To have any chance of success as a business, regulatory compliance must be a prominent part of daily operations. Regulations act as guardrails designed to protect people or organizations from harm. Some regulations can help businesses protect the health of the people they serve or employ, while others may aim to increase transparency of the company’s dealings. Businesses must prepare to engage with an increasingly complex regulatory environment, with rules coming from the industry, government, and other regulatory bodies.
Compliance is a strategic goal, as well as an operational necessity. Companies that are noncompliant may end up with financial penalties or limits on their ability to do business. Entities that prioritize compliance can increase their credibility and trust with stakeholders. With this guide, organizational leaders will understand the importance of regulatory compliance and how it fits into a broader operational framework.
What is Regulatory Compliance?
Regulatory compliance involves adhering to laws, regulations, and standards, whether they are set by government or other regulatory entities. It is usually considered a state of being for an individual or organization. Being compliant means following all the rules as set by the supervising body.
For most businesses, regulatory compliance requires adherence to operational rules and guidelines related to regular operations, in addition to routine reporting. The regulating body reviews the information and determines whether the company meets the regulations.
To achieve compliance, businesses usually need to create a set of documented policies and controls they use to ensure they fulfill the requirements. Companies that implement robust internal controls will often have an easier time proving compliance. Responsibility may be split depending on the specific compliance regulation, but often involves business leadership, as well as legal, finance, and compliance teams.
Common Areas of Regulatory Compliance
Compliance can intersect with a range of business functions, but requirements vary by regulation and governing body. Common compliance standards include:
Financial Reporting and Disclosures: Companies may be required to report financial statements and other disclosures to a regulatory body, to establish fair practices or other transparency standards for stakeholders or shareholders.
Data Privacy and Cybersecurity: Many businesses have to follow data protection laws, showing how they provide necessary privacy and security protections for client data. Examples include the General Data Protection Regulation (GDPR) for the European Union and the California Consumer Privacy Act (CCPA) for California residents.
Labor and Employment: Companies may need to meet compliance requirements showing fair labor practices in hiring, work hours, and work environment.
Environmental: Businesses might have to collect data and show how they meet local and nationwide benchmarks for environmental improvement.
Industry-Specific: Companies could have industry-specific requirements to follow, such as HIPAA in U.S. healthcare organizations.
Governance and Ethics Standards: Businesses may have requirements or voluntary standards to report concerning their overall governance and ethics standards.
Companies often have unique regulatory compliance requirements based on their industry, size, location, and ownership status. A public company with thousands of employees in manufacturing may have more standards to meet than a small startup that produces handmade crafts to spec.
The Regulatory Compliance Process
Maintaining compliance with regulatory standards usually requires companies to follow a specific process, which may involve the following aspects:
Identifying regulations that apply to the business’s classification, industry, location, and operations, and determining the extent and requirements of those regulations
Developing policies to meet the standards, along with procedures that help the organization collect, process, and maintain the data necessary to prove compliance
Creating and implementing training and awareness programs for employees and key stakeholders, so that they understand why regulatory compliance is important and how they can meet guidelines
Monitoring, testing, and auditing the existing controls for efficacy, making changes as needed
Preparing reports for the regulatory authority and submitting them on time, as well as attending to any corrections or other forms of remediation
Compliance management usually requires an ongoing process that works within a broader governance, risk, and compliance system.
The Role of Technology in Regulatory Compliance
For most companies, regulatory compliance management starts with the collection and processing of a lot of data. This process usually requires a digital approach. Technological innovations can speed the work of compliance by ensuring that data is accurate, verifiable, and synthesized quickly. Features of compliance software may include:
Centralized document and data management, such as virtual data room software or a corporate repository
Compliance workflow automation to increase the quality and speed of reporting and disclosures
Real-time monitoring and alerts to ensure that the chief compliance officer and other stakeholders are aware of critical requirements and deadlines
Tools to increase audit readiness and transparency, like the automated creation of audit trails
Ability to scale across complex organizations with multiple locations, divisions, or subsidiaries
Such tools streamline the work of preparing for corporate compliance, so that it functions seamlessly with regular operations.
Regulatory Compliance vs. Risk Management
Regulatory compliance and risk management involve a lot of similar processes and controls, but they are not the same thing. Regulatory compliance requires adherence to rules that are set by a governing body. By comparison, risk management is a careful analysis of various risks that the company may encounter, with policies, procedures, and strategies designed to manage the risk. It focuses more on potential threats and uncertainties, while compliance creates limits on business function.
Although risk management and compliance are different, they have a significant overlap in controls, monitoring, and reporting. For example, regulatory reporting may require a company to disclose details of its risk analysis and plans to mitigate significant threats. Similarly, compliance risk is a concern that organizations must manage, particularly with changing requirements and increasing complexity. As such, it is important for companies to streamline goals between compliance and risk teams. Process alignment between these divisions can better ensure that the company can improve compliance without creating imbalance with risk, or vice versa.
Benefits of Strong Regulatory Compliance Programs
To avoid running afoul of regulatory bodies, including the levying of legal penalties or worse, businesses need to implement a strong compliance program. Benefits of effective compliance include:
Reduced exposure to legal and financial risks, as the company is better prepared to meet each legal requirement
Increased investor and stakeholder confidence due to the business’s proof of transparency and consistent reporting
Stronger governance and internal controls through the detailed analysis required for regulatory compliance
Improved discipline in daily operations on account of the streamlined processes required to meet regulations
Enhanced credibility in the organization for meeting requirements
The strength of the compliance program depends on the company’s ability to integrate robust processes and controls within the existing functional framework, and its commitment to monitoring, testing, and adjustment. An effective compliance effort can support long-term growth and success of the business.
Regulatory Compliance in a Rapidly Changing Environment
In an increasingly connected world, staying current with regulatory change is key. Companies have to adapt to updates and new standards that may significantly alter necessary policies and processes. As businesses become more adept at engaging with data, so too do the regulatory bodies. As such, companies may have to do more work to keep up with the nuances of regulations, for SEC audits and other external checks.
Global operations add layers of complexity to the compliance landscape. While regulatory institutions may attempt to align standards for consistency and convenience, it is not a guarantee. Companies that fail to keep pace with the guidelines governing each jurisdiction are more likely to encounter problems with reporting accuracy and delays in review. In contrast, businesses that implement systems to ensure compliance from the outset can enjoy the benefits of continuous compliance.
Building a Sustainable Compliance Culture
Building a culture of compliance doesn’t happen overnight. Companies that want to maintain compliance with regulations invest time and money into creating processes, policies, and procedures that improve compliance, reporting, and audit-readiness. Success comes from leadership support and accountability, to ensure that the entire organization is on- board with changes necessary to establish and prove compliance.
The alignment of compliance, reporting, and governance structures paves the way toward processes that meet requirements now and in the future. The implementation of a strong compliance program can smooth the path of growth and long-term sustainability of the company. To learn how DFIN’s expertise can help you improve your business’s compliance, with SEC filing software and other tools, contact us to request a demo.
