What Exactly Are Compliance Risks?
The attempt to develop law-abiding conduct is known as compliance. This comprises adhering to ethical and moral standards, such as those outlined for illustration in the organization’s Code of Conduct, as well as “traditional” compliance with relevant national and international laws and regulations. When a company faces the possibility of breaking the laws in these two categories, there is a compliance risk.
The specifics of these hazards vary from business to business. Additionally, if danger materializes, there is a wide range of potential outcomes. Sanctions, damage claims, fines, or jail time are possible penalties, but so is severe harm to the company’s reputation; instances of this are common in recent economic history.
Areas With Particularly High Compliance Risks
In theory, compliance risks might arise in the setting of a wide range of legal disciplines, rules, or moral and ethical principles. Yet, certain legal fields are frequently linked to disproportionately large damage risks:
Laws against corruption
Cartels and the law of competition
Acts of money laundering
Regulations for accounting and bookkeeping
Law on data protection
Compliance risk analysis can be started by assessing potential hazards in these categories in your own business.
The main goal of compliance risk analysis is to improve the efficiency of the compliance program. It is challenging to assess whether compliance resources are being used effectively, or whether more resources are required for the most pertinent risks, without identifying the most pertinent risks and potential bad outcomes. Risk analysis is therefore a crucial component of demonstrating the compliance program’s effectiveness and efficiency to internal stakeholders as well as auditors and law enforcement officials.
Every Compliance Program’s Foundation is Compliance Risk Analysis
A thorough compliance risk analysis should be the cornerstone of any compliance program, according to popular compliance frameworks (ISO 19600, IDW PS 980, and existing international statutes and their guidelines, including the DOJ guidelines and the UK Bribery Act). The German Corporate Governance Code stipulates that the foundation of the compliance management system in Germany should be a study of compliance risks. Without conducting a risk analysis, businesses face the danger of prioritizing the wrong things, taking unproductive action, and utterly missing potentially important concerns.
Due to this, compliance risk analysis should preferably take place from the start of the company’s compliance initiatives. In reality, nevertheless, it is too frequently the other way around: businesses undertake their initial compliance procedures out of a genuine need or obligation without first thoroughly analyzing the dangers. Businesses could overlook important risks and neglect to direct compliance resources in the right direction.
The risk analysis can be viable evidence, especially when a compliance problem arises. Companies can show auditors and law enforcement that the relevant legal risk has been recognized, evaluated, and the proper solutions have been put in place. This data demonstrates the preemptive implementation of an efficient compliance management system, which may have a neutralizing impact.
A Standard Methodology for Compliance Risk Analysis
A corporation often compiles a preliminary review of possible compliance issues using legal catalogs and internal documents like annual reports, organizational handbooks, or audit reports. This overview is then verified and augmented with interviews and workshops with the operating divisions. The risks are then methodically documented and assessed, frequently in terms of their likelihood of happening and the anticipated severity of the damage.
Additionally, a plan is established for each compliance risk. Businesses frequently employ a variety of procedures, such as dual control or job rotation concepts, compliance training, guidelines, and internal communication methods, to try and lower the compliance risks that have been discovered. Companies are better able to look into compliance issues when they can demonstrate that they have taken such procedures, which is another crucial component of compliance risk management.
Continuous Compliance Risk Monitoring Is Required
However, more work has to be done. The examination of compliance risks has now been transformed into compliance risk management. Since both internal and external factors are always evolving, compliance risks should be continuously assessed and reevaluated as appropriate. For instance, a country’s political climate may change, greatly altering the risk of corruption (an external element), or a corporation may enter a new market that may be vulnerable to compliance concerns (an internal factor).
It is advised to periodically check the risks reported, despite the absence of such occurrences. Are the damage level and likelihood of recurrence still reasonable? Have the specified actions been carried out, and are they producing the desired results?
Evaluating compliance risks is essential for proving a strong compliance platform to independent auditors and, in an emergency, law enforcement officers. It also ensures that businesses constantly evaluate the effectiveness of their compliance program and helps them effectively spot possible emerging threats.
Information from EQS Group