As is common knowledge, most large companies worldwide have ethics and compliance programs that include training, policies, codes of conduct, and other elements focused on helping employees make ethical decisions in their day-to-day work. Most large companies (at least $7 Million in annual revenue and 500 plus employees) know a good compliance program is a very worthy investment.
Ethical and Compliance programs assess risks, train employees, and protect companies from major fines, penalties, disbarment, and bad publicity if misconduct occurs. On the other end of the spectrum, small to mid-size companies sometimes think that E&C programs are a luxury they can’t afford. It’s the exact opposite.
Many smaller organizations cite cost as a primary factor in their decision not to develop and implement a compliance program. However, an effective compliance program does not have to be cost-prohibitive. According to a Society of Corporate Compliance and Ethics (SCCE) publication entitled “A Compliance and Ethics Program on a Dollar a Day,” the most important ingredient of any successful compliance program is a sincere commitment by management to operate an ethical business, which doesn’t cost a dime.
Implementing a compliance program can be viewed as a cost-saving measure. The Association of Certified Fraud Examiners estimates that businesses lose 5 to 6 percent of their annual revenues to fraud. By helping to detect and prevent fraud, a compliance program can stop the revenue drain that negatively impacts a company’s bottom line. Additionally, a company that has a compliance program in place and self-reports any serious incidents of misconduct it uncovers can receive as much as a 95 percent reduction in any subsequent fines.
The need for companies of all sizes to have effective compliance programs with a strong emphasis on accountability is critical. The Employers’ compliance program must also meet the regulators’ expectations to avoid sanctions, penalties, and other ramifications of failing to comply with the existing regulatory scheme for the relevant company. Compliance programs help avoid costly missteps and mitigate the risk of running a business in today’s climate.
Smaller companies are just as susceptible to the risks posed by inappropriate or illegal conduct as huge corporations. The Federal Sentencing Guidelines for Organizations make no distinction in the size of the company when it comes to financial or even criminal penalties due to a lack of compliance. According to The Network, Inc., government compliance policies clearly state that “small organizations shall demonstrate the same degree of commitment to ethical conduct and compliance with the law as large organizations.”
The evidence is clear. Small and mid-size companies need ethics and compliance programs. They make up the majority of companies that are sentenced for misconduct.
There were 5,000 companies sentenced for federal crimes since 1991 and 70% had fewer than 50 employees and of those companies, almost 90% of them did not have an E&C program in place.
It is unequivocal that, without an effective compliance program, small and mid-size companies face greater risks than large ones. As previously stated, ignorance is no excuse when it comes to companies with shoddy ethics and compliance practices. In 2014, Smith & Wesson paid over $ 2 Million to settle bribery charges with the SEC. The company had no compliance program, and employees were not aware that offering gifts to foreign officials to get business violated the law. Training employees on what they can and can’t do is essential.
According to the 2023 E&C Program Effectiveness Report, over half of ethics and compliance professionals stated that E&C factors and risks led to their organization substantially modifying or abandoning a business initiative. In addition, high-performing E&C programs were 30% or more likely than those ranked as less effective to impact important business decisions, relevance, and continuous evaluation and improvement.
Compliance training should also create a safe and convenient way for Whistleblowers to come forward after spotting misconduct. The whistleblower can assist the company in rooting out misconduct. If the company ignores the whistleblower and the whistleblower provides the SEC with the information, they would be eligible for an award when their information leads to a successful enforcement action. Awards can range from 10% to 30% of the money collected in an investigation. In 2021, total awards to whistleblowers exceeded $1 billion.
Most importantly, effective compliance programs are the best defense against whistleblower claims because, when implemented effectively, they encourage employees to speak up about misconduct and help the organization take steps to address it.
Regulators are very focused on personal accountability and all companies would be well advised to have a program that ensures their ethics and compliance program is effectively implemented. This could prevent the need for Whistle Blowers but, if someone comes forward with evidence of illegalities, a strong Whistle Blower, anti-corruption program may reduce any fines associated with the illegal conduct.
The steps to create an effective compliance program start with designating a compliance officer or even a full committee that is dedicated to overseeing compliance for the company. The company must then identify risks that are most relevant to the business so that they can be closely monitored, audited, and evaluated on an ongoing basis.
To ensure an effective compliance program, the company should implement strict standards and procedures. Draft a code of conduct, be diligent in performing background checks, develop a procedure for retaining important documents, and track reoccurring issues that the company has dealt with in the past.
Of course, a good program should have very clear guidelines for reporting an incident, anonymously, without fear of retaliation. In addition, there should be a good training program for all employees so that management can explain the program’s purpose and substance. Periodic refresher meetings can be used to reinforce elements of the program and to provide compliance updates. Your employees should have a clear understanding of the potential consequences of any misconduct. Additionally, employees should be made aware of the benefits derived from adhering to your compliance policies.
Most of these steps will only require an investment of time, and possibly some nominal administrative costs. Most importantly, implementing the foregoing will protect companies from major fines, penalties, disbarment, and bad publicity if misconduct occurs.