In business, compliance is very important particularly in accounting because money is a sensitive and vulnerable area where misconduct, fraud or wrongdoing can occur. It is the act of adhering to or conforming with the laws, regulations, rules and policies. Hence there are many regulations that companies need to follow when it comes to financial reporting.
To ensure accuracy in financial reporting, there needs to be clear processes and procedures for recording and verifying every transaction be it expenses, revenues, assets and liabilities. Compliance is used to enforce the adherence of these regulations and the regulatory requirements differ from country to country.
In Singapore, the two main regulatory authorities are the Inland Revenue Authority of Singapore (IRAS) and the Accounting and Corporate Regulatory Authority (ACRA). They regulate business entities and taxation. Singapore takes compliance very seriously and if it is not strictly adhered to, companies might face heavy penalties and/ or imprisonment.
In order to prevent a brush with the law and keep your business running smoothly, here are 3 best practices in compliance:
1. Ensure the leadership is on board
Depending on the size of the company, there could be one or several compliance officers. The officers must have the authority to enforce the rules and hold the employees at all levels accountable. Access to key decision makers is crucial when potential compliance issues arise, empowering them to act quickly.
2. Conduct regular risk assessments
Country, state and industry regulations change constantly and it is important to conduct regular risk assessments to avoid non-compliance. In order to perform effective risk assessments, areas that pose the highest risks should be identified. Some areas to consider are audit results, recent litigation, compliance policies and complaints etc.
3. Establish and maintain a code of conduct and standards
The code of conduct is used as a foundation to how misconduct should be reported and the disciplinary measures for violations. Common violations should be addressed and include bribery, tax practices, corruption and conflicts of interest etc. Creating step by step guidelines makes compliance easier to follow and in identifying non-compliance.
Still think compliance is a challenging matter? Here are 4 benefits when companies follow compliance in accounting:
1. Avoid negative company image
Negative media exposure can harm or end businesses. Errors in financial reporting can cause the public, stakeholders and/ or investors to lose faith in the company and its employees. It not only affects the reputation and credibility but also opportunity cost when it comes to investors. Even if the financial statements can be corrected quickly, the fact that errors could happen is already considered a potential red flag to many people.
2. Prevent lawsuits and penalties
Non-compliance can expose a company to potential lawsuits and heavy penalties with the regulatory authorities that could otherwise have been prevented. An example would be issuing inaccurate financial information to artificially inflate or deflate the value of company stocks, taking the opportunity to personally buy or sell stocks. If these errors are ruled as intentional, the parties involved may face heavy penalties or lawsuits if partnering with another company and resulting in them making losses.
3. Improve the bottom line
Past studies have shown that businesses with solid compliance tend to perform better than their competitors. When clear processes and procedures are in place to foster compliance, the business spends less time to deal with compliance issues and instead, has more time to take proactive steps to outwin their competition, maximising its resources. Compliance lessens the possibility of legal fees and penalties, improving the business’s overall financial performance.
4. Reduces unnecessary liabilities
Inaccurate financial reporting not only causes the company to make poor managerial decisions but can also cause other companies to make the same mistakes. Eg. If the financial statements present the company in a stronger financial position than it actually is, other companies might decide to enter into a business relationship with the company in question when they would not in usual circumstances. If such missteps result in the other companies making losses, they might file a civil suit to recover those losses.
In summary, compliance is for the greater good of the company and clear processes and procedures must be put in place so that they can be adhered to consistently at all times, reducing unnecessary trouble and losses in the long run.