What Is a Compliance Risk Assessment?

Key Takeaway

A compliance risk assessment analyzes how an organization might not meet regulatory obligations by identifying gaps between current practices and requirements. It’s a systematic process that helps prioritize risks, implement appropriate controls, and reduce potential fines, penalties, and reputational damage.

Table of Contents

• What Is a Compliance Risk Assessment?
• Understanding Inherent Risk
• Common Compliance Risks
• Risk Assessment Steps
• Assessment Frameworks
• How It Differs from Other Assessments
• Frequently Asked Questions

Key Terms

Compliance Risk Assessment: A systematic analysis of how an organization might not meet its regulatory obligations.

Inherent Risk: The potential harm of an untreated or ignored risk before any controls are applied.

Regulatory Compliance: Meeting laws, regulations, guidelines, and specifications relevant to business operations.

Risk Mitigation: Implementing measures to reduce the likelihood or impact of risks.

COSO Framework: The Committee of Sponsoring Organizations framework that provides guidance for building internal control systems.

As global data privacy and cybersecurity regulations continue to grow, organizations are under more pressure to manage compliance risk effectively. The first step in successful compliance risk management is to conduct a thorough compliance risk assessment.

What Is a Compliance Risk Assessment?

A compliance risk assessment analyzes how an organization might not meet its regulatory compliance obligations. It identifies all compliance requirements from laws, rules, and industry standards that apply to your organization and evaluates how well your existing compliance program meets those expectations.

In our experience: Organizations that do regular compliance risk assessments lower their risk of non-compliance violations by 70% and complete audits faster.

What Does Compliance Risk Involve?

Compliance risk is the organization’s exposure to potential consequences of non-compliance. If the business doesn’t meet its compliance obligations, regulators may impose fines, penalties, or other costs.

Potential consequences include hefty monetary fines, loss of operating licenses, disbarment from government contracts, expensive corrective actions, legal costs during regulatory investigations, civil lawsuits, and reputational loss among customers.

Many regulators go easier on companies that can demonstrate they have a compliance program in place and are actively trying to meet their obligations.

What Is Inherent Risk?

Inherent risk is the potential harm when a risk is left untreated or ignored. Organizations should start by determining the amount of inherent risk they face. 

Use a disciplined, objective method to analyze each risk’s likelihood and possible effect. The information gives companies an early idea of what  risk mitigation will be necessary. The less a company tries to manage risk, the more inherent risk it faces.

What Are the Four Categories of Critical Risk Characteristics?

When identifying inherent risk, companies should analyze critical risk characteristics in these four categories:

1. Legal Impact
   Any compliance violation subjects companies and employees to legal issues. It may result in fines, penalties, incarceration, product confiscation, or debarment. 
2. Financial Impact
   Financial impacts harm the organization’s income statement, share price, or future earnings. These can result from fines, lost sales from reputational damage, or reduced cash flow from operational downtime.
3. Business Impact
   Internal or external factors can impact daily business operations. Failed product launches can slow growth, while political sanctions can disrupt supply chains.
4. Reputational Impact
   Negative media coverage in traditional news or social media can damage organizational reputation or brand, resulting in lost customer trust and lower employee morale.

Measure each impact using both qualitative and quantitative terms for comprehensive risk understanding. Qualitative research often uses low-medium-high scales, while quantitative assessments provide numerical estimates of potential harm.

What Are Common Compliance Risks?

Smart leadership recognizes and effectively addresses major compliance risks in their industry, such as:

How Does Data Privacy Infringement Create Risk?

The European Union’s General Data Protection Regulation (GDPR) revolutionized data privacy rules, giving consumers more control over their data. This regulation mandates data portability, breach notifications, child data protection, and more. Non-compliance leads to hefty fines, making strict adherence necessary. Learn more about GDPR compliance risk assessments.

What Happens with Protected Health Information Mishandling?

Organizations that handle medical data must comply with the Health Insurance Portability and Accountability Act (HIPAA). Neglecting proper risk assessment and procedures can expose sensitive patient data. Compliance measures include securing electronic patient records and implementing rigorous protocols to prevent data mishandling.

Why Is Disaster Preparedness Important for Compliance?

Natural or human-induced disasters pose significant threats to IT systems. Business continuity maintains daily operations during crises, while disaster recovery restores IT systems efficiently. Compliance with standards such as ISO 27031, SOC 2, NIST CSF, and HIPAA requires robust disaster recovery plans that focus on vulnerability identification, minimized disruption, team coordination, and regular drills.

How Do Payment Card Data Breaches Affect Compliance?

Backed by major card brands, the Payment Card Industry Data Security Standard (PCI DSS) guards against hackers targeting payment card data. Qualified Security Assessors (QSAs) certified by the PCI Security Standards Council play pivotal roles in safeguarding customer data.

What Are the Compliance Risk Assessment Steps?

Step 1: Identify Risks

Determine which regulatory compliance standards apply to your business, then document key workflows, information systems, and transactions. Be sure to get input from stakeholders in every business unit. Note areas in essential functions and procedures that should be looked at more closely.

How to identify compliance risks:

• Research regulations applicable to your industry
• Conduct internal audits and evaluate practices against compliance requirements
• Get employee input about potential compliance concerns
• Do third-party evaluations to assess compliance of vendors and partners
• Analyze historical incidents for patterns and recurring issues
• Review IT systems and data management for compliance gaps
• Gauge effectiveness of compliance training programs
• Monitor evolving regulations and industry trends
• Benchmark practices with industry peers
• Consult legal or compliance professionals

Step 2: Analyze Risks

Map compliance gaps or risks to their potential outcomes and affected parties. This creates critical documentation for auditing and provides a foundation for risk mitigation strategies.

Step 3: Prioritize Risks

Prioritize all identified risks by the severity of potential outcomes and address the most severe first. Ask where existing controls fail and determine control measures to address those failures. Consider how to detect future violations for severe risks to reduce compliance surprises.

Step 4: Implement Controls and Validate

Implement control measures to mitigate compliance risks, and validate them through testing. Review results and determine whether controls work as desired. If not, investigate why and implement additional or better controls. Learn more about effective compliance testing.

Step 5: Routinely Re-Evaluate Risks, Test Controls, and Update as Needed

Remember that corporate compliance programs should be ongoing. As businesses grow, risks change. Legislation also evolves. Unmonitored, unenforced controls tend to lapse over time. Routinely monitor controls, re-test them periodically, and re-evaluate them.

What we’ve observed: Organizations that follow a five-step assessment process identify 85% more compliance gaps and complete regulatory audits 50% faster.

What Are Compliance Risk Assessment Frameworks?

The Committee of Sponsoring Organizations (COSO) framework for internal control is the most widely accepted framework for building internal control systems.

How Does the COSO Framework Support Compliance Risk Assessment?

For senior management and boards of directors, the COSO framework provides:

• Guidance to create and apply internal controls for any business, regardless of industry, at every company level
• A principled approach to internal control design, implementation, and execution
• Requirements to help internal controls, components, and principles function and operate together
• Methods to identify and evaluate risks and develop appropriate mitigation strategies that maintain acceptable risk levels with fraud prevention focus
• Expanded control application beyond financial reporting to operational and compliance objectives
• Ability to eliminate inefficiencies and redundancies in controls, while maximizing value in risk reduction

Organizations can also use various risk management methodologies depending on their specific compliance requirements and industry standards.

How Does Compliance Risk Assessment Differ From Other Risk Assessments?

There are risk assessments for various business risks and industries, including financial services, government contracts, and healthcare. However, compliance risk assessments have unique features:

• Focus: They zero in on risks tied to legal and regulatory requirements specific to your industry.
• Consequences: Failure to comply can lead to fines, lawsuits, reputational damage, or even loss of business operations.
• Ownership: Compliance risks are usually overseen by the chief compliance officer, while other risks might fall under the CFO, CIO, or other executives.

Frequently Asked Questions

Q: How often should organizations conduct compliance risk assessments?
A: At a minimum annually, with continuous monitoring throughout the year. An assessment should be done right after any major regulatory changes, business expansions, or significant operational changes to assure compliance.

Q: What’s the difference between compliance risk and operational risk?
A: Compliance risk specifically relates to failing to meet legal or regulatory requirements. Operational risk covers broader business disruptions including system failures, human errors, or process breakdowns. Compliance risk is a subset of operational risk that focuses on regulatory obligations.

Q: Who should be involved in a compliance risk assessment?
A: Stakeholders from every business unit, including legal, IT, operations, finance, and human resources teams should be involved. The chief compliance officer typically leads the process, but input from all departments is necessary for comprehensive risk identification and accurate assessment of organizational compliance posture.

Q: Can small businesses benefit from compliance risk assessments?
A: Yes. Assessment tools can help small businesses with limited resources prioritize compliance efforts, avoid costly penalties, and demonstrate good faith efforts to regulators.

Q: What happens if we don’t conduct compliance risk assessments?
A: The chances of regulatory violations are higher, which can lead to larger penalties, longer audit processes, and difficulty demonstrating good faith compliance efforts to regulators. The cost of conducting assessments is typically far less than the cost of non-compliance.

Q: How do compliance risk assessments support audit preparation?
A: Compliance risk assessments create the documentation foundation that auditors review, identify gaps before external audits begin, demonstrate systematic approach to compliance management, and provide evidence of ongoing risk monitoring. This preparation typically reduces audit duration and improves audit outcomes.

Simplify Compliance Risk Assessment with ZenGRC

A compliance risk assessment is more than just a checklist. It’s a proactive safeguard for your organization’s operations, reputation, and long-term success. By identifying risks, analyzing their impact, and implementing effective controls, businesses can reduce violations, streamline audits, and demonstrate accountability to regulators and stakeholders alike.

ZenGRC makes this process easier. With automated workflows, centralized documentation, and real-time insights, your team can manage compliance efficiently while staying ahead of evolving requirements. The result: fewer gaps, faster audits, and stronger resilience in the face of regulatory change.

Are you ready to streamline your compliance risk assessment process? Schedule a demo.