Navigating Compliance Risk Assessment (CRA): Best Practices and Strategies

Importance of a Compliance Risk Assessment

Many compliance issues aren’t blatant violations. These subtle deviations are difficult to recognize, especially for employees who aren’t fully aware of the requirements. Additionally, regulations are inherently complex and continuously changing, making it difficult for organizations to keep up. Implementing a compliance risk assessment framework is one of the best ways to manage the company’s compliance and gain the following:

• Increased operational efficiency – Comprehensive CRA helps organizations identify and assess potential risks, allowing them to allocate resources for early mitigation. This proactive approach streamlines operations, reducing unnecessary costs due to failures and operational disruptions.
• Better stakeholder confidence – Companies that demonstrate a commitment to proactive risk management for compliance are trusted by stakeholders, driving a reputation of reliability and credibility in the market.
• Improved business continuity and resilience – Continuous evaluations allow companies to stay ahead of emerging risks. Compliance risk assessment tools are useful in creating business continuity plans and driving adaptability to thrive in competitive markets.

Common Compliance Challenges

There are numerous problems organizations face when conducting risk assessments for compliance. Recognizing and understanding the company’s weaknesses is the first step compliance officers and risk management teams should take. Here are the most common threats to modern compliance endeavors:

• Complex regulatory landscape – Organizations, particularly those operating in different jurisdictions, grapple with complex and sometimes contradictory regulations. Worse, requirements frequently change, making it hard for personnel to adapt.
• Lack of awareness – Employees at various levels don’t always understand the nitty-gritty of Governance, Risk, and Compliance (GRC) structures. The workers’ lack of participation in proactive risk assessment leads to failures in identifying potential compliance pitfalls.
• Data management issues – Effective risk assessment relies on accurate and comprehensive data collection and interpretation. Without the right compliance risk assessment tools, designated teams can’t make data-driven decisions.
• Integration difficulties – Risk management efforts are often siloed within specific departments. This fragmentation results in inconsistencies, undermining the effectiveness of the entire compliance management program.
• Resource constraints – Lack of funds, time, and personnel limit the organization’s ability to conduct thorough risk assessments, leading to subpar methodologies and results. This challenge also influences the aforementioned challenges because deficient resources mean no training and tools for GRC teams.

To help mitigate and deal with such challenges, an average company allocates 1.34% of its total labor expenses to tasks specifically related to complying with regulations. These tasks may include completing paperwork, maintaining records, conducting audits, training employees on compliance, and ensuring adherence to industry rules and legal requirements.

Hence, establishing a robust framework for identifying, evaluating, and mitigating risks for these issues helps companies navigate the intrinsic complexities of compliance. Also, implementing strategies for ensuring compliance-related tasks are completed on time contributes to an organization’s healthy compliance status.

Process of Compliance Risk Assessment

Assessing compliance risks is a trying undertaking, made more formidable by various challenges in the current regulatory landscape. Whether the organization is spurred by adjusting to new industry regulations, strengthening internal policies, or evolving stakeholder expectations, implementing a robust compliance risk assessment is an effective way to build a culture of accountability and continuous improvement.

Steps in Assessing Compliance Risks

Step 1: Identify applicable regulatory requirements.

Establish the foundation for the CRA by determining the internal policies, relevant regulations, and industry standards that the organization should comply with. Utilizing various horizon scanning tools to identify emerging regulations across multiple regions is a specific example of compliance risk assessment under this phase.

Step 2: Assess the organization’s current controls.

Evaluate the effectiveness of existing controls if they will work against identified risks. Overlooking this step results in implementing unnecessary measures that fail to address critical compliance gaps. Control assessment frameworks like the COSO ERM (Enterprise Risk Management) or ISO 31000 are the most appropriate tools for this task.

Step 3: Conduct a comprehensive risk analysis.

Not all risks are equal. This step facilitates proper risk identification and prioritization based on the likelihood of occurrence and impact of non-compliance. Here are some best practices to consider:

• Utilize digital checklists to gather relevant and reliable information, ensuring data-driven decision-making.
• Apply qualitative and quantitative methods to gauge stakeholder perceptions and the measurable cost of the risk.
• Classify threats based on the compliance risk assessment matrix for merit-based resource allocation.

Step 4: Develop the appropriate mitigation strategies.

Effective risk mitigation strategies prevent non-compliance, reducing compliance breaches’ financial, legal, and reputational impact. These are compliance risk assessment examples of what to do under this step:

• Development and implementation of new controls, policies, and procedures
• Employee training on updated compliance procedures
• Tech integration for streamlining compliance processes

Step 5: Monitor and review the new controls.

Compliance risks evolve as business operations, market conditions, and regulations change. Ongoing monitoring ensures that new risk controls remain effective for sustained compliance. Establishing Key Performance Indicators (KPIs), such as the number of compliance breaches, resolution time, closure rates, and percentage of compliance training completion, is a practical way to measure the effectiveness of the controls.

Step 6: Carefully document the findings.

Comprehensive compliance risk assessment reports prove the company’s compliance efforts and provide a historical reference for regulatory bodies and future assessments. Compliance software solutions allow users to keep track of their compliance activities by offering a centralized information hub for exhaustive report generation, recordkeeping, and quick access.

Step 7: Communicate the results to stakeholders.

The final CRA phase is to share the risk assessment outcomes and key findings with stakeholders, including senior management, investors, partners, key department heads, and external regulators. Aside from building trust, this phase aligns compliance priorities with the organization’s overarching GRC goals.