There are rules in life that keep things running smoothly and minimize harm. For example, traffic lights and stop signs help prevent accidents on the road. Following the rules ensures that the system works and people are safe.
In finance and accounting, rules, often known as standards, ensure that companies comply with the law and the practices of their particular industry. Most businesses need to comply with accounting and finance standards to keep accurate records and minimize the risk of wrong-doing.
Learn more about accounting regulations in our guide to financial compliance.
So, what is financial compliance? In finance, compliance has two meanings — it often refers to the standards a company needs to follow and a company’s actions to ensure it complies with said standards. There are accounting compliance standards and compliance in action.
A standard is an agreed-upon way of doing something. In accounting, a compliance standard is a set of policies and rules that help companies maintain relevancy and accuracy. Additionally, compliance standards protect a company’s security.
Of course, standards are only practical when they are observed and enforced. A company must know what it needs to do to comply with standards and why. Some questions to consider when deciding whether a compliance standard is relevant for your business include:
Recognizing that accounting compliance standards exist is just part of the equation. On the other side is the need to put said standards into action. The term “compliance in action” refers to your organization’s efforts to ensure it complies with the standards created by the government or other relevant agencies.
For example, you might need to maintain a ledger or have safeguards in place to ensure only authorized individuals can view certain pieces of data. If your company doesn’t put compliance into action, it could face consequences, ranging from fines to legal action.
Keeping up with financial compliance regulations helps your organization in several ways. Complying with any relevant standards and principles saves your company time and money in the long run. You’ll reduce the risk of being fined and have an accurate system for keeping track of transactions.
Following accounting compliance standards helps you detect issues before they become considerable concerns. For example, you notice that your company is having cash flow problems. A look at your records might show that there have been unauthorized withdrawals from an account or unapproved purchases charged to a company credit card. With that information, you can track down the source of the issue and decide what to do before your company ends up in the red.
Complying with financial regulations also helps your organization steer clear of legal issues. If the standards outline a method of keeping clients’ financial data secure and confidential and your company doesn’t follow those standards, clients can sue you if they find out. Lawsuits cost your company time and money and can damage your reputation.
It takes much less effort to follow the rules and comply with regulations than to undo the damage caused by bad press, legal actions and fines.
One way to ensure your organization follows the rules expected of it is to conduct an audit. Before you conduct an audit or hire an external auditor, you should know the type of standard you follow and the expectations it has. While some standards apply to every company, others are designed for businesses in specific industries.
During a compliance audit, you can expect the individual conducting it to examine the following:
Let’s take a closer look at some of the types of compliance in finance your company might need to follow.
Generally accepted accounting principles (GAAP) are accounting standards and rules that companies often use when creating financial reports. The Securities and Exchange Commission (SEC) has adopted GAAP. The Financial Accounting Standards Board (FASB) also uses GAAP to develop its accounting practices and methods.
GAAP consists of fundamental principles and several rules specific to certain industries. The 10 basic rules under GAAP are:
In addition to the basic principles, GAAP also includes generally accepted industry practices and FASB standards and rules.
One of the goals of GAAP is to eliminate financial reporting practices that can mislead. An organization that doesn’t follow GAAP could theoretically present its financial information in a way that makes the company’s financial health look better than it is.
The Sarbanes-Oxley Act of 2002 (SOX) was passed in response to several financial scandals at the start of the 21st century. The goal of SOX is to boost investor confidence through reforms and additions in four principal areas:
To do that, it increased corporations’ oversight responsibilities. Auditors are now more independent, reducing conflicts of interest. SOX also introduced stricter penalties for companies that misbehave financially.
While GAAP is a collection of generally accepted principles, SOX is a law. Companies need to follow it to stay on the right side of the legal fence.
SOX contains 11 sections:
The Payment Card Industry’s Data Security Standard (PCI DSS) is a set of regulations created by credit card issuers, American Express, Discover, Visa, MasterCard and JCB. The goal of PCI DSS is to protect cardholder information. PCI DSS aims to prevent data breaches and protect any information should a breach occur.
PCI contains several protections that aim to enhance physical security and improve technology to keep cardholders’ details from being revealed or misused. The following are some of the requirements under the standard:
Companies that need to comply with PCI DSS can use encryption to protect customers’ data and ensure that all software and hardware are current. Keeping hardware and software current can mean installing security patches and updates as needed.
If a company collects credit card information and doesn’t comply with PCI DSS, the penalties can be severe. A company might need to pay a hefty monthly fine until it addresses the issue. It risks having its merchant account closed by the card companies, meaning it won’t be able to accept cards as payment. Companies that don’t comply with the standard are also more likely to be audited frequently.
You can complete a self-assessment questionnaire to see if your business complies with PCI DSS. The type of questionnaire you need to complete depends on your card transaction volume and the type of transactions your company processes.
Quite simply, tax compliance means understanding the tax rules, including at the federal, state and local levels. The first step to tax compliance is knowing what taxes your business needs to pay and when to pay them.
Generally speaking, the tax filing deadline is April 15 annually. But there are likely other deadlines that apply to your company. For example, you might have to pay quarterly estimated taxes. If you have employees, you also need to pay payroll taxes.
Your tax obligations can include income tax, payroll tax, unemployment tax and sales tax. If your company is based in a state with income tax, you’ll also need to pay that and file the appropriate tax forms. You might also have to file and pay taxes at the municipal or local level.
Also, part of tax compliance is reporting the correct income. Your business can most likely deduct certain expenses from its taxable income. You need to have accurate records for those expenses and proof of them. The expenses also need to be necessary and ordinary for your industry. A “necessary” expense is appropriate for your business, while an “ordinary” expense is typical and accepted in your industry.
Depending on your business’s industry, it might have to follow a particular compliance framework that doesn’t apply to other sectors. Some examples of industry-specific compliance standards are:
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) might not look like an accounting and financial standard at first glance. However, HIPAA does contain some financial elements, particularly concerning payment information for services patients receive. According to the U.S. Department of Health and Human Services, HIPAA applies to three types of entities:
HIPAA creates a set of standards designed to prevent the disclosure of patient information without their consent or knowledge. It consists of two parts, the Privacy Rule and the Security Rule.
Under the Privacy Rule, there are only a few instances when a covered entity can disclose protected health information without getting consent from the individual first. Those instances include treatment and payment, disclosure to the individual themselves or if the individual has the opportunity to object or agree to the disclosure.
If the disclosure would benefit public health and public interest, an entity can disclose it without the permission or authorization of the individual. For example, disclosure is allowed in the event of a judicial proceeding or if the person is a victim of domestic violence or abuse.
The Security Rule is the other half of HIPAA. It protects a certain type of information covered by the Privacy Rule — all identifiable health information that’s in electronic form. It doesn’t apply to oral or written protected health information.
An entity needs to do the following to comply with the Security Rule:
No matter your industry, complying with financial regulations and upholding accounting standards is a must. There are a few things your organization can do to ensure it avoids compliance risks in accounting.
Multiview Cloud ERP is a fully-managed cloud software application that offers several modules to help you leverage your financial data effectively. Using Multiview ERP, you can improve your work output and respond to challenges quickly. The platform is designed for use by various industries, including healthcare, financial services, education and nonprofits and others.
To learn more about how it works and how it can help you follow finance compliance regulations, schedule a demo today.