What is financial compliance? Everything you need to know

Financial compliance is fundamental to managing an organization’s finances. It is a set of policies and practices which protect the company's finances from mistakes and misuse. In turn, a healthy compliance strategy nurtures trust in the organization with clients, customers, leadership, and shareholders. Let's look at some of the most common questions around this essential topic and some methods you can use to implement and improve compliance.

What is financial compliance?

Financial compliance refers to the adherence to laws, regulations, and standards that govern financial and capital markets. It encompasses a broad range of practices, from investment banking to retail banking, and is crucial in maintaining the integrity and stability of these markets.

Why is finance compliance important?

Compliance is the practice of ensuring that your organization adheres to regulations. The cost of failing to comply with regulations can be very costly, both financially and in terms of reputation. Compliance is intended to maintain and insure trust in not only a company but financial systems as a whole.

What is an example of compliance in finance?

Compliance requirements will vary by industry and geography. For instance, GDPR (General Data Protection Regulation) is a set of European standards, though it has become standard practice for many US-based companies, especially those with European clients.

Companies processing credit card information are subject to PCI DSS, standards created by card companies to protect cardholder information.

Ensuring financial compliance

A strong financial compliance strategy is needed to continually abide by relevant regulations. Let’s take a look at some of the steps needed to implement an effective compliance strategy.

1. Establish clear policies and procedures

Policies are the stated goals of a compliance strategy and must be available and accessible. They should be written clearly to limit misinterpretation. Procedures are for when those policies have to be put into practice and should also be clear and easy to follow.

Having policies covering industry standards like anti-money laundering (AML) and the Foreign Corrupt Practices Act (FCPA) is also crucial.

Compliance is more than just legal requirements, and industry standards are essential to maintaining trust and reliability within your industry.  

2. Implement robust internal controls

Internal financial controls help to monitor an organization’s finances and implement fixes should errors occur. Proper segregation of duties, authorization protocols, and regular audits are all practices that contribute to this. This ensures important processes like financial consolidation and disclosure management remain compliant.

3. Conduct risk assessments

These internal assessments are critical to help identify and prioritize key risk areas. Once identified, these risks can be mitigated with new policies, practices, or tools.

4. Use technology and compliance tools

Tools are essential for streamlining and monitoring compliance processes. Automation reduces manual errors, and live monitoring can quickly flag issues for resolution. Financial performance management software, like Prophix One, provides these tools alongside specific compliance management options that are both intuitive and powerful.

5. Routine audits and reviews

Regular audits, both internal and external, will be part of compliance requirements. Regulators will require audits to be done at a specific frequency, often quarterly or annually.

6. Establish a compliance culture

Maintaining compliance requires alignment from all members of an organization. Leadership must model compliant behavior and make resources — like policies and practices — available and accessible to all employees. Employees should be encouraged to speak up when they spot non-compliant behaviors or practices.

7. Stay informed on regulatory changes

Compliance regulations are not static, and governing bodies can sometimes make unexpected changes that organizations must quickly adapt to. Organizations might also expand into new industries or jurisdictions, adding new regulations that must be incorporated into their overall compliance strategy.

What are the benefits of financial compliance?

While financial compliance is an obligation every organization must live up to, taking a proactive approach has several advantages.

Risk mitigation

The risk analysis involved in compliance gives organizations a headstart on mitigating financial risks and avoiding costly legal penalties, fines, and sanctions. Without effective risk mitigation, the organization is vulnerable to financial mismanagement, which is more costly than compliance.

Improved operational efficiency

Compliance requirements are often an opportunity to streamline operational processes. Compliance software can aid in meeting these requirements while automating and aggregating financial data. Improved monitoring provides additional insights into financial health and automation reduces manual errors.

Increased financial stability

Shoring up trust and resilience in your systems and processes increases financial stability. Reducing opportunities for mismanagement with regular audits and monitoring decreases the chance that an issue goes unnoticed. Small errors snowball into larger issues when ignored and a robust financial compliance strategy can prevent this.

Fraud prevention

Transaction monitoring, regular audits, and the use of software with activity tracking and automated alerts make the misuse of company finances extremely difficult. Educating leadership and employees on the risks of non-compliance can also discourage risky behaviors.

Enhanced reputation

Proper financial compliance reduces the risk of serious issues, making an organization’s financial operations more reliable. This creates trust for shareholders and stakeholders by demonstrating your organization’s commitment to avoiding costly issues.

Regulatory advantages

A robust financial compliance strategy improves your organization’s institutional knowledge where relevant regulations are concerned. This can help leadership spot opportunities, challenges, and potential surprises before they can have a significant impact on your organization. It could even allow your organization to create important relationships with regulators, making compliance easier over time.

Challenges in financial compliance

Maintaining compliance is a crucial component of successful operations, but it does come with its own set of challenges. Establishing your new strategy requires resources and other costs while being resistant to change once in place. Prophix One, a Financial Performance Platform, provides a suite of tools that help organizations overcome these obstacles without which many of these challenges can become overwhelming and costly.

Resource constraints

Maintaining compliance requires resources. Organizations that fail to allocate adequate time and personnel will find out just how costly not meeting regulatory requirements can be. Getting approvals to free up these resources can be daunting but not having them can impact your compliance strategy.

Cost implications

Implementing and maintaining a compliance program has both direct costs, like software and personnel, and indirect costs such as the time spent on compliance activities like continuous training. However, the costs of failing to meet regulatory requirements are typically far more costly.

Resistance to change

Organizations will have some resistance to change. Making sure that new policies are clearly understood can help employees more easily adapt to new requirements. It is crucial to carefully manage the changes in individual responsibilities with the learning curve of new systems so that employees are easily onboarded. Prophix One provides the power that finance and compliance teams need to stay compliant, making it easier for employees and leadership to get on board.

Evolving regulations

Regulations are always evolving, and compliance teams need to constantly stay up to date. Many compliance tools automatically update and inform teams when changes occur. Making sure that teams have the time and tools to maintain compliance as it evolves is crucial to avoiding issues.

Examples of financial compliance practices and frameworks

There are a number of existing and generally accepted compliance practices and frameworks organizations can use and integrate into their larger compliance strategy.

• Anti-Money Laundering (AML) compliance: Financial institutions implement AML programs that include customer due diligence, transaction monitoring, and reporting suspicious activity to regulatory authorities. For example, JPMorgan Chase has established comprehensive protocols for identifying and reporting potential money laundering activities.

• Financial reporting standards like GAAP and IFRS: The Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS) are two compliance models that provide a framework for accounting and finance teams for the USA and internationally.

• Sarbanes-Oxley Act (SOX) compliance: Governs the financial reporting and conduct of publicly traded US companies. It requires internal controls, regular reporting and financial disclosure management, prohibits insider trading, and certifies financial statements.

• Tax compliance like OECD Pillar 2: This relatively new policy establishes a global minimum tax for multinational corporations.

• Data protection and privacy compliance: This set of principles helps define different data and provides protections for it. Data privacy defines who is allowed access, while data protection is a set of practices and policies that restrict data access.

Achieve financial compliance with Prophix

Financial compliance is a target in constant motion. As organizations and markets evolve, compliance does too. Staying up to date requires a strong strategy and a team with the tools they need to keep that strategy agile. Compliant behavior starts at the top, and training needs to be kept up to date and regularly reiterated to keep up with changing or evolving regulations. Without compliance, an organization is vulnerable to financial misuse and mistakes, putting both reputation and profit on the line.

These tasks can't happen easily without collaboration between numerous departments, and a unified financial performance management platform, like Prophix One, can support this. With financial data integration and automation built in, you can easily collaborate across stakeholders. With a streamlined tool, requirements are met on time, every time.