Lack of awareness around compliance mandates leaves companies open to potential financial and reputational risks
Compliance is an integral part of any business activity, even not-for-profit ones. It is estimated that there are over 69,000 compliances in India on a near real-time basis, governed by over 1500 Acts. These compliances, because of the innumerable changes that it goes through each year, make understanding compliance way more complex than it is.
Compliance refers to a continuous process of adhering to the rules and regulations. There is a legal nostrum “ ignorantia juris non excusat” which translates to ignorance of the law is not an excuse. A person cannot escape his liability by claiming ignorance of the law as an excuse.
Given the seriousness of the situation and with the understanding that compliance is not a choice, a mandate toward fulfiling regulatory requirements and a proper mechanism need to be put in place for organisations to run smoothly. The world of legal compliances, for ease of understanding and recall, can be broadly classified into five categories:
1. Corporate and existential laws: Companies Act, 2013; Partnership Act, 1932; Limited Liability Partnership Act, 2008; Reserve Bank of India Act, 1934; and prevention and control of pollution act, 1974.
2. Labour laws: Payment of Wages Act, 1936; Payment of Bonus Act, 1965; and Payment of Gratuity Act, 1972.
3. Tax Laws: Direct Tax (Income Tax Act, 1961) and Indirect tax (Goods and Services Tax Act, 2017, and Customs Duty, 1962.
4. Miscellaneous laws: The Shops and establishments Act, 1947; The Boilers Act, 1923; and Weights and Measures Act, 1985.
Ensuring compliance
The applicability of these compliances and their periodicity varies depending on the nature of the entity, business, and operations. These again can be broadly bucketed as daily, weekly, monthly, fortnightly, quarterly, half-yearly, and yearly compliances. Regular monitoring of these compliances and devising an effective system to ensure adherence to applicable statutes will help mitigate the risk of non-compliance.
This regulatory landscape keeps changing and is quite dynamic. Organisations need to stay up-to-date on these changing regulations. The usage of compliance calendars is one of the appropriate mechanisms to put in place where the due dates and other related information are gathered in one place and makes it easy to keep track of those related compliances.
In larger organisations, where the compliances are more in number and involve more complexity, there exists a difficulty to monitor all those compliances.
Another way of coping with these regulations is the implementation of compliance programmes or even gamification of these within an organisation to make the staff well-accustomed to the practices of the entity. A review of these strategies is of utmost importance to assess the effectiveness of the policies and procedures and to analyse the cost-benefit involved in this.
Costs of non-compliance
There are implications if one fails to comply with these laws and regulations. The cost involved in these non-compliances is huge. The delay in compliance or non-compliance with any law that an organisation ought to have complied with, will attract fines, penalties, legal prosecutions, and in some cases, even imprisonment. Apart from the financial costs involved, there are other risks such as reputation risk which will have a serious impact on the brand value of an entity.
In a long run, this will impact the organisational performance and paves way for unnecessary legal proceedings and lawsuits, even to the extent of dissolution of the entity. This will pose challenges to the company resulting in banks refusing to extend fund support, loss of business from customers and investment opportunities, and market failure.
Compliance is necessary not only from a regulatory perspective but to ensure the longevity of a business. Even though compliance is not a revenue-generating business function, a proper follow-up of these regulations will help with improved efficiency of a business.
With an extremely sensation-seeking social media audience and active stakeholders in capitalism, it is imperative for all organisations to constantly review their compliance practices. The consequence of lack of compliance is dire. Compliance with the relevant statutes is not only a legal requirement but also an ethical responsibility and definitely not a choice.
(The writer is CA Article Assistant, RVKS and Associates, Chennai.)
JANANI V
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