A compliance audit process is crucial to any business that wants to ensure it follows all relevant laws and regulations. These audits help companies identify areas where they may fall short and take corrective action before legal or financial consequences arise.
A compliance audit comprehensively reviews a company’s operations, policies, and procedures. It covers many areas, including data privacy, financial reporting, environmental regulations, and workplace safety.
This article will explain what a compliance audit is and why it’s an essential tool for managing risk in today’s business environment.
Types of Compliance Audit
Various regulatory compliance audits exist internationally, at the federal and at regional or local levels, with variations based on industry. These types of compliance audits can encompass technical, operational, financial, or safety processes and protocols. Here are some examples of agencies or organizations who issue standards and regulations that organizations, depending on their business activities, may be audited against.
Sarbanes-Oxley Act (SOX)
SOX compliance audits entail a detailed examination of financial records and financial and operational controls. It also requires IT departments to undergo specialized audits to ensure disaster recovery controls for electronic communications, proper change management tools, comprehensive audit trails, and payroll and finance departments.
Healthcare Insurance Portability and Accountability Act (HIPAA)
The HIPAA compliance audit is necessary for entities within the healthcare industry, including healthcare insurance providers, healthcare providers, contractors, vendors, and data centers. The audit ensures the secure and appropriate handling of patient data, with confidentiality as a top priority.
Payment Card Industry Data Security Standard (PCI DSS)
PCI DSS is a set of standards businesses must follow to obtain certification for storing, processing, or transmitting electronic payments. An audit is mandatory for organizations that annually process over six million credit card transactions. This audit ensures that networks, systems, and processes can safeguard sensitive information and detect breaches promptly.
Human Resources (HR)
This HR audit is a legal compliance audit, ensuring that an organization adheres to federal, state, and local employment laws and regulations. Companies may have concerns regarding the misclassification of non-exempt work and inadequate personnel files.
Payroll
Payroll compliance audits assess a company’s payroll processes to ensure accuracy. It analyzes various aspects of a company, such as the number of employees, their compensation, and tax deductions. An annual payroll audit ensures your procedures are current and follow legal requirements.
Internal Revenue Service (IRS)
This entity audits individuals, corporations, and nonprofit entities to verify compliance with income tax regulations. The IRS uses the term “examinations” for their audits as they adhere to tax codes and not generally accepted accounting principles.
State and Local Tax (SALT)
State and local auditors have the authority to audit financial records to ensure compliance with state and local tax laws, including income and sales taxes.
Financial Industry Regulatory Authority (FINRA)
FINRA is an independent organization that collaborates with the Securities and Exchange Commission (SEC). They mandate yearly audits for finance, brokerage, securities, and investment companies. The organization verifies fair trading practices by checking licensing, advertisements, and day-to-day activities. When an audit results in poor findings, there may be consequences such as fines, suspensions, or disbarment.
Can-Spam Act
The Federal Trade Commission (FTC) implemented a federal law that regulates bulk mail and commercial electronic messages to prevent offensive, annoying, or misleading commercial emails. The law applies to both retail businesses and nonprofit organizations.
Occupational Health and Safety Act (OSHA)
OSHA enforces workplace health and safety regulations for various industries, including office work, manufacturing, construction, private education, and disaster relief. OSHA audits ensure that workplaces maintain a safe and clean environment, free from potential hazards.
Environmental Protection Agency (EPA)
The EPA collaborates with various federal and local entities to ensure compliance with environmental regulations. Different inspection, testing, self-monitoring, and self-reporting systems maintain ecological integrity.
Securities and Exchange Commission (SEC)
The SEC conducts audits of financial institutions, including securities advisors, to ensure investors receive adequate information before making purchases.
Centers for Medicare and Medicaid Services (CMS)
CMS is a department under the Department of Health and Human Services. It manages Medicare funding and collaborates with states to implement Medicaid. Regular facility audits guarantee proper usage and tracking of funds.
ISO 14001
The International Organization for Standardization (ISO) established ISO 14001 in 1996 as a global framework for businesses to reduce environmental impact by optimizing resources and minimizing waste. Certification is not mandatory but entails initial and regular maintenance audits.
Social Compliance
Social compliance standards promote sustainable labor and environmental practices in a company’s supply chain. There are many ways to set standards, such as legal and regulatory frameworks, corporate codes of conduct, or industry policies. Social compliance audits are a common brand requirement and are typically initiated and funded by suppliers.
Statements on Standards Attestation for Engagements No. 16 (SSAE-16)
SSAE regulates reports on financial service organizations’ controls, including data centers, ISPs, and other entities that may manage, store, or transfer sensitive data.
ISO 9001
A quality management standard that describes the requirements for implementing a quality management system in an organization, regardless of size or industry. The standard aims to help businesses meet customer expectations by ensuring consistent product and service quality.
Monitor regulations for changes with compliance audit checklist templates by Nimonike Audits
Nimonik provides businesses with a comprehensive solution for all their regulatory compliance needs:
- Choose from over 2,000 free compliance audit checklist templates or create your own
- Efficiently create a compliance audit plan by uploading your internal documents, such as vendor contracts, environmental permits, and stakeholder engagements
- Generate audit checklists based on applicable regulations and standards
- Schedule and create audits based on your compliance obligations and assign them to team members
- Map the applicable regulations to your business, such as control measures, policies, procedures, people, teams, and reporting dates
- Generate compliance audit reports in various formats, such as PDF and CSV
Keeping up with all the laws and regulations is no easy task. Furthermore, there’s also the need to address global and local compliance requirements, adding to the situation’s complexity. But none of these challenges should be a reason not to conduct compliance audits.
The History of Compliance Auditing
During the industrial age, regulations and compliance grew to enhance supervision and regulation of business practices. This growth resulted from government initiatives, professional organizations, and social welfare groups. In the 1970s, companies began to adopt internal auditing to ensure their ethical standards. As a result, government agencies such as the EPA and OSHA began conducting more inspections and companies opted to adopt voluntary certification standards such as the ISO 9001, ISO 14001 and others to stay ahead of regulatory agencies.
Objectives of a Compliance Audit and Internal Audit
A compliance audit evaluates if an organization follows laws, norms, bylaws, and behavior codes. There are different types of audits: internal (1st party), internal (2nd party) and external (3rd party).
There are many subjects that can be audited, such as management systems (ISO), audits to regulatory requirements or corporate compliance audit.
Internal Audits
Internal and compliance audits are often confused, although they use staff from different teams and employ different methodologies. Internal audits are done by in-house staff from the same location (1st party) or from a different location (2nd party) within the same organization (i.e. a different facility).
Compliance Audit Plan
Compliance audits concentrate on external requirements – they help ensure that the organization adheres to legal requirements. A compliance audit plan can be done by an internal team or an external party. Internal and external compliance audits should ideally utilize identical terminology and software to provide comprehensive and uniform assessments for optimal results.
Who Can Perform a Compliance Audit?
Internal audits are performed by a company’s employees, including internal auditors, to evaluate compliance management and security risks. The internal audit team assesses the company’s adherence to internal controls and guidelines, such as corporate policies and procedures. Reports from these audits are generated regularly throughout the fiscal year to help executives identify gaps in regulatory compliance processes and determine necessary improvements or corrective action.
External audits are formal audits conducted by independent companies. It follows specific formats based on the compliance programs being assessed. Depending on the audit’s scope, they assess an enterprise’s compliance with federal, state/provincial, or corporate regulations and standards. For financial audits, certified public accountants frequently act as compliance auditors. For environmental, health and safety (EHS) audits, there are various professional associations that certify auditors. In some situations, there is no certification for EHS auditors.
Compliance audits can help organizations mitigate risk and prevent legal issues before they are detected by government authorities and therefore reduce the risk of fines, penalties or sanctions.
What’s the Difference Between Compliance Audit and Internal Audit?
Compliance and internal audit are two functions that serve different purposes within an organization.
External auditors are brought in as experts in the relevant laws and regulations. The external auditors conduct compliance audits and issue reports. They ensure the company complies with all applicable laws and regulations and has adequate controls to prevent non-compliance.
On the other hand, internal auditors, who are company employees, conduct the internal audit. They evaluate the effectiveness of the company’s internal controls and risk management processes. Internal auditors identify risk areas and recommend improvements to the company’s internal processes and controls. You will generally conduct an internal audit more frequently, perhaps annually, and then conduct an external compliance audit on a three (3) year cycle.
Who Participates in Compliance Audits?
Compliance audits involve various stakeholders within an organization. Some of these participants in the compliance audit process can include.
- Compliance Officers – These individuals are in charge of ensuring the company’s adherence to regulations and standards. The auditors typically communicate with them first and receive details about the company’s policies, procedures, and practices.
- Department Managers – The responsibility of department managers is to ensure compliance with regulations and standards within their departments. The department provides the auditor with information on their policies, procedures, and practices and may be requested to participate in interviews.
- Employees – The participation of employees is essential in compliance audits. Employees are frequently interviewed to provide information regarding their department’s compliance practices and may be required to furnish documentation to substantiate their statements.
- External Consultants – Occasionally offer specialized expertise in a specific area of compliance. For example, a company may engage a consultant to assess its cybersecurity practices and suggest ways to enhance them.
How Often Should Compliance Audits Be Performed?
There is no one-size-fits-all solution, as the frequency of compliance audits will depend on various factors.
Firstly, a company’s industry will determine how often it should conduct compliance audits. Industries with high regulatory requirements, such as oil & gas, mining and finance, may require more frequent audits than less regulated ones.
The size and complexity of the business will also impact the frequency of compliance audits. Larger companies with more complex operations may require frequent audits to ensure all business areas meet compliance requirements.
There’s also the level of risk associated with non-compliance. If the consequences of non-compliance are severe, such as legal or financial penalties, then more frequent audits may be necessary to minimize this risk.
The Major Challenges of Compliance Auditing
Conducting a regulatory audit is essential for businesses to comply with laws and regulations, but it poses various challenges. These challenges may include:
- New regulatory requirements are unclear
- Establishing the right internal team with appropriate competence to ensure compliance with all regulatory standards within an organization.
- Data visibility from specific operational processes is lacking
- Integrating people, processes, and systems is challenging, and the compliance audit process isn’t collaborative enough.
- Issues related to data traceability and transparency (of specific processes)
- The lack of integrated document management solutions results in inefficiency since audit leads cannot locate documents on demand.
FAQs (about compliance audit and its importance)
nesses meet customer expectations by ensuring consistent product and service quality.
The Major Challenges of Compliance Auditing
Conducting a regulatory audit is essential for businesses to comply with laws and regulations, but it poses various challenges. These challenges may include:
- New regulatory requirements are unclear
- Establishing the right internal team with appropriate competence to ensure compliance with all regulatory standards within an organization.
- Data visibility from specific operational processes is lacking
- Integrating people, processes, and systems is challenging, and the compliance audit process isn’t collaborative enough.
- Issues related to data traceability and transparency (of specific processes)
- The lack of integrated document management solutions results in inefficiency since audit leads cannot locate documents on demand.
Ensure compliance audit success with Nimonik
Keeping up with all the laws and regulations is no easy task. Furthermore, there’s also the need to address global and local compliance requirements, adding to the situation’s complexity. But none of these challenges should be a reason not to conduct compliance audits.
Nimonik provides businesses with a comprehensive solution for all their regulatory compliance needs. Our solution eliminates the need to manually scour through thousands of regulatory changes, as our system monitors and notifies businesses of any changes in regulations applicable to their business in real-time.
Here are more ways Nimonik can help:
- Generate audit checklists based on applicable regulations and standards
- Efficiently create a compliance audit plan by uploading your internal documents, such as vendor contracts, environmental permits, and stakeholder engagements
- Choose from over 2,000 free compliance audit checklist templates or create your own
- Schedule and create audits based on your compliance obligations and assign them to team members
- Map the applicable regulations to your business, such as control measures, policies, procedures, people, teams, and reporting dates
- Generate compliance audit reports in various formats, such as PDF and CSV
FAQs about regulatory compliance audit
What is a compliance audit and how does it differ from other types of audits?
A compliance audit reviews an organization’s adherence to laws, regulations, and internal policies. It differs from other types of audits, which focus on third-party hired by the organization or contractual agreements between the parties who signed them.
What are the common compliance risks that organizations face?
Common compliance risks that organizations face include data privacy violations, financial fraud, bribery and corruption, environmental violations, and workplace safety issues. Legal penalties, reputational damage, and financial losses can result from non-compliance.
How can organizations ensure they are complying with relevant laws and regulations?
Organizations can ensure compliance by conducting regular risk assessments, implementing effective policies and procedures, providing employee training, monitoring compliance, and promptly addressing issues. Additionally, seeking external expertise and staying up-to-date with changes in laws and regulations can help ensure ongoing compliance.
What are the best practices for conducting a compliance audit?
A risk compliance audit should identify relevant laws and regulations, establish audit objectives, create a compliance requirements checklist, review pertinent documentation, conduct interviews, test controls, report findings, and suggest corrective actions. Also important is maintaining objectivity and confidentiality.
What are the steps involved in a compliance audit process?
The steps in a compliance audit process involve planning the audit, conducting a risk assessment, creating an audit program, gathering and reviewing documentation, conducting interviews and testing controls, analyzing findings, reporting results, and recommending corrective actions.
How can an organization prepare for a compliance audit?
Organizations can prepare for a compliance audits by ensuring that all relevant policies and procedures are up-to-date, identifying and addressing compliance issues, training employees, organizing and maintaining necessary documentation, and cooperating fully with auditors. Self-assessments are also helpful in identifying areas of non-compliance.
What are the key components of a compliance audit report?
The key components of a compliance audit report include the audit’s scope, findings and observations, recommendations for corrective actions, and a conclusion regarding the organization’s overall compliance posture. The report should be clear, concise, and objectively written.
How can an organization evaluate its compliance audit findings?
Organizations can compare their findings with laws, regulations, and internal policies, determine the severity and potential impact of any identified issues, evaluate existing controls, and identify the causes of non-compliance. This evaluation can help develop and implement a plan to address the findings.
What are the consequences of non-compliance with regulations?
Non-compliance with regulations can result in legal and financial consequences, including fines, penalties, and legal fees. It can also lead to reputational damage, loss of business opportunities, and decreased stakeholder trust. In severe cases, non-compliance can result in criminal charges and imprisonment for responsible individuals.
How can an organization avoid common compliance audit pitfalls?
Some of the vital strategies to avoid compliance audit pitfalls are: adequate preparation, accurate documentation, clear communication, prompt issue resolution, and ongoing compliance process improvement. Prioritizing compliance and proactive measures can reduce the risk of non-compliance.
