Libby Bevin

Third-party assessment organizations, or “3PAOs,” play a crucial role in compliance with the Federal Risk and Authorization Management Program, more commonly known as FedRAMP.

3PAOs assess the offerings of cloud service providers (CSPs), to help those CSPs satisfy their FedRAMP compliance obligations. Moreover, the 3PAOs’ input allows U.S. federal agencies to make informed, risk-based decisions about the CSPs those agencies might want to use.

This article answers several important questions about 3PAOs. Among them:

• How do 3PAOs contribute to the FedRAMP authorization process?
• What are their responsibilities and obligations?
• What are the requirements for 3PAO accreditation?

Let’s get started.

What Is a FedRAMP 3PAO?

As defined by FedRAMP itself, a FedRAMP 3PAO is “a trusted third party that provides independent assessments with integrity.” This independent party (typically a company rather than an individual person) is authorized to help CSPs meet the requirements for FedRAMP compliance, foremost by assessing the CSP systems for security risks.

The 3PAO must be accredited through the FedRAMP 3PAO program for JAB P-ATO (Joint Authorization Board Provisional Authorization to Operate). 3PAOs must demonstrate independence and the technical competence to test and document a CSP’s security implementations. Authorized and accredited 3PAO assessors are listed on the FedRAMP Marketplace.

Federal agencies can use other independent assessors for FedRAMP security authorizations decisions, but the agency doing so must attest in writing that the assessor is independent and competent. Using an approved 3PAO eliminates the need to provide such attestations.

3PAO: Accreditation Requirements

FedRAMP and the U.S. General Services Administration (GSA) have specific criteria for 3PAO qualification. For example, the assessor must…

• Meet the International Organization for Standardization (ISO/IEC) 17020 standards for independence and managerial competence.
• Have technical competence in Federal Information Security Management Act (FISMA) and FedRAMP–specific requirements. (Click here to read more about FedRAMP vs. FISMA.)
• Demonstrate expertise in assessing cloud-based solutions.

The American Association of Laboratory Accreditors (A2LA) performs the assessment to accredit 3PAOs, based on the accreditation requirements on www.fedramp.gov. A2LA provides an assessment report to FedRAMP documenting the 3PAO’s technical competence and experience in inspecting CSP systems.

The report also states whether the 3PAO has a documented and fully operational quality management system (QMS) and whether the organization operates according to this QMS.

3PAO Roles and Responsibilities

A 3PAO evaluates a CSP from a security and risk perspective. It verifies the vendor’s security implementations, compares them against the controls specified in FedRAMP, and confirms whether the implementations match the controls requirements. The 3PAO also reviews the documents (formally known as “artifacts”) of a CSP’s security authorization package in accordance with FedRAMP requirements. 

Finally, the assessor considers the overall risk posture of the vendor’s cloud environment, to guide the security authorization decision of a federal agency or the FedRAMP JAB.

The 3PAO plays a role at various stages of the CSP assessment and authorization process:

• Readiness assessment. The assessor prepares the readiness assessment report (RAR) and submits it to the FedRAMP PMO.
• Full security assessment. The 3PAO performs an in-depth review of the CSP’s system security plan (SSP) for FedRAMP compliance and creates a security assessment plan (SAP) and security assessment report (SAR) with matching test cases. It also works with the CSP to develop a plan of action and milestones (PoAM).
• Authorization process. The assessor highlights risks in a cloud service offering (CSO), performs any required retests, and updates all security documentation based on comments from JAB reviewers.

3PAO Obligations

All 3PAOs and their assessments must adhere to FedRAMP requirements for quality, accuracy, integrity, and timeliness. They must also maintain accreditation by demonstrating that they operate in accordance with ISO/IEC 17020 and FedRAMP requirements.

The 3PAO must be independent of the CSP it is assessing, so that the assessor can submit an opinion about the CSP’s security posture without influence from the CSP.

Finally, every 3PAO must develop an employee training program with content incorporating FISMA, FedRAMP, cloud computing, and cybersecurity.

Important Documents Created by a 3PAO

When assessing the security of a CSO, the 3PAO creates numerous documents. These are explained below.

Readiness Assessment Report (RAR)

During the CSP assessment and authorization process, 3PAOs produce a RAR. They may also provide a complete security authorization package consisting of an SAP and SAR. (We will explain the SAP and SAR in more detail below.)

RAR is part of the first phase of the CSP assessment. During this phase, the 3PAO completes the readiness assessment, prepares the RAR, and submits it to the FedRAMP PMO. The assessor also provides support to the FedRAMP project management office during the RAR review.

Security Assessment Plan (SAP)

The 3PAO creates an SAP during the full security assessment of the CSP. For this, the assessor uses a FedRAMP SAP template available on www.fedramp.gov.

In this phase, the assessor assures that all documentation within the SSP matches security control implementations and supports the FedRAMP PMO’s completeness checks.

The SAP identifies the various assets within the scope of the assessment, including hardware, software, and physical facilities

It also provides a methodology and rules of engagement to execute the security tests when assessing a CSO for FedRAMP compliance. The baseline test cases are available on www.fedramp.gov.

The 3PAO can also create alternative test cases for the alternative implementation of controls in the SSP. These are meant to test the effectiveness of the CSP’s controls and to identify the risks that may arise with the implementation of these controls.

During testing, the CSP creates a plan to coordinate the 3PAO’s site visits and personnel interviews. The CSP will also define a schedule of when scans will be performed on the system.

Security Assessment Report (SAR)

After testing the CSP’s security controls, the 3PAO analyzes the risks in the provider’s cloud environment and presents the results in a security assessment report (SAR). This document contains information about the vulnerabilities, threats, and risks discovered during testing.

The SAR also contains guidance to help CSPs mitigate these security weaknesses. The report is first delivered to the CSP and then to the federal agency’s security team. This team will analyze the SAR to determine the CSO’s risk posture.

In general, a 3PAO’s SAR contains these artifacts:

• Security assessment test case workbook
• Risk exposure table
• Penetration test report
• Vulnerability scan data files
• Test artifacts

Like the SAP, the 3PAO uses a template for the SAR available on www.fedramp.gov.

Per FedRAMP rules, all these documents must be based on the most recent standard templates. They must also:

• Be complete on the first submission.
• Meet the quality standards published in the FedRAMP General Document Acceptance Criteria guidance.
• Be delivered per the schedule agreed upon by the CSP, agency, and 3PAO.
• Assure testing of the CSO in accordance with ISO/IEC 17020.

Choosing a 3PAO: Checklist for Cloud Service Providers

CSPs must also be careful about choosing a 3PAO as they pursue FedRAMP certification. To make the right choice, the service provider must ask crucial questions such as:

• How many FedRAMP security assessments has the 3PAO previously completed?
• Has the 3PAO worked with this federal agency (the agency the CSP wants to work with) before?
• Is the 3PAO familiar with the agency’s assessment processes and procedures?
• Is its assessment team experienced with both auditing and IT systems management and engineering?
• Does the 3PAO perform a gap assessment before technical analysis and penetration testing of the CSP’s cloud environment?

A 3PAO that ticks off all these requirements can be hugely beneficial for a CSP.

An experienced 3PAO can significantly ease the burden of preparing the SSP and PoAM. The assessor can perform a gap assessment to identify existing shortfalls in the CSP’s processes, documentation, or technology; and can guide changes the  CSP will need to make to meet FedRAMP compliance requirements.

FAQs for FedRAMP 3PAO

Cost of 3PAO FedRAMP

The cost of 3PAO assessments can vary significantly based on numerous factors. Here’s a breakdown of the typical costs associated with obtaining a FedRAMP authority-to-operate (ATO):

• Security assessment report (SAR). The cost ranges from $125,000 to $190,000, depending on the 3PAO​​.
• 3PAO assessment. The average cost for a 3PAO assessment is around $500,000​​.
• Additional costs. Engaging a 3PAO for testing and execution of the test plan can cost in excess of $150,000​​.
• Overall budget. Organizations may need to budget anywhere from $250,000 to $750,000 to pursue FedRAMP certification​​.

Approval or Recognition of 3PAOs

3PAOs are recognized by the FedRAMP Program Management Office (PMO) but are required to be accredited by A2LA (American Association for Laboratory Accreditation). To gain this recognition, the assessor must do two things.

• Accreditation. Organizations must spend at least a year in the Cybersecurity Inspection Body Program demonstrating technical competence before consideration for FedRAMP 3PAO recognition.
• Program requirements. The 3PAO must adhere to various international standards and requirements, including ISO/IEC 17020 and specific FedRAMP requirements​​.

The Process for 3PAOs to Be Certified

Broadly speaking, a 3PAO must pass three tests to be certified as suitable for FedRAMP compliance.

• Technical proficiency testing. A real-time assessment of a simulated cloud environment is conducted. Teams review system security plans and assess a subset of security controls.
• Evaluation of technical competence. 3PAOs undergo a rigorous evaluation of their technical skills and compliance with international standards.
• Continuous partnership. A2LA works with BCR Cyber to provide proficiency testing for 3PAOs. The entire process is managed and streamlined to assure efficiency​​.

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Corporate compliance is not a new idea; for many years, organizations everywhere have had to comply with certain rules and standards to reduce risks and vulnerabilities. Those rules might be defined internally by the company’s compliance team or by an external party such as a regulatory agency — but either way, they are rules that the company must follow.

An effective compliance function assures that the organization complies with both internal and external rules. The compliance program also prevents undesirable situations or practices within the company such as fraud, abuse, harassment, or discrimination that disrupt operations and damage the company’s reputation.

Enforcing compliance increases operational and behavioral consistency. It also helps to prevent violations and reduces errors. Ultimately, it helps the organization to achieve its objectives and establish a strong competitive position.

That said, achieving (and then maintaining) compliance is not easy. Even a small deviation from compliance policies increases the risk of a security breach, regulatory enforcement, reputational damage, and customer dissatisfaction.

Moreover, as the regulatory landscape evolves, it can be hard for organizations to understand where laws have changed and what they should do to keep up with new compliance obligations. An automated compliance system can effectively address all these challenges.

What Is Automated Compliance?

As stated earlier, compliance helps organizations to guide behaviors, prevent undesirable events, and achieve business goals. Compliance is also essential to manage risk, protect business-critical assets from theft or compromise, and safeguard the company’s reputation and financial stability.

And all of this is easier to do with compliance management and automation tools. Compliance automation is about replacing manual compliance processes — typically spreadsheets, and email-based communication — with automated workflows. The right compliance solutions eliminate time-consuming, resource-intensive manual processes to ease the organization’s path towards compliance.

Benefits of Automated Compliance

Compliance is not an optional exercise; businesses must do it. Still, the regulatory landscape evolves constantly, with old regulations updated and new regulations cropping up with increasing frequency. Companies are constantly updating their policies, procedures, and other practices to assure appropriate behaviors and to provide evidence of such behaviors to customers, regulators, and other stakeholders.

As all those rules emerge or change, companies struggle to keep up using manual processes and legacy tools. These older technologies make it difficult to keep up with these rules, and even harder to comply with them. This is where compliance automation enters the picture.

Adapt to changing regulations with ease. Automated compliance tools actively track and adapt to evolving regulations. Leveraging AI and machine learning, they assure that your systems align with the latest requirements, promptly alerting to any discrepancies. This approach not only keeps you ahead of regulatory changes but also significantly reduces the risk of costly non-compliance.

Streamlining the compliance process. Automation transforms the compliance lifecycle into a seamless process. By integrating automated workflows and predefined rules, it eliminates tedious administrative tasks, allowing your organization to navigate the complex compliance landscape more efficiently and reliably.

Alleviating workload on compliance teams. The tools autonomously gather and organize compliance-related data and documentation, tasks that typically consume considerable time and resources. By automating these tasks, your team’s workload is reduced substantially, allowing them to focus on more strategic compliance issues.

Centralized compliance management. Advanced software consolidates compliance efforts into a unified platform, offering a comprehensive view of your organization’s compliance status. This centralization streamlines processes like evidence collection, control implementation, and communication, enhancing efficiency and reducing the risk of errors or omissions.

Enhanced compliance reporting. Automated tools generate timely, accurate compliance reports based on real-time data. These reports are crucial for informed decision-making, responding to audits, and demonstrating your organization’s compliance status to stakeholders.

Additional advantages of automation in compliance

• Less chance of human error, enhancing the accuracy of compliance positioning.
• Consistent application of policies and standards across the entire organization.
• A complete overview of compliance, highlighting potential gaps and blind spots.
• A stronger culture of accountability, speeding up the compliance process and eliminating blame shifting.
• Streamlined data collection, documentation, and control implementation.
• Easier scalability in your compliance program, to accommodate growth and change.
• Lowers overall cost of compliance thanks to optimized efficiency and less need for extensive manual labor.

Compliance automation is not just a tool for maintaining standards; it’s a strategic asset that propels your organization towards a more efficient, accurate, and resilient compliance posture.

Why are compliance burdens rising?

Compliance burdens have increased across many industries worldwide in recent years. This trend is a response to a confluence of factors that have reshaped the business landscape. Here’s an exploration into why compliance demands are on the rise and what that means for businesses and industries.

1. Stricter regulations and penalties. Governments and international bodies are imposing stricter regulations with heftier penalties. The fear of reputational damage and financial loss has propelled organizations to prioritize compliance.
2. Increased transparency and accountability. Businesses operate under increased scrutiny in the digital age. Consumers and stakeholders demand transparency and ethical conduct, pressing companies to adhere strictly to regulatory standards.
3. Globalization of business. As companies expand across borders, they encounter a complex web of regional and international laws. Operating globally necessitates a higher compliance rate to avoid cross-border legal complications.
4. Enhanced risk management. There’s a growing understanding that non-compliance is a significant risk to business operations Companies recognize that compliance is crucial for risk mitigation and long-term sustainability.
5. Corporate governance initiatives. There’s a shift towards better governance practices, with boards and executives being held more accountable for compliance issues. This is driving a culture of compliance at all levels of the organization.
6. Sector-specific regulations. Certain industries, such as finance, healthcare, and technology, face more stringent and evolving regulations. Companies in these sectors have no choice but to elevate their compliance efforts.
7. Consumer activism. Consumers are increasingly aligning their purchasing choices with their ethical values. Companies that fail to comply with ethical standards risk losing their customer base to more compliant competitors.
8. Reputation as a competitive advantage. A strong compliance record is becoming a badge of distinction in the market. Companies use their compliance status to gain trust and competitive advantage.
9. Learning from the past. The rise in high-profile compliance failures has served as a lesson for many. Companies are more active in their compliance efforts, learning from the mistakes of others.

Companies are rising to meet the challenges of these new compliance obligations. This is good; it’s a shift towards more ethical, transparent, and responsible business practices. While the journey towards full compliance is ongoing and challenging, the collective move in this direction reflects a broader commitment to doing business the right way, benefitting not just the companies but their stakeholders and society at large.

How Automated Compliance Reduces Compliance Costs

Innovative approaches to automation can reduce your compliance costs in numerous ways. These approaches can simplify compliance processes, drive greater efficiency, and ultimately reduce the costs of compliance.

For example, tools based on robotic process automation (RPA), natural language processing (NLP), and optical character recognition (OCR) technologies automatically collect, sort, and understand regulatory changes; and map those changes to appropriate business areas. These capabilities save a lot of time for compliance analysts, which then reduces costs for the organization.

Likewise, AI-based tools can build automated reports after reviewing unstructured regulatory data and defining reporting requirements. Consequently, analysts don’t have to review regulations manually, interpret them, or write code to retrieve required data.

Automation can also help organizations to develop a robust internal monitoring infrastructure and dashboards. That, in turn, helps to drive better security outcomes. These features also allow organizations to respond more quickly to changing compliance standards and frameworks.

Some other ways automated tools can simplify compliance and reduce costs are:

• AI bots can create marketing collateral compliant with regulatory requirements.
• AI-based transaction monitoring systems minimize false-positive compliance notifications (that is, warning a compliance staffer that a transaction seems suspicious, when in fact the transaction isn’t) and reduce review costs.
• Automation speeds up document collection, database checks, and due diligence checks.
• It allows teams to store and manage evidence centrally, to reduce audit preparation time and costs.

Future-proofing your business with automated compliance management

Automated compliance management isn’t just a tool; it’s a strategic advantage that can significantly benefit businesses of all sizes by assuring that they stay ahead of risks. Here’s how organizations across the spectrum can leverage this technology.

Small to Medium-Sized Businesses (SMBs)

1. Cost efficiency. Automated compliance reduces the need for extensive legal teams and consultants, making it a cost-effective solution for SMBs operating with tighter budgets.
2. Focus on core business. By automating routine compliance tasks, SMBs can focus their resources on growth and innovation rather than the complexities of compliance.
3. Scalability. As SMBs grow, their compliance needs become more complex. Automated systems scale with your business, so that you’re always covered.

Large Businesses

1. Risk mitigation. For larger businesses, the stakes are higher. Automated compliance helps in identifying and mitigating risks actively, protecting the business from potential fines and reputational damage.
2. Efficiency at scale. Large businesses can benefit from the efficiency that automation brings, managing and streamlining compliance processes across various departments and even global offices.
3. Data-driven insights. Automated systems provide valuable insights and analytics, helping large businesses to make informed decisions and stay ahead of regulatory changes.

Enterprises

1. Global compliance management. Enterprises operating on a global scale can assure consistent compliance across different regions, navigating through various local laws and regulations efficiently.
2. Integration with enterprise systems. Automated compliance can be seamlessly integrated with existing enterprise systems (say, systems of a smaller company you acquire), providing a holistic view of compliance and risk across the entire organization.
3. Strategic advantage. In an era where trust and compliance are competitive differentiators, enterprises can leverage automation to build trust with customers, partners, and regulators, enhancing their market position.

Automated compliance management does more than help you meet regulatory requirements. By adopting this forward-thinking approach, businesses of all sizes can not only safeguard their operations and position themselves for sustainable growth and success in the future.

Make Compliance Automation Work for You with RiskOptics ZenGRC

Harness the power of compliance automation with ZenGRC. Our platform turns the tedious tasks of compliance into a streamlined, manageable process. 

ZenGRC’s intelligent automation features help you identify risks, manage documentation, and assure that you’re always audit-ready. With customized workflows and real-time insights, you’re not just meeting compliance standards; you’re setting new benchmarks for efficiency and accuracy. 

Let ZenGRC transform your compliance strategy into a dynamic asset, empowering you to focus on growing your business while staying confidently compliant.

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As global data privacy and cybersecurity regulations continue to increase, the pressure for organizations to manage compliance risk grows. The first step in your journey to better compliance risk management is compliance risk assessment.

With risk management methodologies, a compliance risk assessment analyzes how an organization might not meet its regulatory compliance obligations. This assessment should be a holistic analysis to identify all the compliance requirements that various laws, rules, and industry standards might impose on your organization. It evaluates whether or not your existing compliance program meets those expectations.

In this article, we will explain what a compliance risk assessment is, how to undertake one using established risk management methodologies, and how to implement your risk assessment’s findings after completion.

What Is Inherent Risk?

To begin, an organization should determine the amount of inherent risk it faces. Inherent risk is the potential harm when a risk is left untreated or ignored. Use a disciplined, objective method to analyze each risk’s likelihood and possible effect to help you understand the inherent risk you face. This also implies that the less a company tries to manage risk, the more risk it inherently has.

Understanding inherent risk allows a company to develop an early sense of the risk mitigation that might be necessary. When identifying inherent risk, companies should analyze the critical risk characteristics, which are divided into four categories:

Legal Impact

Legal or regulatory proceedings against the company or its workers may result in fines, penalties, incarceration, product confiscation, or debarment. Any time a company or its employees violate the law or compliance requirements, they are subject to legal issues.

Financial Impact

Financial impacts are the harm caused to the organization’s income statement, share price, or possible future earnings. Various compliance issues can generate an economic impact, including fines from legal matters, lost sales from reputational damage, or reduced cash flow from factory downtime.

Business Impact

Internal or external factors can impact a company’s day-to-day business operations. A failed new product can slow business growth, and political sanctions can disrupt the supply chain.

Reputational Impact

Negative media coverage (in traditional news or social media) damages the organization’s reputation or brand. Bad press can result in loss of customer trust and lower employee morale.

Measure each impact in qualitative and quantitative terms for a comprehensive view of risk. Qualitative research often uses a low-medium-high scale to express the magnitude of a risk. Since it is a more subjective measurement, creating definitions for each level of magnitude is crucial.

Quantitative assessments are numerical estimates of potential harm. For example, if you know your factory ships $1 million daily, you can calculate the impact for each day of downtime. Precision is preferred, but estimates are better than nothing.

What Is a Compliance Risk Assessment?

A compliance risk assessment analyzes how an organization might not meet its regulatory compliance obligations. This analysis should be holistic to identify all the compliance requirements that various laws, rules, and industry standards might impose on your organization and how well your existing compliance program does or doesn’t meet those expectations.

Common Compliance Risks

Innovative business leadership not only recognizes these risks but also effectively addresses them. Below are four prominent compliance risks that modern enterprises face all the time:

1. Data privacy infringement

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

2. Protected Health Information (PHI) mishandling

Complying with the Health Insurance Portability and Accountability Act (HIPAA) is crucial for organizations handling medical data. 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.

3. Lack of disaster preparedness

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, and HIPAA demands a robust disaster recovery plan focusing on vulnerability identification, minimized disruption, team coordination, and regular drills.

4. Breach of payment card data

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 a pivotal role in safeguarding customer data.

What Does Compliance Risk Involve?

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

Monetary fines can be hefty. Other possible penalties include loss of operating licenses or disbarment from government contracts. Corrective actions can be expensive to implement. There would also be legal costs as regulators investigate, plus the potential for civil lawsuits and reputational loss among your customers.

Many regulators will offer more favorable treatment to a company that demonstrates a compliance program and is at least trying to meet its obligations.

A compliance risk assessment measures the gap between what your compliance program does versus what your compliance program should do to pass muster as an “effective” program in the eyes of regulators. Mitigation is the step to reduce your compliance risk until it achieves that effectiveness goal.

Before an organization can mitigate its compliance risk, however, it must conduct a compliance risk assessment.

Compliance Risk Assessment Steps

A comprehensive risk assessment will include several steps:

1. Identifying risks
2. Analyzing the level of the risk
3. Determining what actions might be necessary to decrease the risk
4. Implementing initiatives
5. Evaluating the effectiveness 

Here are each of the steps in more detail.

Step 1: Identifying Risks

Identify which regulatory compliance standards apply to your business, then document key workflows, information systems, and transactions. These efforts will require input from stakeholders of every business unit. Take note of areas in essential functions and procedures that suggest non-compliance with regulatory requirements.

Here’s how to identify compliance risks:

1. Research regulations. Understand the laws and standards applicable to your industry.
2. Internal audits. Evaluate your practices against compliance requirements through internal audits.
3. Employee input. Encourage employees to report practices that could raise compliance concerns.
4. Third-party evaluation. Assess compliance of vendors and partners.
5. Analyze history. Study past incidents for patterns and recurring issues.
6. Tech and data check. Review IT systems and data management gaps in compliance.
7. Training review. Gauge the effectiveness of compliance training programs.
8. Stay updated. Monitor evolving compliance regulations and industry trends.
9. Benchmarking. Compare your practices with industry peers for insights.
10. Consult experts. Seek guidance from legal or compliance professionals.

Step 2: Map Potential Risks to Possible Outcomes and Affected Parties

Once you’ve evaluated the company’s operations and where compliance gaps or risks may be, map those risks to their potential outcomes and affected parties. Not only is this critical documentation to have for auditing purposes, but it’s also a way to begin your risk mitigation strategies.

Step 3: Prioritize the Most Severe Risks and Determine Control Measures

Implementing new compliance programs (or improving existing ones) can be overwhelming. We recommend prioritizing all the identified risks by the potential severity of their outcomes and addressing the most severe first.

Ask: Where are existing controls failing to address those risks? How can you remedy that? Also, consider how you can detect a violation of the rules for these severe risks in the future. This consideration will reduce any non-compliance surprises.

Step 4: Implement Controls and Validate through Testing.

Once you’ve determined what must be done to mitigate compliance risks, implement those steps — but you’re not done there! Testing to validate controls is essential before proceeding to another risk. Review the results and decide whether the control works as desired. If not, investigate why, and if necessary, implement more or better controls to get the expected performance.

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

Remember that a corporate compliance program should be an ongoing part of business. As the business grows, risks will change. Legislation affecting the business also evolves. Moreover, unmonitored, unenforced controls tend to lapse after a while. So, you should routinely monitor controls, re-test them periodically, and re-evaluate them as the business grows and laws change.

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. 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 for the organization to drive the design, implementation, and execution of its internal controls.
• Requirements to help ensure internal controls, components, and principles function and operate together.
• A way to identify and evaluate risks and develop the appropriate mitigation strategies is to maintain an acceptable level of risk with a focus on fraud prevention.
• Expanded control application beyond financial reporting to operational and compliance objectives.
• The ability to eliminate inefficiencies and redundancies in controls while maximizing value in risk reduction.

How Does Compliance Risk Assessment Differ From Other Risk Assessments?

Risk assessments exist for various business risks and industries, including financial services, government contracts, and healthcare.

Compliance risk assessments identify, prioritize, and control risks associated with the threat of non-compliance in your industry. Potential penalties could be fines, reputation damage, legal repercussions, or the inability to operate the business.

Unlike other forms of risk assessments, compliance risk assessments focus on the legal or regulatory requirements that an organization must comply with. Furthermore, risk analysis and compliance testing are typically managed by your compliance department’s chief compliance officer, who typically manages risk analysis and compliance testing.

The chief financial officer, the chief information officer, or another C-level executive might manage other risks.

How Internal Audits Aid in Compliance Risk Management

Internal audits are a critical part of the compliance risk assessment process. They help identify areas of high-risk exposure and gaps in compliance programs. Effective internal audits evaluate compliance with legal requirements and adherence to the organization’s risk management processes.

Internal auditors can provide an independent, objective assessment of the company’s compliance risk level. Their findings lead to action plans and remediation to improve compliance risk management.

Key elements of leveraging internal audits include:

• Developing an audit plan that covers high-risk areas and new regulatory changes
• Using risk identification techniques like interviews, document reviews, and data analysis
• Reporting detailed findings on compliance gaps and risk levels
• Making recommendations for remediating issues and enhancing compliance programs
• Following up to validate remediation efforts and risk reduction

Regular internal audits enable ongoing monitoring of compliance risk. They also provide valuable input for the organization’s annual compliance risk assessment process.

What Are the Best Practices for Conducting a Compliance Risk Assessment?

A practical compliance risk assessment follows structured best practices and involves key stakeholders. Here are some best practices to consider:

• Review applicable laws and regulations to identify legal requirements
• Rate each risk according to potential impact and likelihood
• Prioritize the most significant risks for remediation
• Develop risk mitigation plans that assign accountability
• Establish KPIs and metrics to monitor compliance risk levels
• Document risk assessment findings and management responses
• Schedule periodic reviews and updates as risks change

The assessment process should align with the organization’s established risk management system. Provide adequate resources and training to internal audit teams supporting the process.

Use technology like GRC software to collect, analyze, and report compliance risk data. Automation tools can streamline the assessment process.

Organizations can conduct efficient, comprehensive compliance risk assessments following these best practices. They provide the foundation for making strategic decisions to strengthen regulatory compliance.

How RiskOptics Can Support Compliance Risk Assessment

Evaluating risks, implementing the appropriate controls, and gathering documentation at every step can be time-consuming and prone to error if you rely on manual processes and tools such as spreadsheets.

The ROAR Platform is a governance, risk management, and compliance software tool that simplifies compliance efforts by automating tedious, manual tasks. Its easy-to-use risk management templates provide an outline to evaluate risk properly, while our user-friendly dashboard metrics show you where you’re doing well and where your gaps are in real-time, so you always know where you stand.

ROAR also tracks compliance training and documentation requirements across laws and regulations such as the EU General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), Health Insurance Portability and Accountability Act (HIPAA), and more.

Schedule a demo today to learn how the ROAR Platform streamlines compliance risk management.