Your Risk Assessment Essentials for Compliance
An organization needs to ward off a multitude of risks both existing and potential. What’s more – these risks are constantly evolving in their degree of complexity and regulatory severity. Without identifying these new and evolving risks in time, your organization can be exposed to heftier violations and monetary penalties. This is why it is critical to have a risk assessment regimen conducted annually. Risk assessment is a process to identify and address vulnerabilities to internal and external threats. Essentially, it acts as a gatekeeper for your regulatory compliance, backed by rigorous self-audit and controls testing.
The Basics of Risk Assessment
There are two main risks that affect a business: A risk to its customers and a risk to the business itself.
- A customer risk can be a monetary loss, information exposure, or operational failure.
- A risk to a business can be legal (lawsuits), financial (monetary loss), reputation (loss of business), or fines (regulatory violations).
These risks can be internal or external. Internal risks range from customer due diligence to cybersecurity measures and data breach notifications; whereas external risks span anything from cyber attacks to geopolitical events and regulatory changes.
Some risks, however, can be both internal and external, like fraud risk. For example:
- Employee misusing influence in transactions for personal gain (internal)
- Vendors billing for goods or services not received (external)
- Employees providing sensitive information to outside parties (internal)
- Payment fraud (external)
In case you’re wondering what the regulators are concerned about, it’s the public, i.e. your customers. However, your risk assessment should focus on both – the business and the customers that this business serves, because your business integrity impacts your customers. If you conduct business in multiple jurisdictions, then your risk assessment has to span the legal requirements of each individual jurisdiction to ensure you are covering all corners of your organizational risks.
Top Risks for an Organization
The United States Sentencing Commission recently identified six offense types that accounted for 80.4% of all organizational offenders:
- Fraud (30.1%)
- Environmental (24.0%)
- Antitrust (8.4%)
- Food and drug (6.6%)
- Money laundering (6.1%)
- Import and export crimes (5.2%)
Interestingly enough, large organizations aren’t the only ones committing these offenses. The majority of organizational offenders are smaller organizations with fewer than 50 employees (70.4%), domestic (88.1%), and private (92.2%). So, even if you are a small organization, you have to ensure a proactive approach to mitigating risk exposure. This includes effective risk governance (i.e. policies), thorough risk assessments, and strong prevention, detection, and reporting measures.
Measuring Risk Severity
Depending on the industry you operate in, some risks will take higher priority than others. And the more regulated the industry (for example, healthcare, finance and insurance, or manufacturing) – the more complex the risks, usually due to the higher impact on the customers or public well-being. The scope of risk prioritization usually encompasses:
- The likelihood of the occurrence of a risk event;
- Reasons why the risk event may occur;
- Severity of the impact if the risk event does occur.
Your risk prioritization will depend on the inherent threat the risk poses to the business or the customer. Every organization needs to develop their own risk rating system that accounts for their industry’s unique pressure points.
Below is a sample risk rating system to assist in developing your organization's risk assessment.
Ensuring Follow-through
While completely eliminating all organizational risks is impossible, regular risk assessment contributes to better and improved risk prioritization and risk-mitigating activities. Risk assessment should be conducted proactively on an ongoing basis. This will help reflect the latest regulatory changes in your controls and policies.
There are solutions that help you rank risk severity in relation to the regulatory amendment. Regology’s regulatory change management solution enables you to assign risk priority – Very High to Very Low – based on the type of regulatory updates you receive. This can help to fast-track your risk assessment as new laws are passed and amendments are promulgated.
Overall, your organization needs to ensure the annual risk assessment incorporates:
- Oversight and a dedicated specialist
- Risk-based internal and external audit plan
- Detection processes
- Prevention policies
- Best practices
- Risk controls
- Assessment of impact likelihood
- Mapped controls that mitigate the identified risks
- Evaluation of control effectiveness
- Evaluation of residual risks
- Periodical review of risk assessment
If you would like to learn more about streamlining the identification and implementation of regulatory changes, as well as improving risk management in your compliance program, visit our dedicated page or download our free brochure.
