What Is Compliance Risk and How To Minimize It [+ Free Template]
Organizations lose an average of $4 million in revenue due to a single non-compliance event.
Regardless of the industry your business operates in, understanding the implications of non-compliance will protect your business from various ramifications ranging from costly lawsuits to reputational damage.
Compliance risk is the potential consequences your organization will face should it violate industry laws, regulations, and standards.
In this article, we dig into common types of compliance risk and help you understand your organization's level of compliance risk exposure.
What is compliance risk?
Compliance risk, also known as integrity risk, is the potential damage businesses face when they fail to comply with industry standards, laws, and regulations. This risk involves both financial penalties and reputational damage.
Organizations of all shapes and sizes are exposed to compliance risk, from the smallest small business to the largest enterprise company.
For example, a small chiropractic clinic faces compliance risk if they fail to meet HIPAA compliance standards in the same way that a large hospital system would.
An organization must:
- Identify all applicable laws, regulations, and standards that affect the business
- Discover areas where the organization fails to meet industry laws, regulations, and standards
- Implement controls and procedures to effectively comply with industry laws, regulations, and standards
- Keep up with updates and changes to the laws, regulations, and standards that shape their industry
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Compliance risk impact
Besides financial impact and a sense of professional obligation, there are additional reasons to avoid compliance risks. These include reputational, business, financial, and legal implications that can affect your day-to-day business operations.
Failing to comply with industry standards, laws, and regulations can damage your reputation. When your company’s name is in the news for poor compliance management, it’s difficult for customers to trust you.
Don’t let your reputation suffer due to a breach or by falling out of compliance.
As a business owner, you do not want anything to disrupt your company's ability to operate. Yet failure to comply with certain industry standards can lead to business shutdowns or impact to the way you run your business.
For example, non-compliance with the Payment Card Industry Data Security Standard (PCI DSS) could lead to the suspension of your ability to accept major credit cards like Visa and Mastercard. Customers might avoid purchasing from your company or walk away if they do not have another payment type with them.
The financial impact of compliance risk can be drastic. Lost investors, property, and overall revenue can result from strikes on your account, breaches, shutdowns, and more.
Financial implications from non-compliance include:
- Loss of investors
- Loss of revenue
- Legal fees
If you fail to comply with industry standards and best practices, your legal action may be brought against your company and/or employees.
This can lead to costly fees, penalties, imprisonment, exclusion, or forfeiting products and property. For businesses unable to handle the financial burden, legal issues can often lead to a company shutdown.
What are the types of compliance risks?
Compliance risk is something all organizations might face, no matter the industry. Below we discuss the most common types of compliance risk.
Privacy and data security
Impact: Legal, financial, reputational
Proper handling of sensitive and confidential data is critical for protecting employees and customers.
Thankfully there are several laws in place to help protect the privacy of individuals. A few of them include:
- The Health Insurance Portability and Accountability Act (HIPAA) limits the use and disclosure of patient’s protected health information (PHI).
- The European Union General Data Protection Regulation (GDPR) allows EU citizens to control how their personal data is collected and stored by organizations.
- The California Consumer Privacy Act (CCPA), similar to GDPR, gives Californians greater control over how businesses use their personal data.
Workplace health and safety
Impact: Legal, financial, business, reputational
One of the most serious types of compliance risk is workplace health and safety. From accidents to repetitive injuries, risks can happen in any work environment.
Countries have specific health and safety processes that all organizations and their employees must comply with. The Occupational Safety and Health Administration (OSHA) and U.S. Food and Drug Administration (FDA) have enforced significant penalties to ensure the health and safety of employees.
Even in low-risk environments such as offices, accidents such as slips and falls still happen.
Ensure your organization meets industry and federal standards by knowing when and how to report accidents should they occur. Additionally, offer workplace safety training should your industry require it.
Corrupt or illegal activities
Impact: Legal, financial, business, reputational
A common type of compliance risk is corrupt or illegal activities. Fraud, theft, bribery, or money laundering are all examples of corrupt and illegal activity.
As defined in the Foreign Corrupt Practices Act (FCPA) of 1977, it is unlawful for certain individuals to make payments to foreign government officials to help aid in obtaining or retaining business. Under the FCPA, bribery is also unlawful and no form of money should be offered, promised, or given in any organization.
Impact: Business, financial
Process risks refer to day-to-day operations that violate rules and regulations within your industry. Some examples include poor quality assurance, improper machinery maintenance, or even reporting and accounting errors.
Another example of process risk is human error, which is an unpredictable and unintentional error such as a mental slip. One way to help avoid this is to offer regular training opportunities and ensure that staff know that lines of communication are open at all times.
Impact: Legal, financial, business, reputational
The Environmental Protection Agency (EPA) is the federal office in charge of overseeing an organization’s environmental impact. Their main focuses are human health, and ecological effects.
The potential damage to any and all living organisms and the environment inside and outside of the workplace falls under EPA jurisdiction.
Companies that have any impact on the environment (such as taking or emitting things into the environment) are required to comply with environmental laws and regulations issued by the EPA such as the Clean Air Act and the Clean Water Act.
Impact: Reputational, business
Social compliance is how a company protects the health and safety of employees, its community, and the environment where it operates. How a company approaches social compliance is often governed by its perspective on social responsibility.
Human rights, diversity, inclusion, community engagement, labor standards, and cybersecurity practices all fall under the social impact compliance umbrella.
Today, employees and consumers are seeking companies that hold moral standards that mirror their own. Poor internal policies on social issues can lead to boycotts and protests either by employees or customers.
Impact: Legal, business, financial, reputational
Quality compliance risk involves the release of lower-quality products or services that fail to meet industry standards.
For instance, the U.S. Consumer Product Safety Commission (CPSC) works to reduce the risk of injuries and deaths caused by consumer products. By complying with these industry standards, your company can help save lives and prevent injuries.
Failure to create products that meet CPSC standards can lead to costly consequences such as eating the cost of a product that can’t be sold and addressing the problems that led to non-compliance.
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Compliance risk examples
Compliance risk is not something to sweep under the rug. Aside from legal fees, there are serious data security risks, liability concerns, and the potential to damage your reputation.
Here are a few compliance risk examples that illustrate the importance of meeting industry standards.
|Type of compliance risk||Real-world example||Details||Penalties|
|Privacy or data security||T-Mobile (2022)||A data breach exposed the private information of over 77 million people.||$350 million fine|
|Corrupt/illegal activities||Novus Hospice (2022)||The former CEO of Novus Hospice was convicted of healthcare fraud and conspiracy to commit healthcare fraud.||13+ years in federal prison|
|Social impact||Glow Networks Inc. discrimination suit (2022)||10 former employees won a federal discrimination suit alleging racial discrimination and a hostile work environment.||$70 million in damages|
|Workplace health and safety||Ashley Furniture (2015)||OSHA fined Ashley Furniture after over 1,000 employees were injured over the course of three years.||$1.75 million fine|
How do you assess and manage compliance risk?
To fully understand the compliance risk your business faces, you need to conduct a compliance risk assessment. These assessments evaluate potential risk factors that could threaten your company’s ability to adhere to industry laws and regulations.
Steps to assessing and managing compliance risk include:
- Identify risks: Compile a list of all the regulatory requirements that apply to your business and identify compliance gaps.
- Strategize around how to stay protected from potential risks: Understand the departments and outcomes that would be affected by potential risks.
- Prioritize severe risks: Address compliance weaknesses based on the severity of the impact they pose to your business.
- Determine damage control measures: Create and share plans with stakeholders for addressing potential risks if they were to happen.
- Implement control strategy: Put internal controls and measures in place to address compliance weaknesses.
- Test and validate strategy: Verify the effectiveness of your compliance controls with regular testing.
- Re-evaluate risks and update routinely: Monitor and update controls as your business grows and industry standards evolve.
To properly manage compliance risk, it’s important to define roles and responsibilities. You should also train employees on the importance of compliance and help them better understand potential risks in their department.
Compliance risk assessment template
We’ve created this simple compliance risk assessment example to help you think through your business’s top compliance risks. Use it as a starting point and customize it as needed to fit your business and the industry standards, laws, and regulations it must comply with.
Compliance risk management
Performing compliance risk assessments is a key part of risk management and maintaining compliance. Compliance risk management should be tailored to a company’s unique business processes and regulatory compliance requirements, such as SOC 2, ISO 27001, GDPR, HIPAA, and/or other security standards.
The goal of this type of compliance risk management is two-fold. First, to understand the potential legal penalties, fines, business losses, and reputational losses your organization could face for non-compliance. Second, to implement the controls and measures required to keep those risks at acceptable levels to your board and regulators.
Like any risk management program, the goal of compliance risk management is to reduce or manage compliance risk — not to eliminate it altogether. That would be impossible for any company, no matter its budget or resources. There is always going to be some level of risk.
Compliance risk management vs enterprise risk management
Compliance risk management is a subset of enterprise risk management. While compliance risk management aims to address compliance risks specifically, ERM aims to address all risks that might result in losses and liability for your organization. These include compliance risks as well as strategic, financial, and operational risks.
Many organizations also conduct internal risk assessments, which have a broader focus than compliance risk assessments.
While these types of risk assessments have different focuses and approaches, they can be done concurrently. Some organizations may even combine activities that support various risk assessments.
How Secureframe can help with compliance and risk management
A strong security and compliance posture gives you the peace of mind that you are following the regulations and standards that guide your industry.
Secureframe makes it simple to achieve the compliance frameworks specific to your industry. Our compliance automation platform can help you reduce your compliance risk and focus on growing your business.
To learn more about how to accelerate your road to compliance, schedule a demo today.
How do you identify compliance risks?
- Understand the laws, regulations, and standards that apply to your business.
- Ask employees and key stakeholders for their input.
- Perform internal audits.
- Conduct third-party assessments and audits.
- Analyze any past compliance issues or failures.
- Test and monitor the effectiveness of your controls to identify any new risks.
What are the biggest compliance risks?
Some of the biggest compliance risks are:
- Privacy and data security risks, like malware, phishing, hacking, data leakage
- Workplace health and safety risks, like injuries, illness, and death
- Corrupt or illegal activities, like fraud, theft, and bribery
- Process risks, like quality assurance checks and reporting and accounting errors
- Environmental impact, like poor air quality, lack of ventilation, and mold
- Social impact, like toxic environment, lack of diversity, and poor labor standards
What is the difference between compliance risk and legal risk?
Compliance risk is the potential damage businesses face when they fail to comply with industry standards, laws, and regulations. Legal risk is the potential legal repercussions businesses face when they fail to comply with laws or contractual terms.