cpd types

Compliance has two meanings – conforming to rules and regulations, and being willing to do what other people want you to do. The first is easy to understand – rules are rules and must be adhered to. Every accountant is aware of this, standards and codes of conduct make it quite clear what is and is not allowed. But the second definition poses ethical dilemmas.

Imagine you are a new employee joining a dysfunctional organisation. You might be socialised into unethical behaviour because "that's the way we do things around here". Failure to assimilate often results in being ostracised and excluded from the various groups of factions within the organisation.

There are several steps management can take towards building a compliance culture within an organisation.

Create a collaborative environment

There is a need for collaboration within organisations for many reasons of which compliance is only one. There is little point in developing a new product or service if it does not comply with regulations or product standards.

It is important that the relevant rules and regulations are known and that these are commonly accepted across the organisation. Where there is a failure to follow them, the corrections should come from within the organisation and be detected by collaborative effort rather than subsequent investigation.

As with quality issues, making compliance part of the process saves time and money. For example, the use of checklists and compliance software encourages the integration of compliance into normal processes.

Make compliance everyone's responsibility

Compliance should not be left to a compliance team or internal audit. It is an organisation-wide responsibility so that at all levels non-compliance is avoided because everyone knows the rules.

This is particularly important for senior management. Tone at the top, as it is known, sets the example for the rest of the organisation and compliance should be a key example set by senior managers. They have to lead and must not be seen to take shortcuts or bend the rules.

This means not only compliance with external regulations but compliance with internal rules and procedures. Management which ignores or overrides internal rules devalues them and opens the door to forms of dysfunctional behaviour, such as minor pilfering, falsification of time records or abuse of petty cash by the workforce.

Encourage transparency and honesty

One of the key aspects of a compliance culture is the creation of an environment where non-compliance can be questioned at any level. Thus an employee must be able to question the actions of a more senior member of staff without fear of reprisal or dismissal.

In a climate of fear, non-compliance can flourish because it goes unchallenged, but this can only lead to disaster in the long run. Consequently an open, transparent culture where honesty is encouraged can lead to a process of continuous improvement which can only be beneficial to the organisation.

Compliance risk management and ethics

One of the key aspects of compliance risk management is ethics. This is not a view which is promoted as most exercises in risk management concentrate on the processes of assessment, evaluation and actions. But the ethical context underpins the whole principle of managing risk.

Without an ethical or moral compass to drive the actions of an organisation, the stability of the organisation may be at risk.

Arthur Andersen

Former Andersen employees Barbara Ley Toffler and Jennifer Reingold looked at the fall of Arthur Andersen, the huge accounting firm which collapsed when their role in the Enron scandal was revealed, shortly to be followed by a similar problem at WorldCom.

The partners at Andersen were determined to grow the business and focused on profit making, at the expense of Andersen's previous reputation for high moral standards. They reasoned that their responsibility was to shareholders, not directors.

Later, the audit side of the business struggled to keep up with rapidly growing Andersen Consulting, and audit partners were encouraged to obtain consultancy assignments from audit clients. Pressure from companies mounted and Andersen struggled to maintain its moral standpoint in the face of demands from clients. Andersen began to become involved in dubious accounting practices, culminating in the scandals of Enron and WorldCom which finally finished the firm off.

Toffler and Reingold write:

"New recruits were socialised into believing that Arthur Andersen was a special and exclusive organisation.

Arthur Andersen offered something special: a way of life… getting a job there meant making it. They all knew that their chances of making partner were slim, and that they were in for a rigorous, exhausting few years as the grunts. But there was a big fat brass ring at the end”.

In this way, new accountants – or even more established employees – were less inclined to ask difficult questions as this would undoubtedly nullify their chances of winning the brass ring.

John Taylor is an author for accountingcpd. To see his courses, click here.

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