Accounting

Failing Internal Controls: The High Costs of Poor Compliance

May 4, 2023 Katie Thomas, CPA

About the Author: Katie Thomas, CPA, is a content creator, 2021 & 2022 40 under 40 CPA Practice Advisor recipient, Top 50 Women in Accounting recipient, and the owner of Leaders Online, where they help accounting professionals increase their impact, influence, and income through thought leadership and digital marketing. Feel free to visit Leaders Online or connect with her on LinkedIn to get in touch with Katie.

An effective control environment and management program is essential for any organization, regardless of size, to ensure compliance with regulatory requirements, migrate risk, and foster organizational excellence. Between ever-changing laws, ever-expanding regulations, and volatile markets, it’s vital to have an agile and responsive control program in place to navigate these changes. 

Poor compliance leads to a plethora of unwanted outcomes, some of which include: 

  • Higher costs
  • Fines and penalties
  • Internal inefficiencies
  • Lost stakeholder trust
  • Deteriorated company valuation
  • Damaged company brand and reputation

Current-day manual control programs often lack visibility and the agility to adapt to rapid changes in the business’ control environment. Regulators and lawmakers expect companies to be far more agile than what has been plausible for a long time.

A few issues must be addressed to meet compliance and control expectations, and there’s no better time than now to rein in any inefficiencies. However, major challenges must be overcome in the process to achieve efficiency.

Your Compliance Burden is Growing

Today, businesses face a significant addition to their compliance frameworks as they have to adopt more measures with ever-changing laws, regulations, and policies. Each new measure adds to the cost and complexity of compliance, creating a burgeoning challenge for organizations that are already struggling with:

  • Staffing shortages
  • Poor visibility and coordination across the compliance landscape
  • Manual processes, documentation, and reporting
  • Outdated technology and disconnected solutions
  • Competing initiatives in digital transformation and market risk mitigation

Implementing a compliance program is an important first step. However, ad hoc compliance programs create a multitude of organizational headaches for companies and are downright costly. It’s been found that the cost of compliance can be as high as $10k per employee. 

The Compliance Landscape is Vast and Constantly Evolving

The compliance landscape is vast and complex – too complex for everyone to know everything. External auditors are helpful, but companies cannot rely on them to find everything. 

Further compounding the problem is the fact that compliance is constantly evolving. Processes and procedures that worked today may not work next quarter or next year. Companies that fail to adapt to these changes quickly face mounting inefficiencies and broken processes.

The Cost of Poor Compliance is Too Big to Ignore

The cost of compliance is high for organizations and continues to grow. However, the cost of poor compliance is even greater. It’s been found that the average cost of a non-compliance event is $4M or more. 

A report from Glass Lewis found that share prices dropped 4.06 percent 60 days after companies reported a material weakness.

Pathlock stated for companies that reported a material weakness, they saw a loss of up to 19% in stock price over the next 12 months. 

Although the compliance burden is growing, companies have little choice but to jump on board and adapt as the landscape shifts. The alternative – a.k.a. poor compliance – is far costlier.

Compliance Programs Are Tough

Companies that cobble together compliance programs may feel like they’ve solved the problem, but that’s not always the case.

Recent market research by FloQast found that compliance literacy is surprisingly low. In other words, those who are running these programs don’t necessarily have a great deal of knowledge on compliance topics. This finding doesn’t surprise me. While working in audit myself, I was often asked to perform tests on controls without an explanation as to why I was performing such tests. Had I not been curious and dug to determine the why behind these tests, I would have been running tests without any idea as to why they were important. 

It goes without saying, poor compliance literacy can make implementing and using compliance programs difficult.

Overcoming the Compliance Burden With Checks, Balances, and Systems

The need to have proper controls in place is not going away. As an organization continues to grow, the cost to manage controls around SOX, ESG, IT security, fraud, and more only continue to grow along with it. Inefficiencies in compliance are best addressed now, especially in the current environment where, as mentioned previously, many organizations are faced with limited budgets and teams. 

So, what’s the answer? 

A major portion of the compliance burden can be relieved by leveraging the strength of automated solutions and proper technology. As your entity continues to grow, the technology should scale up to meet existing and future needs. The right automation and technology save companies time and money, as it uplifts transparency and efficiency. 

Agility and interconnection are something software can provide that manual processes cannot. Often, companies have a lingering disconnect in their workflow responsible for compliance and control. 

Advanced workflow solutions can improve control and compliance, lower costs, and ensure audit efficiency with features around continuous control monitoring, PBC automation, and more.

A good starting point is to begin reviewing your current workflows and controls. Keep a close eye out for opportunities where you can embed compliance controls into critical business processes such as the close, payroll processing, and financial reporting. Minor changes you make today can pay huge dividends in the future. 

Efficient Control Programs Pay Dividends in the Short- and Long-term

Pre-IPO and large publicly traded companies can reap the rewards of more efficient, automated control programs. Improving efficiency and leveraging automated solutions offers entities:

  • Organizational agility: Having the proper control programs in place enables businesses to respond quickly to the ever-changing business landscape and confidently navigate the unknown. 
  • Investor satisfaction: Pre-IPOs relying on investor funds before going public need investor confidence to move forward. Strict and efficient control programs encourage investment and help alleviate potential fears through reliable financial reporting. Similarly, for publicly traded companies, investors want to know they can place trust in the financials while having confidence the organization can respond to both opportunities and challenges that may be on the horizon.
  • Financial risk reduction: Controls save businesses money by reducing risk exposure to fines and penalties. Complying with regulatory and law changes is easier when the right systems are in place that can easily adjust to new requirements or changes. Further, proper controls help reduce the risk of errors and fraud, both of which can be deadly for an organization.
  • Improve decision-making: When compliance errors and inefficiencies exist, decisions can quickly lead to costly errors. Reliable and accurate information provided through strict compliance control improves decision-making to reduce these risks.
  • Transparency: Stakeholder transparency and trust are crucial to a successful IPO and for public companies. Control programs offer a high level of corporate transparency that help you gain investor trust by supplying data on your operations. Improved public image is a consequence of transparency and accountability, too.
  • Happier professionals: As professionals are tasked with less manual and repetitive work, they’re able to focus on higher value and more reward tasks.

In conclusion, proper control programs strengthen businesses and reduce the risk of fraud and errors while also improving efficiency, compliance, and market trust. There is no better time than now to implement the right technology and automation to improve your current control environment. Doing so can help you reduce the rising cost of compliance, navigate the talent shortage, and provide the visibility you need across your compliance programs.