What is regulatory compliance?
Regulatory compliance is an organization's ability to adhere to the rules, regulations, guidelines and laws set by presiding authorities, including government, regulatory, and accounting bodies. These rules can vary by industry, type, and size of business. Typically, regulatory compliance means that an organization has to disclose company information — ranging from business activities, finances, operations, and performance – to the overseeing regulator. The audience of these reports includes accounting standards boards, governments, stakeholders and the investing public.
Complying organizations must create their disclosures in-line with the rules and standards of presiding regulator. Typically, regulators create rules 1. to ensure transparency into a company’s activities for investors and 2. To create a level playing field for comparison across markets.
Examples of regulatory compliance laws and regulations:
- The Dodd Frank Act
- The Sarbanes-Oxley Act
- Federal Information Security Management Act
Examples of major financial regulatory authorities:
- US Securities & Exchange Commission (SEC)
- European Banking Authority (EBA)
Examples of accounting standards boards:
- International Accounting Standards Board (IASB)
- Financial Accounting Standards Board (FASB)
Examples of regulatory accounting standards:
- International Financial Reporting Standards (IFRS)
- US Generally Accepted Accounting Principles (US GAAP)
Why is regulatory compliance important?
Regulatory compliance levels the playing field. When investors are looking to buy into a company, regulatory rules, standards, and reporting requirements work to create a basis for comparison across markets. Disclosure reports allow investors, analysts, and stakeholders to understand an organization’s position in the market.
Regulatory compliance holds organizations accountable. Accounting standards ensure that companies are using like-ways of disclosing figures so that everyone uses the same formulas to prepare the numbers.
Regulatory compliance is public facing. Corporate compliance refers to internal policies and rules. For businesses, regulatory compliance is akin to following the law. Regulatory compliance requirements are often developed to protect the investing public.
Rules are always changing. Compliance requirements are constantly in flux. Once a standard is issued, you can expect amendments and updates. This natural evolution occurs as global regulations converge, new players enter the markets, mistakes are made, and major events occur, like the 2008 financial crisis, the dot com crash of the 90s, and COVID-19.
What happens if companies have ineffective regulatory compliance programs?
Addressing this from an innocent process errors standpoint — as opposed to fraud — regulatory compliance is often compromised by fragmented processes, legacy software, insufficient data management, and plain old’ human error. (The kind where you’ve been staring at the spreadsheet so long, you add three zeros instead of two.) Typically, ineffective processes result in material errors. Violations, material misstatements and material weaknesses can result in punishment including fines and imprisonment, not to mention, a loss of public confidence.
What are common regulatory compliance issues?
Data and Process Fragmentation: When information-driven processes are divorced from one another — say consolidation from reporting, or groups from sub-groups — this can cause manual data imports and exports. Errors invariable seep in during the changing hands of information, whether it be due to formatting mistakes or a typo.
Data Entry and Manual Intervention: To err is human, which is why it’s best to eliminate human intervention from your compliance efforts. An error could be as minute as a moved decimal point. Or an incorrect emission factor in a calculation. Or a hurried email with the latest numbers. Of course, these errors compound as the figure goes down the disclosure management line. In addition to this, investigations into where the error originated are long and tedious.
Regional Inconsistencies: Data formats, currencies, time zones, and differing calculation methods (due to regional accounting standards) are just a few ways the local numbers can cause global corporate issues. When combined with manual data entry or siloed processes, the risk of an error getting through increases even more.
Inability to prepare data to keep up to changing standards: Siloed systems and large data sets makes reporting on granular information difficult. Standards like IFRS 16 Lease Accounting and IFRS 17 Insurance Contracts require a vast volume of financial and operational information from many different departments and sectors of a business. This information has to be centralized, organized, and readily available. When it’s not, you risk incomplete or erroneous disclosures — and an incredibly stressed out finance team.
What does regulatory compliance software do?
Some key capabilities that you should look for in a regulatory compliance software include:
- A centralized source of financial and operational data
- Real-time data and rapid data processing with flexible data model and calculation rules
- A unified platform that facilitates and connects close, consolidation, intercompany reconciliation, IFRS / US GAAP compliance reporting, disclosure reporting, management reporting, iXBRL
- Automated data refresh
- Process workflow for financial administrators
- Automatic data validation
- Automatic audit trail and audit log
- Centralized communication tools for contributors
- Data locking
- Version control