Cost-effective compliance

Cost-effective compliance

Companies can run up huge costs by not following regulations, but smaller firms can avoid trouble by managing a financially viable compliance programme, says Ronnie Kann of advisory company CEB

1 Understand the root causes
Kann says: “There could be a variety of reasons why companies run into trouble. Perhaps employees are not following company policies. Or maybe they’re ignoring rules and regulations that apply in your industry. There could be unhelpful pressures from managers that put employees under pressure or send the wrong signals. For example, when managers say something like ‘you must hit your sales targets at all costs’, they’re not explicitly urging employees to do something wrong, but they may be implying that hitting goals is more important than doing things the right way. We’ve found that the culture of a company is a lead indicator of whether things may go wrong; the more likely employees are to speak up when they see something going wrong, the less likely there is to be a problem. In a cost-effective compliance programme, communication from directors and top managers to set the right direction is very important.”

2  Use them to highlight risks
“The best way to run a trouble-free company is to ensure that any problems get spotted before they run out of control. The first question to ask is: why do things go wrong and how do we understand the root causes of those problems? Once you’ve identified the reasons why things go wrong, you can develop key risk indicators that are tied to those root causes. For example, one of these indicators might be how much of an employee’s salary is tied to bonuses rather than basic pay. An over-heavy reliance on the former could encourage some staff to book forward revenues into the wrong accounting period to earn extra bonus. Overall, we urge companies to use indicators that are specific, measurable, actionable, results-oriented and time-bound – in other words, SMART.”

3 Spread the burden
“A smaller company is unlikely to have the large compliance staff the corporates enjoy. When compliance is the responsibility of one person – or part of somebody’s larger job – it is important to make sure that the work can be spread throughout the company. That means the importance of compliance needs to be understood by everyone. They need to know what is their responsibility, what are the signs of something going wrong, what they should do about it – and when and to whom to escalate the problem if they are unable to resolve it. There are many different issues which could trigger a cause for concern – an increase in debts that are unpaid, a spike in unusual transactions with third parties, or even a change to a different way of doing things.”

4 Control the costs
“Spreading the burden is also a good way of controlling the costs of compliance. Our research has shown that more than half the cost is attributable to staff and a further fifth to training, communication and awareness programmes. So if you focus on these two items in particular, you’re more likely to have a compliance programme at a cost the company can afford. And there is a sound business case for spending money on compliance. The costs of compliance can be dramatically less than the cost of non-compliance if things go wrong. Our research shows that companies that take compliance seriously deliver better financial results in the long run.”

5 Lead compliance from the boardroom
“The directors must have a clear understanding of what’s expected from the company when it comes to regulation. They must understand what external stakeholders – such as investors – expect from the company. It is the directors’ duty to ask very prescriptive questions to ensure those responsible for compliance are doing what’s expected. Directors need to ask the hard questions to make sure the company has an effective compliance programme.”

Ronnie Kann is a managing director at CEB, a member-based advisory company
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About author

Peter Bartram

Peter Bartram

Peter Bartram is probably the longest serving contributor to Director, having first written for the magazine in 1977. He is a prolific freelance journalist with more than 4,000 feature articles published in dozens of newspapers and magazines. He has written 21 books, including biography, current affairs and how-to titles, and has recently launched a crime mystery website.

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