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Why Your Startup Needs a Compliance Function

Posted on Jul 29, 2015 10:29:00 AM

It’s no surprise that Compliance is sometimes overlooked by startup founders, as they attempt to stay “lean” and “scrappy.” It’s almost a cliché that the startup founder focuses on getting more business while neglecting such internal processes. We have all heard of cases where startups at panic-stations ask their best talent to “pitch in” to these tasks that clearly do not interest them. Inaccuracies, lack of compliance culture and inefficiencies usually follow. But why must a founder wait for things to go wrong before he realizes that time is ripe for a change?

I should first clarify that everything in this note supports the creation of a Compliance function within the startup – pointing to the Compliance Officer just makes it easier to embody the argument.

As a company grows, there are more laws to comply with. Instead of waiting for your business to grow and then create a compliance function, isn’t it better to be well-prepared from the very beginning? Perhaps many Why Your Startup Needs a Compliance Functionentrepreneurs find this unnecessary since they feel they can themselves stay on top of what is required. There are 2 obvious issues here:

  1. Laws are every-changing. How will one keep track of everything after a certain point? The company will grow which will only mean more laws to comply with.

  2. Compliance is not restricted to the financial and legal space – the natural, but less mentioned, extension into the organization’s HR, Payroll and IT areas is just as important.

The case could be made that smaller companies require a Compliance function more than large companies do. A small business cannot afford employee fraud, waste, loss of name or a government fine. Establishing an internal compliance function provides a vital step in such control.

Let's understand how a dedicated Compliance function is beneficial to smaller companies, even leaving aside the obvious benefits from keeping track of the taxes, laws and regulations applicable to the business:

  1. Managing Internal Processes: Smaller companies focus a lot on getting their business to the next level, and in turn do not lay enough emphasis on monitoring the internal processes. A Compliance Officer will prove beneficial by keeping a check on processes, and reducing risk of any potential errors or frauds.

  2. Minimizing Fraud and Errors: Small businesses lose money through frauds. Frauds can include skimming payments from customers, check tampering, cash theft and misuse of company credit cards, and improper payroll transactions. A structured internal audit function as a part of the overall Compliance process will help find and stem such leakages.

  3. Segregating Internal Duties: It's always a task to hand over the right job to the right person in a smaller company. There are times when someone may land up with a job that is not of his liking or interest. This brings about reduced employee engagement, frauds and errors. Processes may well exist to catch such instances but the startup environment sometimes runs in willful ignorance of laid down processes. Checks made as a part of the Compliance function can identify these risks on time, and take actions against the same.

  4. Monitoring Employee Turnover: Small businesses often rely heavily on staff members with specialized knowledge. Without proper documentation of their duties, losing certain employees can prove to be problematic. A Compliance Officer can assist in monitoring the documentation processes which will help clarify business operations.

  5. Addressing Potential IT Security Concerns: Small businesses often have weaker data security and IT controls as compared to larger companies. This makes it necessary to have specialized Corporate Compliance Officers who can evaluate these security concerns.

It has to be acknowledged that with the limited resources and non-existent processes of the startup ensuring compliance will be no cakewalk, but cloud-based solutions exist that can help make the job easier for those tasked with managing the Compliance function.

A structured Compliance function can bring a systematic, disciplined approach to managing small businesses by identifying risks that can affect your organization’s long-term goals. As the founder of a startup wouldn’t you rather focus on your business secure in the knowledge that your compliance management is in safe hands?

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Topics: Compliance Program