What is a Compliance Risk Assessment?

As global data privacy and cybersecurity regulations continue to proliferate, the pressure for organizations to manage compliance risk grows. And the first step in your journey to better compliance risk management is the compliance risk assessment.

In this article we will explain what a compliance risk assessment is, how you undertake one, and how to implement your risk assessment’s findings after the assessment is complete.

What Is Inherent Risk?

To begin, an organization should determine the amount of inherent risk it faces. Inherent risk is the potential harm when a risk is left untreated or ignored. Use a disciplined, objective method to analyze each risk’s likelihood and possible effect to help you understand the inherent risk you face. This also implies that the less a company tries to manage risk, the more risk it inherently has.

Understanding inherent risk allows a company to develop an early sense of the risk mitigation that might be necessary. When identifying inherent risk, companies should analyze the critical risk characteristics, which may be divided into four categories:

Legal Impact

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 Impact

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 compliance issues, including fines from legal issues, lost sales from reputational damage, or reduced cash flow from factory downtime.

Business Impact

Internal or external factors can impact a company’s day-to-day business operations. A failed new product can slow business growth, and political sanctions can disrupt the supply chain.

Reputational Impact

The organization’s reputation or brand can be damaged by negative media coverage (in traditional news media or social media). Bad press can result in loss of customer trust and lower employee morale.

Measure each of these impacts in qualitative and quantitative terms for a comprehensive view of risk. Qualitative research often uses a 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 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 an organization might not meet its regulatory compliance obligations. This should be a holistic analysis to identify all the compliance requirements 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.

Common Compliance Risks

Smart business leadership not only recognizes these risks; it also effectively addresses them. Below are four prominent compliance risks that modern enterprises face all the time:

1. Data privacy infringement

The European Union’s General Data Protection Regulation (GDPR) revolutionized data privacy rules forever, giving consumers more control over their data. This regulation mandates data portability, breach notifications, child data protection, and more, all designed to empower the consumer. Non-compliance leads to hefty fines, making strict adherence necessary.

2. Protected Health Information (PHI) mishandling

For organizations handling medical data, complying with the Health Insurance Portability and Accountability Act (HIPAA) is crucial. Neglecting proper risk assessment and procedures can expose sensitive patient data. Compliance measures include securing electronic patient records and implementing rigorous protocols to prevent data mishandling.

3. Lack of disaster preparedness

Natural or human-induced disasters pose significant threats to IT systems. Business continuity maintains daily operations during crises, while disaster recovery restores IT systems efficiently. Compliance with standards such as ISO 27031, SOC 2, NIST, and HIPAA demands a robust disaster recovery plan that focuses on vulnerability identification, minimized disruption, team coordination, and regular drills.

4. Breach of payment card data

Backed by major card brands, the Payment Card Industry Data Security Standard (PCI DSS) guards against hackers targeting payment card data. Qualified Security Assessors (QSAs) certified by the PCI Security Standards Council play a pivotal role in safeguarding customer data.

What Does Compliance Risk Involve?

Compliance risk is the organization’s exposure to the potential consequences of non-compliance. That is, if the business doesn’t meet its compliance obligations, what fines, penalties, or other costs might regulators impose?

Monetary fines can be hefty. Other possible penalties include loss of operating licenses or disbarment from government contracts. Corrective actions can be expensive to implement. There would also be legal costs as regulators investigate, plus the potential for civil lawsuits and reputational loss among your customers.

Many regulators will offer more favorable treatment to a company that can demonstrate it has a compliance program in place and is 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. Mitigation is the steps you take to reduce your compliance risk until it achieves that effectiveness goal.

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:

1. Identifying risks
2. Analyzing the level of the risk
3. Determining what actions might be necessary to decrease the risk
4. Implementing initiatives
5. Evaluating the effectiveness 

Here are each of the steps in more detail.

Step 1: Identifying Risks

Identify which regulatory compliance standards apply to your business, then document key workflows, information systems, and transactions. These efforts will require input from stakeholders of every business unit. Take note of areas in essential functions and procedures that suggest non-compliance with regulatory requirements.

Here’s how to identify compliance risks:

1. Research regulations. Understand the laws and standards applicable to your industry.
2. Internal audits. Evaluate your practices against compliance requirements through internal audits.
3. Employee input. Encourage employees to report practices that could raise compliance concerns.
4. Third-party evaluation. Assess compliance of vendors and partners.
5. Analyze history. Study past incidents for patterns and recurring issues.
6. Tech and data check. Review IT systems and data management gaps in compliance.
7. Training review. Gauge the effectiveness of compliance training programs.
8. Stay updated. Monitor evolving compliance regulations and industry trends.
9. Benchmarking. Compare your practices with industry peers for insights.
10. Consult experts. Seek guidance from legal or compliance professionals.

Step 2: Map Potential Risks to Possible Outcomes and Affected Parties

Once you’ve evaluated the 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, but it’s also a way to begin your risk mitigation strategies.

Step 3: Prioritize the Most Severe Risks and Determine Control Measures

Implementing new compliance programs (or improving the existing program) 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 existing controls failing to address those risks? How can you remedy that? Also, consider how you can 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 controls is an essential next step before proceeding to another risk. Review the results and decide whether the control works as desired. If not, investigate why, and if necessary, implement more or better controls to get the desired performance.

Step 5: Routinely Re-Evaluate Risks, Test Controls, and Update as Needed

Remember that a corporate compliance program should be an ongoing part of business. As the business grows, risks will change. Legislation affecting the business also evolves. Moreover, unmonitored, unenforced controls tend to lapse after a while. So you should routinely monitor 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 for building internal control systems. 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 internal controls, components, and principles function and operate together.
• A way to identify and evaluate risks and to develop the appropriate mitigation strategies: ones maintain an acceptable level of risk with a focus on fraud prevention.
• Expanded 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 healthcare.

Compliance risk assessments 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 your compliance department’s chief compliance officer.

The chief financial officer, the chief information officer, or another C-level executive might manage other risks.

How RiskOptics Can Support Compliance Risk Assessment

Evaluating risks, implementing the appropriate controls, and gathering documentation every step can be time-consuming and prone to error if you rely on manual processes and tools such as spreadsheets.

The ROAR Platform is a governance, risk management, and compliance software tool that simplifies compliance efforts through automation of tedious, manual tasks. Its easy-to-use risk management templates provide an outline 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.

ROAR 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.

Schedule a demo today to learn how the ROAR Platform streamlines compliance risk management.