Compliance Risk: Building An Effective Framework

Keeping up with rules and regulations is a constant headache for businesses today. Laws change fast, and what was acceptable yesterday might not be tomorrow. This is where compliance risk comes in—it enables businesses follow all the rules they needs to.

Every industry has its own set of do’s and don’ts. Whether you’re in manufacturing or in SaaS, there are regulations that apply. Many business owners see this as just another chore, but it’s more than that.

Sure, following the rules keeps you safe from fines and bad press. But it’s also about taking care of your customers and protecting your company’s reputation. Understanding the various types of compliance risk is crucial for effective risk management.

TL;DR

Compliance risk is the susceptibility for legal, financial, and reputational damage resulting from failing to follow laws and regulations. It’s crucial for businesses of all sizes to manage this risk effectively.

Businesses face a range of compliance risks, from human error and data breaches to regulatory changes and supply chain vulnerabilities. Each risk type demands specific strategies for prevention and mitigation.

Implementing a compliance risk framework involves systematic steps— setting clear objectives, identifying risks, assessing their impact, and developing mitigation strategies.

What is compliance risk?

Compliance risk refers to a company’s possible susceptibility to financial penalties, legal ramifications, reputational damage, and material loss due to failure to act according to legal regulations, industry standards, or advised best practices. Every organization, whether public, private, for-profit, charity, state, or federal, faces this kind of risk. 

Top 10 types of compliance risk

There are several types of compliance risk that organizations need to deal with in order to protect sensitive data and comply with legal obligations. These risks form part of the top 10 compliance risks that businesses commonly face.

Human error

People make mistakes, which makes social engineering and phishing successful. Your data is at risk if employees are not routinely taught about prevalent cyber threats.

To overcome this:

Implement regular, comprehensive cybersecurity training programs for all employees. Use simulated phishing exercises to test and improve awareness. Develop clear, accessible security policies and procedures. Encourage a culture of security consciousness where employees feel comfortable reporting potential threats or mistakes.

Absence of supervision

Data monitoring is frequently required by compliance rules. Administrators can detect active threats through monitoring and receive warnings when there is a data breach. Both of which have the potential to lower the severity of a violation and any ensuing consequences.

To overcome this:

Implement strong and well rounded monitoring systems and data loss prevention tools. Establish clear roles and responsibilities for data supervision. Conduct regular audits and reviews of data access and usage. Create an incident response plan that includes early warning systems and clear escalation procedures.

Incorrect storage

Sensitive information ought to be kept in an encrypted format. If there is a data breach, your company is more at risk if you use the cleartext format.

To overcome this:

Implement strong encryption protocols for all sensitive data, both at rest and in transit. Regularly review and update data storage policies and practices. Use access controls and authentication measures to restrict data access.

Data breach 

The possibility of sensitive data being lost, stolen, or subject to unauthorized access because of insufficient security measures. Serious repercussions from data breaches might include monetary losses, reputational harm, and legal liability.

To overcome this:

Develop and regularly test a comprehensive incident response plan. Implement multi-layered security measures including firewalls, intrusion detection systems, and endpoint protection. Regularly conduct security assessments and penetration testing. Ensure proper employee training on data handling and security best practices.

Regulatory noncompliance

Not following cybersecurity laws and guidelines established by business associations or governmental agencies, such as the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), the Payment Card Industry Data Security Standard (PCI DSS), etc.

To overcome this:

Implement a compliance management system to track and manage regulatory requirements. Conduct regular compliance audits and risk assessments. Foster a culture of compliance throughout the organization, with clear accountability and reporting structures.

Vulnerabilities in the supply chain

Modern supply chains are interconnected, which makes them vulnerable to cybersecurity concerns if a breach occurs at one of the partners or suppliers.

To overcome this:

Conduct thorough due diligence on all suppliers and partners. Include security and compliance requirements in all contracts. Regularly audit and assess third-party security practices. Implement a vendor risk management program to continuously monitor and mitigate supply chain risks.

Inadequate incident response planning

The lack of a well-defined and tested incident response plan can lead to slower reaction times, increased damage, and potential non-compliance with regulations that require timely reporting of breaches.

To overcome this:

Regularly test and update the plan through tabletop exercises and simulations. Ensure all relevant staff are trained on their roles in the incident response process. Establish clear communication protocols for internal and external stakeholders during an incident.

Outdated systems and software

Failure to update and patch systems regularly can leave known vulnerabilities exposed, increasing the risk of successful cyberattacks and potential non-compliance with security standards.

To overcome this:

Conduct regular vulnerability assessments to identify potential weaknesses. Develop a systematic approach to retiring and replacing legacy systems. Allocate adequate resources for ongoing system maintenance and upgrades.

Insider threats

Risks posed by employees, contractors, or other insiders who may intentionally or unintentionally compromise data security. This can include data theft, unauthorized access, or accidental data exposure.

To overcome this:

Implement the principle of least privilege for data access. Use employee monitoring tools to detect unusual behavior. Conduct regular security awareness training focused on insider threat scenarios. Develop and enforce clear policies on data handling, acceptable use, and consequences for violations.

Cloud security misconfigurations

As more organizations move to cloud-based services, misconfigurations in cloud environments can lead to data exposure, unauthorized access, and non-compliance with data protection regulations.

To overcome this:

Implement the principle of least privilege for data access. Use employee monitoring tools to detect unusual behavior. Conduct regular security awareness training focused on insider threat scenarios. Develop and enforce clear policies on data handling, acceptable use, and consequences for violations.

How do you identify compliance risk?

Assessing possible areas of non-compliance inside an organization requires a systematic methodology in order to identify compliance risk. Understanding applicable laws and regulations, performing compliance gap analysis, engaging compliance experts, assessing internal processes, monitoring the external environment, and conducting risk assessments are all part of identifying compliance concerns.

Let’s have a look at how you can assess compliance risks.

1. Connect potential risks to affected parties and potential results

Map those risks to their prospective consequences and affected parties once you are familiar with your company’s activities and any compliance issues or gaps that may exist. This important paperwork is not only important for auditing purposes; it also serves as a starting point for your risk mitigation methods.

2. Determine controls and prioritize serious risks

It might be overwhelming to implement compliance programs or to enhance the ones you already have. We advise ranking all identified dangers according to their consequences and focusing first on the most serious ones. Find out where your current controls are falling short in addressing such threats. What can you do to fix that? Also, think about how you can spot a future breach of the rules for these serious dangers. This will lessen any unexpected non-compliance costs.

3. Implementing and validating controls 

Implement controls to ensure compliance with every identified risk. Before moving on to the next risk, test the control’s performance to validate its efficiency. Examine findings and assess if the control is functioning as intended. If required, deploy additional/better controls to achieve the desired performance.

4. Continually review risks, evaluate controls, and update as required

Remember that your company should always have a corporate compliance program in place. Your risks change as your firm expands. Laws that are relevant to your company change over time. 

Check your controls periodically, assess their performance and implement course-correction changes if required.

Find out the different types of Compliance Frameworks

How to build a framework for compliance risk assessment?

Creating an organized approach to recognize, evaluate, and reduce compliance risks inside an organization is part of creating a framework for compliance risk assessment. 

The essential steps to creating a framework for assessing compliance risk are as follows:

Step 1: Set objectives

Setting goals should always be the first step in any business endeavor. What does our risk management program aim to achieve? In what ways can our risk assessment support those goals? What elements must the evaluation contain in order to achieve this?

Your compliance risk assessment should ideally strive to:

• Summarize your organization’s risk profile.

• Identify the areas for improvement and the gaps therein.

• Determine the duration of the compliance approach.

• Note the assessment’s methodology.

• Be used to develop suggestions for top management on risk mitigation for handling certain hazards.

Step 2: Make preparations

Before you actually design and use a framework, you must first set everything else in place after you are certain of your compliance risk assessment goals.

Create a team first that will be in charge of completing the remaining steps. Afterward, create a structure, methodology, data repository, timeframe, and implementation plan. With all these procedures in place, you’ll be ready to conduct a compliance risk assessment using the framework you generate during this process.

Step 3: Risk assessment approach

Pick a risk assessment approach that is appropriate for your organization. The most popular techniques include qualitative, quantitative, and semi-quantitative methodologies. To assess the severity of detected hazards, decide on the risk criteria and scoring system.

Step 4: Conduct the risk assessment

You are now prepared to carry out the plan. Begin by conducting interviews, issuing surveys and questionnaires, hosting forums, and so forth. Then, gather all of this data in your data repository.

Using that data, you’ll be ready to move on to the next risk assessment phase: risk evaluation or comparing risks across domains and categories.

If your risk assessment has done its job correctly, you should be able to prioritize risks individually or by category in a way that makes sense. Decide which risks need to be mitigated after they have been prioritized, and then develop action plans for each.

Also, check out: Guide to compliance risk management

What are some instances of compliance risk?

There have been numerous occasions in real life where compliance risks have had serious repercussions for organizations. Here are a few examples:

Unauthorized accounts scandal at Wells Fargo:

 In 2016, it was discovered that workers had opened millions of unauthorized accounts on clients’ behalf without their knowledge or agreement, posing a compliance risk to Wells Fargo, a significant U.S. bank. As a result, senior executives left the company, and there were regulatory penalties and reputational harm. (Source)

Equifax data breach:

A significant data breach occurred at the consumer credit reporting company Equifax in 2017 that exposed the personal data of over 147 million people. The breach happened as a result of a system vulnerability that had not been patched, presenting a compliance risk with regard to data security and privacy. As a result, Equifax was subject to large monetary fines, legal lawsuits, and brand harm. (Source)

Fraudulent practices by Theranos: 

When it was discovered that Theranos had misled investors, regulators, and the public about the capabilities of their blood testing technology, the healthcare technology business was exposed to compliance risks. Theranos finally filed for bankruptcy after being hit with legal actions and having its reputation damaged. The company’s founder and top executives were accused of fraud. (Source)

Sprinto’s say on compliance risk

Sprinto is a cybersecurity compliance automation solution that helps you prevent compliance risks and stay compliant with the major frameworks, including SOC 2, HIPAA, GDPR, PCI-DSS, and many more. 

Here’s how it helps you:

1. Streamlined assessment: Sprinto automates much of the compliance risk assessment process, making it easier to set objectives, prepare, and conduct thorough risk evaluations.
2. Risk identification: Sprinto’s intelligent scans automatically identify potential compliance risks across your systems and processes, covering major frameworks like SOC 2, HIPAA, GDPR, and PCI-DSS.
3. Continuous monitoring: Our platform offers real-time monitoring and alerts, ensuring you stay on top of your compliance posture and can quickly respond to emerging risks.

FAQs

How significant is compliance risk?

Compliance risk management is critical for avoiding legal penalties, reputational harm, and financial losses, as well as ensuring ethical company practices. Furthermore, assessing and managing compliance risk ensures a sound security posture.

How are compliance risks mitigated?

Compliance risks can be addressed by establishing strict rules, procedures, and controls, delivering frequent training, keeping an eye on compliance, and promoting an ethical and accountable culture. 

What are the repercussions of not complying?

Serious repercussions for non-compliance can include regulatory fines and penalties, legal actions, the loss of company licenses, reputational harm, a drop in stakeholder trust, and even the possibility of criminal prosecution for serious infractions.

What are the repercussions of not complying?

Compliance risk is the potential for legal penalties, financial loss, or reputational damage due to failure to comply with laws, regulations, or internal policies. It’s about the consequences of not following the rules.

Operational risk is the chance of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. This covers a wide range of potential issues, from human error to system failures.

While separate, these risks often overlap. For example, a data breach (an operational risk) could lead to non-compliance with data protection laws (a compliance risk).

How to identify compliance risk?

To identify compliance risks in your organization:

1. Stay informed about laws and regulations affecting your industry.
2. Understand how your business operates and where it intersects with regulatory requirements.
3. Systematically review your operations for potential compliance issues.
4. Keep an eye on compliance issues affecting similar businesses.
5. Employ software or frameworks designed to spot compliance weak points.
6. Look at any previous compliance failures for patterns or ongoing issues