What Are the Risks of Non-Compliance, And How Can Companies Mitigate Them?

Whether it’s intentional or unintentional, failing to comply with internal policies, industry regulations, and legal standards can expose your business to significant financial, legal, and reputational risks.

Safeguarding your organization against non-compliance and ensuring nothing slips through the cracks is crucial. Yet, today’s businesses are handling an increasing number of expense items across departments, categories, and different payment methods, all of which create additional risk.

Why does noncompliance happen? According to the Association of Certified Fraud Examiners (ACFE), the number one reason is a lack of internal controls.

Get our top tips to tighten audit controls to improve spend compliance.

Download now

What Is Non-Compliance and Why Is It Important for Businesses?

Non-compliance occurs when employees fail to adhere to company policies or regulations. This can be accidental or fraudulent, and when it comes to expense management, you have multiple liabilities.

When employees submit inaccurate or fraudulent expense claims, it can create a cascading effect. Besides reimbursing employees for non-compliant spend, your financial reporting may be off. This can lead to bigger issues such as failing to meet tax obligations or inaccurate financial reporting, which could produce regulatory penalties and security vulnerabilities.

Accuracy and compliance are non-negotiable. Failing to ensure them can jeopardize:

• Financial integrity: Proper compliance ensures accurate reporting and reimbursement, preventing financial misstatements.
• Legal protection: Adhering to tax laws, regulatory standards, and corporate policies reduces the risk of fines and legal disputes.
• Reputation management: Demonstrating ethical and compliant practices fosters trust with customers, investors, and employees.

As regulations become more complex, organizations that fail to prioritize compliance face greater exposure than ever before.

Let’s take a closer look at some of the biggest risks.

Failing to comply with tax laws, regulations, or reporting standards can cause chaos within your organization. It can lead to fines or penalties from regulatory bodies and increase your risk of litigation. You may also be subjected to increased audit frequency from the government or by third parties, especially if you are a publicly traded company.

Compliance failures can severely impact your reputation. Customers, investors, and business partners may lose confidence in companies that fail to adhere to regulatory or industry-specific policies. In many cases, you may face negative media attention, which can damage your public image, as well.

A lack of controls can also impact how employees view leadership and the company overall, hurting morale and causing problems in recruiting or retaining team members.

Non-compliance can also create disruptions. When compliance policies are unclear or poorly enforced, expense reports may contain errors or inaccuracies. This creates additional work downstream for managers and accounting teams, correcting issues and tracking down information to verify expense claims. This manual intervention is time-consuming, taking employees away from their primary tasks.

Weak compliance controls can produce significant financial losses, not only due to regulatory fines, but also from fraud. Weak compliance practices can make it easier for unauthorized or fraudulent transactions to go undetected. For example, weak expense management processes may allow fraudsters to submit fake invoices or execute payment scams.

Without proper monitoring, you can easily miss:

• Duplicate expense claims or manipulated receipts
• Unauthorized vendor payments or misclassified expenses
• High-risk transactions that have the greatest risk of fraud

ACFE estimates that as much as 5% of revenue is lost due to occupational fraud every year with the median loss per case of $145,500. 89% of cases involve asset misappropriation, such as false or overinflated expenses, or payroll fraud. Only 5% of fraud cases involve deliberate financial statement fraud, but are the most costly with median losses of more than three-quarters of a million dollars.

In addition to posing significant financial and legal risks, non-compliance also creates security vulnerabilities.

Non-compliance can lead to data privacy issues, as well. Mishandling financial or employee data may violate privacy regulations, resulting in fines.

In addition, non-compliance with cybersecurity protocols can expose financial systems – and sensitive company data – to unauthorized access, potentially leading to a cyberattack, identity theft, or other security breach.

To reduce the risks of non-compliance, you must be proactive and embrace modern methodologies, such as compliance tools that can constantly scan for anomalies, non-compliant spend, and potential fraud.

When your policies are unclear, it invites errors and fraud. Clear, well-defined policies that are consistently applied are key to ensuring compliance.

It’s a good idea to review your policies periodically to make sure you are employing best practices, such as:

• Defining allowable expenses: Explaining which expenses are reimbursable and which are not.
• Establishing spending limits: Setting clear thresholds for travel, entertainment, and miscellaneous expenses.
• Frequent policy reviews: Regularly updating policies to reflect evolving regulations and business needs.

Established approval workflows can help catch non-compliant transactions early. You should work with finance leaders, team managers, and other relevant stakeholders to determine approval requirements. Putting multiple sets of eyes on spending can help identify and stop potential non-compliance – for example, requiring multiple approval levels for high-risk expense categories or spend above certain thresholds.

Your strategy should also include training for approvers on how to detect and prevent non-compliant spend and fraud.

Automating compliance checks can significantly reduce human error and improve accuracy. For example, tools like Intelligent Audit and Concur Detect by Oversight leverage AI to audit receipts for policy compliance.

AI-powered tools combined with human oversight can surface non-compliant spending, ensuring rules are applied consistently. This can significantly reduce the manual workload while creating a more efficient system for managing compliance.

The right expense management tools can help you build and maintain a culture of compliance to protect your company and your team.

Staff training is also critical. When employees understand your company’s expense policies and your expense management system and processes, they are more likely to comply. Even the most well-defined policies can fall short if employees don’t understand them or know where to find them.

By educating your staff on your internal and external requirements, you can reduce accidental non-compliance and enhance your overall compliance culture.

Taking a proactive approach to compliance and implementing automated expense management and audit tools can help organizations reduce fraud and non-compliant spending.

Learn more about spend compliance and fraud detection solutions from Concur and how you can improve your compliance and first-pass ratio.