Compliance mistakes rarely become newsworthy unless they result in a tragedy. For every headline grabbing compliance scandal in the business news cycle, there are hundreds of more minor transgressions siphoning off the resources of companies that thought compliance was under control.
The facts tell a gloomy story. Regulatory fines are reported to cost businesses billions in fines each year, yet that is just the bait on the fishing line. The invisible costs associated with audit remediation, legal fees, and improvement project costs can exponentially overshadow the in-your-face fine amount.
Most executives know compliance is important, but few realize how readily a small issue can evolve into a costly business issue that can enter at all levels of business.
When a small non-compliance management issue becomes a large organizational cost
Consider a health care organization. A missing signature on a patient consent form might seem small, but it can initiate an audit finding that results in weeks of remediation. Each staff member must spend hours recreating documentation, compliance teams are forced into emergency reviews of similar consent forms, and legal teams must assess the organization’s potential liability if things go badly.
A simple error with an administrative function escalates into a multi-departmental problem that captures resources well beyond the original amount of the problem. Health care systems often find these small compliance errors create thousands of dollars in costs to fix, even though there was no harm done.
Service business units often experience a similar multiplier effect. An incomplete customer due diligence file can prompt regulators to conduct reviews of hundreds of other relevant customer accounts. The investigation that results will need specialized staff time, outside legal counsel, and often time-consuming and pricey system upgrades to prevent it from happening again.
The reputation impact nobody mentions
A financial penalty in the thousands of dollars gets your attention, but the reputational impact is often much more costly. People lose confidence in your operations, partners rethink their negotiations, and prospective employees seek other opportunities.
The reputational impact is not exclusive to consumer-facing businesses, either. Even companies that primarily service other businesses find that compliance issues impact their ability to win contracts or renew partnership agreements. A large number of organizations require their vendors to complete compliance audits each year.
The reputational impact extends to employee morale within your business. Employees take pride in working for an ethical, well-structured organization, and when compliance violations are reported in the news, even just in the local news, your ability to recruit top talent becomes more difficult and your ability to retain employees will begin to suffer as your top talent pursues employment opportunities with organizations that have their act together.
Technology to the rescue
Smart organizations are looking to systematic approaches that have been shown to decrease human error and ensure better monitoring of compliance activities. Modern compliance technology can automate necessary routines you need to track, send reminders about upcoming deadlines and/or expected compliance audits, and create a digital audit trail to propose valid good faith efforts to maintain standards. Human judgment remains essential in compliance, but these systems do not eliminate it or prevent important requirements from being missed, because someone forgot to update a spreadsheet or missed a notification.
The cost of investing in adequate compliance software management tools will quickly cover their cost, simply in terms of the impact of even a small violation. Additionally, the value of knowledge that key deadlines and requirements are being recorded is immeasurable, but appreciated.
The Multiplication Effect from A Violation
Regulators often do not stop after the first violation being discovered. Whenever a regulator finds a violation, they are also likely to see related compliance violations during their investigation, which reaches deeper into related departments, over longer periods of time.
This “multiplication” effect explains the legal and consulting costs for a simple violation can be equally costly or worse than doing the compliance in the first place. An organization has to not only fix the issue, but provide evidence to a regulator to prove that everything related has been resolved.
Compliance Impact Across Industries
While different industries carry unique risks when it comes to compliance, the harm incurred or risk is often multiplied the same way. Safety violations can bring manufacturing companies to a halt. Technology companies deal with privacy issues that affect both product designs and marketing techniques.
Professional service companies risk having licenses or certifications taken away that are critical revenue generators. In these situations, and with little infractions, the risk is impactful core revenue streams, and resource-intensive efforts to restore operations.
The regulatory environment also continues to become more onerous. New rules, modified interpretations of rules, and shifting enforcement priorities require that compliance programs must be constantly nurtured in order to remain effective.
The Requirement of Defense-Based Systems
The most successful organizations build compliance programs as a system. A system incorporates work processes to identify issues early; train employees to identify potential issues in their daily routines; and articulate an established pattern of documentation that demonstrates ongoing organizational commitment to specific regulatory standards.
Conducting regular internal audits, writing clear policies, and administering level punishment processes create a culture of compliance that becomes second nature instead of an afterthought. When all employees know their obligations to performance to practice standards, the likelihood of an expensive mistake is significantly reduced.
The Bottom Line Profitability Reality
Compliance isn’t merely a way of avoiding a fine – it can minimize business disruption that leads to interruption in profitability and growth. In the current regulatory climate, those who succeed are those treated compliance as a competitive advantage instead of simply a cost of doing business.
Smartly constructed, front-loaded compliance systems and compliance processes afford the organization protection against far more than just fines or other regulatory violations. It protects relationships, operations, and allows leaders to focus on operating and growing the business instead of pure crisis management. In a business environment where mistakes have a very high cost of penalty, the least costly approach remains proactive.
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