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 following:
Cost of the systems needed to collect information for compliance reporting.
Cost of the personnel needed to construct and monitor the compliance systems.
Cost to compile and issue reports.
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.
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.
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.