Risk and compliance are two terms that businesses will see very often. Risk is a key part of operating a business and exists in every activity and decision an organisation makes. Compliance is the act of following laws, regulations, guidelines, policies and other necessary documents. 57% of senior employees rank risk and compliance as two categories they are less prepared to address. Risk and compliance management are vital to the success of the business. Failure to manage them effectively could mean significant consequences for the company. While risk and compliance may seem similar, they have their differences even if they are closely aligned. 

 At Polonious, we develop workflows that promote both risk management and compliance. We are ISO27001 and ISO9001 certified which means that we comply with the highest international standards to give our clients the best service possible. Polonious generates online risk assessments to save time and calculate risk ratings and makes registers and reports easily exportable. If you want to know more about how we can help you, request a demo and we will be happy to show you!

Risk and compliance explained

Risk and compliance are interconnected as great compliance leads to fewer risks, but as legislation and regulation are environmental factors not under an organisation’s control, potential changes introduce new compliance risks. Risks are mostly analysed based on assessments that attempt to predict them, and the slower-changing nature of the legal environment means there is usually some chance to assess and predict the effect of legal changes before they take effect – while other risks may come about much more quickly and unpredictably.

Risk and compliance are similar in the way that every business decision requires management to look at both before proceeding. Is the activity compliant with policies and government laws? What risk does the activity carry? Every objective employers set carries some degree of compliance risk along with other business risks. Compliance may be one of the harder risks to manage in the long term due to how heavily reliant it is on external factors, as well as the significant consequences if laws or regulations are breached.

So how does a company ensure low risks and better compliance? Another similarity the two have in common is that they both depend on continuous improvement and they are an ongoing process. Risk and compliance management requires the business to stay committed to a culture that promotes adherence to laws and regulations while staying risk aware. While some rules may apply to only some departments, it is important to promote risk and compliance to the company as a whole.

Organisations should not sacrifice one in the favour of another. They should focus on risk management and compliance equally as they can both have grave consequences for the business. While the incidents that may follow can vary, they are both tempering with the potential of the company and its ability to collaborate with other firms and grow its customer base.

Failure of risk and compliance management

Non-compliance and the increased presence of risks are two factors that could be detrimental to the future of a business. To explain the relationship between risk and compliance in simple terms, non-compliance is a risk. There are two types of threats:

  • Regulatory compliance
  • Corporate compliance

Regulatory compliance

Every company has to address laws and regulations that apply to the specific business and the industry it operates in. Each country and state has its own laws so compliance standards can vary. For example, the Work Health and Safety Act 2011 is an example of legal requirements organisations have to comply with. Some industries face stricter requirements such as the financial services and healthcare industries that involve various risks.

Risk and compliance

Corporate compliance

Corporate compliance involves more than just complying with company policies. It involves the company culture and the emphasis that has been created towards obeying external and internal regulations. An example of internal compliance is the code of conduct. However, employees need to be aware of all rules that apply to their organisation.

When the company does not adhere to industry standards, laws and regulations, it creates a non-compliance risk. This risk carries consequences that include:

  • Legal ramifications
  • Financial damage
  • Reputational damage

Legal ramifications

When companies fail to comply, new risks emerge. Data breaches, accidents and injuries along with lawsuits occur as a result of non-compliance in the business. The policies and rules are there to protect the company, the employees and the public from harm. When those responsibilities are ignored then they turn into liabilities.

Financial damage

Due to the problems non-compliance creates there is a great financial risk. The company risks losing money from legal ramifications along with productivity decreasing due to suspension of any non-compliant operations. If staff does not feel safe in the workplace then they are less likely to perform to the best of their ability and are likely to suffer mentally and physically. The organisation may have to pay settlements because of injuries, cyberattacks and fraud that has gone unnoticed.

Reputational damage

If the business fails to manage the risk of non-compliance, it is likely that the information will go public. Society does not value organisations that do not promote an ethical compliance culture and leave themselves vulnerable to risks. The negative publicity will potentially affect sales as well as customer loyalty which will reduce the entity’s market share and ultimately, revenue. This is both a financial and reputational risk. Corrupt and illegal activities could leave a long-term stain on the firm’s name even after the issue has been resolved.

The main difference between risk and compliance is that businesses need to develop a tactical approach for compliance while they need a strategic vision for risks. Compliance is already present, it is there and it is mandated by external stakeholders. Risk on the other hand can be assessed through the company’s action. There may be more risks than the company is aware of and management can only make predictions based on current figures and facts. The company has to think ahead and adopt proactive measures for threat management while following laws and policies will require a reactive response.

Compliance risk

While risk and compliance, when treated separately, can be divided into multiple categories, compliance risk connects the two. Every organisation needs to have a plan in place to manage compliance risk. They need to:

  • Be aware of obligations
  • Develop strategies
  • Monitor progress and accountability

Be aware of obligations

Compliance risk requires companies to have resources that allow them to stay updated on relevant laws and regulations that apply to the business. The entity will need to identify what obligations they have internally and externally and then develop policies that address all the obligations. The business should try to estimate what the costs associated with compliance are and what is the most efficient way to ensure that the risk is mitigated without hurting the business financially.

Develop strategies

Human error could interfere with successful compliance as humans are the ones that need to follow the rules. Compliance risk from human error can be improved through compliance and ethics programs and effective training. This may seem like the obvious option, but only 12% of businesses have developed advanced compliance and training programs for their staff. Businesses that ignore the importance of effective training still suffer from scandals and fraud allegations.

 Similarly to other risks, compliance risk can be measured through a risk assessment or other options such as an audit. While general risk assessments can identify the risks a company faces in various areas, compliance risk assessments are solely focused on the risks that arise as a result of the company failing to comply with relevant laws and regulations. They will be able to measure how exposed the organisation is to the risk and what strategies are required to minimise it. 

 These risk assessments can assess the consequences mentioned above that include reputational, financial and legal issues. The strategies will allow the business to determine any gaps that may be present in its compliance efforts and policies. After the managers analyse the results, they will be able to update their current measures with more effective ones. 

Monitor progress and accountability

Once strategies have been implemented, the design and resources allocated to them should be reviewed and there should be clear accountability. The managers responsible for enforcing compliance should regularly monitor the effectiveness of their strategies and assess whether the entity is doing enough to promote adherence to laws and regulations. They should also try to improve their strategies by talking with employees and checking whether they feel that their measures are working. Is the business doing enough to raise awareness? Is there something else that needs to be better? As mentioned before, compliance risk relies on continuous improvement, so every action to minimise it is a step in the right direction.

Managing risk and compliance

Risk and compliance can be hard to manage simultaneously. Polonious offers its customers a space where they can manage both in one place. Our online reports ensure better record keeping while your employees save time and are able to access all information from anywhere anytime. The information provided is cross-referenced and managed through a central hierarchy and our platform is easy to navigate. Our customers report up to 25% reduction in administrative effort and faster turnaround times that allow them to focus on their key responsibilities. Do you want to know more? Reach out to us!