Is your business in compliance with every law, rule, and regulation that it should be?
If you can’t confidently say yes, it’s time for a compliance risk assessment. And even if you could confidently say yes six months ago, it’s probably time to repeat that risk assessment.
Periodic compliance risk assessments are the foundation of any effective compliance program. But how should you structure that comprehensive risk assessment, to ensure you don’t miss anything?
In this blog article, we dive deeper into the concept of compliance risk assessment, its core challenges, and provide guidance in assessing your own compliance risks with a practical template.
- What is Compliance Risk Assessment?
- Challenges of Performing a Compliance Risk Assessment
- Why Conduct a Compliance Risk Assessment?
- The Compliance Risk Assessment Process
- Corporate Compliance Risk Assessment Template
What is Compliance Risk Assessment?
Compliance risk assessment is a systematic process used by organizations to locate, evaluate, and manage potential risks associated with failing to comply with laws, regulations, industry standards, internal policies, and ethical guidelines. The purpose of compliance risk assessments is to proactively identify areas where the organization might be exposed to legal, financial, operational, reputational, or other forms of risk due to non-compliance with applicable regulations.
Challenges of Performing a Compliance Risk Assessment
Compliance risk assessment can be a complex process that comes with several challenges. Some of the key challenges related to compliance risk assessment include:
- Regulatory Complexity: The landscape of regulations and standards is vast and constantly evolving. It can be challenging to stay updated on all relevant laws and regulations that apply to an organization’s operations, especially in industries with numerous and rapidly changing requirements.
- Interpretation of Regulations: Interpreting complex regulatory language and understanding how it applies to specific business practices can be difficult. Different stakeholders within an organization might have varying interpretations of the same regulation, leading to confusion.
- Global Operations: Organizations with international operations must navigate a variety of local, national, and international regulations. Each jurisdiction might have its own unique requirements, leading to a complex compliance landscape.
- Data Privacy and Security: With the increasing emphasis on data privacy and security regulations (e.g., GDPR, CCPA), managing the collection, storage, and processing of personal data in compliance with these regulations can be challenging.
- Resource Constraints: Performing thorough compliance risk assessments requires time, expertise, and resources. Smaller organizations or those with limited budgets might struggle to allocate sufficient resources to this process.
- Rapid Regulatory Changes: Regulatory changes can happen suddenly, and organizations must adapt quickly to remain compliant. Staying up-to-date and implementing necessary changes promptly can be a challenge.
- Diverse Stakeholders: Different departments and stakeholders within an organization might have varying compliance priorities and perspectives. Aligning these perspectives and priorities can be challenging, especially in larger organizations.
- Documentation and Reporting: Maintaining comprehensive documentation of the compliance risk assessment process and outcomes is crucial for demonstrating due diligence. However, documentation can be time-consuming and might not be a top priority for some teams.
- Risk Quantification: Assigning quantifiable values to compliance risks (financial impact, reputational damage, etc.) can be subjective and difficult. This makes it challenging to prioritize risks accurately.
- Lack of Expertise: Conducting thorough compliance risk assessments requires specialized knowledge of regulations and risk management techniques. Oftentimes, organizations might lack the necessary expertise internally and need to rely on external consultants.
- Vendor and Third-Party Risk: Assessing compliance risks associated with third-party vendors and partners can be challenging, especially when dealing with vendors in different regions with varying compliance requirements.
- Resistance to Change: Implementing new processes and controls to address compliance risks might meet resistance from employees who are accustomed to existing practices.
- Scope Management: Determining the scope of the assessment, including which processes, departments, and locations to include, can be complex, especially in large and diverse organizations.
Why Conduct a Compliance Risk Assessment?
Conducting a compliance risk assessment is essential for several reasons, all of which contribute to the overall well-being and success of an organization. Some of the key reasons why organizations should conduct compliance risk assessments include:
- Identify Potential Risks: Compliance risk assessments help organizations identify and understand the potential risks they face due to non-compliance with laws, regulations, standards, and internal policies. This proactive approach allows organizations to anticipate challenges and mitigate risks before they escalate.
- Minimize Legal and Financial Consequences: Non-compliance can lead to legal actions, fines, penalties, and lawsuits. By identifying and addressing compliance risks early, organizations can minimize the financial impact of legal actions and avoid reputational damage.
- Safeguard Reputation: Maintaining a good reputation is crucial for sustained business success. Non-compliance can lead to negative publicity and damage to an organization’s reputation, affecting customer trust and stakeholder relationships.
- Ensure Operational Continuity: Regulatory violations can lead to operational disruptions, business interruptions, and even business closures. Addressing compliance risks ensures the smooth functioning of operations and the continuity of business activities.
- Demonstrate Due Diligence: Regulatory authorities often expect organizations to demonstrate that they have taken reasonable steps to prevent non-compliance. A well-documented compliance risk assessment process can serve as evidence of due diligence in case of regulatory inquiries.
- Ethical Responsibility: Organizations have an ethical responsibility to operate within the bounds of the law and uphold high ethical standards. Organizations that conduct risk assessments regularly showcase their commitment to ethical behavior.
- Strategic Decision-Making: Compliance risk assessments provide insights into the potential impact of non-compliance on business strategies, allowing organizations to make informed decisions about risk tolerance, resource allocation, and market expansion.
- Risk Prioritization: Not all compliance risks are equal in terms of impact and likelihood. Assessments help organizations prioritize risks based on their severity and the resources available for mitigation.
- Resource Allocation: By identifying specific compliance risks, organizations can allocate resources more effectively to address the most critical areas, optimizing the use of time, manpower, and financial resources.
- Enhance Internal Controls: Compliance risk assessments highlight weaknesses in internal controls and processes. Addressing these weaknesses can lead to improved operational efficiency and effectiveness.
- Avoid Operational Disruptions: Non-compliance can lead to operational disruptions, work stoppages, and loss of productivity. Addressing compliance risks helps maintain a stable and productive work environment.
- Support Change Management: When organizations introduce new processes, technologies, or expand into new markets, compliance risks can change. Conducting regular assessments helps organizations adapt their compliance strategies to accommodate these changes.
- Meet Stakeholder Expectations: Investors, customers, partners, and other stakeholders expect organizations to operate within legal and ethical boundaries. Demonstrating compliance through risk assessments builds trust and confidence among stakeholders.
- Prevent Recurrence of Issues: If an organization has previously faced compliance issues, a risk assessment can help compliance professionals identify the root causes of those issues and prevent their recurrence.
The Compliance Risk Assessment Process
The compliance risk assessment process involves several systematic steps aimed at identifying, evaluating, and managing potential compliance risks within an organization. Though it might vary, here’s a general outline of the compliance risk assessment process:
1. Scope Definition:
Define the scope of the assessment, including the business units, processes, functions, and geographical locations to be assessed.
2. Regulatory and Legal Framework Identification:
Identify and gather relevant laws, regulations, industry standards, and internal policies that apply to the organization’s operations.
3. Risk Identification:
- Identify potential compliance risks by reviewing the identified regulatory and legal requirements in relation to the organization’s operations.
- Consider external factors such as changes in regulations, industry trends, and evolving best practices.
4. Risk Assessment:
- Evaluate the identified risks based on their potential impact and likelihood of occurrence.
- Use a risk matrix or similar method to categorize risks as low, medium, or high risk.
5. Control Assessment:
- Evaluate the effectiveness of existing controls, policies, procedures, and processes in place to mitigate compliance risks.
- Identify gaps between existing controls and the requirements of relevant regulations.
6. Risk Quantification:
Assign quantitative or qualitative values to risks, considering factors such as financial impact, reputational damage, and operational disruptions.
7. Risk Prioritization:
- Prioritize risks based on their severity, potential impact, likelihood, and other relevant criteria.
- Focus resources on addressing high-priority risks.
8. Gap Analysis:
- Identify specific gaps in compliance between current practices and regulatory requirements.
- Determine areas that need improvement or enhancement to ensure compliance.
9. Mitigation Strategies:
- Develop strategies to mitigate identified compliance risks.
- Design and implement controls, policies, procedures, training programs, and technological solutions to address the gaps.
10. Action Plan Development:
- Create a detailed action plan that outlines the steps, responsibilities, timelines, and resources required to address each compliance risk.
- Ensure clear accountability for each task.
11. Monitoring and Review:
- Establish a mechanism for ongoing monitoring and review of compliance risks and mitigation efforts.
- Regularly assess the effectiveness of controls and update the action plan as needed.
12. Documentation and Reporting:
- Maintain comprehensive documentation of the entire compliance risk assessment process, including risk analysis, action plans, progress updates, and outcomes.
- Prepare reports for management and stakeholders summarizing the assessment results, identified risks, and mitigation strategies.
Communicate the results of the compliance risk assessment and the action plan to relevant stakeholders, including senior management, legal teams, and employees.
14. Training and Awareness:
Provide training and awareness programs to educate employees about compliance requirements, risks, and their role in identifying inherent risk and maintaining compliance.
Corporate Compliance Risk Assessment Template
The US Department of Justice (DOJ) offers some guidance in its Evaluation of Corporate Compliance Programs. That document spells out the factors that prosecutors should weigh in deciding whether to charge individuals for non-compliance and what, if any, penalties or corrective actions the DOJ should seek. It centers around three fundamental questions:
- Is the program being applied earnestly and in good faith?
- Has the corporation invested sufficient resources in its compliance program and empowered its compliance officers to take effective action?
- Does the corporation’s compliance program work in practice?
- It’s always possible that some criminal activity will evade detection, but how serious is the corporation about investigating problems and taking corrective action?
However, the DOJ notes that each corporate compliance program should be distinct because each corporation faces a unique risk landscape. Prosecutors are therefore urged to avoid using “any rigid formula to assess the effectiveness of corporate compliance programs” and instead make individual determinations based on a company’s size, industry, geographic range, regulatory landscape, and other features.
We’ve created this compliance risk assessment template in the same spirit. It can be used as a starting point for your own assessment process, but it does not include every possible risk that your business may need to address. Rather, it points out a few common considerations that may apply to your business or industry, which you can use to design your own bespoke compliance risk assessment process.
With that said, consider creating a copy of the following template for each risk or category of risk you identify. As you fill the template in for each risk, add to it until it perfectly suits your specific circumstances.
1. Identify all compliance obligations and risks
First, you need to identify every risk that your organization may experience. To ensure that you don’t miss anything, we recommend approaching this from several different angles.
a. Top-down evaluation of compliance obligations: What laws, rules, and global regulations does the corporation need to be in compliance with? What specific behavior is required for each obligation to maintain compliance? Consider:
- Tax and financial reporting laws
- Employee-related laws related to non-discrimination, workplace safety, hour and wage issues, and more
- Information security and data privacy laws
- Environmental laws and regulations
- Industry-specific regulations, particularly for highly regulated industries such as healthcare and financial service organizations
- State and local regulations and requirements
List obligations or risks: [Insert]
If any of these obligations have changed since your last compliance risk assessment, list changes: [Insert]
b. Bottom-up evaluation of risks: Are there any potential concerns among employees or leadership? Have any incidents or patterns of behavior raised suspicion that warrants further investigation? Inquire about:
- Hotline reports
- Complaints to supervisors
- Anonymous reports
- Issues reported in previous assessments
- Audit results
- Reports from operational leaders in each division of the organization
- Concerns from legal and risk management personnel
- Customer complaints or grievances
List concerns or risks: [Insert]
c. Management of third-party risks: What third-party relationships does the business engage in—and do those relationships raise any further compliance obligations or create additional risks?
List third-party obligations or risks: [Insert]
Risk under consideration: [Insert]
2. Prioritize the importance of each obligation and risk
You can’t fix every concern that you’ve identified at once. But where should you start? This step will help you prioritize your actions, so you address the most serious risks first.
Evaluate each obligation and risk you’ve identified to determine which, if any, require urgent attention. At a minimum, you should balance the following two factors.
a. Severity of the risk: What are the consequences of non-compliance? These could include regulatory investigations, fines, or even prosecution and jail time for corporate officers—any of which could be accompanied by reputational damage and financial or business losses. Rank the severity of each risk as high, medium, or low.
Rank severity of risk: [Insert]
b. Probability of the risk: How likely is this risk to occur? Evaluate the steps your organization is currently taking to maintain compliance with each obligation and mitigate each risk. Rank the probability of each risk as high (very likely to occur), medium (somewhat likely), or low (unlikely).
Rank probability of risk: [Insert]
Combined risk ranking and prioritization: Combine the severity and probability of each risk to determine where it should fall in your priority schedule. Risks that rank high on both severity and probability must be addressed immediately; risks that rank low on either scale can likely be delayed for a time while higher-priority risks are mitigated.
Calculate combined risk ranking: [Insert]
Assign a priority for this risk: [Insert]
Note that you’ll need to weigh your corporation’s risk tolerance realistically to prioritize risks accurately.
Risk under consideration: [Insert]
3. Evaluate the sufficiency of current risk management and supplement as needed
Are you doing enough to manage the various risks you’ve identified? It’s time to find out.
Working through each obligation and risk in order of priority, determine whether your current approach to complying with that obligation and/or managing that risk is adequate. List every aspect of your current risk-management strategy that pertains to this risk and look for gaps that may allow non-compliance to occur or to evade detection.
List current risk-management controls: [Insert]
Next, ask whether there are additional steps you should take to maintain compliance or mitigate risk. Consider:
- Any policies and procedures you have in place to manage the obligation or risk
- The training programs you’ve established to educate employees about the obligation or risk and the actions they must take or avoid taking
- Any reporting structures you have in place to encourage employees at all levels of the organization to report their concerns
- Your procedures for investigating and addressing concerns
- Additional guidance you could offer to third parties whose actions may introduce risk
- Any resources or oversight you could implement to improve risk management
List additional risk-mitigation controls: [Insert]
Risk under consideration: [Insert]
4. Determine – or assign – responsibility for risk management
There’s a common pitfall that trips up some organizations: it’s unclear who’s responsible for managing each risk, or the person or department assigned to manage the risk lacks the authority or resources needed to take effective action. That’s what this step is about.
Verify, for each risk, who is responsible for monitoring compliance and managing any concerns that may arise and inquire whether they need additional resources to do so.
If it’s not clear who has both the responsibility and the authority to manage this risk, assign someone to bear that responsibility—but be sure that they have the requisite authority and autonomy for the task.
If your organization has an independent risk-management or compliance department that manages all risks and ensures ongoing compliance efforts, you may be able to skip this step.
List who is responsible for managing this risk: [Insert]
5. Document all results
Your organization’s compliance is only ever as good as your ability to prove that compliance.
Document every step you have taken to investigate, prioritize, and manage each risk. For example, if you’ve completed this template for various risks, save each completed template with the date and your notes.
There’s one final point: be sure that you also document where you’ve stored your documentation!
List where risk assessments and related documents are stored: [Insert]