There was a time when the average corporation didn’t have a dedicated compliance department to deal with government agencies and other regulatory bodies that monitored their industry. Back then, compliance responsibilities fell to either the legal department or a Board of Directors’ subcommittee. Moreover, these issues were examined on a case-by-case basis, without using a uniformly consistent set of practices.
A New Kind of Compliance Department
However, all this changed in the wake of the Enron and WorldCom scandals that rocked the financial world at the start of the millennium. Along with the nightmare of Bernie Madoff’s Ponzi scheme ten years later, these two crises led to the stricter regulations of the Sarbane-Oxley and Dodd-Frank Acts and essentially created an independent arm of company governance– the compliance department.
In the next few sections, we’ll provide an overview of the concept of compliance itself and of how a compliance department functions. Here are the topics we’ll cover and the three things every employee should know about compliance:
What compliance means and its importance to the everyday workings of the modern-day corporation
The relationship between compliance and the wider scope of corporate management duties
Proper methods for enforcing compliance within your corporate culture
1. What does Compliance Mean and Why does it Matter so Much?
Compliance refers to the procedures that a company uses to ensure that they’re following the industry standards established by the regulatory body (or bodies). In short, compliance is a tool that companies use to prevent regulatory or legal violations.
A company’s compliance department provides internal checks on possible corporate malfeasance. Of course, the various industry regulatory bodies have the power to impose sanctions or penalties upon a company where such malfeasance occurs, but compliance departments are the first line of defense. However, the compliance department goes further than the simple avoidance of legal issues.
It’s at this point that the importance of compliance becomes quite clear. In addition to maintaining the ‘external’ compliance demanded by relevant government agencies, compliance departments work to establish and enforce strict internal controls as well. Typically, these include company policies, ethics, business procedures, and employee conduct codes.
Obviously, following the law is not a novel concept in the business world. But the compliance department of today has a level of autonomy much greater than the board subcommittees of the past. In fact, there are many cases where a compliance department communicates with government entities directly.
A compliance department’s role includes the following duties:
Naming the risks associated with an organization’s daily operations
Coming up with strategies and control measures that help protect a company from the consequences of these risks
Keeping tabs on these preventative measures and reporting on how effective they are
Handling compliance issues whenever they arise
Consulting with department heads and other company leaders on the best way to apply and enforce the controls
2. What is the Relationship Between Compliance Departments and Company Management?
For large companies with complicated operations– especially as they scale up and cross- regulatory boundaries– compliance requires increasingly fine-grained internal control procedures. The regulations that govern an industry inevitably change over time. Take the new U.S. tax codes, for instance. The protectionist changes they’ve imposed upon American companies emphasize the need for compliance procedures to remain adaptable.
This demonstrates the growing need for compliance standards that are correctly established for the industry sector that any multinational organization operates within. It also emphasizes the necessity of standards that are integrated internationally, especially as the Trump White House vows to ratchet up its trade wars.
3. What Policies Should be Put in Place to Enforce Compliance?
In today’s corporate world, compliance departments with authority that is independent of company legal departments are becoming the norm. However, the way these departments function is dependent upon the company-specific situation. The necessity of autonomous compliance departments became apparent when Wal-Mart’s Mexican branch came under scrutiny as the result of bribe allegations in 2012. This was a case where the company’s international counsel was held responsible when it was revealed that they had conspired to scuttle an internal investigation by taking it to the very firm that initially sanctioned the payments.
This scandal underscores the need for compliance standards that are independent of legal departments, which are now viewed as a necessity for modern corporations. However, the need for customized compliance enforcement procedures remains unchanged. Large multinational firms might discover that they require a Chief Compliance Officer, or CCO, in addition to an autonomous compliance department. This is because a CCO has the authority to address matters such as data privacy, IT threats, and management issues.
The use of certain technologies can improve large scale changes in the way compliance departments functions. Entity management software is a tool that can help your company’s management team reexamine your company’s overall structure to avoid unnecessary risk exposure and take advantage of emergent opportunities.
About Zach Inghram
Zach Inghram is a CPA and holds a BBA in accounting from Loyola University Chicago. He has a diverse professional background having held analyst, accountant, and audit roles within the insurance, infrastructure services, and oil & gas industries. As the sole proprietor of Inghram CPA, he provides tax and bookkeeping services locally in the Austin, TX area and remotely around the country. His clients commonly remark that he holds himself to the highest standards of honesty, integrity, and professionalism. In his free time, he and his wife enjoy being outdoors hiking, camping, gardening, and fishing.