Tied in knots

Ah, regulation. The last few years have seen a slew of the stuff, accompanied by reams of guidance on how to improve corporate governance and prevent another Enron-style debacle. It is also aimed at restoring the tarnished image of the accountancy profession.

Alongside this, UK companies listed in the US have the additional responsibility of complying with the Sarbanes-Oxley Act, another response to Enron. All of this adds up to a significant increase in the regulatory burden facing companies.

Add to this changes to compliance burdens from bodies such as the Financial Services Authority and government departments like the Department of Trade and Industry and the Inland Revenue and it can get confusing as well as resource-draining.

So much so that many listed companies are simply unaware of the exposure they face and could easily find themselves unknowingly in breach of their requirements.

‘Although I signed the papers to be a director, I had no clue when I signed them what that meant and where I might end up as a result,’ says one former FTSE100 chief executive, responding to a recent survey carried out by legal services group DLA Piper Rudnick Gray Cary. ‘Management has had a cavalier attitude to regulation and assumed in some way that it didn’t really apply to them.’

The survey found that while FTSE500 companies are more aware than ever of the regulatory burden placed on them, their endeavours at compliance are often misdirected. Companies are also failing to grasp the full scope of the powers and sanctions that regulators possess.

The research showed that around nine in 10 of those asked felt that the risk of being punished for regulatory breaches had increased in recent years. Furthermore, the fear of investigation by regulators is rife, with a third of respondents expecting to face a probe of some sort in the next 12 months.

Despite this fear, few seem to be allocating the necessary dedicated resources to dealing with these risks. Even with a greater emphasis by regulators on personal responsibility, only 27% of those surveyed allocate responsibility for regulatory awareness to a specialist manager, such as a risk manager, head of compliance or head of regulatory affairs.

Just over half have a specialist in-house regulatory team to review new regulations, but these are sparsely staffed, with less than a quarter having ten or more employees. As a result, very few were aware of the powers that bodies actually do possess. Only 17% were aware that the DTI can raid a company premises with a warrant, while just 27% realised that the FSA can do so without one.

Less than a third understood that both of these bodies could force a company to cease trading – just one in 10 was aware that competition authorities could also do this – and even less were aware of these bodies’ abilities to seek custodial sentences over regulation breaches.

While compliance is often regarded as a serious issue in some areas, such as health and safety, other just as crucial parts of the business are being ignored. Of those asked 36% did not have a compliance programme for financial services, while 15% didn’t know whether such a programme was in place. Half either didn’t have or didn’t know of a compliance programme for customs and excise tax.

‘I would be willing to bet money that if you did a straight audit of the top 100 companies you would find at least half of them are non-compliant with something significant,’ says the former FTSE100 chief.

The understanding of what an investigation by a regulator entails and a company’s ability to cope with it also seems to be patchy. Only 15% thought an investigation by the Revenue would be damaging to the company, while one in seven companies has neither investigation procedures nor a compliance team in place.

‘People don’t seem to understand how damaging an investigation can be to a business,’ says Jonathan Pickworth, partner in the regulatory group at DLA. ‘We’re talking about the time, effort and resources diverted by being investigated, the disruption to business that can occur, the consumption of management time and on top of that you have the PR side of it.’

In addition, few seemed to understand their obligations under the Listing rules and code of market conduct, with only 36% saying they would inform their listing authority in the event of being investigated.

While the situation has improved since the last survey in 2002, Pickworth argues that work still needs to be done. With so many struggling to fulfil regulatory requirements, he also warns that it does not bode well for self-regulatory guidance, such as the combined code.

‘If people aren’t quite ready to deal with the hard and fast rules, it follows that they won’t likely be ready for self-regulatory requirements,’ states Pickworth, ‘It all boils down to a company’s compliance culture. Some companies place great importance on compliance with regulations, whereas others see it as just a red-tape burden.’

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