A fundamental requirement for an effective ethics and compliance program is that it is supported by “adequate resources.”  This does not mean a bare minimum requirement; nor is this requirement satisfied by flat-lining a compliance department’s annual budget. 

Someone is not getting the message straight – a compliance program has to evolve – that does not mean that it has to suck up more resources each year, but it does mean that a compliance program cannot be strangled.  A CCO faces a real dilemma – a CCO is responsible for implementing an effective ethics and compliance program.  How can a CCO do so if his/her program budget is cut?   

CCOs are experiencing budget cuts — after years of consistent growth or consolidation. Such budget cuts pose significant risks unto themselves.

What is a CCO supposed to do when the funding does not adequately support the company’s ethics and compliance program?

I do not mean to suggest that CCOs should be immune from budget cuts or belt-tightening depending on the company’s financial situation.  Such a narrow view would be unrealistic and unfair.

However, a CCO has to be honest about his/her situation.  A company has to be able to explain why it has to cut a compliance program budget.  If a company increases financial resources and internal audit to ensure compliance with Sarbanes-Oxley, or cuts compliance to fund business expansion, the company cannot turn around and fund those initiatives with a blind ax to the compliance function. 

If corporate leadership is committed to ethics and compliance and the proposed cuts would significantly hinder the company’s compliance program, corporate leaders better have a well-documented justification and explanation for such a decision.

Companies cannot hide behind budget issues as a convenient way to strangle a compliance program while funding pet projects or initiatives.  Such a dangerous strategy will be exposed once a CCO explains the basis for his/her budget request – if the budget amount is carefully calibrated to support a compliance program’s ability to mitigate relevant risks, corporate leaders cannot – and should not – cut a compliance program budget.  To do so, is nothing less than irresponsible.

Corporate leaders cannot mouth their support for the company’s compliance program, while quietly removing or reducing resources needed to carry out an effective compliance program.  In these unfortunate circumstances, the message is clear – cut your compliance program at the company’s risk and prepare for potential harm – risks will increase, detection by government investigators is more sophisticated, and companies could suffer significant legal and reputational risks.

In these circumstances, a CCO has a responsibility – one that everyone knows in the profession – it is to speak up and let senior leaders know about the impact that such budget cuts could have on company operations.  Staying silent is not an option.

A full and frank discussion with senior leadership (and if necessary, the corporate board, is a basic minimum.  If a CCO fails to initiate such a discussion, the CCO has ignored his/her fundamental responsibilities.  Once the issue is discussed, and senior leadership responds, the CCO will then be in a position to decide on next steps.