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The Business Manager's Guide to Preparing for a Compliance Audit

Are you preparing for a compliance audit? As you know, compliance is critical for all businesses, no matter the industry. Unfortunately, when compliance infractions are discovered, costly penalties may incur. Moreover, nonconformance issues can result in serious damage to your organization's reputation.

According to one recent survey, financial organizations have paid up to $42 billion in fees for non-compliance infractions. Additionally, 73% of compliance and risk managers admitted that they were not aware that non-compliance penalties could amount to more than $5 million. With so much at stake, what procedures must your financial organization follow to adequately prepare for its next compliance audit?

How to Prepare for a Compliance Audit: 5 Actionable Tips

Since the late 1960s, federal banking regulatory agencies have instituted an array of regulatory requirements for financial organizations. These laws and regulations govern every customer-related banking transaction.

In most cases, banks have responded to these existing as well as new regulations with varying effectiveness. Today, all banks have a compliance function. The focus of the compliance function has been to enforce policies that ensure compliance with various consumer protection laws and regulations.

However, partly due to unprecedented levels of new and evolving laws and regulations, compliance has become a sticking point for financial organizations. Consequently, compliance officers face serious challenges keeping up with regulatory changes and ensuring that changes are implemented across the organization.

In this scenario, compliance audits can expose serious inconsistencies within the financial organization, resulting in major financial and/or operational setbacks. Fortunately, there are some simple procedures that your organization can act on right now to orchestrate and prepare for a compliance audit:

1. Perform Self-Audit

When a compliance issue comes to light, the first question is often, "who's at fault?" This kind of finger-pointing is a waste of valuable time and resources. Instead, invest in more productive and profitable processes for your financial organization.

The most effective way to ensure a successful compliance audit or regulatory exam and avoid major surprises is to conduct a self-audit well in advance of the compliance audit. A good starting point in your self-assessment is the regulatory requirements applicable to the area(s) under scrutiny and internal policies and procedures developed to reasonably comply with applicable laws and regulations. For better or worse, compliance has quickly become a primary driver of risk management. So, these are a good place to start. In your self-assessment, identify and document issues found, fix what you can in the short run, and develop action plans for those that would take longer. Be prepared to share and discuss these self-identified issues with your auditor or examiner. This demonstrates that you're proactive in managing your risk. You could appoint an independent contractor to help you identify and document compliance inconsistencies and action plans to mitigate significant issues.

As a trusted advisory partner and managed service provider, Compliance Core offers scalable, data-driven, end-to-end compliance services and software to help organizations monitor and manage regulatory change and mitigate infractions. Our compliance methodology prioritizes the very best processes and systems to strengthen compliance programs prior to regulatory audits and reviews.

RELATED: The Fundamentals of Process, Risk, and Controls Inventory

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2. Ensure You Have an Audit Trail

Most compliance reviews, whether conducted by internal audit or by regulators, fail because of lack of documentation. Demonstrating compliance with regulatory obligations requires evidence that you did what you committed to do. Documentation of user actions, including any record of changes to databases, files, applications, or operational procedures, is a key factor in passing a compliance audit. You must be able to track user's actions and have the documentation to support it.

According to SmartSheet, audit trails are the "manual/electronic records that chronologically catalog events or procedures to provide support documentation and history that is used to authenticate security and operational actions, or mitigate challenges." These records provide proof of compliance and operational integrity.

In most cases, elements of the audit trail include the following:

  • Original source document
  • Transaction/activity history
  • The date/time the activity occurred
  • Ability to reconstruct transaction/activity

RELATED: The 5 Best Regulatory Compliance Software for Growing Enterprises

3. Monitor Third-Party Activity

In some cases, organizations outsource certain functions or processes to vendors. In these instances, keep in mind that even though the function is outsourced, your organization still owns the risk and is accountable for managing the risk presented by the third party relationship. For this reason, your organization must institute appropriate third party monitoring controls designed to specifically mitigate process execution risk and risk of regulatory non-compliance and to provide effective ongoing oversight of activities performed by the vendor on behalf of your organization. Make sure your monitoring and oversight activities are properly documented, including any issues noted.

Depending on the maturity of your business, third-party vendors can play a key role in the success of your organization. Don't let their compliance oversights jeopardize your business.

RELATED: 4 Steps to Find the Best Regulatory Compliance Software

4. Monitor Compliance Events Within Your Industry

As a best practice, keep an eye on compliance events in your industry. Compliance issues at another company within your industry may prompt internal auditors or regulators to look at your processes for similar inconsistencies. Use major compliance events as a learning opportunity. When an event does occur, ask yourself the following:

  • What happened?
  • How did it happen?
  • What can your organization do to avoid a similar compliance infraction?

RELATED: How to Build a Risk Management Framework

5. Train Relevant Personnel on Compliance Policies

Finally, train all relevant personnel on compliance policies and procedures. Use this training as an opportunity to align employees, management teams, and board members with major regulatory compliance requirements. Unfortunately, routine compliance training is the biggest shortcoming of most major financial organizations. Simple improvements towards company-compliance awareness can dramatically improve your organization's overall compliance and risk management posture.

Compliance Core Ensures Compliance Audit Preparation

Today, many businesses and organizations choose to outsource major aspects of their compliance and risk management efforts. Compliance Core's unique services are designed to simplify compliance and risk management while maintaining operational efficiency and effectiveness. We've seen first-hand how organizations run compliance audits and regulatory exams, and, over the years, we've helped industry-leading businesses and organizations to streamline and transform processes to comply with regulatory obligations.

To help you get started, we've designed a simple self-assessment: How Mature is Your Risk Management and Compliance Program? Our self-assessment will show you how you are performing against risk management and compliance best practices. Use these findings to identify gaps and take your organization's compliance and risk management programs to the next level. New call-to-action

Published by Jacqueline Maduneme October 8, 2020