SOX Compliance

What Is a Compliance Management System?

What Is a Compliance Management System?

Do you feel like there’s too much to keep track of when it comes to legal and regulatory compliance? Do you wonder whether there’s a better way to keep up with regulations and ensure that your organization remains in compliance? A compliance management system (CMS) could be just what you’re looking for. It can provide an efficient, reliable method for staying current with legislation and enforcing consistent processes throughout your company.

So let’s dive into the key components of a CMS and explore how you can use one to maintain adherence to industry standards and remain at the forefront of any regulatory changes.

Importance of a Compliance Management System in Business Operations

In the business world, compliance means adhering to a variety of business processes, systems, standards, codes, internal policies, contracts, and relevant laws and regulations. 

A compliance management system in your business operations helps ensure the organization remains compliant, which can reduce costs and help the organization avoid fines, corporate sanctions, product recalls, legal liability, SOX non-compliance penalties, and reputational damage.

A compliance management system helps companies adhere to all of those policies, procedures, and laws by:

• Incorporating requirements into business processes
• Ensuring everyone in the organization understands their compliance responsibilities
• Reviewing operations to ensure employees are carrying out their duties and meeting the necessary requirements
• Taking corrective action when needed

With legislation and regulations increasing around the globe, it’s nearly impossible for large organizations to handle a compliance program on their own. So a compliance management system helps organizations remain up to date on all relevant laws and regulations and reduce the risk of penalties, fines, and even criminal prosecution.

Utilizing the right compliance management system doesn’t just make compliance tasks easy—in some cases, it can help eliminate some workflows altogether by automating many tedious, time-consuming processes, such as scheduling, monitoring, approvals, and more. With the right solutions for compliance managers and automations, your team can better utilize its limited resources and focus on higher-value work.

Compliance Management System Benefits

A compliance management system (CMS) provides organizations with a comprehensive solution to ensure that their business operations fully comply with relevant federal, state, and local laws and compliance regulations. Having a CMS in place offers four primary benefits:

1. Minimizes risk. Organizations put a lot of resources into designing business processes that reduce risk. A compliance management system is a central repository for critical information on those processes, allowing selective access to sensitive information. 
2. Better security. In a compliance management system, employees, third-party vendors, and service providers are authenticated before gaining access to data. This prevents sensitive information from ending up in the wrong hands.
3. More accurate risk assessments. A CMS helps organizations assess risk in all governance and compliance efforts. With a clear picture of potential threats, organizations can manage risks by evaluating their existing controls to determine whether they are adequate. Better risk assessment also helps with internal audits and external audit reports.
4. Map requirements with activities. When regulatory requirements change, knowing how compliance processes should adapt is often difficult. A CMS allows organizations to map actions to the requirements that drive activities and proactively adjust their business practices to remain compliant. 

Key Elements of a Compliance Management System

An effective CMS helps organizations manage their compliance obligations and reduce compliance risks. To be effective, it should include the following elements:

Board and Management Oversight

A successful compliance management system requires oversight from both the board of directors and senior management. This sets the “tone at the top” to help ensure employees take compliance seriously. 

A Compliance Officer

The board of directors should appoint a compliance officer to be in charge of compliance activities and conduct periodic compliance audits.

In a large organization, this might be a full-time role. In smaller organizations, the duties of the compliance officer might be handled by one or more employees on a part-time basis.

Policies and Procedures

A comprehensive set of policies and procedures is essential for any CMS. These should be regularly reviewed and updated to ensure they remain up-to-date with relevant legislation and regulations. The organization should also provide employees with the necessary education and training to ensure they understand the policies and their own responsibilities.

Monitoring and Auditing

A CMS should include procedures for monitoring operations, reviewing processes for vulnerabilities, and conducting compliance audits to ensure the company’s internal controls are working as planned. When these compliance activities are documented and summarized on visual dashboards, it makes it easy to monitor the company’s compliance activities.

If the monitoring activities or compliance audits uncover any non-compliance incidents, the organization should also have a process for tracking, reporting, and resolving those incidents.

How to Create or Improve a Successful Compliance Management System

Creating or improving a successful compliance management system is an important endeavor for any organization. It requires an in-depth understanding of applicable laws, regulations, and industry standards, as well as a commitment to maintaining consistent processes throughout the company. 

Here are some tips for creating or improving a successful CMS:

1. Establish Policies and Procedures. Establish policies and procedures for all areas of compliance, including documentation, data security, risk management, compliance training, incident reporting, and more.
2. Automate Your Compliance. Leveraging technology to automate compliance helps reduce the risk of human error and ensures that policies, procedures, and processes remain consistent across the entire organization. It can also allow you to quickly identify potential areas of non-compliance or vulnerability and take appropriate action. Automated systems also allow for more efficient audit tracking and reporting.
3. Provide Training. Provide employees with the necessary education and training to ensure they understand their responsibilities and remain compliant.
4. Designate Responsibility. Assign responsibility to key personnel to ensure the CMS is properly implemented and maintained.
5. Compliance Monitoring. Regularly monitor operations and processes to ensure that they remain in compliance.
6. Keep Up to Date. Stay up-to-date on all relevant laws, regulations, and industry standards to ensure your organization is always in compliance. 

Example

One example of a successful compliance management system is the one utilized by Amazon for its supply chain. The Amazon Supply Chain Standards Manual outlines the requirements for suppliers and facilities involved in the production of Amazon products.

Its CMS includes:

• A supplier code of conduct. For example, suppliers must comply with applicable laws and provide workers with labor rights and respectful workplace conditions.
• Requirements facilities must meet to qualify to produce Amazon products. For example, workers must be of appropriate age and work voluntarily without the threat of physical or financial punishment.
• Independent auditors verify compliance with its standards. Auditors inspect the facilities, interview workers, identify compliance issues, and work with suppliers to develop a corrective action plan.

These measures help Amazon to stay in compliance with applicable laws and regulations and help protect the company’s reputation.

Your organization’s compliance management system might not be as formal or extensive as Amazon’s. However, it’s still an essential part of ensuring the company meets industry standards, maintains data integrity, reduces costs associated with non-compliance, and protects the company from financial and even criminal penalties. 

Implementing a Compliance Management System

Organizations can implement a compliance management program by:

1. Appointing a chief compliance officer or a compliance manager with knowledge of change management best practices and authority to create and revise policies
2. Adopting written compliance policies, procedures, and standards of conduct
3. Appointing compliance leaders from different departments who communicate requirements to employees and discipline anyone who fails to comply with legal requirements
4. Providing a compliance training program to educate employees at all levels so they understand the compliance program standards and why they are necessary
5. Establishing two-way communication, allowing employees to ask questions, report issues, address ethical concerns, and anonymously report fraudulent or illegal behavior without fear of retaliation
6. Implementing the CMS and monitoring key performance indicators to measure its effectiveness
7. Taking remediation action when vulnerabilities or violations are uncovered 

By following the tips outlined above, your organization can create or improve a successful compliance management system and ensure you’re ready and able to handle compliance requirements in an ever-changing environment.

Stefan van Duyvendijk

Stefan van Duyvendijk is the Accounting Operations Evangelist at FloQast. Previously, Stefan served as the Corporate Controller for Kodiak Cakes, a private equity owned, leading consumer packaged food company, and as a Controller for Skullcandy, a multinational headphone CPG. These positions followed his five years at KPMG. His experience includes ASC 606 implementation, reduction of financial close timelines, accounting operational improvements, business combinations, financial statement audits, SOX audits and implementation, management reporting, debt, treasury, and systems integrations/implementation.