Too Small to Worry About Compliance?

In the Due Diligence phase of an acquisition not so long ago, the owner of the target company casually remarked, “We can’t afford to worry about compliance because we are too small.” He was probably surprised when the acquisition did not go through.

Is there a “too small” for organizations when it comes to regulatory compliance?

Every business and nonprofit has compliance challenges. They range from payroll tax remittance to local government permits to strings attached to their revenue. Some carry harsher penalties than others, but there are consequences if your organization is caught while not in compliance.

One aspect of managing risk is to determine the costs of failure and balance it with the long-term costs of prevention. If the cost of failure is very small and the cost of prevention is significant, many will choose to “self-ensure” and gamble that they will not have a failure. But be certain you accurately quantify the costs of failure. There may be hidden costs such as damage to reputation, injury to a contractual relationship or an increase in attention from other regulators.

For example, refusing to compensate employees for accrued vacation hours when they voluntarily leave your employment seems like a cost-savings tactic that motivates employees to stay with your organization. Yet if the state the employee resides in requires that you pay the accrued vacation hours upon separation, you face a combination of penalties, legal fees and time away from your core business operations on top of the amount you will eventually pay for the vacation time (plus interest in many states). If you are gambling with compliance, takes only one disgruntled employee to ruin your whole day.

Are there provisions in any of your contracts where you assured the other party that you are compliant with all labor laws? If so, in the scenario above, you may put that contract and future contracts in jeopardy. If the contracts are with a government agency, you may face even worse penalties for false statements in the contract. The cost savings now look far less valuable.
So are you “too small” to worry about compliance? Perhaps the better question is: “How can I become (or remain) compliant with a reasonable effort and expense?” I will explore that in later posts.