A compliance review is a systematic assessment used by organizations to examine their operations, policies, and procedures against established requirements. This proactive measure ensures the organization operates within acceptable boundaries of governance, particularly concerning legal and ethical frameworks. The process provides management and stakeholders with an objective view of the organization’s adherence to its obligations in a regulated business landscape.
Defining the Compliance Review
A compliance review is a formal, structured evaluation designed to verify that an organization adheres to a specific set of rules, including laws, industry standards, or internal guidelines. This process involves a detailed examination of documentation, controls, and operational practices to identify any gaps or weaknesses. The review serves as an assurance mechanism, giving leadership confidence that the company is meeting its mandates.
This assessment differs from a traditional financial audit, which focuses primarily on the accuracy of financial statements. A compliance review centers on adherence to processes and controls, encompassing non-financial areas like data security protocols, environmental reporting, and labor practices.
Why Are Compliance Reviews Necessary?
Organizations conduct these assessments primarily to mitigate legal and financial risks arising from non-adherence to rules. Failure to comply with established laws can result in steep financial penalties, such as those levied by the Securities and Exchange Commission (SEC). Regular reviews help prevent costly violations by identifying issues before they draw the attention of regulators.
Protecting the corporate reputation is another motivation, as public confidence can be damaged by compliance failures. Reviews also help identify operational inefficiencies caused by outdated controls, allowing organizations to streamline workflows and demonstrate due diligence to stakeholders.
Key Areas of Compliance
Regulatory Compliance
This area involves adherence to laws, statutes, and governmental regulations enforced by federal, state, and international agencies. Examples include the Sarbanes-Oxley (SOX) Act, which mandates financial record-keeping and reporting standards for public companies. Data privacy laws, such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), require rigorous review of data handling practices. Labor laws, environmental regulations, and consumer protection mandates are additional governmental rules that must be continually monitored.
Industry Standards Compliance
This type of compliance focuses on non-governmental, sector-specific rules, standards, and best practices developed by industry consortiums or professional bodies. Organizations processing credit card transactions must comply with the Payment Card Industry Data Security Standard (PCI-DSS) to protect cardholder data. Healthcare entities must adhere to the Health Insurance Portability and Accountability Act (HIPAA) standards for securing patient health information. Compliance with International Organization for Standardization (ISO) certifications, such as ISO 27001, demonstrates a commitment to standardized quality and security frameworks.
Internal Policy Compliance
Internal policy compliance reviews ensure that employees and departments follow the specific rules and codes of conduct established by the organization itself. These rules manage internal risk, reinforce company culture, and ensure consistency across operations. Reviews include adherence to the employee ethics code, IT security protocols, and internal financial controls like expense reporting rules. The goal is to verify that documented policies are consistently applied in day-to-day operations.
The Stages of a Compliance Review
The process begins with the Scoping and Planning phase, where the review’s objectives and boundaries are clearly defined. This involves determining which specific regulations, departments, and time periods will be examined to ensure the review is targeted. Key stakeholders and subject matter experts are identified during this initial stage to inform the scope and confirm resource availability.
The next stage is Data Collection and Testing, which is the investigative core of the review. The team gathers evidence by reviewing policies, procedures, contracts, and supporting documentation. They conduct interviews with personnel to understand how controls are executed in practice. The review team then performs control testing, sampling transactions or activities to verify that stated procedures are operating effectively.
Evidence is processed during the Analysis and Reporting stage, where the review team identifies gaps, control weaknesses, or instances of non-compliance. Findings are categorized by risk level and root cause to provide context for the final report. The report details non-compliant areas and provides actionable recommendations for improvement. These findings are then presented to senior management and the board.
The final stage is Follow-up and Monitoring, which ensures that identified issues are fully addressed. The organization creates a formal plan to implement the recommended corrective actions, assigning ownership and deadlines for each item. The compliance function monitors the execution of these remediation steps to verify that gaps are permanently closed and controls remain effective.
Internal vs. External Reviews
Organizations must decide whether to conduct a review using internal resources or engage a third-party specialist. An internal review is performed by the organization’s own compliance department, leveraging institutional knowledge, which often results in cost savings and allows for more frequent monitoring.
Engaging a third party for an external review provides objectivity and impartiality. External reviewers bring specialized expertise and a fresh perspective on industry best practices. This external validation is often required for certain mandates or preferred by stakeholders, though the trade-off is higher cost and initial lack of familiarity with the company’s operations.
Outcomes and Remediation
The immediate outcome of a compliance review is a comprehensive report detailing the scope, findings, and recommendations. This report serves as the foundation for developing the Corrective Action Plan (CAP), a formal document that assigns responsibility and sets timelines for addressing every identified deficiency.
Remediation requires the allocation of resources, including budget, personnel, and technology, to implement necessary changes. Once the CAP is executed, the organization establishes ongoing monitoring mechanisms to ensure identified gaps do not resurface. This continuous oversight maintains a robust compliance posture and prevents future instances of non-adherence.