The effect of declining energy prices on the compliance function
The price for a barrel of crude oil has taken a plunge since the second half of 2014, with prices going from over US$100 a barrel to around just US$45 at the end of October 2015. Natural gas in the United States has followed the same trend, with a similar drop in value of around 50 percent. These dramatic shifts in prices might be a boon to the consumer at the gas pump or during a cold winter, but companies in the energy sector (and many others as well) are feeling the effects of the price drops. With an increase in supply, less demand and a glut of energy on the market over the past two years, the effect of this cheaper energy is taking a toll on the industry.
So the question is, with oil and gas prices at their lowest in nearly a decade, what does this mean for the compliance function at energy, oil and gas companies? Certainly it means decreased budgets for compliance and increased pressure to meet financial goals, and could therefore also mean reducing the compliance workforce.
More importantly, what can be done to respond to those challenges? The fact of the matter is that compliance is often seen as a cost centre that does not provide a return on investment. In lean times, cutting compliance can be seen as a way to instantly improve the bottom line; however, the risks of cutting the compliance function are multiplied when employees are facing an uphill battle to meet quotas in the face of declining revenues. In these situations, it can be tempting for less scrupulous employees to cut corners or even commit illegal acts to keep the company afloat, meet expectations and retain their jobs. For this reason, the compliance function is even more essential and necessary during lean times as a measure to detect, prevent and remediate improper conduct.
Dealing with a decreased budget
Surveys and studies found that pressure to commit misconduct increased during the financial, banking and real estate crisis of 2008 to 2011, as did actual misconduct by employees.
It would be wise for companies in the energy industry to learn from these lessons and maintain the compliance role, but the reality of times like these is that budgets are likely to be reduced and there will be hiring freezes or possible losses of staff in the compliance, legal, audit and HR functions. This presents the challenge of doing more with less. Compliance professionals should plan ahead for possible budget decreases and, if necessary, change the way they do business.
Getting the most ‘bang for your buck’ should be a mantra when examining the priorities of the compliance role. Risk assessments should be conducted to determine what the highest risks are for the company in terms of severity and likelihood. This can ensure that resources are being used appropriately and not being squandered on low-priority risk topics.
In some cases too, it can be worthwhile to outsource menial or niche tasks to outside firms and entities so that high-paid and experienced staff members can spend their time doing more valuable jobs. The result can often be better work in a shorter timeframe.
Lastly, some projects can have a big impact on the workforce with just a small investment in time and resources. Creating a communications plan to increase awareness of the resources available to employees can be an effective way of reminding them of ethics and compliance. Providing extra training or toolkits to middle managers and direct supervisors can do a great deal towards setting a tone from the middle and encouraging an ethical culture at the company.
Increased pressure to meet financial goals
As previously discussed, employees are likely to feel new pressures as company revenues slip and they are tasked with ‘picking up the slack’. For employees that are looking to advance their own commissions or prowess via illicit business practices, no amount of communication, training or written policies is likely to stop them. They can be stopped, however, if the company actively monitors and audits so suspicious transactions and behaviour are detected as soon as possible. These measures should be stepped up in areas where misconduct is likely, such as around finances, accounting, trading, competition, gifts and entertainment, bribery and conflicts of interest.
Employees that want to do the right thing can be the best eyes and ears of the compliance department during troublesome times so it is important to make use of these people whenever possible. It is therefore worth the investment in time and resources to relaunch the reporting and hotline avenues that are available and focus on non-retaliation.
Reduction in workforce and increased reports of misconduct
If the prices of energy stay low for long enough the effects of reduced revenue will deepen and the impact will be felt in compliance functions across the energy industry. Typically, companies will first cut fledgling projects and less-profitable assets to reduce costs, but if the bleeding is not stopped the workforce is then reduced.
Along with reduced morale and the possibility of even more pressure to commit misconduct, the effects of a workforce reduction can be a great influx of misconduct reports by departing employees. With the whistleblower bounty provisions of the Dodd–Frank Act, some employees could let malfeasance fester in the company and then report their concerns directly to the government on their exit in the hopes of getting a hefty payout.
To stay ahead of the potential wave of alleged misconduct that comes with a group of employees departing, companies should conduct exit interviews. These interviews are an opportunity for the company to learn about potential misconduct and seek some honest (and possibly harsh) feedback about employees’ perceptions of the company. It can also be a way for the company to stay ahead of reports made by bounty-seeking employees as it is always better to resolve issues in-house instead of learning about them during a midnight raid by a government agency.
Slumping energy prices might be a boon for consumers, but a price will still be paid by the lack of revenue generated by the many companies around the world that deal in extraction, processing, trade, servicing, delivery, or one of the many other aspects of the energy industry. Responding to these challenges can ensure that companies do not unduly increase their hardship when faced with the consequences of a neglected compliance function.