One would need a crystal ball or working time machine to predict for certain whether the U.S. and global economies will enter a recession this year. But, as a handful of compliance, risk and governance experts told us, it doesn’t take a psychic reading to know compliance professionals are likely to be well-insulated in any event.
There’s far from consensus on whether the U.S. will experience an economic recession this year (yes, and it’ll be a long one; yes, but it’ll be a short one; no, the U.S. will make a narrow escape). But one thing is for certain — compliance functions will be spared the harshest effects. Probably.
The recession chorus has been growing louder for months, spurred by a combination of continued inflation and interest rate hikes, a cooling job market and Wall Street declines. Despite these fears, compliance, risk and governance professionals likely have little cause for concern for their own jobs, according to economic and compliance analysts.
In fact, compliance professionals may become even more important to their organizations, for example, in the event of widespread job loss, analysts said. Fitch Ratings has projected the unemployment rate, which sat at 3.5% in December 2022, will rise to 4.7% by the end of 2023 and peak at 5.3% in 2024.
“This could potentially lead to increased risks and a greater likelihood of non-compliance with laws and regulations,” said Lakshmi Raj, co-CEO of Replicon, a time-tracking platform. “A recession may also lead to increased scrutiny and enforcement by regulatory agencies, as governments may be more concerned about financial stability and the protection of consumers. This could create a greater demand for compliance, risk and governance enforcement, as companies seek to ensure that they are meeting their regulatory obligations.”
The threat of government oversight and regulatory enforcement is a huge stressor for corporate compliance officers. Our survey last year found that the pace of changing regulations was their single biggest stressor, with 69% of people we surveyed citing it. But this heightened regulatory environment is the very thing that will spare compliance from cost-cutting, said John Brisco, CEO of business software provider Coherent.
“Companies are reconsidering their budgets, which is a natural reaction in these market conditions, but few will cut their compliance budgets, and if they do, they will regret it — maybe not immediately but eventually,” Brisco said. “Regulators are strengthening enforcement through increased oversight and issuing more fines for compliance errors like compromised data and spreadsheets failures. The bar is higher for compliance not just in the U.S., but globally, and companies that don’t shape up will pay the price. Much like healthcare, preventative measures will save money in the long run.”
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Since 1854, the American economy has experienced a total of 34 recessions, the shortest being the most recent, a two-month dip between February and April 2020 in the early days of the Covid-19 pandemic, according to data from the National Bureau of Economic Research. The longest spanned more than five years, starting in October 1873 and running until March 1879.
Few prognosticators expect any contraction in 2023 to last quite that long, but regardless of length, recessions are often followed by government action. The 2001 recession was followed by the Sarbanes-Oxley Act (SOX), which was put in place after accounting scandals at Enron and WorldCom. And the Great Recession, an 18-month dip that remains the longest U.S. recession since the 1920s, gave birth to the 2010 Dodd-Frank Act, building on the regulatory landscape established by SOX.
But given the causes of any 2023 recession, it’s unclear whether the government would respond, though some sectors are likely to be bigger targets than others. Cryptocurrency, for example, is already in the U.S. government’s regulatory crosshairs, and recent upheaval in the sector is likely to draw added attention if crypto exchanges drag down the economy.
“Cryptocurrency provides the most colorful, if not most notable, example of an emerging financial crisis,” said David Bissinger, a partner at the Houston law firm of Bissinger, Oshman, Williams & Strasburger.” … [U]nder Chairman [Gary] Gensler, no major SEC rulemaking occurred; now, with the fall of multiple cryptocurrency platforms, the SEC and other agencies have begun to scramble to address the many complex issues arising from the growth of cryptocurrencies in the past decade.”
And even if the recession is shallow and brief, making new regulation unlikely, the feds are already watching. The DOJ filed criminal enforcement charges against 40 individuals and corporations during FY 2022, a huge increase from the pre-Covid year 2019, when only 28 charges were filed. And the SEC filed 760 enforcement actions in FY 2022, a 9% increase from 2021.
“We advise clients to ensure that any changes in processes and personnel resulting from any economic downturn not affect policies, processes and control structures related to compliance matters,” said Jim DeLoach, managing director of business consulting firm Protiviti. “Adherence to the timeless DOJ guidelines is a constant regardless of the state of the economy. In a recession, incidents involving fraudulent revenue reporting, misstated financial statements and illegal acts — including money laundering — tend to increase.”
In its most recent job turnover release, the U.S. Bureau of Labor Statistics said nearly 11 million jobs were unfilled at the end of November, a level that has remained largely unchanged since August. In companies that are having a tough time keeping compliance roles filled, risk exposure could snowball, said ACA Group analyst Nicole Morton.
“For firms caught with under-populated or under-skilled compliance teams, the risks can be significant. For example, when people are not in place to perform compliance tasks or are not adequately trained, compliance risk can escalate very quickly,” Morton said. “Processes may not be completed or may be completed incorrectly — opening the firm up to potential reprimands and fines from the regulator. This, in turn, can morph into reputational risk, resulting in damage to the firm’s perception by customers, investors and other regulators.”
And under the big umbrella that is compliance, what’s true in one sector isn’t in another. Some industries may see overall job contraction in the event of a recession, while others might expand.
Cybersecurity, for example, which has been rocked in recent months by layoffs (more than 150,000 tech workers were laid off in 2022), could see a boost, as companies continue the remote work transition and if a recession leads to an increase in cyber threats, said Igor Volovich, a VP at cybersecurity compliance firm Qmulos.
“Ensuring that a company has strong cybersecurity measures in place can help protect against data breaches, cyberattacks and other online threats that can have serious consequences, such as financial loss, reputational damage and loss of customer trust,” Volovich said. “As a result, the demand for cybersecurity and compliance services is typically relatively stable, even during times of economic downturn.”
Similarly, tax compliance professionals are likely to see pressure increase, as the IRS (a political fight over an injection of new workers notwithstanding) seeks to target the tax gap that often accompanies recessions, according to Wendy Walker, chairperson of the IRS advisory council’s information reporting subgroup.
“Recessions have typically proven to be a time when we see increases in the tax gap, essentially the difference between how much taxpayers owe and how much they actually pay. Small declines in taxpayer compliance cost the nation billions of dollars in lost revenue and shift the tax burden away from those who don’t pay their taxes onto those who pay their fair share on time every year,” Walker said. “Any increases in the tax gap would almost assuredly lead to more severe IRS enforcement of tax reporting compliance.”
In short: Compliance officers will keep their jobs, but maybe they’ll wish they hadn’t
Compliance experts tend to agree that the impact on professionals in the field isn’t so much that they’ll lose their jobs, it’s that their jobs will become harder and worse. And for already-pressed compliance officers (more than half of whom told us they were burned out), even a brief recession could cause added stress.
They could expect, for example, more attention from their board of directors and corporate officers as those groups clamp down on their governance obligations — for good or for bad.
“The governing board’s core challenge to oversee operations in a financial downturn will be expanded to include specific oversight concerns with respect to heightened oversight of risk and compliance functions, in addition to financial oversight,” said Michael Peregrine, a partner at the international law firm McDermott Will & Emery. “The board will be expected to be more engaged with respect to operational oversight given the projected recession. While continuing to be respectful of the line between business and management, the board will need to be more inquisitive than in more tranquil economic periods in monitoring the impact of the economy on all aspects of the enterprise.”