All formally registered organizations and enterprises in the United States of America are legally subject to abiding by federal and state regulations for non-discriminatory employment practices, satisfactory conditions for health and safety in the workplace, transparent financial transactions, and robust data security.
There are different types of laws every organization needs to follow each with a corresponding compliance audit checklist of industry, state- and type-specific priorities and areas of focus. Some audits are external, some internal. Some audits are mandatory and some are voluntary (but highly recommended as a preventative measure against potential future non-compliance). Some are done through a template, others are designed from scratch to address each organization's unique set of needs and challenges. Check out these examples of compliance audit so you know what to expect. This will help you plan out a strategy before the audit is done.
Executing a legal compliance audit with a carefully developed compliance audit checklist is an essential way to stay compliant with the law and to maintain the company's mission. Just some of the positive outcomes from maintaining regular compliance audits include:
A safe and stress-free work environment for the employees
Increased employee productivity
Avoidance of disruptions or shut-downs of the enterprise's operations
Ensuring a good reputation for the business
Before we get into how to our compliance audit checklist, let's talk about what compliance audits are.
Get An Instant Free Course Preview
Try our best-in-class, interactive, and engaging courses for free!
Defining A Compliance Audit
What is a compliance audit? Legal compliance audits exist to ensure that company operations are compliant with regulatory standards on health and safety, labor, data privacy and security, corporate governance, and other industry-specific areas subject to legal oversight.
The specific legal compliance standards and requirements for each organization or business depend on a variety of factors:
- Whether the business is a public or a private company
- Which industry sector the business operates in (healthcare, education, hospitality, etc.)
- The types of occupational roles employed within the company (programmers, construction workers, nurses, etc.)
- Laws and regulations local to the business
- Whether or not the company retains its clients' private information
- Whether or not the company has international clients/customers
What Is The Point Of Compliance Audits?
All legal compliance audit functions are risk-based, aimed at:
- Risk identification
- Risk prevention
- Risk monitoring
- Risk resolution
- Risk advising
All are designed with the purpose to review and assess a company's functioning, determine and draw attention to areas that need improvement, and ultimately ensure that the business is compliant with legal requirements and regulations.
Types of Compliance Audits
Different industries have different requirements, but, primarily, a legal compliance audit of a company is performed for the following legal concerns:
- Being compliant with labor laws. Arguably the most intensely scrutinized area of compliance is the protection of the rights of the workers. The Department of Labor performs regular audits of organizations to verify their obedience to the corresponding rules and regulations.
- Being compliant with health and safety / environmental protections. Failing to comply with safety regulations carries a lot of financial liability in the form of legal fees, payouts to the victims, and fines from government entities such as the Occupational Safety & Health Administration or OSHA violations
- Being compliant with corporate governance rules. Sustainability, accountability, and transparency are all qualities every company owes to the government and to its own investors. A compliance audit into corporate governance probes the financial and governing decisions and policies of the executive employees of a business.
- Being compliant with data security requirements. A business that retains sensitive customer data is legally responsible for its protection from leaks and abuse. A compliance audit would evaluate whether or not a company uses proper, updated communication software and hardware with the latest password protection and takes other measures to keep the information confidential and from being misused.
What Is A Compliance Checklist?
A compliance audit checklist is a compliance tool utilized by external or internal auditors to assess and verify an organization's adherence to government regulations, industry standards, or the company's own policies.
The compliance checklist guides the assessment process by cross-checking the company's performance against legal standards and identifying organizational gaps, weak points, and risks where adherence to rules should be tightened.
Audit Checklists For Different Legal Areas:
- Labor Laws. This compliance checklist must enforce a detailed query into the enterprise's HR management practices, collective bargaining, employee relations, equality / anti-discrimination policies, etc.
- Health / Safety / Environmental. Depending on the specifics of the business, the compliance checklist is used to inspect for dangers to human and environmental health, with attention given to items and practices that constitute a "hazard" as well as preventative practices such as fire safety and emergency response training of employees, access to proper and safe work equipment and other legal housekeeping necessities.
- Corporate Governance. A legal compliance checklist for this aspect of corporate operations probes into the inner workings of how an organization is run, combing through corporate policies, registration paperwork, appointments and elections of executives and organizational officers, relevant financial documents, the corporation's performance of civic responsibilities, etc.
- Data Security. A compliance audit checklist for this category is focused on making sure that the company adheres to the strictest measures of privacy for their client data (through access control, updated encryption software, etc.) This also includes providing data privacy training for employees.
Internal (HR) and External (Regulatory) Compliance Requirements
All companies deal with a combination of internal and external compliance requirements. The ideal corporate compliance program incorporates a healthy mix of internal and external policies: not just to satisfy the legal end of things, but to also prioritize the ethical requirements for a happy and safe work environment for all employees. An HR checklist for compliance would come in handy to ensure you pass every internal audits.
External (Regulatory) Compliance Requirements
External (aka regulatory) compliance requirements satisfy federal and state laws regarding operating a business.
For example, all corporations and LLCs are legally bound by complying with the Fair Labor Standards Act (FLSA) of 1938, which prohibits child labor and establishes standards for minimum wage, overtime compensation, hours worked, and records-keeping for all American workers (full and part-time). Employers need to check their local FLSA compliance requirements, as they differ from state to state.
To be compliant with regulatory compliance requirements, companies may bring in third-party (external) auditors who conduct the compliance audit and evaluate the results from a neutral standpoint.
External compliance auditors are also preferred by companies' investors, lenders, and stakeholders because of the presumed objectivity they bring to their review process, conclusions, and recommendations.
Internal Compliance Requirements
Internal compliance requirements -- frequently referred to as HR Compliance -- are set by the organization itself, for the benefit of maintaining a workplace run with integrity.
Being a discretionary function, an internal compliance audit is typically conducted by an internal auditor who is an employee of the company, though, as an auditor, this employee must apply an objective, bias-free approach to the review and its conclusions. The auditor answers to the audit committee: a group of non-executive directors who, in turn, answer to the board of directors of the company who appointed them for this task.
Is A Compliance Audit Necessary For Every Company?
Regulatory compliance audits are mandated by state and federal law and are, therefore, legally "necessary" for all organizations.
An internal HR compliance audit may technically be voluntary but, in reality, without taking regular measures from the inside of the corporate system to be in compliance with all the legal and ethical requirements, businesses are likely to succumb to non-compliance, corruption, and other violations of external compliance requirements that will, in no uncertain terms, sabotage the functioning, productivity and bottom line of the company.
A strategic mindset and the willingness to go beyond the bare minimum in compliance assurance -- to conduct all the necessary HR compliance training and to perform all the necessary compliance audits -- is the only recipe for preventing non-compliance from happening in the first place.
Consequences For Being Non-Compliant
Doing poorly on a compliance audit of the internal, company-mandated requirements brings on an evaluation by the executive, managerial, and board staff to assess appropriate response, depending on the infraction(s) identified. Typical penalties range from different types of formal reprimand to probation to the dismissal of the employee (or employees) for subsequent violations.
Not being compliant with external regulatory compliance requirements may result in a wide spectrum of negative "fallout" for the organization, again, depending on the severity of the compliance violation. In addition to a variety of government penalties (such as sexual harassment compliance fines or OSHA safety violation fines), there are instances of corporate non-compliance when courts can put an enterprise's limited liability aside and hold top executives and shareholders personally liable for the company's debts or actions (this happens when the courts determine that a "piercing of the corporate veil" has taken place).
The Phases And Steps For Conducting An Internal Compliance Audit
Typically, to perform a successful compliance audit, a business must go through the four general phases: preparation, performance, reporting, and follow-up. Each phase of the compliance audit process requires several "steps" to complete.
While the exact review/verification trajectory and schedule depends on the specifics of the organization and the nature of the audit, most audits take place along the following lines:
The Preparation Phase
The preparation phase of the audit requires the following steps:
- Notification. Notifying the organization being audited (the auditee) and providing a discussion of the scope, goals, and framework of the upcoming investigation.
- Team Selection. Assembling a team of most experienced and detail-oriented employees to conduct the compliance audit, with one person assigned the role of an auditor. Appoint the most qualified member to supervise the team.
- Gathering Of Documents. A thorough review of all relevant audit documentation provides a better understanding of the upcoming compliance audit processes. Request and assemble copies of departmental procedures for each part of the compliance audit and cross-check them against the latest regulations to rule out (or catch) apparent violations. Break down the separate parts of the business to audit: begin with a review of the aspects subject to most regulations and at the highest risk for violating those regulations.
- Setting A Timeline. Create an efficient timetable of the audit from beginning to end (and stick to it).
- Creating A Practical Audit Plan, If Required. Determine the type and scope of the review. If the audit requires a review of a large volume of documents or personnel that must be scaled down, make sure to determine the correct size of the audit -- one that makes for a representative sample of the features/people/numbers surveyed. Invest into developing probing employee questionnaires.
- Developing A Legal Compliance Audit Checklist. Create a legal compliance checklist to be implemented in the next phase of the audit.
The Performance Phase
The performance phase is the enactment of the compliance audit utilizing the prepared compliance audit checklist, involving the following steps:
- Having An Opening Meeting. Before launching the audit, the team should meet with the lead auditor to discuss primary objectives and agree on the overall expectations of the effort.
- Performing The Audit. The audit is conducted relying on the previously developed compliance audit checklist.
- Having An Audit Team Meeting. The results and findings of the audit are discussed and solutions to the exposed problems are suggested by team members. Measures are recommended for achieving complete compliance with legal requirements and best industry practices. Improvements to the existing legal compliance checklist may be suggested for future audits.
- Meeting For The Closing Of The Audit. An attendance list is put together, followed by a discussion of key topics and questions related to the audit. The audit summary is presented, followed by the thanking of the auditor for their help and cooperation.
The Audit Reporting Phase
Within the several days following the audit completion, an audit report is written, signed by the auditor, and made available to the company being audited (the auditee).
The audit report should contain a summary page with the audit number, objectives, auditor's name, a list of checklist items that did not conform to standards/expectations, and any relevant observations and recommendations on how to fix any remaining non-compliance. Make sure that the information and arranged in an easy-to-follow, logical fashion. It is essential to suggest actionable plans for each infraction found, separated, and listed in the high-medium-low order of importance and urgency.
The Follow-Up Phase
Compliance audits are an ongoing process. After the initial audit is conducted and its results are revealed, follow-up audits are typically required to assess whether or not the auditee business has responded with appropriate rectification of the points of non-compliance exposed by the main audit.
For maximum effectiveness, the follow-up audits must be conducted in accordance with the same standards and expectations as the first audit (though the audit checklist does not have to same exactly the same).
Legal Compliance Audit Checklist Example: HR Compliance
Every business needs to stay HR-compliant to ensure the most professional and lawful handling of the human-element issues within the enterprise (check out our done-for-you HR compliance checklist)
In brief, the checklist of necessary ways to be compliant with the laws, safety standards, and best practices of human resource management can be boiled down to the following focal points:
- Break down and evaluate the company's recruiting/interviewing/hiring employees. Pay particular attention to potential discriminatory practices on the basis of disability, skin color, ethnicity, religion and gender, holding onto and archiving onboarding documents that trace all the processes related to hiring.
- Institute / re-evaluate the Affirmative Action Plan. Businesses with 50+ employees and US government contracts for $50,000+ are legally required to institute the Affirmative Action Plan: a diversity plan meant to include racial minorities, women, employees with disabilities, and US military veterans into fair hiring and workplace training practices (EasyLlama's diversity and inclusion training makes it easy and simple to stay compliant with the Affirmative Action Plan).
- Maintain stellar employer record-keeping. Keep records of all employee-signed paperwork, including employment agreements. Also, make sure to develop and furnish the employee handbook to all workers.
- Create and maintain health (and drug testing) records confidentiality. (If this is a concern, consider taking EasyLlama's HIPAA compliance training course.)
- Adhere to Equal Employment Opportunity Commission laws. Paying strict attention to EEOC regulations is the way to avoid discrimination complaints at the workplace.
- Train staff and supervisors to get compliant with sexual harassment regulations. (Check your state's sexual harassment laws and compliance requirements with EasyLlama's free guide.)
- Practice best techniques for developing and implementing human resources policies. (For example: institute a reasonable policy on ways employees may and may not use social media/networking sites while at work.)
- Be compliant with employee benefits and payroll rules. Review existing benefits offered to employees to make sure they are in compliance with the law; consider adding voluntary benefits like dental, vision, rehabilitation services, retirement accounts, and life insurance -- to stay competitive (and be considered a good company to work for).
Provide the necessary workplace training before an HR audit happens and up your company's chances of passing the review with flying colors.
Stay Ahead Of The Audit Compliance Game By Creating Your Own Legal Compliance Checklist
Whether externally or internally compelled, no organization can afford to be non-compliant with legal and ethical standards of a worthy American enterprise.
Hence, it is in every organization's best interest to:
- Do the due diligence and thoroughly research and become familiar with all the compliance requirements that apply (and keep updated on new legislation developments)
- On the basis of that research, develop a compliance audit checklist and perform a self-audit to stay ahead of potential problems
Additionally, developing a comprehensive compliance review process (that includes a well-thought-out compliance audit checklist) shows federal examiners that the company is serious, proactive, and cooperative about staying compliant with the law.
A business is only as compliant as the people who make up its culture and community. Compliance training does not have to be difficult or painful: consider signing up your business with EasyLlama's online compliance training program, specially designed for ease and convenience for the modern mobile workforce.
