What Are the Consequences of Non-Compliance for Companies?

Compliance is the practice of adhering to laws, rules and regulations. Each company has to ensure that it conducts its business in an ethical manner, by following all the laws that are applicable to it. These could be Central laws, State laws, or sector specific laws. It is obvious to believe that companies should adhere to laws and regulations, or they should be prepared to face consequences such as penalty, fines or imprisonment.

Increasingly, companies are taking compliance very seriously, with several of them having taken efforts to automate it, so that compliance with all laws are ensured well before the due date. However, for companies that continue to take compliance lightly, there can be grave consequences.

The most common reasons for non-compliance are:

Lack of leadership – The Board and management are unable to ensure that compliance is a priority for their company. This could be because they fail to set the right tone at the top.
Lack of a compliance culture – If there is no accountability for delay in compliance, persons in the company are unlikely to give it much importance.
Outdated compliance practices – Processes relating to compliance are often person-dependent. Compliance is an ongoing process. It is important for companies to improve their practices, and focus on investing in compliance softwares, and other specialized technologies, to ensure timely compliance, or timely escalations, in the event of non-compliance.

The cost of non-compliance is much more than only fines and penalties. Non-compliance may pose a grave risk to the company, and its operations. Major consequences of non-compliance include:

Fines and penalties – Fines and penalties are the most common consequences of non-compliance. These may vary depending upon the severity of the non-compliance. Regulatory fines ultimately eat into the income of the company.
Legal proceedings – In addition to levying fines/ penalties, regulatory bodies may also initiate legal action against the individual concerned or the company. Such proceedings may be initiated against senior management persons or board members, depending on the offence, and it may continue for several years.
Imprisonment –In exceptional cases, the accused may face imprisonment.
Audits and Regulatory scrutiny – Non-compliance may result in regulatory scrutiny to discover the reason for non-compliance. It may also call for inspections and audits. Such audits can be both time consuming and costly.
Adverse notice by Regulator – The Regulator is unlikely to favourably view a company with a track record of non-compliance.
Revenue loss or shutting down of business – Non-compliance may result in businesses discontinuing their operations temporarily. This would result in loss of revenue. In exceptional cases, it could also result in shutting down of business permanently.
Reputation risk – Non-compliance poses a serious reputational risk for the company. The fines, penalties, lawsuits, or imprisonment can damage the reputation of the company and the brand value may take a serious hit. As a result, stakeholders may lose trust in the company.
Board level exits – Non-compliance may lead to many exits at the board level. Non-Executive Directors, especially Independent Directors, do not want to be associated with companies that are non-compliant. This may further impact the reputation of the company.
Qualified audit reports – Statutory auditors and Secretarial auditors will not give clean reports to companies with a track record of non-compliance.
High attrition rate – Loss of reputation, and poor culture in the company would result in significantly higher attrition rates, even at senior levels.
Business disruption – Non-compliance would disrupt the normal course of business.