Compliance audits help organizations ensure that they are following the law and protecting their customers' data. They allow organizations to identify areas where they may be at risk for fines or other penalties.
Despite this, organizations often fall short when it comes to compliance auditing -- as companies continue to scale, auditing can often become more challenging.
In this guide, we'll be looking at what a compliance audit means, and how you can conduct them properly.
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What is a Compliance Audit?
How do you define a compliance audit? Think of a compliance audit as a process, and not a project. It is typically a repeatable examination of company processes or documents to determine if they adhere to certain policies and procedures.
Compliance audits can be conducted on a variety of topics, such as environmental regulations, financial regulations, employment law, and health care regulations.
For example, if your company creates software, you need to confirm that it does not violate copyright laws and that it follows open standards for interoperability. If you operate in the food services industry, you will need to confirm that your company follows federal regulations for foodstuffs.
If you cannot prove compliance with auditing results in hand, then you may be subject to fines.
Some examples of regulations that may be audited are Health Insurance Portability and Accountability Act (HIPAA), the Chemical Safety Improvement Act (CSIA), and the Emergency Planning and Community Right-to-Know Act (EPCRA).
The frequency of compliance audits varies depending on the industry they are conducted in. For example, food companies will need to do more frequent compliance audits due to sanitation standards.
Follow our checklist for a compliance audit in order to avoid penalties.
Compliance audit example
Imagine this: You're the Compliance Manager for a mid-sized retailer that sells a variety of products both online and in physical stores. Your company has decided to conduct a compliance audit to ensure that its business processes align with the latest regulations from the FTC (Federal Trade Commission).
The first step is to develop a plan for the audit. You'll need to identify which regulations you plan to review, so you can begin researching the regulations. You'll need to read through all of the regulations and look for any discrepancies between them. You also have to figure out whom this compliance audit will affect. For example, does it only apply to online sales or are physical stores included as well?
Once you have the plan in place, it's time to start conducting the actual audit. This will involve reviewing documents, interviewing employees, and testing processes. One of the most important aspects of a compliance audit is ensuring that everyone who needs to be aware of the audit is kept in the loop.
You'll also want to document everything that you find during the audit. This will help you identify any potential issues and track your progress as you work to resolve them.
The final step is to create an audit report on your findings. This report should include a description of the audit process, a list of discrepancies found, and a plan of action for how these discrepancies will be resolved.
What is the difference between a compliance audit and an internal audit?
Unlike internal audits, which are conducted to assess the effectiveness of an organization's controls, compliance audits are focused on assessing compliance with specific laws and regulations.
Internal audits may also identify areas of noncompliance, but the goal of a compliance audit is to determine whether an organization is in full compliance with relevant regulations.
Also, the results of internal audits are generally for the management of the company, whereas the results of compliance audits are usually reported to regulatory agencies.
Why are compliance audits important?
Here are some of the benefits of conducting compliance audits:
Assists in preventing violations and mitigating associated risks
When you conduct a compliance audit, you can identify any areas of non-compliance with required standards or business policies, or practices that could potentially lead to violations or put the company at risk.
This allows for corrective action to be taken before issues arise. Audit results can also help organizations reduce risk exposure and mitigate losses when an issue does occur.
Boosts efficiency and effectiveness
Compliance audits can also help improve organizational efficiency by identifying and correcting inefficient processes. Additionally, a well-run compliance audit program can help improve the effectiveness of an organization's controls.
Helps improve your organization's image and reputation
By conducting compliance audits, certain standards must be met to ensure the business is operating at a level that will not affect its reputation. If compliance auditors discover deficiencies, it can also negatively impact an organization's image and reputation.
What are the challenges associated with compliance auditing?
There are several challenges that organizations face when conducting compliance audits:
Constantly changing regulations
Regulations can be complex and constantly changing, and organizations may have different interpretations of what it means to be in compliance. To conduct a successful compliance audit, organizations need to have a clear understanding of the regulations they are trying to comply with and of their own internal processes.
Time and resources
One of the biggest challenges is the amount of time and resources needed to conduct a compliance audit properly. Organizations need to have someone who is knowledgeable about the audit process and the applicable laws and regulations, and who can also identify any potential risks.
Access to information
Another challenge is gaining access to all the necessary information for the audit. This can be difficult if certain areas of the business are off-limits or if key personnel are not available.
Confidential and/or trade secret information needs to be carefully handled during a compliance audit. Auditors need to make sure they can access all necessary information without revealing any confidential or proprietary data.
No standard process
A common issue is the lack of a standard process for compliance audits. Organizations need to ensure they have a consistent approach for how compliance audits are performed so accurate results can be achieved every time.
It's also important for organizations to have a system in place where they can track and trend the results of compliance audits. This will help identify any areas that may need additional attention in the future
How do organizations conduct compliance audits?
There are a few different ways organizations can go about conducting compliance audits:
Hiring an external auditor
This is often the most common way for larger companies to conduct compliance audits as it allows for the most flexibility and customization. The external auditor may be required to adhere to internal policies and procedures depending on the audit.
External audits must follow the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB). External auditors must adhere to the ISA but may take into account national requirements when preparing reports for their clients.
Using auditing software
Organizations can use automated compliance auditing software as another way of conducting audits. Since these tools are made by third parties, there is more flexibility in terms of how they work compared to hiring an external auditor.
Using internal auditors
Depending on the size of the company, having employees conduct HR compliance audits is another option. Depending on the organization's structure, there may be some overlap with risk management activities since both roles are involved in overseeing risks that could potentially affect an organization.
Some organizations have their own internal policies and procedures for conducting compliance audits. This can be more restrictive than other methods, but it does allow for more control over the audit process.
What are the different types of compliance audits?
There are a variety of different types of compliance audits, each of which is designed to assess compliance with a specific set of regulations or guidelines.
Some common types of compliance audits include:
Sarbanes-Oxley Act Compliance Audit
The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act, is a United States federal law that sets new or enhanced standards for all U.S. public companies with respect to financial reporting, corporate governance, and auditing.
Payroll and finance departments are the most common areas targeted by SOX compliance auditing.
HIPAA Compliance Audit
The healthcare industry has been subject to regulation since the enactment of HIPAA in 1996 which established standards designed to protect the privacy and security of protected health information (PHI).
HIPAA compliance audits require a review of organizational policies concerning privacy and security, as well as employee training. In addition, HIPAA compliance audits may also focus on the availability of data backup systems for all organizations that retain ePHI.
The U.S. Department of Health and Human Services (HHS) Office for Civil Rights is responsible for administering and enforcing the rules adopted under HIPAA. The HHS is authorized to conduct health care oversight activities through various enforcement mechanisms including civil money penalties, no-match letters, corrective action plans, complaint investigations, and compliance reviews. Here's the complete HIPAA compliance checklist for employers for your reference. Make sure everything is covered and taken care of to avoid penalties.
PCI DSS Compliance Audit
The Payment Card Industry Data Security Standard (PCI DSS) is a security standard that is used to assess compliance with the payment card industry's data security standards.
PCI DSS compliance audits are required for all merchants and service providers who store, process, or transmit credit card information, as well as any third-party service providers.
Food and Drug Administration (FDA) audits
The Food and Drug Administration (FDA) is a federal agency that oversees most areas of food safety in the United States. FDA audits are conducted to prevent adulterated food from entering interstate commerce.
Internal Revenue Service Audits
An Internal Revenue Service (IRS) audit is a process used by the IRS to evaluate a taxpayer's tax return. The goal of an IRS audit is to ensure that taxpayers are reporting their income, deductions, and credits correctly. To conduct an accurate audit, the IRS uses several techniques including examining financial records, interviewing employees, and going through historical data.
Occupational Health and Safety Act (OSHA) Audits
The Occupational Health and Safety Act of 1970 (OSHA) is a federal law that requires employers to provide a safe and healthful workplace for their employees. OSHA compliance audits are used to assess how well an organization is complying with OSHA's safety requirements.
OSHA compliance audits can be conducted through a variety of methods, including on-site inspections, document reviews, and interviews with employees.