As global regulations for data privacy and cybersecurity continue to proliferate, the pressure for organizations to manage compliance risk grows. To meet the demand for greater compliance risk management and value for corporate stakeholders, compliance professionals must be sure they have a thorough understanding of their compliance obligations and potential vulnerabilities.

This starts with a risk assessment that evaluates all potential compliance risks, and prioritizes them based on the severity of the potential operational, legal, and financial damage associated with each one.

In this post, we’ll explain what a compliance risk assessment is, what your compliance program must do to start one, and how to implement an effective compliance risk assessment in your own organization.

What is a Compliance Risk Assessment?

A compliance risk assessment is an analysis of all the ways your organization might not meet its regulatory compliance obligations. This should be a holistic analysis, to identify all the compliance duties that laws, rules, and industry standards impose you; and how well your existing compliance program does or doesn’t meet those expectations.

What Does Compliance Risk Involve?

Compliance risk is your organization’s exposure to the potential consequences for non-compliance. That is, if the business isn’t meeting its regulatory compliance obligations, what sanctions might regulators impose on you?

Those sanctions can include monetary penalties, disgorgement of profits gained from improper business conduct, or corrective actions that might be expensive to implement. You would also face legal costs as regulators investigate, plus the potential for civil lawsuits and loss of reputation among your customer base.

Many regulators will offer more favorable treatment for a company that has violated regulatory compliance obligations, if the company can demonstrate that it had a compliance program and was at least trying to meet its obligations.

A compliance risk assessment, then, measures the gap between what your compliance program actually does, versus what your compliance program should do to pass muster as an “effective” program in the eyes of regulators. The mitigation steps you take reduce your compliance risk until it achieves that goal of effectiveness.

Before an organization can mitigate its compliance risk, however, it must conduct a compliance risk assessment.

What are the Steps of a Compliance Risk Assessment?

To conduct your risk assessment, we suggest the following steps.

Step 1: Identify the risks

Identify which regulatory compliance standards apply to your business. Begin by documenting your key workflows, information systems, and transactions. (This will require stakeholders for every business unit within the organization.) Are there areas in your key functions and systems that suggest non-compliance with regulatory requirements? Note them.

Step 2: Map potential risks to possible outcomes and affected parties

Once you have a sense of your company’s operations and where compliance gaps or risks may be, map those risks to their potential outcomes and affected parties. Not only is this critical documentation to have for auditing purposes; it’s also a way to begin your risk mitigation strategies.

Step 3: Prioritize the most severe risks and determine control measures

Implementing compliance programs, or beefing up the program you have, can be overwhelming. We recommend prioritizing all the identified risks by the severity of their outcomes, and addressing the most severe first.

Where are your existing controls failing to address those risks? How can you remedy that? Also, consider how you might be able to detect a violation of the controls for these severe risks in the future. This will prevent any non-compliance surprises.

Step 4: Implement controls and validate through testing

Once you’ve determined what must be done to mitigate your compliance risks, implement those steps – but you’re not done there. A compliance function is only as good as its ability to prevent risk exposure. Thus, testing to validate your controls is an important next step before proceeding to another risk.

Step 5: Routinely re-evaluate risks, test controls, and update as needed

Don’t forget that a corporate compliance program should be a permanent, ongoing part of your business. As your business grows, your risks change; legislation affecting your business does too. Moreover, unmonitored, unenforced controls tend to be discontinued after a while.

Therefore, you should routinely monitor your controls, re-test them periodically, and re-evaluate them entirely as the business grows and laws change.

What Frameworks are Associated with Compliance Risk Assessments?

The Committee of Sponsoring Organizations (COSO) framework for internal control is the most widely accepted framework for modeling compliance risk programs.

For senior management and boards of directors, the COSO framework provides:

  • Guidance to create and apply internal controls for any business, regardless of industry, at every level of the business.
  • A principled approach that provides the flexibility for the organization to drive the design, implementation, and execution of its internal controls.
  • Requirements that provide the framework for ensuring that internal controls consider how components and principles function and operate together.
  • A way to identify and evaluate risks, and develop the appropriate mitigation strategies that maintain an acceptable level of risk and a focus on fraud prevention.
  • The ability to expand the application of a control beyond financial reporting to operational and compliance objectives.
  • The ability to eliminate inefficiencies and redundancies in controls while maximizing value in risk reduction.

How is a Compliance Risk Assessment Different from Other Risk Assessments?

Risk assessments exist for a variety of business risks and industries, including financial services, government contracts, or the healthcare industry.

Compliance risk assessments specifically identify, prioritize, and control risks associated with the threat of non-compliance in your industry. Potential penalties could be fines, reputation damage, legal repercussions, or the inability to operate the business.

Unlike other forms, compliance risk assessments are focused on those legal or regulatory requirements that an organization is required to comply with. Furthermore, risk analysis and compliance testing are typically managed by the chief compliance officer or manager of your compliance department.

Other forms of risk may be managed by the chief financial officer, the chief information officer, or another C-level executive.

How ZenGRC Can Support Compliance Risk Assessment

Evaluating your risks, implementing the appropriate controls, and gathering documentation every step of the way can be overwhelming, not to mention time-consuming if you’re trying to do it all yourself and managing your on-going requirements on a spreadsheet.

ZenGRC is a governance, risk management, and compliance software that can help to simplify and streamline your compliance efforts by automating much of these tedious, manual tasks.

ZenGRC’s easy-to-use risk management templates provide the outline you need to properly evaluate risk, while our user-friendly dashboard metrics show you where you’re doing well, and where your gaps are in real-time, so you always know where you stand.

And ZenGRC can track compliance training and documentation requirements across a variety of frameworks such as GDPR, CCPA, HIPAA, and more.

Rid yourself of the headaches of compliance risk management, and find your zen. Book a free demo of our software today to learn more.

How to Build a
Risk Management Plan