Compliance from a business perspective refers to its operations within the boundaries of the laws of the land. Non-compliance with these regulations can land a company and its management team into legal trouble such as lawsuits, claims, investigations, penalties, fines and prosecutions on the basis of the severity of lapses.
Collapses of many businesses over the years were often due to non-compliance of both internal and external rules and regulations. Some of the more well-known and documented examples are as below:
- Satyam Computer was in the news for all the wrong reasons in 2009. The huge accounting fraud was committed by the founder of the company to report fictitious financial results. The gap between actual and recorded financials kept growing over the years until it reached unmanageable proportions. He was hungry for power, money, fame, glory and ambitious and put his business at risk. This was basically a failure of corporate governance.
- The accounting fraud by Enron in 2001 used mark to market on long term contracts to forecast high future cash flows and SPE (special purpose entity) as a tool to exclude large debts from own financial statements.
The key learnings from corporate compliances are:
- Effective Board: There should be a healthy corporate culture within the company. Failures and losses are part of the business game and full disclosure of the company`s performance is always recommended. The management should report accurate financials instead of covering up their losses in order to protect its reputation.
- High Transparency: Transparency builds trust and makes employees feel they are working for a company with high ethical standards. When transparency is added to the corporate culture, employees will be more engaged and committed to the vision of the company.
- Effective Audit System: Maintaining an effective system of internal controls is vital for achieving a company`s business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets and minimizing its cost of capital.
Compliance is a matter of timeliness and discipline. It is a mandatory and crucial factor in the long term sustainability of your business. If you’re a start-up looking to raise funds, rest assured that it is definitely one of the hygiene checks the investors look for.