Have you ever heard the phrase “financial compliance” thrown around in business meetings and thought, Sounds important, but what does it really mean? You are not the only one. While it may sound like it is a phrase only used in boardrooms, financial compliance is a term that has deep roots in business. It helps avoid expensive lawsuits and increases trust from investors, among many other things.
Deeply exploring the realms of financial compliance is the objective of this blog. We will dissect it, discuss its significance, list the major components and even discuss the struggles businesses go through to remain compliant to it. Furthermore, we will provide relevant actionable insights and key learnings to paint a clearer picture of the role financial compliance plays in the modern business setting.
Sounds good? Let’s get into it.
Financial Compliance Explained
In simple words, financial compliance means a company following the law or any legal guidelines regarding finance not matters. These legal guidelines can be local, national or international depending on how big the company is.
Financial compliance deals with the overriding principles of governance. It guarantees that companies manage their funds, and file reports, taxes, and other functions in a manner that is truthful and prevents fraud. It does not matter whether you are managing a startup or a multinational enterprise, compliance is a key pillar of the business.
Consider that you are trying to cook a meal. Financial compliance would be the recipe, telling you how much of every ingredient to add, what sequence to follow, and what not to do, such as burning your reputation in the world of business.
Common Sources of Financial Compliance
Some of these are the more common regulatory frameworks which all businesses must follow:
SOX (Sarbanes-Oxley Act) for transparency of corporations in the US.
GDPR (General Data Protection Regulation) for compliance of data and privacy law in the EU.
SEC Regulations for use by all publicly traded companies in the USA.
Anti-Money Laundering (AML) Standards for the fight against criminal financial activities internationally.
Why Financial Compliance Matters For Success
Are you still wondering if compliance is worth your time and energy? Here are some benefits that stand out and define the value of financial compliance for businesses:
Steering Clear of Legal Issues
Non-compliance can come with legal challenges and severe fines that can result in the erasure of your business. For example, a large technology corporation was fined $746 million in 2021 for non-compliance to GDPR regulations. Yikes! Adhering to financial regulations ensures that one stays within legal parameters.
Enhancing Brand Reputation
Investors, customers, and even employees rely on a business’ ethical and monetary financial practices; if not met, credibility is lost.
Encouraging Internal Responsibility
Minimizing the risk of internal financial misappropriation is made effective with accountability management controls. Following compliant practices guarantees accountability and trust of all business activities and operations.
Establishing Global Objectives
Expanding business internationally is heavily reliant on compliance regulations from the said country. The adoption of international AML and GDPR standards helps mitigate business risk.
Increasing Market Share
Effective investor and partner relations is the outcome of proper compliance in accounts with fraud investors. Many businesses gain an advantage in all aspects over competitors, making maintenance of standards and compliance cross borders effortless.
Important Elements of Financial Compliance
So what does a company’s compliance pillar look like? Here are the essential elements that every organization should consider:
1. Financial Reporting
Keeping accurate and smooth financial reports ready is critical, especially with major stakeholders in your organization. This ensures that operations run smoothly and prevents complications from arising during tax seasons.Findings fraud within a business is very common. This is were compliance comes in and aids to get rid of unpermitted tampering of any kind.
2. Tax Compliance
This term applies far more than mere filing your taxes. Tax compliance ensures that structures set by higher management within the jurisdiction your company operates are crystal clear and that you follow them across the board.
3. Risk Management
A working and productive compliance framework pinpoints compliance weaknesses, especially in regard to money laundering, fraud, and breaches in cybersecurity.
4. Internal Controls
Very strict internal controls make certain that fraud in any form will not be implemented and that sensitive financial data is stored and operations set and execute without errors being made. Internal controls prove that everything is functioning properly along with instituted checks, balances, and audits.
5. Ethical Practices
Fair treatment of all employees, customer data that is secure, honesty in business dealings and many more factors lead to objectives being met. In simple words, it wouldn’t be wrong to say, at its core ethical has everything to do with financial compliance.
Obstacles to Attaining Financial Compliance
Though it has its perks, financial compliance is never easy. Here are some of the common challenges, hurdles and issues which even top businessmen experience:
Regulations that Change Rapidly
All the newly established rules and laws are as good as a fire hose. A perfect example would be almost 70 countries putting into action major privacy laws in just a year (2022).
Management of Data
Today’s compliance is mainly concerned with parsing through heaps and heaps of financial data, which is absolutely debilitating for some firms that do not have adequate equipment or personnel.
Expensive Cost
Programs that deal with compliance require a big amount of money to be spent on both hardware and software technology, as well as on human resources like compliance officers and lawyers.
Global Expansion
Conducting business in multiple geographies means having to adhere to a different set of compliance standards for every geography which is multi-compliance. What is acceptable in the USA, for instance, may not be compliant at all in India.
Feeling stressed? There’s no need to panic because this brings us to the best part, the good news.
Best Practices in Financial Compliance
When developing a compliance plan, you do not need to do anything as drastic as reinventing the wheel, like these simple and proven best practices would grant you unrestricted success.
1. Educate Yourself
For global regulatory updates, ensure that you employ an in-house compliance officer or whole compliance team. For instance, it is now from platforms such as Coursera that compliance certification courses are being offered.
2. New Technologies Adoption
There is compliance software like Thomson Reuters, Workiva, and SAP GRC to use. Automated tools can assist in reporting, assessing risks, and data management.
3. Audit Frequently
Perform internal audit as well as external audits to check for breaches or discrepancies before authorities spot them (and take away a lot of your money).
4. Educate Employees
From finance departments to information technology departments, prepare your workers on the compliance standards. Competent employees will help curtail unintentional errors.
5. Seek Professional Assistance
Confused on how to begin? You can outsource your compliance undertakings to experts who have specializes in financial rules relevant to your domain.
6. Are You Aware of What Others Are Doing?
Draw ideas from firms that are already industry leaders. Microsoft, for example, has developed an extensive compliance framework covering cybersecurity, anti-corruption, and tax compliance using sophisticated AI.
Flexible Market is Compliant Market
Even though financial compliance might not be the most glamorous aspect of managing a business, its significance is vital. It goes beyond forms and documents—it is about establishing a culture of openness, and trust. Your regulators expect you to have appropriate relationships that require discipline and care. By applying proper strategies and tools, your business will not only survive, but thrive in the long term.
Do you need additional information regarding the development of a compliance plan? Please let us know in the comments section or contact your finance team in order to build an effective compliance strategy.
