Appendix D: A Review of the Literature on Compliance
In general terms an interest in the cost of business compliance (as a potential business constraint) began in the 1950s in the United States.26 This interest was sparked by the post-war commercial environment, where industrial growth meant that more firms were dealing with an increasing volume of legislation, which was increasingly complex. In the 1960s this interest in the topic of "compliance costs" and "compliance behaviour" spread to Europe (Germany in particular), and over recent years a number of countries have examined compliance in the context of their particular regulatory and legislative environments. Some countries have focused on specific groups of businesses (such as small or medium enterprises), others have examined particular industry sectors with specific issues (the primary sectors in relation to environmental pollution for example), while others have focused on groupings of legislation and regulation that is seen as having the potential to be problematic (such as taxation). In terms of specific studies, some of the best known are those carried out in the UK, the US, Canada and Australia. The United Kingdom addressed the issues in a number of reviews during the 1980s,27 the Small Business Administration in the United States reported on compliance in 1995,28 Canada focused on tax and SMEs in their 1996 report,29 and Australia examined taxation30 and other aspects of compliance31 in the mid 1990s, and established a Small Business Deregulation Task Force. 32 In New Zealand, a Ministerial panel on Business Compliance Costs was established in 2000 and reported in 2001.3334
The context for all of these reviews was the complex set of changes that accompanied the changing face of public management that has become particularly apparent since the 1980s. In this era of "the new public management",35 the relationship between government and the business sector has changed in a number of fundamental ways. At the core of the change is a shift away from government intervention in the economy. In relation to compliance, reducing intervention has often meant a focus on "reducing compliance costs" and "cutting red tape". One of the manifestations of this attitude (that businesses are better equipped to make decisions than government agencies) in some sectors has been a shift away from prescriptive legislation towards self-regulation by industries and firms themselves.36 This change shifted responsibility from government to private enterprise, and necessitated a major shift in the mindset of business people. However, if this shift is to work, it needs a mental shift within the business sector. There is also a need to build capability, either internally (through the firm's managers becoming more knowledgeable about the different aspects of compliance) or externally (through the firm expanding its network of personal advisers).
In situations where responsibility for compliance increasingly falls on the shoulders of business, (either in countries where deregulation and non-intervention are key drivers of government policy or in sectors where self-regulation has become the norm), there has been a growing perception that more compliance activity is occurring at the firm level. As compliance in general terms became a matter of concern for business, in particular in reference to the level of cost associated with complying, this perception becomes even more firmly held: Now it is received wisdom that complying with government regulations is a heavy burden for business. This remains true despite the lack of empirical evidence to support the contention that businesses finds compliance with controls imposed from the outside (i.e. government) any more burdensome that those that are internally driven (i.e. in line with the firm's own strategy).
While the debate about compliance increasingly focused on its cost to businesses, there was also a shift in the way in which the community expressed its tolerance of non-compliance with certain types of legislation (such as environmental pollution). The result of these dynamics is that today's business owner is faced with an acute awareness of the cost of compliance, has more responsibility than ever before in terms of self-regulation (and/or accessing the appropriate advisers to ensure compliance), and is facing an increasing level of compliance and community disapproval over non-compliance with certain pieces of legislation.
Government Responses to Compliance
In the face of this sensitivity on the part of business and government to a) the high levels of compliance activity needed in the light of increasingly complex legislative systems, and b) the perceived high cost of compliance, a number of governments have established permanent agencies for monitoring new legislation in the light of its impact on business. These agencies have promoted a variety of systems for monitoring the impact of new legislation. The United Kingdom has the CCA (compliance cost assessment) and the United States takes a cost-benefit analysis approach to all new legislation.37 Australia announced a business regulation reform package in 1994 in Working Nation,38 and since then a number of reports have continued this work and there is now a set of well accepted principles for the design and implementation of government regulation.
Another approach has been in line with the changing approach to compliance that has emerged over recent years in relation to some specific areas where compliance is an issue. Partly in response to changes in society generally, the traditional (regulatory) paradigm is being replaced in some sectors (and/or in some countries) by a participatory, educative paradigm. There are two implications of this new approach. First there is a need for a change in the role of the regulatory and advisory agencies;39 instead of acting as the monitor of compliance, the agency practitioner becomes a facilitator, assisting firms to comply. The second implication is the increased need for the firm's owners and managers to develop their own capacity so that they can comply. The consequence of both these changes is that the interaction between the parties is altered: Interactions become based on identifying needs and building capacity rather than on monitoring compliance.4041
This approach is well documented in the literature, with a number of examples of training programmes for enhancing compliance in different areas (such as occupational safety and health42). However, it could be argued that there is still a conceptual gap within the field. Until relatively recently the only framework for understanding compliance behaviour was Becker's economic model of non-compliance with legislation, which was originally developed as a framework for examining criminal behaviour.4344 Dominant in the literature for many years, more recently this solely economic model has been challenged by researchers from psychology and sociology. The psychologists have examined individual behaviour (cf. "firm behaviour"), using the perspective of social learning and cognitive theory and the sociologists have introduced the notion of instrumental (cf. normative) behaviour to the subject. This has meant that new concepts have been introduced (such as the concept of "mental accounting", which comes from examining an individual's cognitive models),45 and there is a greater understanding of the limitations of using a wholly economic perspective.
This somewhat broader understanding has been the basis for the development of some practice-based models for encouraging taxpayer compliance. Generally developed by statutory bodies, they are based on the assumption that compliance behaviour can be changed by government agencies 46 through a variety of strategies (such as persuading people that it is in their self-interest to comply; or making people feel that it is their responsibility to comply).47 This line of thinking is the basis for some recent work on categorising individuals as "environmental laggards, reluctant compliers, committed compliers, environmental strategists and true believers" (the latter two relying on building reputational capital).48
This typology, and others like it, are helpful in allowing the agencies charged with ensuring compliance occurs with a way of understanding the factors that enhance compliance (as well as those that act as barriers to it). One of these factors is the way compliance is often seen by the firms as an admission of limited autonomy. Small firms in particular are often run by individuals who are strongly motivated by the independence that being "one's own boss" can bring, and they have a tendency to regard legislation as a challenge to their management rights.49 In the same context, the discussion about what constitutes a public good adds to our understanding of why some individuals comply, and how this number can be increased. This is important in a society which in general terms is moving away from an acceptance of governmental intervention, but which at the same time is losing a sense of the individual's "duty" towards an economy.50
Developing Concepts and Definitions
While on one level there has been a large amount written on compliance with an abstract perspective (as seen above), there has also been a continuing focus on ensuring that basic definitions have been developed. In this context it is important to remember that much of the initial work on compliance has been done in the context of taxation, and that therefore many of the key concepts and definitions refer to the particular regulatory environment for taxation. In this context, compliance costs are "those costs incurred by taxpayers, or third parties such as businesses, in meeting the requirements laid upon them in complying with a given tax structure".51 This definition has become standard when discussing compliance in any context, and is the basis for the typical focus on compliance costs rather than the benefits that may accrue to either firms or governments from high levels of compliance. Despite this traditional focus on costs, some benefits have been identified. These include the fact that legislation and regulation can establish frameworks in which commercial transactions can take place at lower cost, which can help smaller firms get access to markets and ensure that accounting and information systems for small firms are improved.52
Another "developing concept" concerns "additionality" (i.e. the fact that the compliance cost refers to the time and expense outlaid that is over and above normal commercial practices). This cost may include lost opportunities and disincentives to expand the business.53 Despite this caveat, there is increasing agreement that the "cost" of compliance includes time, effort, financial and "psychological" costs;545556 that there can be negative impacts on a firm's productivity and other non-economic costs;57 that there may be opportunity costs associated with compliance;58 and that there are internal compliance costs, external compliance costs and net compliance costs.59 Some discussions use the term incremental compliance costs to refer to the costs that exceed those that are incurred in normal business practice,60 and make the point that some compliance "costs" are temporary (e.g. the "learning curve" associated with dealing with a new piece of legislation).61
Empirical Work
The detailed terms included above suggest that the empirical work (compared to the largely theoretical studies already cited) on compliance will be sophisticated and rich. However, the vast majority of studies have focused on identifying the actual (direct) costs of compliance such as financial costs and estimating the time commitment needed. Most studies omit indirect costs,62 and/or others that are regarded as intangible: Despite the fact that there is an awareness of the presence of other "costs" (e.g. psychological costs), there is as yet no generally agreed method as to how these should be measured. Much of the research also focuses on understanding non-compliance, rather than improving fairness attitudes and compliance behaviour.63
One of the other main reasons for this lack of empirical work on all of the issues that surround compliance is the methodological complexity implicit in researching a complex phenomenon, where the issues are not simple for respondents to articulate, and where there is likely to be a high level of ignorance in the target population as to what constitutes a "reasonable" level of regulations and legislation.
Other methodological challenges include defining what activities constitute a compliance activity; deciding whether opportunity or marginal costs should be used; and developing an approach that minimises the impact of the efficiency/inefficiency of the firms being studied, ensures that the most appropriate person is located, and makes some allowance for the subjective measures that respondents use.64
The consequence is that most research has addressed compliance in a relatively simplistic way, or as a by-product of a study on a related topic. For example, a New Zealand study on the barriers for exporters identified administrative procedures and "red tape" as one of the most common barriers faced.65 Whilst this research was useful in a broad sense, more detail is needed if government agencies are to address the compliance concerns of New Zealand business owners.
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