Compliance cost definition
/What is Compliance Cost?
Compliance cost is the total cost incurred by a firm to comply with applicable regulations. These regulations may cover such areas as tax reporting, environmental topics, transport, and finances. Compliance costs can include the cost of the systems needed to collect information for compliance reporting, the cost of the personnel needed to construct and monitor the compliance systems, and the cost to compile and issue reports.
Accounting for Compliance Costs
Compliance costs are not generally considered to have value over more than one reporting period, and so are charged to expense as incurred. Thus, they are classified as period expenses. However, if you install systems to collect compliance costs, it is possible that these expenditures can be classified as capital expenditures. For example, the cost of the computer systems needed to store collected data could be considered a capital cost. If so, these expenditures are initially recognized as fixed assets, and are then depreciated over their useful lives.
Compliance Costs as a Barrier to Entry
Compliance costs can be so high in regulated industries that they represent a barrier to entry, which effectively creates an oligopoly. When this is the case, companies already competing in the industry may favor regulation in order to keep new entrants from appearing and increasing the level of competition. The result is increased prices for consumers.
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Multi-Market Compliance Costs
An organization operating in multiple jurisdictions may have to deal with a broader range of regulations, and so may incur higher costs than smaller competitors operating in fewer markets. This is a particular problem for organizations that operate internationally. This tends to result in larger organizations selectively dropping out of smaller markets when compliance costs become excessive.
Public Company Compliance Costs
Compliance costs are especially high for publicly held companies. These organizations have to maintain adequate control systems, while also producing a range of required reports for the Securities and Exchange Commission, such as the Forms 8-K, 10-Q, and 10-K. These costs are so high that smaller organizations no longer find it cost–effective to go public. In addition, smaller public companies are going private in order to avoid compliance costs.