General Overview
In the unpredictable world of business, risks lurk around every corner[2]. An organization or a business entity can face risks in many forms, from financial risks and operational risks to perimeter risks, strategic risks, legal entanglements and threats to reputation of the organization. Robust risk management practices equip companies to anticipate these challenges and take proactive measures to minimize their impact. Compliance protects a business from sanctions due to non-compliance with regulations. On the other hand Risk Management helps a business to reduce the possibilities of suffering risks.
In this article, I will be addressing the two concepts, Compliance and Risk Management, by defining them, stating their importance and benefits to a business and also stating some challenges business owners face with these concepts.
Compliance in Business
Compliance in the legal parlance simply means adhering to laws, regulations, industry standards and policies.
However compliance in business goes beyond the documents and statutory adherence needed for business approval. It is also about how employees should be treated and compensated by their employers, how decisions are made in an organisation, how customers and business data are handled etc. Compliance in business also involves a business complying with ethical practices and standards regulating such business. Business compliance is an essential position every company should strive to attain.[3] An example of a case of compliance is the act of placing the certificate of registration of a business at a place that is accessible to the public as required under the Companies and Allied Matter Act, 2020. The basis of this act is to assure customers of the legality of such business. Every business entity who fails to comply with this requirement is subject to sanction for defaulting.
The Importance of Compliance in Business
- It protects the company against potential legal crimes.
- It protects the business reputation by ensuring workers follow ethical business practices.
- It helps the business maintains trust with their customers, suppliers and other stake holders e.g. a bank will only give loan to a company duly registered and compliant with the regulations such company is subjected to.
- It ensures compliance with industry standards and government regulatory requirements.
- It minimizes the risk of financial losses due to non-compliance or failure to follow regulations.
- It assesses and manages the compliance risks associated with third-party vendors and partners, as they can impact your organization’s compliance and risk profile.
Categories of Compliance
Compliance can be classified into two different categories
- Internal Compliance– This focuses on the measures a company takes within its own business to set a standard and maintain a certain level of quality services[4]. In simple terms, internal compliance means compliance within a company. Examples of Internal requirements for compliance include;
- Physical entrance policies
- Virtual Access to business
- Password protection
- Security update
- Risk Analysis
- Protection of employee and customer data
- External Compliance– This refers to the measures a company takes to ensure it stays compliant with state and federal laws. External compliance means compliance outside your company[5]. External requirements for compliance include;
- Filing of Annual statements or reports
- Taxation laws
- Remittance of pension and other statutory employer contributions
- Abiding to Labour standard Acts
- Acquisition of all necessary business Licenses/Permits
- Employer Identification Number, or EIN
Below are some of the various business compliance according to Companies and Allied Matters Act 2020 (CAMA 2020).
- Incorporation of Companies & Annual Returns
- Remittance of Employees taxes and other form of taxes to the Federal inland revenue service.
- Adhering to the Employee Compensation Scheme
- Payment of Industrial training fund
- Registration with the Nigerian Immigration Service (NIS)- where applicable in case of foreign participation in business.
- Adhering to the standards of the Financial Reporting Council (FRC)
- Special Control Unit Against Money Laundering (SCUML) to ensure there is no form of money laundering in the businesses.
How to ensure Compliance in your Business
- Engage the services of Legal Practitioners
To avoid unintentionally breaking laws, it is advisable that a business involve legal practitioners to ensure check that the business remains compliant. This is particularly important for small and growing businesses. A business can also create a compliance department; employ lawyers to work in this department as this would facilitate all compliance process. It also makes it easier for the business to get up to date laws and policies through these lawyers.
- Be up to date with changing laws and regulation
The compliance laws are always changing. As a business, it is important that you stay on top of this to monitor and identify that which your business needs to work on, without delay. This can be done by subscribing to websites and following pages that frequently post legal updates.
- Embrace a Compliance culture in your organization
These policies should be well communicated to the workforce by the management. The management team of the business should put structure in place to ensure that the employees stay compliant to these policies. Where necessary the organization can organize training programs for it staff to educate them on compliance in business.
Challenges of Compliance in Businesses
- Inability of a business to afford the service of a lawyer as a result of funds.
- Ensuring compliance requires a high level of maintenance.
- Multiplicity of laws to comply with.
- Keeping up with updated regulations.
Risk Management
Risk Management is the process of identifying, assessing and controlling threats to an organization’s capital, earnings and operations. The purpose of risk management is not to eliminate all the possible risk a business can face rather it is to preserve and add to overall enterprise value by helping a business entity make smart risk decisions.[6]
Many experts note that managing risk is a formal function at companies that are heavily regulated and have a risk-based business model.
Risk Management Process
SO 31000[7] outlines a risk management process that can be used by any type of entity and includes the following steps for identifying, assessing and managing risks:
- Identify the risks faced by your organization.
- Analyze the likelihood and possible impact of each one.
- Evaluate and prioritize the risks based on business objectives.
- Treat or respond to the risk conditions.
- Monitor the results of risk controls and adjust as necessary.
The Importance of Risk Management in Business
- It helps to detect and respond quickly to company issues.
- It protects the organization from the risk of unexpected events that can cause it a financial and reputational loss.
- It is crucial for any business to know the nature and extent of risk it is prepared to take the level of risk it can tolerate and communicate the same to its employees at all levels of management. This enables limited control all over the organization.
- The ability to understand risks enables the organization to make confident business decisions.
- Implementation of a robust risk management plan will help an organization build policies and procedures around avoiding potential threats and measures to minimize their impact if it occurs.
- Planning and developing structures to address potential threats improves the odds of becoming a successful organization.
- It increases awareness of risk across the organization.
- It boosts the confidence in organizational objectives and goals because risk is factored into strategy.
- It enhances better and more efficient compliance with regulatory and internal compliance mandates because compliance is coordinated.
- It ignites and improves operational efficiency through more consistent application of risk processes and controls.
- It enables workplace safety and security for employees and customers
Challenges of Risk Management in Businesses
The following are some of the challenges risk management teams should expect to encounter:
- Expenditures go up initially, as risk management programs can require expensive software and services.
- The increased emphasis on governance also requires business units to invest time and money to comply.
- Reaching consensus on the severity of risk and how to treat it can be a difficult and contentious exercise and sometimes lead to risk analysis paralysis.
- Demonstrating the value of risk management to executives without being able to give them hard numbers is difficult.
Conclusion
Companies face the risk of being sanctioned by the governing authorities if they fail to comply with these various requirements. These sanctions could be huge fines which may negatively impact the cashflow or revenue of the company or could also affect the brand identity of the business. It is important that companies that operate in Nigeria stay compliant to the governing authorities requirements.
Lastly business owners in Nigeria are advised to have a compliance and Risk management structure for the growth, legality and success of their businesses.
[1] Written by Faidat Balogun, LL.B, BL.
[2] ‘Importance of Governance, Risk and Compliance’, Ishan Seghal.
[3] What is Compliance and why does it matter to Nigerian Businesses, https://www.trybrass.com/guides/nigerian-business/compliance, Accessed on the 16th day of January, 2024.
[4] Ibid at 3
[5] ibid
[6] What is risk management and why is it important? By Linda Tucci
[7] One of the best-known resources is the ISO 31000 standard. Formally called ISO 31000:2018 Risk management — Guidelines, it was developed by the International Organization for Standardization, a standards body commonly known as ISO.