Fixing non-compliance in a small to medium enterprise (SME) requires a strategic shift from reactive, last-minute panic to a proactive, structured approach that integrates compliance into everyday business operations. Typically, non-compliance stems from limited resources, complex regulations, or a lack of awareness, resulting in financial penalties, reputational damage, and operational disruptions.
What is Non-compliance in SMEs?
Non-compliance in SMEs is the failure to adhere to mandatory laws, industry regulations, tax obligations, and internal policies, creating legal, financial, and reputational risks. This issue often arises from neglecting labour standards, safety protocols, or failing to register intellectual property. Common examples include tax evasion, improper financial reporting, and ignoring employment laws, leading to hefty fines, business closure, and loss of trust.
For SMEs operating in South Africa, being compliant means knowing your regulations, broad-based black economic empowerment (B-BBEE) standing and adhering to policies like the Code of Good Practice.
In this article, we look at what non-compliance looks like in an SME and how to fix it.
Primary Risks of Non-Compliance in Businesses
Here are some of the risks of non-compliance in organisations.
Legal and Financial Consequences
Failing to comply with tax laws, regulations, or financial reporting standards can cause a lot of chaos for your SME. Non-compliance in this area can lead to fines or penalties from regulatory bodies such as the South African Revenue Service (SARS) and increase your risk of litigation. Also, you may be subjected to increased audit frequency from the government or third parties, particularly if you are a public company.
Reputational Damage
Failure to comply can significantly impact your reputation. Customers, investors and business partners may lose confidence in businesses that fail to adhere to regulatory or industry-specific policies. In some cases, you may gain negative media attention, which can damage your public image.
Additionally, a lack of controls can impact how your employees view leadership and the company overall, negatively impacting morale and causing problems in recruiting or retaining team members.
Operational Disruptions
Non-compliance can create business disruptions. When compliance policies are unclear or poorly enforced, expense reports may contain errors or inaccuracies. This creates additional work downstream for managers and accounting teams, correcting issues and tracking down information to verify expense claims. This manual intervention is time-consuming, taking employees away from their primary tasks and possibly costing the business financially.
Fraud and Financial Loss
Weak compliance controls can produce significant financial losses, not only from regulatory fines but also from fraud. Weak compliance practices can make it easier for unauthorised or fraudulent transactions to go undetected. For example, weak expense management processes may allow fraudsters to submit fake invoices or execute payment scams.
Lack of proper monitoring can lead to:
- Duplicate expense claims or manipulated receipts
- Unauthorised vendor payments or misclassified expenses
- High-risk transactions that have the greatest risk of fraud
These are just some of the ways in which non-compliance can affect your business.
Rethabile Thobejane, Compliance Manager at CMS South Africa, says, “The biggest thing that business owners often get wrong about compliance is viewing compliance as a stand-alone department in the business, rather than a strategic business partner. This perspective causes business owners to underestimate compliance’s continual, proactive and value-adding nature.”
Steps to Overcome Non-Compliance
While navigating compliance can be overwhelming for SMEs, adopting a strategic approach can help manage regulatory obligations.
1. Leverage Technology
Investing in low-cost compliance management tools can streamline processes such as reporting, monitoring and record-keeping. Cloud-based platforms can help SMEs maintain secure and scalable compliance systems without large capital investments. FinTech and regulatory-technology compliance tools can also assist in automating regulatory reporting and risk assessments, reducing the manual workload for SME owners and employees.
2. Outsource Compliance Functions
If you don’t have in-house expertise, outsourcing compliance tasks to consultants or compliance service providers can be an effective way to stay on top of regulatory requirements. Also, outsourcing can provide SMEs with access to specialised expertise that would otherwise be costly to maintain in-house.
3. Prioritise Training and Awareness
Regularly training your staff ensures that employees understand regulatory obligations and compliance risks. Subscribing to industry newsletters, attending webinars and joining professional networks can help SMEs stay informed about regulatory changes.
4. Develop a Strong Compliance Framework
Documenting your compliance policies and procedures tailored to the needs of your business ensures consistency and accountability. Performing regular risk assessments can identify gaps and areas of improvement. Additionally, you should establish internal controls, such as monitoring mechanisms and periodic compliance reviews, to prevent lapses in regulatory adherence.
5. Create a Compliance Culture
As a leader, you should prioritise compliance and set a tone of accountability within your organisation and as an ongoing business priority. Embedding compliance into the company’s values and decision-making processes can ensure it becomes an integral part of business success.
Top Compliance Platforms for SMEs
Here are some platforms SMEs can use to monitor and ensure they remain compliant.
CompliFlow: CompiFlow is specifically designed to automate South African compliance requirements, including Companies Act (CIPC), SARS (tax), and labour law.
Sage Business Cloud: A market leader in South Africa for SME accounting and HR, providing automated compliance for payroll and taxation.
Xero: Widely used for payroll compliance, tracking employee data, and generating required reports.
Ariscu: A specialised platform for South African compliance, covering OHS Act, ISO, and environmental regulations with a local legal register. It offers real-time risk monitoring, audit trails, and contractor management, making it suitable for manufacturing, logistics, and corporate sectors.
