Compliance vs risk management: what’s the difference?
Risk management is one of the fundamental principles of good governance, and so is staying compliant with industry-specific requirements and expectations.
In the minds of many, compliance and risk management are considered the same business process. But they are activities – both of which need to be managed effectively.
Understanding compliance
Compliance relates to how your company fulfills operational obligations. Whatever your business or industry, there will be relevant laws and regulations that will apply to your work and trade.
Internal documentation
Your internal documents such as policies and procedures, guidelines, and protocols also form part of your compliance strategy.
Even your organisation’s values and mission statement can be considered overarching statements that clarify how to work and operate.
Your compliance framework ensures that there are enough processes and resources in place to keep people working in an appropriate, legal and ethical way.
Staying aware
Compliance also involves staying aware of any changes to the rules and laws related to your business. Industry standards, trade regulations, and other legislation are often changing.
For example, companies are currently expected to know and comply with COVID-19 rules in their state or territory. There are specific requirements for businesses in food, hospitality, real estate, recreation, and childcare. And these rules are changing regularly.
There are penalties associated with non-compliance. It is critical that you are aware of and adhering to any and all relevant laws.
Understanding risk management
Put simply, risk management involves recognising any risks which could affect your ability to achieve your organisational goals or objectives.
Each risk you identify is then considered regarding the impact should that risk occur and the likelihood and frequency of that risk occurring. Responses to identified risks be documented, and will typically be treated, tolerated, transferred or terminated.
Preventing loss
There are many different types of risks; commercial, financial, reputational and more. Technological risks are only set to increase as we rely more on our IT systems for data collection, management, and disposal.
If identified risks do come to pass, there can be genuine consequences including losses, damage or injury to your people or the public.
Embedding risk management processes into your organisation will give you the best chance of staying on track, recovering from any issues or crises, and even turning the occurrence of an incident into an opportunity.
Internal controls
One important risk management strategy involves the establishment of internal controls.
Internal controls help to minimise the effect and probability of a risk occurring. They are put into place to enable you to achieve goals and objectives by mitigating risk.
It is wise to put internal controls to work in all systems and processes. They are designed to achieve a particular outcome to ensure that actions can be implemented to keep systems and processes on track and correct any deviations.
Auditors
Your business may require the involvement of internal or external auditors. Auditors play an important part in ensuring that risks are planned for, and reporting to the board that there are adequate controls in place to manage any issues.
Although many larger organisations employ risk experts or seek the series of an external consultant. But the truth is that all employees need to play their part in the mitigation of risk.
Risk register
A detailed risk register that employees become familiar with can help everyone is involved in the systematic identification and repose to risks. A risk map or assessment tool that compares probability with impact is a simple way in which your people can consider and rate the risks they encounter at work.
Compliance and Risk Management – the similarities
Both keep people on track
At their core, risk management and compliance strategies could be said to both be related to the security of your business.
Risk management and compliance strategies will help keep you and your people ‘on track’ and doing the right thing.
Both help the business achieve long-term goals
Both also help you carry out work in a way that will best help the business achieve goals. If your goals involve growth and expansion, then knowing what could go wrong and planning for how you would respond (risk management) and making sure you are not breaking any rules or regulations, and avoiding penalties (compliance) are both equally important.
But, with a closer look at the two processes, it becomes apparent that they are quite different and that considering risk and compliance as one and the same will lead to problems. Many organisations make this mistake by investing heavily into one system and not considering the use and benefits of the other.
Compliance and Risk Management – the differences
There are certainly some key differences between risk management and compliance.
One is reactive, another is proactive
Firstly, compliance is reactive where risk management is proactive.
To achieve compliance, your organisation must demonstrate understanding and responses to various laws, rules, guidelines, and even your internal practices.
These laws and guidelines are set from outside of your organisation. This means it involves your documented response to what is already detailed and stated as a requirement.
Risk management, however, requires much more flexibility of thinking and planning for what has not happened – and may never happen.
Example: food business
If you operate a food business, you will be required to comply with food handling laws and protocols. You may have to take a food handling test, receive certification, and have an assessing officer come and watch your work to make sure you are following the guidelines.
To be compliant, you must demonstrate your awareness of the rules and your ability to follow them. You are responding to the requirements of your industry. Compliance is an important process that enables you to remain open and trading.
Your risk management strategy covers much more about what could possibly occur. Consider the example around food handling. Your risk management strategy will detail how you would respond if a customer alleged they had become extremely unwell as a result of eating food bought at your business, and if there was a significant complaint about food hygiene and standards within your business.
One is day-to-day, the other is big picture
Compliance enables you to keep your business operating practically and functionally on a daily basis. It enables you to keep the doors open, the income flowing, and the regulators off your back.
Risk management often involves seeing the bigger picture, being both strategic and forward-thinking. Thinking about risk helps you think about the threats that could interfere with business and operations and recognise positive opportunities for change, which can be identified as part of a risk assessment process.
It’s through the measuring, assessment and taking of risks that your business can not only achieve but exceed your goals. A risk management strategy is part of your organisations intellectual capital. It can act as a resource that propels you forward, mapping out opportunities.
Top entrepreneurs seek to harness the possibilities that taking a risk can offer. Understanding risk and taking calculated risk opportunities enables you to move past the everyday nature of compliance and steer your course towards something bigger and better for your business.
Different people who respond
There are also differences as to who typically respond to compliance and risk requirements.
Individual staff members and smaller teams may be responsible for ensuring compliance in relation to their specific work. Your IT team or finance officers might have to work in line with specific standards related to data, technology, funds or payroll requirements. Compliance tends to be handled by the people who work most directly and specifically within the relevant law or guideline.
An effective risk management approach is much more centralised across the organisation, with everyone being familiar with the risk register and tools and working to integrate and respond in a cohesive way. This helps to ensure a more holistic response with greater transparency.
Both compliance and risk management are important processes within any business of any size. It would be best if you thought about what is happening within your organisation today and the worst-case scenario for what could happen tomorrow.
It’s critical that you engage your leaders about both compliance and risk. It makes sense to ensure senior people in your organisation are ensuring a proactive approach. This can be established and documented by marking out clear compliance and risk management responsibilities to certain staff members.
It’s important to talk to new employees about both compliance and risk and why your business makes a point of responding to both. This helps cement their understanding of personal responsibilities, and the part that they can play in keeping the business operating legally and ethically. Ensure there are processes in place to keep people aware of any changes to compliance requirements and engaged in the monitoring and response to risk.
Everybody should know about compliance and risk
Embedding compliance and risk into your onboarding processes will help solidify the expectation that operating appropriately is the responsibility of each employee.
Several technological systems can help you manage compliance and risk in a central way, enabling staff to be aware of rules, risk and regulations and practices in monitoring practices and risk identification.
The risk register, risk map and tools and compliance requirements and timelines should be shared around the organisation and easily accessed. Regular review of documents and procedures should be scheduled and carried out.
Here at 2account, we can help your business strengthen its grip on its compliance obligations and risk management strategies. Book a discovery call with our team today and let’s discuss the future of your business.