Compliance Action and Compliance Standards

Financial discipline and a proper accounting system ensure the smooth running of the company. The company has to implement financial Compliance for Accounting to have a healthy financial status.

The system to ensure all financial accounting is practiced with standard rules and regulations is called Compliance. Compliance adopts a standard to prevent malpractice, wrongdoing, and misconduct in financial accounting. Financial compliance is to abide by the rules and regulations laid down by Legal authorities and internal company policy. It regulates all financial transactions.

Compliance is achieved by setting a standard and ensuring that the business follows the set standards. One is compliance standards, and the other is compliance action.

Compliance Standards

It’s a set of rules, regulations, laws, and policies concerning finance and accounting. It maintains the connection and authenticity of accounting procedures. Compliance standards are necessary and effective if followed and implemented in all departments. The company must know the requirements for a compliant and the need to comply.

A company should analyze the below before implementing the Compliance standards.

  • The need for compliance.
  • Effects of non-compliance.
  • Standards relevant to the business of the company.
  • Benefits to the company
  • Serves the purpose 

Compliance Action

The efforts taken to implement the standards through various steps are called Compliance action. It involves

  • Appointment of a responsible person to oversee the implementation. 
  • Training of staff. 
  • Putting systems in place
  • Selecting appropriate accounting procedures
  • Addressing the issues in areas of critical concerns 

What comes under Compliance?

Anything and everything that involves monetary transactions will come under business compliance. All financial transactions, either physical or on books, will be compliant. Man management, time management, and material management come under compliance. 

Few heads to illustrate: 

  • Payroll
  • Financial records
  • Human resources
  • Management Standards
  • Health and safety policies and procedures
  • Data security 
  • Welfare policies
  • Material management
  • Sales implications
  • Legal issues
  • Purchase implications

Principles of Accounting

Each company has its policies and procedures to follow. No business entity is the same when accounting principles are concerned. It is impossible to chalk out one particular system for all the companies.

Generally Accepted Accounting Principles (GAAP)

These rules and standards are commonly used by companies worldwide for financial accounting. Generally Accepted Accounting Principles have set rules and standards for preparing financial statements. The basic rules under GAAP are:

  • Economic Entity Assumption: The business of the company and that of its owners cannot be mixed. It should be a separate entity.
  • Monetary Unit Assumption: All information concerning finance should be in currency used locally.
  • Time Period Assumption: Preparation and presentation of all financial statements should be on time.
  • Cost Principle: All records relating to the price of any asset or item should be in purchased value, not at present market value. 
  • Full Disclosure Principle: A company should not hide any information or misinform details like lawsuits in financial statements. It has to be mentioned in the financial statement.
  • Going Concern Principle: The company will continue to exist until it decides to close the business soon.
  • Matching Principle: The expenses to the relevant revenue earned should be matched in the same period.
  • Revenue Recognition Principle: The Company should account for the revenue as and when sales happen, even if the company receives the payment later.
  • Materiality: A company needs to provide all relevant information and can’t withhold or misstate any details that might influence a person reading a financial statement. 
  • Conservatism: A company needs to account for the uncertain expenses and liability on actual value in the same period, but uncertain revenue is accounted for as and when it is realised.

The primary concern of GAAP is to put an end to practices that mislead the financial status of a company.

Financial crimes and misconduct by companies with the help of financial auditors and consultants are increasing. The lawmakers passed a law (SOX) to stop such incidences and bring back the confidence in investors and other stakeholders.

The Sarbanes-Oxley Act of 2002 (SOX)

In the wake of increasing financial fraud, lawmakers passed a law to curtail the same.

SOX aims to create confidence in investors through reforms and additional regulations. In principle, four areas,

  • New laws for the protection
  • Accounting regulation
  • Severe criminal punishment
  • Increased corporate responsibility and accountability

Companies must follow GAAP principles and abide by SOX laws to have a healthy financial status.

SOX 11 clauses to follow

  • Public Company Accounting Oversight Board (PCAOB):

 The PCAOB acts as a watchdog on auditors. It makes regulations for auditors to follow. It also oversees and inspects their work.

  • Auditor Independence:

This clause limits the services of the auditor firms to their clients. The auditor should not perform other paid work for the clients they audited. It creates conflicts of interest and will bias the auditors toward their clients.

  • Corporate Responsibility:

The internal audit committee members should not have any financial obligation to the company. The person heading the company affairs is responsible for the accuracy and completeness of the financial report.

  • Enhanced Financial Disclosure:

The company has to disclose the financial statement to the public. The company also needs to show the internal controls report in annual reports.

  • Analyst Conflicts of Interest:

  A securities analyst lists conflicts of interest that could bias them toward a company. The disclosure gives the investors the chance to consider the weight of a bias.

  • Commission Resources and Authority:

To increase investor confidence, it authorises to prevent the professionals in the industry from not abiding by the rules and regulations.

  • Studies and Reports:

It makes available the studies and reports made while scrutinising the financial status of a company. It gives details of audits for financial frauds and misconduct like investment banks that are not participating in illegal activities.

  • Corporate and Criminal Fraud Accountability:

It enables the auditing persons to interfere in the investigation by law authorities. It protects the person’s identity by informing the agency about financial irregularities.

  • White-Collar Crime Penalty Enhancement:

It increases the punishment and penalty for financial crimes involving company authorities and audit firms.

  • Corporate Tax Returns:

The appointed company head has to sign the tax return. This ensures transparency, accountability, and responsibility.

  • Corporate Fraud Accountability:

It increases the punishment and penalty guidelines for records tampering and corporate fraud. It assists the SEC in investigating fraud.

Benefits of Compliance Standards

  • It increases the credibility of your company in the market.
  • It will identify and detect issues before they create damage.
  • It gives the exact status of the financial position at any given time.
  • Will keep the company away from legal issues that arise for a non-compliant company.
  • It ensures an accurate system for tracking all transactions and avoiding misappropriation of funds.
  • It improves stability and saves a lot of money and time in the long run.
  • It keeps the company data secure and confidential as the financial gives limited access with password protection.

Everything in life and business moves smoothly when rules and regulations are followed. Compliance will ensure a healthy business prospect. Maintaining an accounting system will save the company from penalties for delays and wrong information.


Keeping track of many rules and regulations is a difficult task. Their violation by oversight can lead to legal issues. Vakilsearch provides you with solutions and assistance to overcome the problems.

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