As a business, you need to determine whether you are complying with the laws and regulations that affect your business. Even if you are, laws are ever-changing, and there is always the risk you will have to deal with additional regulations in the future.
Furthermore, as you expand your business, you might have to comply with new rules that were not applicable before. In general, compliance risk is what a business stands to face by failing to follow industry laws and regulations, prescribed best practices, and internal policies. The best way of dealing with compliance risk is through compliance risk assessment.
What Is Compliance Risk Assessment?
A compliance risk assessment implies every way a business fails to satisfy its compliance obligations. It is a comprehensive analysis that involves reviewing all the compliance duties that rules, laws, and industry standards impose upon you and how well your compliance program addresses these expectations.
Compliance risk assessment involves measuring the difference between what your compliance program does and what it should do to pass an effective program in the eyes of regulators. You should take mitigation measures to reduce your compliance risk until you achieve the goal of effectiveness. This is the importance of a compliance risk assessment.
The first step in a compliance risk assessment is identifying the risk. You should identify areas in your key functions and systems that suggest non-compliance with regulatory requirements.
Consequences Of Non-Compliance
Hefty Fines And Penalties
Businesses that do not comply with industry laws face fines and penalties from different authorities. The most common are:
- GDPR: This applies to businesses that hold data that belongs to an EU citizen. You will be subjected to a maximum penalty of 20 million pounds or 4% of the worldwide revenue for a violation.
- I-9 form: Employers should verify employee eligibility verification forms and store them if there is an audit. Businesses that tend to break these laws are likely to pay a fine of up to $20,130.
- Affordable Care Act: If you are an applicable large employer, you have 50 or more full-time employees. This means you should provide healthcare to these employees or be subject to IRS penalties.
- Fair Labor Standards Act: You are obligated by the law to pay overtime pay and federal minimum wage to exempt employees. Failing to do so means you will have to pay back pay and face a fine of up to $10,000.
Another thing that is at stake when you fail to comply with industry laws is your business reputation. Ethical and compliant businesses benefit for their consumer brand reputation and their employer brand. According to a study by Accenture, many consumers like brands that care about social issues. A significant percentage of respondents in this study would walk away from companies that do not support their beliefs.
Additionally, many consumers spend a lot of time and energy researching potential employers and integrity matters. Problems involving wages or allegations of discrimination are warning signs that a business will not meet a client’s expectations.
Compliance implies best practices and rules and regulations. These laws are made for the safety of people, for the protection of personal information, and to make sure businesses conduct fair labor practices. When businesses fail to comply, they may end up facing criminal charges or class action lawsuits.
Legal action for non-compliance does not discriminate against small businesses. Even large corporations are not left out of the hook. For example, Target is dealing with a class-action lawsuit for violating ERISA laws associated with failing to give sufficient notice and instruction on COBRA offerings following a qualifying event.
Types Of Compliance Risks
Workplace Health And Safety
Businesses are required to keep their employees healthy and safe. This is achieved through several federal regulations enforced by the Occupational Safety and Health Administration (OSHA). These regulations cover almost all U.S. workers.
Safety compliance regulations are identified in OSHA’s FY 2015. Failing to meet these guidelines could lead to hefty fines. In one case, a manufacturer was fined over $3.42 million for violating these guidelines.
According to the Environmental Protection Agency, the administration that enforces legal rules and regulations related to your business’s environmental impact, there are two types of environmental compliance risks: human health and ecological impact. This means that your business should not conduct activities that put the health of its workers at risk.
For example, chemical plants should ensure workers use safety gear and do not deal directly with hazardous chemicals. Ecological impact implies the effect on the environment. A business should ensure its practices are safe for the environment. Failing to comply with these regulations can lead to hefty fines and even legal action.
Another compliance risk is data management. The regulations for data management will depend on the type of information your organization deals with. The rules regard how information is stored, transmitted, and accessed. The common records linked to government oversight include; financial documents, medical information, credit card data, and student records.
The Gramm-Leach Bliley Act requires financial institutions that deal with financial products and services such as financial or investment advice, loans, or insurance, to make sure their customers are aware of their information-sharing practice.
The HIPAA Privacy Rule regards medical information. The institution protects patient medical records and applies to health care clearinghouses, health plans, and health care providers that perform health care transactions online. According to these rules, businesses should take safeguards to protect health information. The institution also sets limitations for disclosures. HIPPA rules also afford patients the right to examine and acquire their health records and also request corrections.
The PCI Security Standards affect businesses that store and process cardholder data. The rules on payment security are outlined in PCI security standards. These standards lay out the operational and technical requirements for businesses accepting or processing payments. The PCI standards also apply to the manufacturers of applications and software developers.
The Family Educational Rights and Privacy Act (FERPA) is a law protecting the privacy of student records. The law is applicable to all schools that get funds from the U.S. Department of Education program. The law gives parents rights with regard to the school records of their children.
This risk pertains to the quality of products and services. The Consumer Product Safety Commission sets standards for the required quality for products and services. Any business that does not satisfy these regulations is liable to huge penalties. For example, Britax Child Safety Inc was recently forced to recall more than 700,000 baby strollers because of safety concerns.
Businesses are forbidden from discrimination and harassment. Although many employers have strict guidelines regarding the treatment of their employees, sometimes rogue staff members tend to create problems when their actions are addressed swiftly and decisively. In 2015, the U.S. Equal Employment Opportunity Commission (EEOC) gathered over $525 million for persons subjected to workplace discrimination. A significant amount of these settlements were associated with harassment cases.
Compliance risks apply to any type of business. As a businessman, it is your responsibility to conduct a compliance risk assessment to determine which risks apply to your practice. Violating compliance standards can subject to severe consequences, including fines, lawsuits, and a tarnished reputation. It is essential you comply with your industry standards for your sake and for those who subscribe to your products or services.