The Pandemic and Compliance

There is no question that the coronavirus (COVID-19) continues to have a profound impact on global business. In just a few months, traditional business practices have become outdated. As companies try and navigate these murky waters, corporate compliance departments are becoming a favored place to cut overhead. These already overburdened departments add spectacular value for the cost and save organizations far more money than is recognized (and far more than they cost) yet their value is still not understood. Funding compliance is a solid investment for all organizations.  

Recently, we worked with a client’s compliance staff and during a due diligence investigation identified a risk involving a Russian partner. Compliance concluded the proposed business partner was a disaster waiting to happen. Among other things, the partner never paid its bills. Nonetheless, the “business” side decided to move forward with the deal as they were impressed with the partner during meetings (as explained in the book by Malcolm Gladwell Talking to Strangers, people who interact with others have a skewed view of the importance of face-to-face interactions). It took only a few months, but the client is now out $40 million.  

Industries that have been hit the hardest due to COVID-19 have naturally reduced headcount and compliance has not been spared. Those industries that have not been affected, are preparing for future downturns by cutting costs. Who needs compliance during a pandemic? Just watch and see.  

We’ve said it before and it bears repeating, companies cannot rely on their auditors to prevent and detect fraud. Fraud is not an illusion – it slams the bottom line. The Association of Certified Fraud Examiners has repeatedly found that outsourcing compliance tasks to auditors is ineffective as a strategy to avoid material misconduct. The numbers show that internal and external audits are not as effective as other means to stop misconduct. Having a robust compliance department is critical to thwarting kick-back schemes, corrupt employees, and Code of Conduct violations.  

Even where staffing is being maintained, compliance is being asked to do more with less. Reducing resources available to compliance places professionals in a precarious situation – having to manage regular job responsibilities with increased regulatory scrutiny and with limited available resources. This is a delicate balancing act that can create a recipe for disaster. We predict that once the pandemic has been resolved, many organizations will face devastating failures in compliance that could have been averted by maintaining already lean compliance staffing.  

One important function for compliance - maintaining an effective reporting hotline, is essential during times of upheaval. Hotlines are still the most valuable tool in the compliance toolbox. Employees will always serve as the best line of defense against misconduct that can hurt the bottom line. Another resource that cannot be underestimated – due diligence on vendors and business partners. Third-party due diligence management systems, like KLINKsmart, identify problems before they harm organizations.  

There is no one-size-fits-all approach when it comes to effective compliance – especially in a world where fraudsters continue to get more creative at exploiting weaknesses. Continue to invest in a strong compliance program that alleviates the unknown risks as we move forward during and after COVID-19. And always do your due diligence.