Companies face compliance risk

Financial troubles are not the only storm facing companies during an economic slowdown. The risks posed by losing focus on key governance and compliance issues are just as great.

In these tough economic times, management are under increasing pressure to deliver results as well as reduce costs but doing so without the proper forethought could place the business in peril.

The danger emanates from the perception that the various forms of compliance such as tax compliance are routine tasks that happen with little or no supervision. This couldn’t be further from the truth.

Considering the reputational damage that can occur as a result of companies failing to comply with regulations as well as the possibility of companies in more regulated industries being fined this is not something that should be taken lightly.

The challenge posed by difficult economic circumstances is that the while management is focused on trying to ensure the survival of the business they may lose focus on some other areas of the business.

The issue of retrenchments is typically a compounding factor in this situation. Very often retrenchments are not done on the basis of which business processes will be affected. Rather the organisation reduces it headcount by retrenching the most junior or those that it feels will have the least impact on the day-to-day operations of the company. Often these cuts come in the finance and administration functions of the business, two departments that typically deal with issues surrounding governance and compliance.

The risk here is that either the person that had governance responsibilities is retrenched and the duties not reassigned to anyone else or the people responsible for compliance and governance functions are given additional duties. This additional workload may result in some tasks falling by the wayside.

Because larger organisations are more focused on issues surrounding governance they typically have a stronger grip on ensuring that all business processes are followed to the letter. However, smaller organisations are likely to assign multiple tasks to individual employees and because of this the chance of some documentation falling through the cracks is much higher.

The problem is that administration is seen as an overhead and not as a vital part of the business.

Solving this problem may lie in a combination of a careful examination of business processes and identifying which people are responsible for critical governance and compliance issues. Once these people are identified it is possible to ensure that in the event of a retrenchment tasks can either be reallocated or management can keep a close watch on those processes.

An alternative solution involves outsourcing specific business processes. The best outsourcing strategy is to look at which business processes are the most generic across the industry.
Tax compliance is one of the areas that, even though it is a complex process, is similar enough across multiple companies to make it a good candidate for outsourcing.

Depending on the industry concerned, the level of compliance varies greatly. However, every company has to comply with a certain level of government regulations and maintaining this compliance, even through a downturn, is critical to ensuring the survival of the business.