Enterprise Compliance: Necessities, Audits, Risk Management, and Examples

Enterprise compliance is not only a legal necessity but also a strategic advantage in a fast-evolving regulatory landscape. CFOs and finance leaders must stay ahead of enterprise compliance duties. They are responsible for safeguarding their enterprise from risks, optimising operational efficiencies, and exploring growth potentials. In this article, let’s dive deep into enterprise compliance.

What is Compliance?

Compliance refers to following the laws, regulations, standards, and ethical practices prevalent in an enterprise. Understanding compliance meaning is crucial for businesses, as it involves adhering to regulations and standards that ensure legal and ethical operations. 

It ensures that an enterprise does business within the legal ambit. Therefore, it minimises risks and upholds its reputation. Effective compliance protects your enterprise from legal penalties and builds trust with stakeholders. 

Compliance involves setting up and monitoring practices, policies, and procedures to meet applicable laws, regulatory requirements, and internal standards.

Origin of Compliance in India

The origin of compliance in India can be traced back to the early legal frameworks set up during the British colonial period. The introduction of laws such as the Indian Penal Code (1860) and the Companies Act (1866) laid the foundation for formal business regulation and governance. These early regulations were designed to maintain order and ensure legal conformity in trade and commerce.

 After India’s Independence, our regulatory framework grew prominently, with laws such as the Factories Act (1948) and the Industrial Disputes Act (1947), which focused on worker safety and industrial relations. The 1990s' economic liberalisation marked a key shift, introducing new regulations for financial markets, corporate governance, and foreign investments. SEBI was established in 1992 to enforce compliance. 

In recent years, the introduction of GST in 2017, data protection laws, and environmental regulations have further solidified India's compliance framework. Compliance has now become integral to corporate governance and ensuring legal, ethical, and sustainable business practices.

Compliance Necessities

Compliance necessities mean the essential actions and requirements for enterprise compliance. The following are some of the compliance necessities-

1. Following industry rules and regulations- Every industry has to comply with certain rules and regulations applicable to it.
2. Training employees-The management must regularly train employees in areas relevant to compliance and updates.
3. Managing risks—The finance teams must identify, evaluate, and mitigate non-compliance risks to a minimal level.
4. Ensuring ethical operations- Finance teams must ensure business operations are conducted in an ethical manner for integrity.
5. Building trust with stakeholders- Enterprises can build stakeholder trust by meeting compliance.
6. Facing competition confidently- Meeting compliance requirements becomes necessary to compete in markets that comprise highly regulated industries.
7. Maintaining sustainability- Compliance ensures the business is operating in an environmentally and socially responsible manner in accordance with the global standards and expectations.
8. Using tools and technology- The enterprise must utilise advanced tools, such as cloud-based software solutions, to streamline compliance processes, ensure accuracy, and enhance real-time monitoring and reporting.

What are Some Examples of Compliance?

In India, enterprises must meet one or more compliance requirements listed below-

1. Tax Compliance:

• Corporate Tax Filing: Enterprises must file annual corporate income tax returns and periodic TDS returns. This ensures an accurate reporting of their income, expenses, and deductions as per the Income Tax Act, 1961.
• Goods and Services Tax (GST): Enterprises must register under GST, file regular returns (monthly or quarterly), and ensure accurate tax payment and input tax credit (ITC) claims. Monthly filers usually have complex GST compliance requirements, including reconciliation of GSTR-2A/2B with the purchase register.
• Transfer Pricing Compliance: Multinational enterprises operating in India must comply with transfer pricing regulations to ensure that transactions between related entities are conducted at arm’s length, as per the guidelines set by the Income Tax Department.

2. Corporate Governance Compliance:

• Companies Act, 2013: Enterprises must comply with the provisions of the Companies Act, including the appointment of directors, conducting board meetings, minutes of meetings, filing annual returns, and maintaining statutory registers.
• Registrar of Companies (ROC) Filings: Enterprises must file various forms and returns with the ROC, including details of financial statements, director changes, and shareholding patterns.

3. Labor Law Compliance:

• Industrial Disputes Act, 1947: Enterprises must adhere to regulations related to industrial relations, including dispute resolution mechanisms, retrenchment, and layoffs.
• Employees’ State Insurance (ESI): Enterprises employing a certain number of workers must contribute to the Employees’ State Insurance scheme, ensuring social security benefits for employees in case of sickness, maternity, and employment injury.
• Compliance with the Code on Wages, 2019: Enterprises must ensure that wages are paid according to the minimum wage regulations and that employees are compensated fairly, including overtime pay and timely wage payments.
• Sexual Harassment: Enterprises must adhere to the Sexual Harassment of Women at Workplace Act, 2013. Management must establish an Internal Complaints Committee (ICC) to provide a safe work environment and ensure prompt complaint resolution to protect employees’ rights.

4. Environmental Compliance:

• Air and Water Pollution Control: Large enterprises, especially those in manufacturing and heavy industries, must obtain consent from State Pollution Control Boards (SPCBs) under the Air (Prevention and Control of Pollution) Act, 1981, and Water (Prevention and Control of Pollution) Act, 1974. 
• Hazardous Waste Management: Enterprises that generate hazardous waste must comply with the Hazardous Waste Management Rules, ensuring safe handling, storage, and disposal of hazardous materials.

5. Financial Compliance:

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: Listed enterprises must comply with these regulations, which include disclosure requirements for financial results, corporate governance standards, and timely reporting of material events.
• RBI Compliance: Financial sector enterprises, such as banks and NBFCs, must comply with RBI regulations regarding capital adequacy, asset classification, and reporting standards.
• Prevention of Money Laundering: Under the Prevention of Money Laundering Act (PMLA), 2002, enterprises must implement anti-money laundering measures such as customer due diligence, transaction record-keeping, and reporting suspicious activities to the Financial Intelligence Unit (FIU-IND).
• FEMA: The Foreign Exchange Management Act (FEMA), 1999, governs foreign exchange transactions. Enterprises must comply with the FEMA regulations in cross-border dealings, including foreign direct investment (FDI) and remittances.

6. Data Protection Compliance:

• Information Technology Act, 2000: Enterprises must comply with the IT Act, particularly in securing sensitive personal data and preventing cybercrimes. This includes implementing measures to protect against data breaches and ensuring customer information privacy.
• Data Localisation Requirements: Certain sectors, such as banking and telecommunications, are required to store data within India as per regulations set by authorities like the RBI and the Department of Telecommunications (DoT).

7. Anti-Bribery and Corruption Compliance:

• Prevention of Corruption Act, 1988: Enterprises must ensure they have policies to prevent bribery and corruption within their operations. This includes conducting regular audits, implementing whistleblower policies, and training employees on ethical practices.

8. Industry-Specific Compliance:

Enterprises operating in particular industries have legal requirements to fulfil, such as the following for instance-

• Pharmaceuticals: Pharmaceutical enterprises must comply with the Drugs and Cosmetics Act, 1940, ensuring that all drugs manufactured and sold meet the standards set by the Drug Controller General of India (DCGI).
• Telecommunications: Telecom enterprises must adhere to the regulations of the Telecom Regulatory Authority of India (TRAI), including licensing, spectrum usage, and customer data protection.

9. Export-Import Compliance:

• Foreign Trade Policy Compliance: Enterprises engaged in international trade must comply with the Foreign Trade Policy and obtain Importer Exporter Code (IEC). They must comply with the export-import regulations and customs requirements.
• Compliance with FTAs: Enterprises seeking benefits under Free Trade Agreements (FTAs) must meet the rules of origin criteria and other conditions to qualify for preferential tariffs.

10. Competition Law Compliance:

• Competition Act, 2002: Enterprises must comply with competition law, which disallows anti-competitive agreements and abuse of dominant position and regulates mergers and acquisitions to prevent adverse effects on competition.

What is Compliance Risk?

Compliance risk implies the potential of an enterprise facing legal penalties, financial losses, and reputational damage if it fails to comply with the laws, regulations, or internal policies. The compliance risks can arise because of changes in law or rules, errors, process gaps or misconduct. Non-compliance may have severe consequences such as fines, imprisonment, legal action, loss of licenses, and damage to reputation.

Therefore, enterprises must mitigate compliance risks to safeguard their integrity and ensure long-term sustainability. Their management can implement robust compliance programs, regular audits, and foster a culture of ethical behavior. They must regularly proactively identify and address potential risks. 

What is a Compliance Audit?

Compliance audit refers to a comprehensive review and examination of an enterprise’s compliance capabilities, which includes regulatory guidelines, internal policies, and industry standards. 

Compliance audits are conducted by internal or external auditors. The objective of this audit is to assess whether the enterprise is operating in accordance with the applicable laws, regulations, and contractual obligations. If any non-compliance is identified, then this audit allows the enterprise to take corrective action and reduce potential risks. 

It helps maintain legal and ethical standards, minimises the risk of penalties, and ensures that the enterprise operates within the framework of established regulations. The audit involves evaluating processes, procedures, and documentation to ensure compliance across various areas, such as financial reporting, environmental regulations, labor laws, and data protection. 

What is a Compliance Role?

A compliance role involves ensuring that an enterprise follows the applicable regulations and internal policies. Professionals in compliance roles are responsible for creating, implementing, and monitoring programs and procedures that ensure the enterprise operates within the scope of law and rules applicable to its industry. Their duties also include conducting audits, providing training to employees on compliance matters, and nudging management for any potential risks.

Compliance officers and teams play a crucial role in protecting the enterprise from legal penalties, financial losses, and reputational damage by proactively identifying and addressing areas of non-compliance. They act as a bridge between the enterprise and regulatory bodies, ensuring that all activities are conducted ethically and in full compliance with applicable standards.