Roughly 15 years ago, the United States endured a financial crisis that brought massive regulatory changes to the financial sector. After the 2008 crisis, businesses and organizations had to learn to adapt and comply with these new regulations.
The landscape of financial compliance is constantly evolving. New rules and regulations always pop up, and as an entrepreneur, staying well-informed is crucial. To ensure that your company complies with the laws and regulations, you must understand financial compliance.
Definition of Financial Compliance
The term financial compliance refers to the act of adhering to laws and regulations set by government agencies that regulate financial activities. That includes everything from banking regulations to taxation laws.
These laws and regulations set standards that all financial institutions and businesses must follow or face severe penalties. It consists of external and internal procedures that help mitigate risks and prevent fraud.
Financial compliance is also crucial because it helps protect the financial system from being misused. It also ensures that businesses adhere to regulations, pay their taxes, and protect the privacy of their customers.
Financial crimes affect around 47% of all businesses. Nearly $1.5 trillion was lost to financial fraud last year. So, it is essential to stay compliant with the rules and regulations.
What Does it Involve?
How can you ensure that your business is compliant? The answer to that comes in two parts: understanding and adhering to the laws and regulations and internal requirements for filing a corporation or LLC.
Understanding and Adhering to Laws and Regulations
All business owners, employees, and stakeholders should be familiar with the laws and regulations in their sector. Different countries have varying compliance standards and regulations. It is your job to ensure that you are familiar with these laws and any changes or updates that occur.
Internal Requirements for Filing a Corporation or LLC
Additional internal requirements must be met for incorporated businesses to maintain legal status. These include filing the necessary paperwork with the state, maintaining accurate records and financial information, and filing taxes on time.
Potential Ramifications for Non-Compliance
Penalties for non-compliance come in multiple forms:
- Financial fines.
- Limitations on activities.
- Restrictions on business operations.
The list of penalized companies is long. Both small and large companies have faced the consequences of not following the rules. For instance, in 2019, Google was fined $50 million for breaches of France's data privacy regulations.
Even if a governing body doesn't give your organization a substantial penalty, there are still potential ramifications that can arise from non-compliance. For example, your company's reputation might be in jeopardy, customer trust might go down, and you might even face civil or criminal charges.
Moreover, not following the compliance mandates can lead to gaps in internal processes, which can be expensive for any business.
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How to Stay Compliant
With the potential consequences of non-compliance in mind, all reasonable efforts must be taken to ensure that you stay compliant. If you're a business owner, here are a couple of things you need to do:
Staying Informed of Changes in Regulations
As mentioned earlier, rules and regulations are dynamic. They change and evolve. Your responsibility is to stay informed of these changes.
For example, the EU's General Data Protection Regulation (GDPR) was implemented a couple of years ago. The GDPR replaced the 1995 Data Protection Directive and imposed new requirements on businesses that handle and process data.
How can you stay informed of changes in regulations? The best way is to check all relevant agencies' and organizations' websites regularly. They usually have detailed information about new rules and changes.
Developing a Compliance Monitoring Strategy
Once you have determined all relevant regulations, create a monitoring strategy to ensure your business is compliant. This strategy should include the processes and protocols you will use to document, track, and monitor compliance.
A lack of personnel, budget, or resources should not be an excuse for failing to monitor compliance. Various tools and platforms are available to help you manage your business's compliance.
For example, hiring a part-time finance director to review financial documents, investing in compliance management software, or hiring an accountant to ensure all filings are done correctly.
Investing in Compliance Management Plans
Compliance management plans are broken down into steps and should be followed closely. These plans help keep your organization compliant by ensuring all relevant laws and regulations are followed.
Your compliance management plan should define each responsibility your employees have. From top to bottom, every person involved should understand their role in ensuring compliance.
Here are the steps to consider when devising a compliance management plan:
- Identifying current and potential risks.
- Creating policies and procedures to address any potential risks.
- Implementing training and awareness programs.
- Conducting periodic compliance audits.
Your part-time financial director can help you draft a sound and effective compliance management plan. Then, with some help, you can rest assured that your business is always compliant.
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Financial compliance is an essential factor for any business. You want to avoid getting in trouble with the law and risk hefty fines, penalties, and other potential implications.
Therefore, it's essential to stay informed of regulation changes, develop a monitoring strategy, and invest in compliance management plans. With these steps, you can ensure that your organization is always compliant.
If you need financial help understanding and adhering to compliance standards, consider outsourcing a part-time finance director. Platforms like Boardroom Advisors can help you get in touch with experienced professionals who can help you stay compliant.
Compliance is vital for any business and should never be taken lightly! So stay informed, stay ahead, and stay compliant!