Compliance Risk: What you need to know

Global regulations on commerce are constantly changing to meet the standards of today and be equipped for the technology of tomorrow. This leads to constant developments for global business compliance standards as well. What your company can and cannot do and what you need to be aware of while managing daily operations will depend on regulations specific to the industry in which you operate.

Often businesses treat regulatory compliance as one of many current business needs they need to check in the long list. Businesses are typically expected to comply with at least one if not numerous, sets of regulations.

The main justifications for which business owners gladly jump through the necessary hurdles most frequently concern protecting their clients and their own brand, aside from the fines and the negative publicity.

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. 

Types of compliance risk

There are several types of cybersecurity compliance risks that organizations need to deal with in order to protect sensitive data and comply with legal obligations.

Here are a few examples of different types of compliance risks:

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.

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.

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.

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.

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.

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.

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

Whatever strategy you decide to use, it should be obvious why managing compliance risk is crucial to operating any size firm successfully. Organizations of all sizes and types are subject to compliance, which demands that the proper safeguards be put in place to protect both customers and the organizations. Failing to do so could have potentially serious consequences.

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. 

Choosing Sprinto as your compliance solution will not just be cost-effective, but it will guarantee you accuracy and human-error-free operation. Sprinto’s compliance experts ensure that you’re never stuck while getting compliant. 

Want to know more about compliance risk or getting compliant? Talk to our experts now.

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.