On average, 5 million USD. This is the figure most CEOs and CFOs seek when they want to know the average compliance costs for larger companies worldwide. Although this amount is alarming, it's just part of the truth.
Non-compliance costs are nearly three times higher. Even if one only considers compliance from the perspective of its impact on the final profit at the end of the year, there's much more at stake for companies. Naturally, concerns at the executive level include protecting the company's reputation, avoiding negative headlines, and circumventing hefty fines. However, the societal impact is much greater and more consequential than that. However, the costs of compliance must be viewed in a broader context. Ultimately, robust compliance processes not only protect but can even enhance a company's reputation.
As compliance costs skyrocket, companies are currently struggling more than ever with increasing financial burdens and the threat of severe penalties. Non-compliance not only leads to monetary losses but also tarnishes the company's image. Such damage to reputation is hard to reverse, if at all possible. For larger companies, average annual compliance expenditures amount to a staggering 5 million USD, while penalties for non-compliance can reach up to 15 million USD annually. With regulations constantly changing, increasing uncertainty, and compliance costs not likely to decrease soon, proactive compliance management is no longer a luxury but a necessity.
It's essential to embed a culture of compliance within companies. To effectively manage compliance internally, the first step is to identify the major cost drivers and take measures to limit damage. This is the only way to avoid potential penalties and fines.
To mitigate these risks, Cedar Rose offers comprehensive credit risk reporting and business intelligence. Our expertise in investigative due diligence helps companies navigate complex regulatory landscapes, reducing the likelihood of non-compliance and associated costs.
According to a Thomson Reuters study, respondents indicated that the greatest compliance challenges in 2022 were the scope and implementation of legal changes, as well as the general availability of qualified resources. However, as regulatory requirements become increasingly difficult to manage and expectations rise, implementing appropriate processes and resources is crucial and should be the top priority for all companies.
PwC recently found in a survey that the correct use of digital applications can reduce overall compliance costs by 30-50 percent due to shorter processing times and generally better quality. No wonder, since technology and digital tools play a significant role in daily operations in every company, allowing more to be achieved with less effort. Many companies have already recognized this clear benefit. A Gartner study revealed that CFOs and financial executives will spend 13.8 percent more on software in 2024 than in 2023, despite current economic challenges. But why? Compliance is often fraught with paperwork, repetitive tasks, and inaccurate reporting, all of which can lead to hefty fines and drive up compliance costs. However, with the right technology and automation of such processes, companies can reduce the time spent on repetitive tasks and consolidate all to-dos on a single, streamlined platform. This is not only more manageable but also reduces costs.
Emphasising the role of technology in compliance, Cedar Rose utilize advanced AI-powered processes to deliver accurate, up-to-date compliance reports. This technological edge not only ensures compliance but also streamlines processes, leading to significant cost reductions.
While many reports on compliance focus primarily on the negative aspects such as fines, brand damage, or increased controls, this is precisely the challenge companies can take on. In the current market situation, the company report also represents the reputation and public perception. Thus, the compliance obligations and requirements placed on companies are becoming increasingly complex. The ESG criteria direct attention and focus to the overall internal structure of existing processes. In particular, the EU Corporate Sustainability Reporting Directive (CSRD) has made many companies aware of the importance of timely, accurate, and reliable reporting. This challenge – and the associated additional controls – also presents an opportunity for companies to commit to transparency, fulfill their promises, and become an attractive employer brand.
A prime example of the impact of compliance and proof of the importance of trust and transparency in the economy is Denmark. It is no coincidence that Denmark was again rated by Transparency International as the least corrupt country in the world. Trust and transparency are almost a given and prerequisite for how companies do business there. Firms and individuals meet their tax obligations, and the reports companies submit on factors like ESG are absolutely accurate. But what if this is not the case? It's not hard to imagine. There are plenty of examples showing what can happen: The headlines. The criticism. The consequences.
However, the conversation doesn't go far enough. While a compliance violation initially affects only the company involved, repeated breaches have consequences for society as a whole and economic development. Less tax revenue means fewer investments in public services to drive development. It also weakens trust in organizations that help us in difficult situations like a pandemic. Additionally, the incentive to contribute to transparency or "do the right thing" significantly diminishes. Why bother if no one else does? In other words, high-quality compliance processes give everyone the opportunity to meet the standards we set for ourselves. These are the very standards that have put Denmark at the top of lists like those of Transparency International. Only then can we continually raise the bar for future generations in their expectations of companies and society. Therefore, the discussion about compliance must go beyond mere costs and consequences.
Cedar Rose's commitment to 'Strive for Excellence' resonates deeply within the compliance sector. By providing tailored services like electronic identity verification (KYC and KYB) and detailed compliance checks, we help companies maintain transparency and integrity, aligning with the larger goal of societal trust and corporate responsibility.