Compliance risk stems from non-compliance with laws, regulations, and standards, posing a threat to an organization's data, reputation, and finances. Fortunately, an effective way to address compliance risk is to implement compliance risk management. But what is that? In this article, we'll explore this crucial concept in detail.
Compliance risks significantly threaten organizational stability and success, regardless of your firm's industry. So, proper strategies and processes must be implemented to avoid potential non-compliance pitfalls. But how do you address these risks? This is where compliance risk management emerges as a vital solution. But what is compliance risk management? Let's find out.
What Is Compliance Risk Management?
Compliance risk management is a process that involves identifying and assessing the risk of non-adherence with compliance regulations to reduce financial repercussions, legal penalties, and material losses.
But what are these compliance risks? To help you understand better, here is a compliance risk example -
Let's assume a SaaS provider company did not implement adequate security measures (such as encryption) to protect client data. This lack of protection exposes the data to potential breaches.
So, in the event of a breach, the company risks losing and compromising client data, which violates laws like the General Data Protection Regulation. As a result, the company may face legal penalties, financial losses, and reputational damage.
But how does compliance risk management help in such a scenario? Compliance risk management involves a series of steps that help detect such threats and enable your team to take necessary actions against them. What are these steps? How does it work? Let's find out.
Steps Involved In Compliance Risk Management
Below are the steps involved in the compliance risk management process that help mitigate potential risks associated with noncompliance:
Step 1: Evaluate Current Position
During compliance risk management, IT teams must first analyze how well the organization's compliance framework functions. This involves examining the key systems and processes, understanding the applicable industry regulations, and considering the operational complexities.
Step 2: Conducts Comprehensive Risk Assessments
In this next step, the IT team must evaluate the qualitative and quantitative aspects of compliance risks. By doing so, they can determine the severity of each risk and prioritize their risk mitigation efforts accordingly. As part of the process, they even use a risk matrix that helps them understand each type of risk's likelihood, impact, and severity.
Step 3: Evaluate and Prioritize Gaps
Then, IT teams need to assess compliance gaps, which are crucial for managing compliance risks. This gap evaluation helps teams identify areas where internal policies do not meet industry standards or regulatory requirements. How do you identify the gap?
Your team needs to compare your current practices, procedures, and controls with compliance requirements to identify areas of noncompliance. Classify these risks by severity and develop a prioritized action plan to address these gaps.
Step 4: Implement Policies and Procedures
The next step is developing a strategic action plan to address the risks identified during risk assessment. New policies and procedures should be created or revised to fill the compliance gaps.
Step 5: Monitor and Test Controls
Furthermore, during this step, IT teams must continuously monitor key risk indicators and test internal controls to ensure that policies and procedures are followed correctly.
Step 6: Audit and Report
Then, IT teams need to conduct internal audits to assess whether they adhere to policies and regulations. Additionally, they can use a continuous monitoring system to generate a progress report that monitors progress.
Furthermore, IT managers can utilize this report to assess whether compliance goals are being achieved and if risks are adequately mitigated. This provides insights into what is effective and what requires improvement.
Step 7: Remediate (Corrective Actions)
Lastly, the IT team needs to take immediate action to address any compliance failures or instances of non-conformance. They should review what went wrong and implement measures to prevent similar issues in the future.
After going through the compliance risk management process, you might have a question—Isn't compliance risk management similar to risk management? Although both processes involve identifying risks and analyzing their potential impacts, their purpose and focus vary.
We have compared both processes using different parameters to provide you with more clarity. So, let's explore the difference.
How Does Compliance Risk Management Differ From Risk Management?
Below, we have thoroughly compared compliance risk management and risk management. This comparative analysis will help you understand what sets them apart.
Parameters | Compliance Risk Management | Risk Management |
Focus | Compliance risk management focuses on identifying, evaluating, and addressing risks associated with noncompliance with laws, regulations, and corporate policies. It specifically targets hazards linked to statutory and regulatory requirements. | Risk management has a broader scope, which includes the detection, evaluation, and mitigation of risks across various contexts. This includes financial, operational, strategic, and other types of hazards. |
Objective | Compliance risk management aims to ensure that an organization complies with internal policies, laws, and regulations. Its primary goal is to mitigate the risk of legal issues and regulatory violations, along with associated penalties, reputational damage, and other potential consequences. | Risk management concentrates on identifying and mitigating risks that could impede the achievement of organizational objectives. Irrespective of whether these risks are related to compliance. |
Framework | A compliance risk management framework is formed for the organization's activities, laws, regulations, and industry standards. It often serves as the basis for compliance risk management. Furthermore, it involves adhering to specific compliance standards and conducting regular monitoring and reporting. | Risk management typically uses a broader framework, such as the COSO ERM (Committee of Sponsoring Organizations of the Treadway Commission – Enterprise Risk Management) framework, which addresses various risks and provides a structured approach to risk identification, assessment, and mitigation. |
After going through the comparison table, you may have clearly understood the difference between risk management and compliance risk management.
But how do you determine which is a better option for your organization?
If your sole purpose is to analyze the risk associated with compliance issues, you should implement a compliance risk management process. However, investing in additional tools and resources for a broader risk assessment, as involved in the risk management process, may not be necessary in this case.
Compliance risk management provides several other benefits besides being less resource-intensive and more straightforward than risk management.
What are these benefits? Let's explore them.
Benefits Of Compliance Risk Management
Compliance risk management offers several benefits, such as:
Addresses Cyber Attacks: By implementing a compliance risk management program, organizations can better respond to cyber threats such as insider attacks, ransomware, and malware, which can hinder compliance with regulations and disrupt operations.
Protects Sensitive Data: Organizations that handle data are responsible for safeguarding vast amounts of sensitive financial, personally identifiable, and other information. An effective CRM plan can help organizations ensure the security of this data.
In addition to these proactive benefits, CRM helps organizations avoid the negative consequences of non-compliance. These consequences include:Penalties and Fines: Regulators can impose significant financial penalties for non-compliance with regulations. Organizations may also incur expenses for hiring auditors, investigators, and lawyers to address compliance issues.
Reputational Damage: Non-compliant organizations are often exposed through social media and the internet, leading to a loss of trust and reputation damage. This can have swift and severe business consequences, including lost profits.
Lost Access to Supply Chains: Non-compliance may lead to partners, suppliers, and distributors severing ties with the organization due to increased risk, impacting the organization's access to essential supply chains.
However, to reap its benefits, you must ensure you effectively implement compliance risk management. But how can you ensure that? You can follow compliance risk management best practices. What are these best practices? Let's find out.
Compliance Risk Management Best Practices
Listed below are some of the best practices that you can follow to ensure effective implementation of compliance risk management:
1: Assign Teams Responsibility For Monitoring And Managing Compliance Risks
To maintain a proper flow of the compliance risk management process, it's crucial to clearly outline roles and duties. For instance, assign specific tasks to oversee each type of risk identified during the assessment phase and assign other individuals or teams to manage (implement strategies) those risks. By doing this, you can ensure everyone knows what they are supposed to do and ensure no compliance risks are overlooked.
2: Involve Senior Management To Promote The Importance Of Meeting Compliance
Involving senior management in compliance efforts sets a positive example for other departments about the importance of following compliance regulations. What can they do? Senior leaders can monitor how well the organization meets its compliance goals, quickly address any issues that arise, and show dedication to ongoing improvements. By doing so, other departments also get influenced to prioritize compliance and strive for better adherence to regulations.
3: Adopt of Recognized Frameworks To Ensure Data Integrity
Adhering to established compliance frameworks, such as SOC 2 and ISO 27001, is essential to safeguarding your data and improving your chances for business growth. These frameworks provide guidelines for ensuring the security and integrity of your data, which can enhance trust with clients and partners and open up new business avenues.
Additionally, it's crucial to stay up-to-date with any industry-specific compliance frameworks that apply to your organization. By understanding and adhering to these standards, you can demonstrate your commitment to meeting industry best practices and regulatory requirements, which are essential for maintaining trust and credibility within your sector.
4: Conduct Regular Employee Training To Keep Them Up-to-date On Regulatory Changes
Conducting regular training sessions to educate employees about relevant regulations, policies, and procedures and ensure they understand their responsibilities and how to comply with them effectively is crucial.
By providing ongoing training, organizations can keep their employees up-to-date on any changes in regulations and emerging compliance issues, prompting a culture of compliance within the organization. This practice also helps to increase employee awareness, engagement, and accountability, ultimately reducing the likelihood of compliance breaches and mitigating compliance-related risks.
5: Utilize Appropriate Tool To Streamline Your Compliance Effort
Using an appropriate tool enables your team to enhance their compliance risk management efforts. Also, it helps improve their ability to detect and respond to compliance risks and ultimately strengthen their overall compliance posture.
For instance, by opting for an access review tool, your team can streamline compliance processes, improve operational efficiency, and expedite audit readiness. But how? To help you understand better how such tools work, let's take the Zluri access review solution as an example.
Zluri offers an access review solution that automates the access certification process. With just a few clicks, you can review the access of multiple employees and identify if any employee holds unnecessary access that can risk data safety. This visibility enables your teams to take proactive actions to address such risks, minimize potential security breaches, and safeguard critical data.
Moreover, by ensuring data integrity, Zluri's access review helps meet the security requirements of different compliance standards, which helps your organization comply with stringent regulatory obligations.
Compliance Risk Management: A Solution To Avoid Non-Compliance Pitfalls
To sum it up, a compliance risk management strategy serves as an ultimate solution to mitigate the risks linked to noncompliance with regulations. Organizations can adeptly manage compliance risks by diligently following the steps involved in this process — evaluating current positions, conducting compliance risk assessments, prioritizing gaps, implementing policies and procedures, monitoring controls, auditing, and remediation.
Furthermore, to ensure optimal results from your compliance risk management efforts, consider implementing best practices such as adopting recognized frameworks, involving senior management, conducting regular training, and leveraging appropriate technology like Zluri.
