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Building Defensibility: Creating an Effective Compliance Risk Analysis Framework

Jun 2, 2022

The world of compliance risk management is in a constant state of change. Because of this, organizations continuously struggle to ensure that their business operations are compliant not only with governmental regulations but also with ethical values. With this in mind, it seems that compliance teams worldwide are constantly playing catch up in determining what business units, departments, and processes are prone to compliance failures and which are not. Being behind on this process can be extremely dangerous to the organization as compliance failure can lead to a plethora of fines, setbacks, and a diminishing reputation among customers. It would seem to many compliance teams that nothing short of the ability to predict the future is suitable enough to identify and prevent emerging risks effectively. A compliance risks analysis may be able to give organizations exactly what they need to build a robust compliance program better and better mitigate the potential of emerging risk.

Before we begin discussing how to create an effective compliance risk analysis it is important first to understand exactly what a compliance risk is and where these risks might emerge from. Compliance is the organization’s attempt at establishing policies and procedures that adhere to government regulation as well as ethical values described throughout the organization’s code of conduct. Compliance risk emerges when the organization’s processes do not effectively adhere to the standards stated previously. 

Compliance risks can be different for various organizations, but all can be dangerous as repercussions can include fines or imprisonment, as well as damage to the organization’s reputation. Compliance risks can often emerge in a number of areas, some organizations may be more prone to risks in some areas than others. Areas where compliance risks are frequent include but are not limited to: 

●      Anti-bribery and corruption

●      Anti-money laundering acts

●      Data protection and cybersecurity laws

●      Labor laws

●      Cartel and competition laws

●      Bookkeeping and accounting regulations

●      Export control

●      Environmental law

●      Financial Regulation 

Identifying which areas most applicable to your organization is one of the first key steps to ensuring that the compliance risk analysis process is effective. By determining which of these areas are most susceptible to emerging compliance risks within your organization, you can better determine the most appropriate allocation of compliance resources and ultimately ensure better compliance. Once identified areas of risk, organizations can begin the compliance risk analysis process.

Compliance Risk Analysis: When And How Should It Be Done?

When re-evaluating an organization’s compliance program, many would agree that a compliance risk analysis should be the first step. The compliance risk analysis will outline the framework for developing, implementing, and managing policies and procedures that are catered to the organization’s areas of high risk. 

With the information gathered from an effectively executed compliance risk analysis, organizations will be better equipped to allocate resources and better set priorities for mitigating risks. Unfortunately, oftentimes organizations first implement their efforts of compliance programs long before they undergo a compliance risk assessment. 

This can lead to organizations missing crucial areas of risk and cause the company to be more susceptible to compliance violations. Regardless, organizations should undergo a complete compliance risk assessment as the assessment itself can serve as evidence demonstrating that various compliance risks have been identified and relevant countermeasures are being implemented, this can greatly assist in the event of a compliance violation by greatly mitigating its negative impact on the organization.

Implementing an Effective Compliance Risk Analysis Framework

Typically, a compliance risk analysis will begin with an initial overview of potential compliance and overall risks to the organization. These will be found by analyzing documents such as annual reports, organizational handbooks, and audit reports. Any areas that are found to have potential risks are then validated through interviews with relevant operating units. These risks must then be evaluated for their probability of occurrence and the risks’ potential impact. Once this is determined compliance teams can then begin prioritizing various risks for the best allocation of resources.

Once compliance risks are prioritized compliance teams can then begin implementing preventative measures. These preventative measures can be a wide range of strategies including improving policy and procedure practices, enhanced training, job rotation principles, or internal communication processes. Implementing some sort of control can greatly increase an organization’s compliance risk management and put the organization in a better position to investigate compliance issues.

Continued Monitoring of Compliance Risks

Now that an effective compliance risk analysis framework has been built, the organization should understand what areas of compliance hold the most risk to the organization and how to best combat or mitigate those risks. Unfortunately, the work does not end here. Without continual monitoring of the identified compliance risks, the organization will soon end up where it initially began with several unidentified risks and no established means of preventing them. Risks are constantly changing, and compliance risks are no exception. 

The re-evaluation of the organization’s compliance program is essential to ensuring that the program remains effective and agile. By continuously monitoring and re-evaluating compliance risks organizations can determine the effectiveness of set controls, identify new and emerging risks, and also determine if a reallocation of resources is required for effective compliance. The continual monitoring of a compliance risk program can also demonstrate a robust compliance program in the eyes of an auditor and law enforcement.

Organizations need to develop an integrated, agile, and collaborative compliance program and framework like VComply – built on a common information architecture and framework. VComply’s system and compliance architecture allows for compliance, risk management and assessment activities to be coordinated across different departments and functions of the organization, assisting the organization in breaking silos and making more informed business-decisions. 

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