporate culture fosters ethics and integrity at all levels. Employees are empowered to make lawful, principled decisions instead of feeling pressured to cut corners. Overall, compliance promotes doing business the right way.
Businesses today need to comply with a variety of laws and regulations. Some of the main compliance regulations that apply across most industries include:
Financial regulations help protect investors and the integrity of financial markets. Major laws like the Dodd-Frank Act and the Sarbanes-Oxley Act impose strict reporting rules, internal controls, and auditing requirements on publicly traded companies.
Data protection regulations safeguard consumer and employee privacy. Laws like the EU's General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) establish data management and breach notification rules.
The Occupational Safety and Health Administration (OSHA) oversees health and safety in the workplace through standards for hazard communication, personal protective equipment, and exposure limits for toxic substances.
Industry-specific regulations govern issues unique to certain sectors. For example, healthcare companies follow rules like HIPAA, while financial firms adhere to regulations around consumer lending and transactions.
Understanding the web of compliance rules applicable to your business is crucial. Enlisting help from legal counsel and consultants can help navigate this complex area.
Non-compliance can have severe consequences for a business. Some of the main potential consequences include:
In summary, the stakes are high for non-compliance. It threatens a company's finances, operations, reputation, and ability to compete (https://www.paychex.com/articles/human-resources/non-compliance-protecting-your-business). Businesses must make compliance a top priority to avoid these consequences.
There are several key steps businesses can take to ensure they remain compliant with relevant regulations:
Assign responsibility to a compliance officer or entire compliance team. Having dedicated staff for compliance helps establish accountability and oversight. The compliance team can continually monitor and identify potential issues (Source).
Conduct research to identify all applicable regulations for your industry and business activities. Compile relevant laws and regulatory guidelines into a centralized document or database for easy reference (Source).
Create policies and procedures that align business operations with compliance standards. Document steps employees must follow to remain compliant in their daily work.
Provide regular training to employees at all levels on compliance policies and their responsibilities. Have employees formally acknowledge their understanding of the rules.
Perform internal audits and monitoring to ensure compliance protocols are being followed properly. Conduct reviews of documents, processes, and transactions.
Maintain proper reporting and documentation to track compliance activities. Keep records organized in case of audits or investigations.
Regularly review policies and update as regulations change. Stay current on industry guidelines and best practices for compliance (Source).
To develop an effective compliance program, businesses should follow certain best practices. According to MetricStream, some key compliance best practices include:
Top-down commitment from leadership - Leadership must be fully committed to compliance for it to become part of the organizational culture. Senior management should communicate the importance of compliance and model ethical behavior.
Integration into company culture - Compliance principles should be embedded into everyday operations and decision making. Employees at all levels should receive regular compliance training.
Regular policy reviews and updates - Compliance policies need to be frequently reviewed and updated to account for regulatory changes. Staying current is crucial for compliance success.
Automation and technology solutions - Leveraging compliance software and tools can streamline processes and provide better visibility into compliance gaps. This enables proactive compliance management.
Anonymous reporting system - Having an anonymous ethics and compliance hotline allows employees to safely report violations without fear of retaliation. This supports a speak-up culture.
Despite best intentions, many organizations make simple yet serious compliance mistakes. Some common pitfalls include:
Lack of employee training - According to Lorman Education, 23% of organizations have no formal compliance training plan 1. Without proper training on policies and procedures, employees are more likely to overlook or unknowingly violate regulations.
Outdated or missing policies - Campgemini reports that only 28% of companies update compliance policies annually 2. Static, outdated policies often fail to cover new regulations and risks.
No centralized compliance function - Radical Compliance notes that 42% of compliance officers report to corporate counsel rather than the CEO or board 3. This decentralized approach makes oversight and accountability more difficult.
Weak internal controls - Insufficient monitoring procedures fail to detect non-compliance in a timely manner. Regular internal audits are essential.
Complacency after initial compliance - Everfi cautions that 60% of ethics and compliance failures happen in companies with established programs 2. Ongoing vigilance is required to avoid backsliding.
Compliance is becoming an increasingly important focus area for businesses globally. Some key trends shaping compliance requirements and programs include:
Increasing regulations globally - More countries and regions are establishing regulations around data privacy, financial reporting, environmental standards, and other compliance areas. For example, the EU's GDPR significantly expanded data protection compliance.
Growth of automation and compliance technology - Businesses are adopting regulatory technology (RegTech) solutions to help streamline compliance processes through automation and AI. This improves efficiency and lowers costs of compliance programs [2].
More enforcement and litigation - Regulators globally are stepping up enforcement actions, with large fines for noncompliance becoming more common. Businesses face increased litigation risks from compliance failures.
Expanding role of compliance officers - Compliance is increasingly a strategic function, with Chief Compliance Officers having greater authority and responsibilities in ethics, risk management, and culture.[3]
Compliance with regulations, laws, and ethical codes is a critical element of operating a successful business. As we have seen, non-compliance can result in major legal consequences, fines, reputational damage, and loss of stakeholder trust. On the other hand, a reputation for integrity and compliance can give your business a competitive edge.
By implementing proper compliance policies, training employees, monitoring adherence, and staying up-to-date on evolving regulations, businesses can build a culture of ethics and ensure they meet all requirements. It takes an organizational commitment with involvement from leadership, HR, legal, and operational teams.
Compliance may seem complicated initially, but many resources exist to help you understand the requirements for your industry and location. No business can afford to ignore or downplay the importance of compliance in today's regulatory climate. Use this article as a call to action to thoroughly review your compliance programs and controls to reduce risk and create a compliant, ethical organization.