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What is Compliance Audit Procedure: Why It’s Necessary and How You Can Avoid Penalties

What is Compliance Audit Procedure: Why It's Necessary and How You Can Avoid Penalties

Every successful organization has codes of conduct, internal controls, and guidelines that define how business is carried out. And while a lot of these codes and guidelines are developed internally by the business owners, there also exist compulsory standards that businesses in different industries need to comply with.

These standards are set forth by government agencies and are legally binding. Consequently, any organization found not to comply with the set standards and regulations could face legal repercussions. This is why an audit usually takes place. But what is a compliance audit?

A compliance audit is an evaluation of whether a company is following these set standards.

Compliance auditing involves the review of an organization's policies, procedures, processes, files, and documentation to determine whether they are in alignment with existing regulations in that industry.

Something to note, a compliance audit is not the same as an internal audit. Yes, they use the same working principle but, they serve different purposes.

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Compliance audits vs Internal audit: What's the difference

I have seen these two terms used interchangeably and I think it's misleading. Their only similarity is that they involve a deep dive into the operations, policies, and procedures of a business to determine whether it lives up to a certain standard.

However, an internal audit determines whether the business is adhering to its own codes of conduct while an external audit checks whether a business is in compliance with external regulations set by government agencies.

Moreover, unlike an external audit, an internal audit does not necessarily require independent third-party auditors to prove compliance. The auditing process can be completed by an internal auditor or even a normal employee with enough knowledge about an industry and the regulations that govern it.

Also, in most cases, the results of an internal audit are not made public. They only serve to identify areas where an organization is not adhering to internal standards and recommend remediation steps.

Internal audits may also be conducted to investigate compliance with external regulations but this is usually in preparation for an upcoming compliance audit. By identifying shortcomings in an organization's regulatory compliance beforehand, the organization can work on fixing them and thus avoid penalties that would arise from failing the external compliance audit.

Apart from internal and compliance audits, there is a third type of audit that may sometimes be indistinguishable from an internal audit. It's called an operational audit. Oftentimes, an HR compliance audit is an internal and operational review.

Operational audit

This is a type of audit that measures the effectiveness and efficiency of different departments and actions of an organization and determines whether these areas are in alignment with the organization's goal and vision. Similar to internal audits, operational audits don't require certified compliance auditors and are usually not revealed to the public.

Why compliance audits are necessary

Compliance audits are necessary because they force companies to think beyond their profit margins. The sad truth is that if left alone a lot of businesses owners would gladly overlook fair and safe practices in their organizations if it brings in more profit.

So what if the manager has constantly been making unwanted sexual advances on his secretary, what matters is he has tripled the company's profit this year, right?

Or, we have not installed all the necessary security measures to protect our customers' sensitive data from breaches but at least it is saving us thousands of dollars in security tools and personnel.

You get what I mean. This is why it's not only necessary to have compliance regulations that businesses have to adhere to but also to go the extra step and require that businesses prove adherence through external audits.

Compliance audits are not about punishing businesses but rather ensuring that their services and products live to a certain standard. It's about protecting the interests of everybody around the company including employers, employees, and entities that interact with the company indirectly.

For instance, a compliance audit investigating a company's adherence to the Environmental Protection Act (EPA) ensures that a company is implementing the best waste disposal methods that are friendly to the environment. This is going to cost the organization money to implement but at least, they won't resort to, say, dumping their waste in the local river which would make the water unsafe for human consumption and also affect the aquatic ecosystem.

The EPA standard is just one of many regulatory acts that have been set up to govern how companies operate. We can't cover all existing regulations here but to give you perspective, I'll go ahead and highlight some of the more popular ones in the US.

Something you will notice is that although the highlighted compliance standards touch across different industries, they can all be said to perform either of these functions:

  • Ensure security of sensitive personal data

  • Ensure health and safety in the workplace

  • Define acceptable HR and payroll policies

  • Define acceptable management standards

  • Taxation

  • Ensure environmental protection

  • control user access controls

Check out our handy compliance audit checklist to make sure your organization is following the law.

Examples of compliance regulations and bodies in the US

These are some compliance regulations that you may have to put into consideration when coming up with business processes, policies, and procedures.

Sarbanes-Oxley Act (SOX)

The Sarbanes-Oxley act SOX act was effected in 2002 and is applicable for all public companies. Although quite broad, the main objective of the regulation is to protect investors by requiring that all public companies uphold integrity and honesty in all their corporate disclosures.

Other provisions included within this act include proper storage and management of corporate records to prevent tampering. This should be a collaborative effort between the IT department and management since the act requires that business executives take responsibility for their own financial records.

CEOs and CFOs could get major fines if found in violation.

Health Insurance Portability and Accountability Act (HIPAA)

The health insurance portability and accountability act was effected in 1996 and its objective is to ensure that healthcare organizations have the right provisions to ensure the privacy and security of their customer's medical information.

HIPAA also includes provisions to protect employees that have lost or changed their jobs. As you may have already deduced, it's businesses in the health industry that need to comply with this standard. This includes health insurers, healthcare cleaning services, or any healthcare providers that handle health information.

Non-compliance with this standard could lead to fines reaching millions of dollars.

Payment Card Industry Data Security Standard (PCI DSS)

The PCI-DSS standard was created in 2006 and it outlines necessary steps that businesses in the credit card industry need to take to ensure proper management and security of consumer data.

To prove compliance, any organization that processes payment cards, creates payment processing systems, or transmits credit card data is required to analyze its IT infrastructure and methods used for handling credit cards to identify any risk to consumer data.

The data security standard also forbids businesses from storing any sensitive information of credit card holders such as their Pin or social security number.

Organizations that process more than six million credit card transactions per year are required to perform an annual compliance audit to ensure that their systems, network, and procedures do not put sensitive customer data at risk and they can detect data breaches early.

Proof of non-compliance to the PCI-DSS standard could result in fines of up to $100,000.

Human resources

There are several types of compliance audits in HR audits but they all work towards ensuring a safe, fair, and friendly working environment.

To ensure compliance within your organization's HR department, aside from having a compliance checklist for HR, make sure you are implementing best practices in various HR functions such as the hiring process, onboarding of new employees, and conflict resolution at the workplace. You can also check our guide to HR complaince training.

Examples of best practices include having policies that promote equal and fair employment free from discrimination and properly classifying exempt and non-exempt jobs.

Internal Revenue Service (IRS)

An IRS compliance audit checks an organization's adherence to the set tax codes at the federal level.

Systems and Organizational Controls (SOC 2)

SOC 2 standard seeks to ensure the safety of sensitive customer data by requiring that companies implement strict policies, procedures, and security controls to protect this information.

The standard is particularly common among modern technology companies that store customer data in the cloud.

General Data Protection Regulation (GDPR)

The GDPR regulatory standard sets guidelines for the collection and processing of personal information from people who are members of the European Union. The standard applies to all companies operating in the European Union but even organizations outside the EU need to show compliance if they handle the data of EU citizens.

GDPR is among the compliance standards that businesses should take very seriously since proof of non-compliance could attract fines of up to 20 million euros or 4% of your company's total annual turnover. Whichever is higher.

Environment Protection Agency (EPA)

EPA is not a compliance regulation but rather a body that works with the federal and local agencies to ensure that organizations comply with environmental laws.

Apart from US-specific compliance programs, there also exist regulatory standards such as the International Organization for Standards (ISO) that apply globally. Similar to SOC 2 standard, the ISO standard provides guidelines for the risk management of people, processes, and technology.

For a company to be considered ISO compliant, it has to adhere to the various ISO standards such as the ISO 14000 that require that businesses cut on their waste and the ISO 9001 that requires that organizations maintain high management quality.

Compliance audit procedure

A compliance audit is initiated when the company contacts an external compliance auditor looking to enlist their services. An audit may also be commissioned by regulatory bodies when they want to investigate if a company is compliant. In this case, the regulatory body will send their compliance auditors or require that the company hire a specific independent third-party auditor.

Once the company and the auditor agree to proceed with the audit, sometimes the auditor may not have the relevant expertise to carry out the audit, the next step is to schedule a preliminary meeting to discuss the guidelines for the audit including the scope of the audit and what the auditor will require so that the organization can start preparing.

For some businesses, the compliance audit may be completed through the phone by having the relevant people fill out a compliance questionnaire and send over the necessary documents.

In other cases, the auditor will have to come to the business premises to study its internal controls and inspect infrastructure and the work environment while interviewing the relevant people.

Once the compliance audit is finished, the auditor then compiles their findings in a report. This report outlines areas where the company passed, areas where the company failed compliance, and then recommends steps to ensure compliance.

After the audit report has been completed and presented to the management, it is recommended that businesses begin corrective measures within 120 days. Waiting for too long could see the business move on to other matters only to be hit with non-compliance penalties the next time a compliance audit is conducted.

Not to worry though, most compliance auditors offer follow-up services to ensure that organizations have become fully compliant.

Check our compliance audit examples to help you develop a plan for an upcoming audit.

Challenges of a compliance audit

One of the main challenges of conducting a compliance audit is that it may prove non-compliance resulting in repercussions such as legal fines and reputational damage to your brand.

Organizations also dread compliance audits because if found non-compliant, then they have to implement the recommended remediation processes which may require additional audits and inspection by the relevant regulatory body.

Then there is the fact that adherence to the various regulatory guidelines is bound to cost the business money in terms of acquiring the required infrastructure and human expertise. This is especially true for companies in highly regulated industries such as finance and healthcare.

Additional challenges brought about by compliance audits

  • Determining how new compliance regulations will impact existing business models and the general direction of the business.
  • Ensuring that the company is always compliant as new regulations emerge.
  • Assembling the right internal team to ensure complete compliance with all the regulatory standards within an organization's industry.

Nevertheless, none of these challenges should be a reason not to conduct compliance audits. As we mentioned earlier, audits whether internal or external don't exist to punish you but rather to ensure a more efficient business that is conducive for everyone that interacts with it directly or indirectly.

Moreover, failure to undertake compliance audits could result in worse penalties such as lawsuits and suspension of business.

We can help your business ace compliance audits

We get it, keeping up with all the laws and regulations is no easy task. There is also the fact that the laws are usually presented in complex and boring ways that make it hard to fully understand what they imply.

But our compliance training software changes all of that. We make compliance training more interesting and memorable by incorporating videos and quizzes that keep you and your employees engaged.

Our software also makes it easy to track the progress of the training which will serve as evidence of compliance.

By getting trained on compliance standards you become informed on what is required to pass the compliance audit and you can consequently set up your business procedures in a compliant way.

Additional tips to ensure your business stays compliant

Keep a clear record of your company policies and procedures

Have a business handbook where you document all processes, procedures and internal controls that are critical to the success of your business. This way when it is time to prove compliance, you don't have to rush into documenting these procedures and processes as you may end up missing important processes or misrepresenting them in a way that proves non-compliance.

Perform a self-audit before a compliance audit

Before you subject your organization to an external compliance audit, you can commission an internal audit that checks for compliance. The audit will uncover deficiencies in regulatory compliance beforehand allowing you to correct them before they are discovered in an external compliance audit. An internal compliance officer can carry out the internal audit or you can hire an independent auditor to complete the task.

Keep yourself updated

New policies are always coming up. For instance, an area like data security where cybercriminals are always developing new attack methods may see new regulations come up frequently to address these new threats. This leaves you with the responsibility to keep up with new compliance requirements.

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