What is Compliance Audit Procedure and its importance in organisation

Shivi Gupta

25 May, 2022

The ‘governance’ of an organisation generally refers to the processes by which an organisation covers the issues of authority, accountability, stewardship, leadership, direction and control exercised in the organisation. Good governance practices are crucial towards the success of the organisation in order to achieve its objects and to comply with all the legal, ethical and operational requirements of the company. This piece of writing provides a discourse on Compliance Audit Procedure.

What is Compliance Audit procedure?

A Compliance Audit is the comprehensive in-depth evaluation of an organization to comply with the regulatory frameworks as set up by the government bodies. The Compliance Audit procedures include evaluation reports on compliance preparations, data security policies, risk management and compliance task management. Corporate Compliance Audit procedure involves a research of applicable laws on the organisation, a proper evaluation whether the organisation is complying with such standards and should report to the top level management if any loophole is present in the organisation. Company Secretary with core competence in compliance governance plays a crucial role while Compliance Audit procedures.

Why is Compliance Audit procedures important for an organisation?

A regular and adequate Compliance Audit plays a significant role in the success of an organisation. Various benefits that can be attached with a corporate Compliance Audit are as follows:

• Provides quality support:  A properly evaluated Compliance Audit procedure incorporates and supports ongoing quality initiatives taken within the organisations Compliance Auditing, can help a company to identify its weaknesses in complying with regulatory compliance standards and provide guidance to mitigate or reduce these risk, while avoiding the potential legal issues that a company can face in future.
• Helps in avoiding heavy penalties or other legal consequences- A proper Compliance Audit procedure helps the business to avoid various risk which includes heavy penalties or Imprisonment of the errant officials, civil action by the authorities or even cessation or shutting down the business activities of the organisation.
• Creates brand reputation- Companies that are embed with positive ethics and effective compliance management program often gains healthy and loyal  employees, customers  and earns a higher level of public respect for their brand and thereby increasing the market capitalisation and a higher profitable returns.
• Enhances credibility/creditworthiness- A good compliant company increase the creditworthiness in the eyes of the lenders. This will help to pave new credit opportunities such as a personal loan, credit card or line of credit.  If a company is able to maintain a good credit score (670 and above), lenders are more likely to approve your loan request lower interest rates and on more favourable terms.
• Helps to mitigate risks- A proper Compliance Audit not only protect investor’s wealth but also helps identify any potential risk in a timely and accurate manner and provides adequate and absolute solutions to it.

Steps in an effective Compliance Audits Procedure

1.  Identification of applicable laws on the company- Compliance Audit starts with identifying and proper evaluation of applicability of the various Act, Rules, Regulations, Policies and Procedures as per Industries standards, type of Entity, nature of business activities etc. The laws are divided into Central laws, State Law and Local Laws. For example, FSSAI licence is applicable on a food related business activities whereas Drugs license is required to be obtained by a medicinal company.
2.  Preparation of Compliance Chart- . The Compliance Chart plays a vital role in the Compliance Audit procedure. The compliance chart of a company should be prepared on the basis of the operations and structure of the company and the type of business activities. Broadly, the compliance chart  consists of the following activities: Identification of various applicable Laws on the entity, Risk Assessment, Compliance Monitoring and Compliance Reporting.
3. Assessment of Compliance Risk-The next step in Compliance Audit report is to identity the existing risks or any new risk the company may face in future. There are generally two ways of risk assessments that can be performed by the company, i.e., high level risk assessment and detailed risk assessments. In the high level risk assessment, only the current and anticipated critical and high compliance risks are identified. Whereas in the detailed risk assessment only inputs for high level risk assessment are identified which needs to be  by representatives of Risk Management^[1] team.
4. Compliance Reporting- The last stage of Compliance Audit procedure is to report non-compliances risks to the concerned person who can take appropriate corrective actions to mitigate these risks. Reporting of non-compliances ensures that is taken by the responsible person to reduce the compliance could be done to the top level management such as Chief Financial Officer (CFO), Chief Executive Officer (CEO) and other functional and operational  heads of the company.

What are the types of Compliances in India?

The two types of Compliances that every company should follow are:

1. External Compliance refers to the rules, laws and standards that are governmental authorities that regulate the operational and administrative functions of an organisation. The external compliances are broadly categorised into
2. Company Laws
3. Administrative Laws
4. Tax Laws
5. Labour Laws
6.  Internal Compliances- Internal compliance refers to set of rules and regulations which regulates the internal functioning of the organisation. A company is governed by the rules and regulations mentioned in their articles of incorporation.

Conclusion

Compliance Audit Program is the basic need for healthy and prosperous growth of the company. Having a periodical Compliance Audits not only ensures that the organisation is strictly adhering with the regulatory as well as internal compliances but also identifies and measures the existing risks or new risks that the company may face in future and tries to reduce it. Having an active Compliances Audit will also increase the market capitalisation and gains creditability in the eyes of the customers. This can be achieved with the help of effective Compliance Audit Procedure.  

Read our Article:Important Compliance for Running Business in India