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A Quick and Easy Guide to Compliance Risk Management

Every business, no matter the industry or size, needs to think about worker safety, risk management, and regulatory compliance. In fact, businesses are usually required to comply with more than one set of regulations (e.g., worker safety regulations, financial safety regulations, data protection and cybersecurity regulations, etc.). An effective risk management program can usually tackle both potential risks and compliance issues.

But it always helps to check if your business is compliant with all the regulations that apply to it. This is because noncompliance with applicable laws and regulations can lead to both obvious setbacks, such as penalties and fines, as well as more indirect issues like reputation damage. To avoid these pitfalls and ensure that you’re compliant, it’s a good idea to assess and manage your compliance risk.

What is compliance risk, and how does compliance risk management work? Here are the details you need to know.

What Is Compliance Risk?

Compliance risk is your exposure to legal and financial penalties for failing to follow industry regulations and legislature, internal policies, and prescribed best practices. Every organization faces the possibility of compliance risk, whether you’re a public, private, for-profit, nonprofit, state, or federal organization.

To avoid compliance risks — and the hefty penalties that can result — you first need to know what the risks are in your business and the regulations applicable to your industry. Then you need to implement strategies to manage and mitigate these risks.

Compliance Risk Management

Compliance risk management is the process of identifying, assessing, and mitigating the risks and penalties involved when you fail to comply with the laws and regulations applicable to your business. And you shouldn’t stop at managing compliance risk in your own organization: Your suppliers could be putting you at risk, too, so you need to vet them properly.

Compliance risk management usually forms a part of a business’ collective governance, risk management, and compliance (GRC) program. Some industries such as the financial and health care sectors are required by law to implement a risk management and compliance plan, but it’s a good practice for all companies even if not required by law.

If you already have compliance risk management policies and procedures in place, that’s great, but you should review the procedures regularly and keep them up to date. If you don’t, here’s how you can create a compliance risk management program.

1. Identify and Define Compliance Risk Exposure

Compliance in risk management: employees wearing hard hats, safety goggles, reflectorized vests, and masks

The first step is to know what kinds of compliance risks you might face. They are usually different for different industries, but here are some of the broad types of compliance risks you could face.

  • Workplace safety and health: The health and safety of employees is a major concern in most countries. In the U.S., these laws are enforced by multiple federal and local agencies such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA). The risks here include environmental factors such as pollution; workplace hazards such as dangerous chemicals or malfunctioning equipment; and inappropriate worker conduct such as abuse, discrimination, and sexual harassment — some of which are additionally enforced by the Health Insurance Portability and Accountability Act (HIPAA).
  • Privacy: The privacy of employees as well as customers of a business, especially when it comes to confidential data such as financial information, social security numbers, etc., is also closely regulated. Lax cybersecurity can lead to a violation of regulations such as the General Data Protection Regulation (GDPR) in Europe and various state privacy laws such as the California Consumer Privacy Act in the U.S.
  • Corruption in the company: Illegal practices by management or employees within the company such as fraud, theft, embezzlement, bribery, and money laundering also constitute compliance risks.
  • Quality: The products or services provided by your company should adhere to specified standards. Failure to comply with these would be considered a compliance risk that could result in penalties, product recalls, or even the shutting down of your business (e.g., if a product is found to be harmful to the health and/or safety of your customers).

Finally, there is always the risk that the regulations themselves may change. This is especially a concern when the political climate is uncertain, as this makes it difficult to predict any potential changes in the regulations.

2. Implement a Compliance Risk Assessment Program

Now that you know what compliance risks you could possibly face, the next step is to create a compliance risk assessment plan. This involves measuring the likelihood that your company or your suppliers might violate the regulations that apply to your company. Rather than simply “checking the boxes” to confirm that you’re following the rules, compliance risk assessment should include evaluating loopholes in your risk management process. This is important in all industries, but absolutely vital in highly regulated ones like defense, finance, chemicals, and health care.

Here are five steps to help you formulate a compliance risk assessment process for your organization.

Step 1: Understand Current Business Processes

Before looking at the risks, it’s important to understand everything your business does. Evaluate and document key processes, systems, and regular transactions. The compliance team can sometimes be isolated, leading to a siloed approach. To prevent this, meet key personnel from different departments and take a deep dive into the operations they carry out. Also use this opportunity to look up every regulation and regulatory body that your business needs to comply with.

Step 2: Outline Your Compliance Risks

Now that you have a detailed picture of your operations and compliance landscape, it’s time to identify the operations that present potential risks to compliance. You can do this by examining the key processes and systems identified in the previous step in light of the regulations you need to comply with. This will give you a high-level overview of the compliance risks your company might face.

Step 3: Review the Controls Already in Place

What internal controls have you already implemented to protect against compliance risks? Go through your current policies and risk management systems and evaluate how effective these controls are. This is an important step because rather than reinventing the wheel, this will help you build on what you already have. The gaps in your current controls are what you’ll need to work on in your compliance risk management plan.

Step 4: Prioritize the Risks and Controls

Let’s face it: No company has unlimited resources and time. In addition to tackling risks and compliance, you have your regular business processes and a bunch of other operations to focus on. You can’t possibly confront every compliance risk you face at once. So, based on the data gathered from the previous steps, list the risks you face and prioritize them based on their severity. This could be in terms of:

  • Legal impact—Would it result in a minor legal fine or imprisonment?
  • Financial impact—How much would the violation cost your company in terms of fines, loss of investor confidence, share prices, or reputational damage affecting future earnings?
  • Business impact—On a scale ranging from a dip in sales to a plant shutdown or trade embargo, how serious would the consequences be?

As you rank the risk severity, also rate how well your company is currently managing each risk (e.g., on a scale from “excellent” to "poor”). Based on this data, you can decide what resources to allocate to each of the risks and how soon to tackle them. It makes sense to deal with high-severity risks with poor controls first, and to allocate more resources to them than to low-severity risks.

Step 5: Review and Update the Compliance Risk Assessment Regularly

Compliance risk assessment should never be a one-off event. Regulations change and so do business processes, resulting in ever-changing operational risks and compliance requirements. In fact, if an issue is uncovered by an external inspection, your corporate compliance program may be evaluated to check if your compliance risk assessment is up to date. If you’ve been largely on top of your compliance risk management, it may lead to some leniency in citations issued.

The risk assessment should be reviewed periodically as well as when any big changes happen, such as the introduction of new operations, expansion into new markets, or a change in the regulatory environment. So in addition to the risk assessment process, create a deliberate regular review schedule to ensure you’re staying up to date.  

3. Work on Mitigating the Compliance Risks

Supervisor talking to a warehouse personnel

Once you’ve identified and prioritized the compliance risks through a risk assessment, the next step is to actually mitigate the risks. Allocate resources based on the compliance risk assessment data and set timelines for the respective teams to implement risk mitigation strategies. Follow up on the mitigation efforts regularly, and make sure that the high-priority risks are tackled as quickly as possible.

Finally, remember that just like any risk management process, compliance processes should also be dynamic — never stagnant. Follow up the reviews of your compliance risk assessments with prompt action in response to any new risks that are flagged, and come up with initiatives to ensure that your compliance efforts are always up to date.

Automate Compliance Risk Management With a Cloud-Based Solution

Managing the compliance risks of an entire organization can be challenging, especially if you’re doing it using Excel sheets and manual forms. Automating your processes will help, both in making your efforts more effective and in freeing up your team members’ time to focus on revenue-generating operations.

Using a platform such as Pulpstream can make your compliance processes run seamlessly. The intuitive dashboard and data storage features help you keep up to date with new regulations. What’s more, with Pulpstream’s predictive analytics and reporting capabilities, you can easily find gaps in your compliance efforts, as well as patterns in your risk and compliance data.

So make your compliance team’s work easier today with Pulpstream. Book a free demo now!