Image Source: Freepik – CC0 Licensed Image
Compliance failures are among the worst things that can happen to a modern business. Rules and regulations are everything in certain sectors, especially those that are hazardous to workers, customers, and the environment. When a company follows rules, it has nothing to be scared of. However, breaching the public trust and disregarding safety have immense consequences. From damaged reputation to impacting mental health, here are some examples.
Financial Penalties and Fines
There are many negative consequences of non-compliance across every sector. However, the most obvious is financial. These sums can be massive, depending on the transgressions, and could impact the operation of a business. To avoid penalties, most businesses conduct regular compliance checks, such as a CQC mock inspection, emergency drills, and safety audits. These can help a business improve safety across the board while avoiding harsh legal fees and fines.
Compliance Failures Lead to Damaged Reputation
While it varies by industry and country, the UK’s Health and Safety Executive confirms that 17% of British businesses faced enforcement action due to non-compliance in 2024. While the penalties can be financial, there is also a significant risk to the reputation of a company:
- Companies known for cutting corners face questions from the public over safety.
- The media has a field day reporting bad practices in sensational stories that stick.
- Talented employees are more likely to leave a business that has a bad reputation.
Operational Disruptions and Lost Productivity
Non-compliance doesn’t impact a department or individual; it can actually bring an entire business to a grinding halt! Safety violations, for example, can be used to force a factory to shut down by regulators. The same goes for customer-focused businesses, too. A dirty kitchen can be enough for hygiene inspectors to close a restaurant. When this happens, the business loses money every minute, and any employees might be unable to work throughout this period.
An Impact on Employee Morale
Further to employees, morale can take a massive hit when a business is forced to close because of non-compliance. They might feel betrayed that those in charge didn’t take every step to guarantee their safety. While this will typically cause anger among the staff, it can also lead to lawsuits and an immense lack of trust between employer and employee. At the very least, the business can face a higher employee turnover rate, directly impacting funds.
It Costs a Lot to Fix Compliance Failures
There is no fixed amount of compliance penalties, but UK health and safety fines reached £145,000 in 2022 and 2023. So it’s safe to say that compliance failures do come with a price tag, meaning staying up-to-date with HR compliance and other types of regulations is in the best interest of a company. Fixing mistakes comes with a hefty price tag, especially when repeated.
Correcting previous mistakes
Businesses have to devise new systems and processes to correct previously made mistakes. This includes new equipment, software, and policy restructuring that takes time and money.
Further training and education
Employees must be brought up to speed with new policies, and training is essential. New systems take hard workers away from their roles and require continuous investment.
Ongoing and enhanced audits
A regulator will usually request an advanced audit after a business fails compliance checks. These are at the cost of the company and can take a long time to complete to satisfaction.
The money and effort required to fix past mistakes are a major part of the whole compliance system. According to the Ponemon Institute, the cost of non-compliance is 2.71 times higher than satisfactory maintenance, and this is only in relation to the cost of a cyber data breach!
Missed Business Opportunities
Because of reputational damage, other would-be partners and clients can distance themselves from your business if you have engaged in non-compliance. Depending on the level of non-compliance, this can lead to missed opportunities that could have been beneficial for the company. Compliance problems are also recorded for public record and may be reported by the media, which won’t help your business even a long time after the events have taken place.
The Cascading Effects
From just one compliance breach, there can be a cascading or domino effect that ripples out across the entire business. For example, a single security breach can lead to fines, but also legal action from customers or employees who have had their data stolen, similar to the 2023 data breach of Insomniac Games, where employee personal details were stolen. However, details of a Wolverine game were also leaked online, causing work to be scrapped and redone.
Compliance Failures Take an Emotional Toll
A study from 2023 found that 75% of employees involved in non-compliance investigations were negatively impacted by a high level of stress. Therefore, the impact isn’t only financial, but can also be emotional. This can take a toll on the mental health of the workers who are involved:
- Managers are under pressure to fix the problems while dealing with regulators.
- Employees will usually feel betrayed by the company and feel a loss of pride.
- Company culture can become negative, based more on fear and distrust.
Increased Regulatory Scrutiny
When a business gets on the radar of regulators, it can be hard to get off. A single compliance breach means you are now in the crosshairs of pretty powerful regulatory bodies that can come down heavy on your business. They will also use it as an opportunity to increase scrutiny on the company to ensure it does all it can to meet standards and make positive changes. This can increase the risk of further incidents as the pressure mounts to meet the burden of compliance.
Summary
There are, of course, financial penalties and fines for compliance failures in any sector. Some are more heavily regulated than others. However, it always costs a lot of money to fix a failure, even as a small business in a lenient sector. After a compliance investigation, it isn’t uncommon for a business to be on the radar of regulators, leading to further scrutiny placed on a company.
