As global data privacy and cybersecurity regulations 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 compliance risk assessment that evaluates all potential compliance risks, and then prioritizes them based on the severity of the possible operational, legal, and financial damage associated with each one.
This post will explain a compliance risk assessment, what your compliance program must do to undertake one, and how to implement a practical compliance risk assessment in your organization.
What Is Inherent Risk?
To begin, an organization should first try to understand the amount of inherent risk it faces. Inherent risk is the potential harm that exists when a risk is left untreated or ignored. Use a disciplined, objective method to analyze each risk’s likelihood and possible effect; that will let you understand the amount of inherent risk you face. This also implies that the less a company tries to manage risk, the more risk it inherently has.
Understanding your inherent risk helps a company to develop an early picture of its risk mitigation approach. When identifying inherent risk, companies should analyze the critical risk characteristics, which may be divided into four broad categories:
Legal or regulatory proceedings against the company or its workers may result in fines, penalties, incarceration, product confiscation, or debarment. Any time a company or its employees violate the law or compliance requirements, they are subject to legal issues.
Financial impacts are the harm caused to the organization’s income statement, share price, or possible future earnings. A financial impact can be caused by various issues, including fines from legal issues, lost sales from reputational damage, or reduced cash flow from factory downtime.
Internal or external factors can influence an organization’s ability to operate. A failed new product can slow business growth, and political sanctions can disrupt your supply chain.
The organization’s reputation or brand can be damaged by negative media coverage (in traditional news media or on social media). Bad press can result in loss of client trust and lower employee morale.
Measure each of these types of impacts in qualitative and quantitative terms for a comprehensive view of risk. Qualitative research often uses some sort of low-medium-high scale to express the magnitude of a risk. Since it is a more subjective measurement, creating definitions for each level of magnitude is crucial.
Quantitative assessments are actual, numerical estimates of potential harm. For example, if you know your factory ships $1 million daily, you can calculate the impact for each day of downtime. Precision is preferred, but estimates are better than nothing.
What Is a Compliance Risk Assessment?
A compliance risk assessment analyzes how your organization might not meet its regulatory compliance obligations. This should be a holistic analysis to identify all the compliance duties that various laws, rules, and industry standards might impose on your organization, 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 of non-compliance. That is, if the business isn’t meeting its compliance obligations, what fines, penalties, or other costs might regulators impose on you?
Monetary fines can be hefty. Other penalties could include loss of operating licenses or disbarment from government contracts. Corrective actions can be expensive to implement. You would also face legal costs as regulators investigate, plus the potential for civil lawsuits and reputational loss among your customer base.
Many regulators will offer more favorable treatment to a non-compliant company if it can demonstrate that it had a compliance program in place and was at least trying to meet its obligations.
A compliance risk assessment measures the gap between what your compliance program 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.
Compliance Risk Assessment Steps
A comprehensive risk assessment will include several steps: identifying hazards, analyzing the level of the risk, determining what actions might be necessary to decrease the risk, implementing initiatives, and evaluating the effectiveness. Here are each of the steps in more detail.
Step 1: Identify the risks
Identify which regulatory compliance standards apply to your business. Begin by documenting your key workflows, information systems, and transactions. These efforts will require inputs from stakeholders for every business unit within the organization. Take note of areas in your essential functions and procedures that suggest non-compliance with regulatory requirements.
Step 2: Map Potential Risks to Possible Outcomes and Affected Parties
Once you know 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 improving the program you have) can be overwhelming. We recommend prioritizing all the identified risks by the potential severity of their outcomes and addressing the most severe first.
Ask: 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 rules for these severe risks in the future. This will reduce any non-compliance surprises.
Step 4: Implement Controls and Validate through Testing.
Once you’ve determined what must be done to mitigate compliance risks, implement those steps – but you’re not done there. Testing to validate your controls is an essential next step before proceeding to another risk. Review those results and decide whether the control works as desired. If not, investigate why and, if necessary, implement more or better controls to get the performance you want.
Step 5: Routinely Re-Evaluate Risks, Test Controls, and Update as Needed
Don’t forget that a corporate compliance program should be an ongoing part of your business. As your business grows, your risks change. Legislation affecting your business also evolves. Moreover, unmonitored, unenforced controls tend to lapse after a while. So you should routinely monitor your controls, re-test them periodically, and re-evaluate them as the business grows and laws change.
Compliance Risk Assessment Frameworks
The Committee of Sponsoring Organizations (COSO) framework for internal control is the most widely accepted framework to build systems of internal control.
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 company.
- A principled approach for the organization to drive its internal controls’ design, implementation, and execution.
- Requirements to help assure that internal controls, 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 with a focus on fraud prevention.
- Expand control application beyond financial reporting to operational and compliance objectives.
- The ability to eliminate inefficiencies and redundancies in controls while maximizing value in risk reduction.
How Does Compliance Risk Assessment Differ From Other Risk Assessments?
Risk assessments exist for various business risks and industries, including financial services, government contracts, and 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 of risk assessments, compliance risk assessments focus on the legal or regulatory requirements that an organization must comply with. Furthermore, risk analysis and compliance testing are typically managed by the chief compliance officer or manager of your compliance department.
Other risks might be managed by the chief financial officer, the chief information officer, or another C-level executive.
How Reciprocity ZenComply Can Support Compliance Risk Assessment
Evaluating your risks, implementing the appropriate controls, and gathering documentation every step of the way can be time-consuming and prone to error if you rely on manual processes and tools such as spreadsheets..
ZenComply is a governance, risk management, and compliance software tool that can help to simplify and streamline your compliance efforts by automating many tedious, manual tasks.
ZenComply’s easy-to-use risk management templates provide the outline you need to evaluate risk properly, 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.
ZenComply also tracks compliance training and documentation requirements across laws and regulations such as the EU General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), Health Insurance Portability and Accountability Act (HIPAA), and more.
Rid yourself of the headaches of compliance risk management, and find your zen. Schedule a demo of our software today to learn more.