Compliance and Risk Management: Important Effect for A Corporate Entity
A couple of terms that gain significance and come into play while discussing the security mechanism and threat mitigation process of a corporate entity are compliance and risk management. These are tied to averting security threats to an enterprise’s assets and legal structure. Often used interchangeably, what is important to understand is that these concepts are quite different from each other and are often identified as the weak spots by companies’ leadership.
Understanding compliance and risk management
As the term suggests, compliance is adherence to rules, regulations, standards, protocols put in place by an organization as well as those mandated by external parties such as government laws and guidelines, industry standards, legal protocols, et cetera. Regulatory and corporate compliance is essential to stave off potential federal fines, legal actions, shutdowns, strikes, among others disruptions to business operations.
Risk management, on the other hand, involves identifying, assessing, managing and mitigating potential threats to the organization, its operations, reputation and profitability. These can range from financial uncertainties, legal liabilities to data-related issues, among others. Simply put, it involves not only studying the probable, existing threats but also increasing awareness around the potential ones that may occur and devising the strategy to nip them before they may occur.
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To think of it, one may say that compliance and risk management serve the same purpose, like two sides of the same coin. Both ensure that a corporate entity is safe from unexpected hits, blows, and threats. However, compliance can be seen as a result of risk management. Risk management exercises may often result in the formulation of guidelines and roadmap to avert possible threats in the future which brings the compliance aspect into the picture.
Also, bear in mind an interesting fact, risk management may also help organizations guard against risks that could stem from or lead to non-compliance. Therefore, it won’t be out of line to say that risk management, as an exercise, is critical to a company’s compliance protocol or mechanism.
Let’s refer to an example to understand the dynamics of compliance better. With respect to grant disbursements, if an organization is not compliant with the proper management of grants, it can run the risk of misusing the grants funds, failing to receive the grant objective, violating laws, regulations to even losing the opportunity of receiving funding in the future. Regular audits and compliance reports help identify the loopholes such as misallocation of costs, lack of approvals on certain purchases, among others.
A mix of internal as well as external controls can help in strengthening the compliance mechanism of an organization such as segregation of duties, robust IT framework, administrative and accounting controls, timely and accurate reconciliations of expenditures and related revenue, timely and effective internal reviews and audits, meticulous record-keeping, et cetera.
Simply put, a good corporate compliance practice includes accountability, transparency, consistency, integrity, viability, and of course, adherence.
One of the first steps in an organization’s journey towards strategic risk management would be to factor in compliance risks and begin by devising a plan to curb or mitigate the same.
Risk management broadly involves formulation of relevant policies, identification of risk and possible context assessments, risk management – processes to avoid, mitigate or deal with risks – assessing and bolstering organizational risk capacity, competencies, and emergency preparedness and response; timely and consistent monitoring and review.
This will involve establishing policies and defining the objectives and principles that guide a project and provide sound performance. There is also the need to provide a framework that assesses and manages processes and specifies the laws, regulations, and any other standards or certification schemes or codes of practices the project will comply with. It is also important to decide who in the organization will ensure conformance with the policy and is responsible for its execution
It is important to establish and maintain a process to identify risks, their type, scale, and location to determine the level of effort needed to mitigate and manage it. The identification process will provide a “heat map” of areas affected directly by the risk.
This entails providing risk-mitigating actions and processes in the form of operational procedures, practices, or plans and ensuring compliance with local rules, laws.
Organizational capacity and competency
This is to ensure that the organization and its structure are well-equipped with the know-how of risk identification, assessment, management, and mitigation. It involves appointing specific personnel with clear lines of authority and responsibilities, defining environmental and social responsibilities, and ensuring that staff, personnel as well as senior management have sufficient knowledge, skills, and experience to perform their roles as well as of the host country regulatory requirements and laws.
Monitoring and review
Organizations need to have processes in place to monitor and measure the effectiveness of the risk management as well as compliance with any legal, contractual obligations or regulatory requirements. This may involve keeping a record of tracking organizational performance, internal inspections, and audits, among others.
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Building a strong, constructive, and responsive relationship with relevant stakeholders is also necessary to stave off potential risk and enhance an organization’s compliance mechanism. Besides timely and regular engagement with stakeholders, an organization must have a stakeholder redressal mechanism in place, a medium for disclosure and dissemination of information, consultation and participation efforts, ongoing reporting, et cetera.
In the end, risk assurance and compliance, when working in tandem, can go a long way in safeguarding a company’s reputation, enhancing the brand, and boosting stakeholder loyalty. It leads to value creation through robust and tactical planning against bottlenecks, threats, and risks.
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