What is compliance risk and 7 ways to manage it

Compliance risk is a company’s exposure to consequences if they don’t follow financial and legal laws. A company is exposing itself to compliance risk when it’s not aware of how its daily operations are breaching regulations. This is sometimes also referred to as Integrity risk. Compliance risk applies to all organisations, regardless of industry or size. There are many steps businesses can take to protect themselves and lower their exposure to risks. 

Types of compliance risks 

The type of compliance risk that a company may face depends on the kind of operations it’s undertaking. It’s always advisable to know what type of compliance risks a business might be vulnerable to. These usually include: 

• Corruption 
• Bad data management 
• Process risk 
• Data breaches 
• Workplace health and safety 

Corruption 

Corruption occurs when the employees don’t follow local laws, regulations and company policies. and act on their own interests. This means that they abuse the power given to them and hurt the company in the process of doing so. In a corrupt company, employees may hide fraudulent activities, pay off suppliers to hide illegal activities and work with competitors who are against the interest of the company for personal monetary gain. Multiple people can be involved in a corruption case. It could be both low-level and high-level employees. Unfortunately, without transparency, corruption can hamper the economic development of the organisation and future growth opportunities. 

It can damage partner relationships as well as put the business in a difficult position due to non-compliance. 

Bad data management 

Most companies deal with customer or partner data to some extent. This means that they need to have secure handling procedures and storage. All over the world, there are privacy laws that protect individuals’ data. Failing to comply with these laws leaves the company vulnerable to legal, financial, and reputational consequences. 

Process risk 

Processes are in place because they need to be followed to ensure the best possible results. Not following processes could mean that employees are making the wrong decisions and aren’t following relevant laws that apply to their task at hand. This could include disregarding scheduled audits, not doing proper machinery maintenance and not checking the quality of products. 

This can affect the overall quality standards of company products and they might fail to meet industry standards. Process risk could be an issue, especially if the organisation hasn’t introduced monitoring systems. 

Data breaches 

Compliance risk means that the company can face cybersecurity risks as well. Neglecting to adhere to company policies and training may expose the company to human errors that could result in a data breach. Employees might receive suspicious emails that they don’t report to IT. There are many ways this scenario can unfold: They may click on the links without realising the risks, exposing themselves to malware or phishing attacks, or they might fail to recognise the emails as phishing scams, thus missing the opportunity to alert the IT department about potential security threats. Either one of those opens up the door to more issues for the company in the future. 

If employees don’t comply with the training they were provided, this can cause many problems for the company. 

Workplace health and safety 

Compliance risk is really high when it comes to Work Health and Safety. In 2022, there were almost 130,000 Work Health and Safety claims, with an estimated median time lost of 8 weeks. There were also 195 fatalities recorded, showing how companies and employees need to take safety compliance seriously to prevent lives from being lost. A high compliance risk means a hazardous workplace, as the environment doesn’t comply with laws and regulations. 

Following laws and regulations in this instance is crucial as it can save lives and protect employee wellbeing. 

How to manage compliance risk

Managing compliance risk can help the company avoid complicated situations, unnecessary expenses and reputational damage. Here are some useful ways:

• Conduct a risk assessment 
• Develop a due diligence process for third parties
• Outline strong consequences and enforce them 
• Encourage leadership to take the first step
• Create a risk-aware culture
• Encourage employees to come forward
• Save time and money by using a case management system

Conduct a risk assessment 

A risk assessment is the first step in understanding the type of compliance risks the company is dealing with. By identifying the risks, the company can start thinking about strategies to either:

• Mitigate them
• Avoid them
• Eliminate them

To decide which approach is the most suitable, organisations will need to consider the likelihood of the risk materialising and the impact it will have on the company. Businesses may not be able to avoid or eliminate some risks. However, by prioritising treatment plans, from most severe to least severe, they have better chances of managing them. 

At the beginning of the process, the company will need to evaluate inherent risk and but at the end, the organisation will have to consider residual risk. If the residual compliance risk is still high, more controls may be necessary to reduce it further. 

The most important part of risk assessments is how regularly they are conducted. Risk assessments that are not part of a schedule may be less effective as businesses may not conduct one at all or start one when it’s too late. Compliance risk is constantly evolving, so organisations need to stay on top of future threats.

Develop a due diligence process for third parties

Third parties can bring high compliance risk as companies have low visibility and control over vendor or partner actions. To manage this type of compliance risk, companies should establish a due diligence process that is followed at the beginning of a partnership but continues on during the partnership. The first step of this process is usually a due diligence investigation that provides the following:

• Financial statements
• Any cash flow issues
• Criminal history
• Debt
• Management 
• Stock prices (past, current)
• Projections for the business
• Policies

Of course, there is more information that can be acquired during the process, depending on the type of data needed. 

A similar process can be followed, in the form of a background check, when new employees join the organisation. This can further contribute to lowering compliance risk. 

Outline strong consequences and enforce them 

Creating strong policies can’t be done without being clear on the consequences that will follow when non-compliance is identified. The company needs to describe how employees will be affected if they don’t follow laws and regulations as well as the policies in place. 

The best way to show that a business is serious about compliance is when a risk materialises. The extent to which policies and procedures are followed and executed will highlight how seriously compliance risk is taken. 

Another action that will show the importance of compliance is how often policies are reviewed and updated. New laws are often introduced around work health and safety as well as other business operations such as employee rights and financial requirements. This means that policies will need to be updated on a regular basis to stay current. 

Encourage leadership to take the first step

Managing compliance risk starts from the top. The leadership team needs to be aware of what risks the company is facing, the strategies used to control and how future plans may lead to more risks. Making decisions based on risk management can lead to a safer and more successful workplace. 

If management disregards potential risks, this shows other employees that risk mitigation isn’t part of the decision-making process. 

Create a risk-aware culture

One of the best ways to prevent or mitigate compliance risk is to build a risk-aware culture. In a risk-aware culture, employees are educated about compliance risks, and how misconduct can affect the organisation. Training on sexual harassment and what actions count as bullying and discrimination can make staff more aware of their behaviour. 

When a new employee joins, it’s advisable that they are given a clear set of expectations around compliance and are introduced to the policies during the induction process. It should be communicated who is managing what, including cyber concerns, harassment incidents and work health and safety incidents. That way, they will be able to report potential risks. 

Encourage employees to come forward

One of the best ways to combat compliance risk is through employees identifying potential problems. Employees may notice signs of fraud, mistreatment or potentially hazardous areas. A big part of creating the risk-aware culture mentioned above involves encouragement around reporting non-compliance and setting clear lines of communication. If employees are confused about what steps they need to follow and who they need to report the incident to, that doesn’t motivate them to report potential risks. 

Save time and money by using a case management system

A factor that increases employee motivation to report noncompliance is swift action once a report is made. A case management system can be very beneficial in dealing with compliance risk as it assists in handling employee complaints efficiently and effectively and encouraging a speak up culture. Through a case management system like Polonious investigators can automate manual tasks, ensure complete confidentiality and prioritise cases based on severity. 

Having everything in one place allows for better case completion and quick follow-up on non-compliance issues. This shows employees that their reports are looked at and taken seriously, encouraging them to speak up again if they notice another problem. 

To make things even easier, Polonious can be integrated with a number of different software, allowing for smoother information transfer. 

Compliance risk management never ends

Compliance will always be an area for improvement as more employees join the company and other employees are given more power. People may think they will get away with not complying with laws and policies, which will raise the overall risk as they might get more confident. Companies have to stay vigilant and constantly strengthen their mitigation strategies by updating them and making them more solid. 

It should be clearly communicated to everyone that there is zero tolerance against misconduct and consequences may follow ill-intent employees outside the workplace.