Different internal and external rules dictate how organizations should conduct their business. As a manager, it's essential to familiarize yourself with the compliance requirements for your business. Failing to comply with these regulations can lead to detrimental effects, ranging from financial penalties to imprisonment. Here's a look at what compliance risk is, types of compliance risks, and the steps involved in a compliance risk assessment.
What Is Compliance Risk?
Compliance risk is the risk of loss and legal penalties resulting from failure to abide by the laws and regulations affecting your business. Even when you are committed to complying with laws and regulations, there is still a chance of compliance risk if there is a breakdown in oversight, monitoring, and other processes.
Managing compliance risk entails a commitment by management and cooperating with business lines. It is part of an organization’s risk management process. Compliance professionals should address internal and external elements that affect a business’s compliance risks.
Types Of Compliance Risk
There are different compliance risks that an organization is likely to face. These include:
Compliance ensures your organization and its employees follow the laws and regulations set for the industry. Many compliance risks center on illegal practices. These activities include bribery, theft, fraud, embezzlement, and money laundering.
Another compliance risk you should be aware of is violating privacy laws. Viruses, malware, and hacking are cyber risks that are likely to affect any organization. The risk is especially high for businesses that deal with sensitive information. These organizations are required to observe the appropriate regulations on data protection and the prevention of data breaches.
These risks focus on the extent of pollution and environmental damage that a business’s activities can cause. Some common examples include the use of hazardous chemicals, destroying natural habitats, pollution of water, and improper waste disposal. One of the best ways of addressing this risk is integrating sustainability in your organization and training employees on how to attain environmental compliance.
A process risk involves failing to observe a specific procedure for completing tasks. It also involves deviating from standard procedures. For example, if a company has outlined its procedures for using its network remotely and an employee violates these standards, this is a process risk.
Workplace Health And Safety
Organizations are required to follow certain health and safety procedures. In the U.S., these laws are mainly enforced by federal institutions like the Food and Drug Administration (FDA) and the Occupational Safety and Health Administration (OSHA). In Europe, the agencies that oversee health and safety procedures are the European Medicines Agency (EMA) and the European Agency for Safety and Health at Work (EU-OSHA).
Stages In Compliance Risk Assessment
ACompliance risk assessment involves identifying and mitigating potential losses that could arise if your organization doesn't comply with the required regulations and standards. Your management practices should ensure your organization complies with various rules and regulations. Your organization should have compliance risk management policies to control compliance risk.
Compliance risk assessment and management is a continuous process that involves updating your practices to match the current regulatory environment. The five steps in compliance risk assessment include:
The first step is to identify the compliance standards that affect your business. Assemble all the leaders in every business unit in your organization and document workflows and information systems. Also, take note of the transactions. Determine the elements of non-compliance in these areas.
Identify The Outcomes Of Potential Risks And The Affected Parties
After determining the compliance gaps, map these gaps to their potential consequences and the affected parties. This information is crucial for auditing and also helps you create a risk mitigation strategy.
Prioritize The Risks
Implementing compliance programs is a labor-extensive program. It's better to begin by prioritizing on the risks with severe outcomes. Determine where your controls don't address these risks and devise ways to remedy these gaps. Ensure you have a mechanism for detecting when someone violates the controls for these risks.
Implement Control Measures And Test Them
After you have determined what you need to do to prevent compliance risks, implement these measures. A compliance function is effective if it prevents risk exposure. Therefore, make sure you test these controls before addressing the other risks.
Re-Evaluate Risks, Make Updates, And Test Controls Regularly
Compliance programs should be ongoing. Therefore, don't get comfortable after implementing your measures. Your risks change with time as your business continues to grow. Legislation affecting your industry is also subject to change. Unmonitored controls are likely to be discontinued after some time. Therefore, you need to be committed to re-evaluating risks, testing controls, and making updates regularly.
Compliance risk management should be a top priority for any organization. These compliance standards are designed for the benefit of the business and the public. Therefore, any organization worth its salt should have effective compliance risk management programs to ensure it complies with the law and satisfies the best interests of consumers.
The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the Author. Compliance Calendar LLP and the Author of this Article do not constitute any sort of professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove. Compliance Calendar LLP shall not be responsible for any loss or damage in any circumstances whatsoever.