Regulatory compliance : A cost-benefit analysis

We all know about the cost of regulatory compliance, says Gunjan Sinha, chairman of MetricStream Inc, but how much do we know about its benefits?

Gunjan SinhaIs regulatory compliance really desirable? While the cost of compliance to consumers and taxpayers is extremely well documented, what about the cost of non-compliance? This is still an uncharted area measured mostly through penalties levied on defaulting organisations and the negative media value it generates. Those who oppose the pressure of compliance, often argue that regulations only expand the bureaucracy, further burdening the industries that they seek to regulate.

But there is evidence to show that regulatory compliance by enterprises results in a positive impact on the quality of the products and services that they offer. It should be possible, therefore, to quantify the results of compliance in direct financial terms, although there are no tested and quantified hypotheses for this. No one disputes the fact that a significant body of regulation attempts to raise the quality of products that benefit or protect consumers. But, is it possible to quantify the gains so achieved?

There has been endless criticism in the press that the recent Sarbanes-Oxley regulation is overburdening companies; that it seeks to bring them in line with needless compliance. Obviously, there is some truth to this. But one should not forget that it was ordinary shareholders who ended up being short-changed by companies whenever they broke the inherent trust of the financial markets. I believe that the Sarbanes-Oxley provisions give CEO's an internal mandate to institutionalise what most of them have always wanted, but in many cases failed to achieve — real-time documentation and controls on key financial and operational processes.

A more correct operating perspective would allow business executives to turn the focus away from debates about the cost of meeting the regulatory provisions of Sarbanes-Oxley, and to concentrate on achieving greater competitive advantage through tighter process controls and metrics. This will not only result in a higher quality of financial controls and disclosures, it can also actually boost financial results through superior process automation and controls.

Take an example from the food industry in the US — a single diseased cow could push the entire industry to the brink of bankruptcy, disrupt markets and spread worldwide paranoia. Yet, business lobbies fought tooth and nail to stop cattle inspections. The industry did not heed the FDA's advice to avoiding mixing meat from downers into cattle feed.