What is Compliance Risk Management?
The process of detecting, measuring, and monitoring the risks to your organization’s compliance with rules and industry standards is known as compliance risk management. This includes all of the internal controls you put in place to ensure that your company complies with those obligations, as well as monitoring those controls on an ongoing basis to ensure they’re effective.
The documents of the compliance risk management are the potential losses and liabilities of a firm that could face as a result of non-compliance, such as legal penalties, fines, business loss, and reputational damage, and then takes the necessary steps to mitigate those risks.
What is Risk Management?
The process of assessing, discovering, and controlling threats to a firm’s profitability and capital is known as risk management. Financial uncertainties, strategic management failures, technology challenges, legal liabilities, natural disasters, and accidents are all potential causes of risk.
A risk management program allows a company to analyze all of the hazards that it confronts. It also looks at the link between risks and the potential for them to have a cascade effect on an organization’s strategic goals.
What’s the Difference Between Risk Management and Compliance Risk Management?
Enterprise risk management includes compliance risk management as a subset. It aims to address all potential threats to your company’s operations. Failures to comply with regulations are one such danger, but they are far from the only one. Businesses also confront a slew of other threats that have nothing to do with regulatory requirements.
Compliance risks, on the other hand, remain a major worry for every large firm. This is especially true in highly regulated areas like healthcare and banking, as well as publicly traded corporations that are subject to a slew of investor protection and securities rules.
Comprehending the Consequences of Non-Compliance
First and foremost, compliance officers must determine where the true risks of non-compliance for your company are. Some are more common than others, and those should be the first and most aggressively addressed compliance issues in your program.
Due diligence of third parties and teaching staff on the anti-bribery policy, for example, are two cornerstones of efficient FCPA compliance. Both should be included in a compliance program, but not to the same level; it all depends on your business model. A company that relies primarily on local agents may engage heavily in due diligence, but a company that relies on employees in a direct sales model may devote more time to training and enforcing its gift and entertainment policies. Understanding what your compliance risks are and how they came to be is the first step in strategic risk management.
Noncompliance’s Potential Risks
What happens if your company fails to comply with its legal obligations? For CEOs involved in misconduct, such failings can result in monetary penalties, exorbitant investigation fees, and, in the most serious situations, prison time. You could face a variety of consequences depending on your industry.
Fines and penalties: For failures to comply with most state and federal rules and regulations, monetary penalties are imposed. Furthermore, a company under regulatory scrutiny will have to pay lawyers, auditors, investigators, and other advisers as it works with the regulators to remedy the issue. These inquiry costs are frequently several times higher than the final monetary fine.
Bad Reputation: Failures in compliance, such as poor consumer safety practices, wage and hour violations, or accounting fraud, frequently make the news. The consequences to a company’s business reputation can be swift and severe, wreaking havoc on years of carefully cultivated brand building.
Furthermore, in today’s social media and online world, disgruntled customers, employees, or customers may vent their frustrations about your company online. Those remarks might remain for a long time.
Failures to comply with international border regulations, such as failing to pay import taxes or forgetting crucial documentation, could prevent your company from receiving items or delivering goods to clients. Suppliers, distributors, joint venture partners, and other members of your supply chain may discontinue doing business with you.
Choosing a Risk Tolerance Level
Figure out how much of a compliance risk your organization is willing to take. The lower the risk tolerance, the less stringent your compliance policies and procedures must be.
Because risk tolerance can be a hazy idea, the internal control group coined the phrase “acceptable variance from a performance target” to describe it more precisely. As you establish rules, processes, and internal controls, keep this benchmark in mind: how far can corporate transactions or employee behavior vary from the aim before senior management intervenes?
For example, the corporation may have a policy that no discounts or credit notes that can be turned into cash be given to local distributors (bribes). Do you want complete adherence to that goal with no deviations? That is doable, but it will necessitate stringent corporate accounting controls and a readiness to terminate anyone who breaks the rules. Would you accept a 1% or 5% failure rate, or differing failure rates for resellers in high-risk and low-risk markets?
Every business will come up with its own solution. The problem is that unless every organization responds, you won’t know how many compliance policies and procedures are in place.