What Is Compliance Monitoring and Why Is It Important?

Michael Nyhuis

As regulatory compliance obligations continue to multiply, achieving a clear picture of your performance around good governance and compliance is more important than ever.

Organizations have responded to this challenge by implementing increasingly stringent compliance monitoring programs. Larger and more complex businesses and smaller, simpler ones face issues ensuring they meet their obligations across all their entities.

Here we look at what compliance monitoring is, and examine why it's so important in today's legislation-heavy business landscape.

 

What Is Compliance Monitoring?

Compliance monitoring refers to the quality assurance tests organizations do to check how well their business operations meet their regulatory and internal process obligations.

This need to monitor compliance performance is often a regulatory requirement; regulators like the UK’s Financial Conduct Authority or the International Organization for Standardization require firms applying for approval to operate to detail their compliance monitoring plans, for instance. Ongoing, the robustness of organizations’ monitoring programs can form a central tenet of compliance with the rules that govern them.

Typically, a dedicated compliance team will be responsible for tracking compliance and monitoring day-to-day activities, using relevant compliance tools, making everyday activities easier to control. This is achieved with an internal audit also providing additional checks and rigor, particularly in larger or more complex entities.

What Does Internal Monitoring of Compliance Ensure? 

Internal monitoring of compliance ensures that your staff follows company policies and procedures. While auditing verifies that the necessary controls are in place, it’s through monitoring that you can determine whether or not staff are following those controls in their daily activities. This helps organizations guard against liability, data breaches, and costly regulatory fines like HIPAA penalties

The compliance monitoring program’s extensiveness depends on the organization’s size. A smaller company might rely on a single compliance person. In contrast, larger organizations might have an entire compliance and audit team responsible for establishing the compliance audit strategy and continuous monitoring. In both cases, policy management technology can help ensure that policy administration is streamlined and verifiable for easy, accurate reporting. 

 

What Should a Compliance Monitoring Plan Look Like?

There are several considerations when designing a compliance monitoring plan. Your compliance report:

  • Should be comprehensive — it needs to cover all of the compliance risks your organization’s various departments face, along with the mitigating steps you put in place to address them
  • Needs to be proportionate to the size, complexity and nature of your business, and the nature and number of risks it faces

The compliance report should describe the following:

  • The testing program
  • Who will be responsible for carrying it out
  • How often testing will take place
  • How you will record and evidence the testing conducted

5 Steps to Create a Compliance Monitoring Program

Compliance monitoring programs should ultimately achieve two things: establish auditing processes and ensure regulatory compliance. Compliance monitoring can reduce liability and fines associated with data breaches when created effectively. 

To create a compliance program, you should:

  1. Conduct a Compliance Audit: Before creating a plan, you must comprehensively review the risks faced across your entire organization. Gaining a clear and complete picture of your risk profile will provide your monitoring program with a solid foundation and ensure there are no gaps in the areas you assess.
  2. Identify Areas of Greatest Risk: As well as being far-reaching, your compliance monitoring plan should be weighted to focus on the areas that pose the most significant risk. In this way, resources — whether financial or human — target the most crucial areas.
  3. Align Compliance Reporting: Your compliance reporting needs to support and enable your regulatory compliance strategy to ensure that the areas where you face the most risk receive the most attention.
  4. Monitor the Results: Once the plan is in place, you can start to measure the effectiveness of your current compliance approaches to discover the importance of compliance monitoring. Considerations include the methodology you will use and how you will make the right people accountable for each risk. 
  5. Enlist Subject Matter Experts: Any areas that need specialist knowledge will require specific attention from appropriate internal experts. Are some risks related or interdependent? In these areas, can you produce collective reports and action plans that maximize efficiency and leverage synergies?

Compliance Monitoring and Internal Audit

Internal audit will often take over where the compliance team left off. While the compliance or risk team will conduct the first round of auditing, this usually informs a second round led by internal audit. Sometimes, this second aspect won’t happen at all, either because the organization is too small to have its own internal audit department or because the results of the first round of testing have given sufficient assurance.

Increasingly, as the whole area of regulation and compliance grows more complex and the nature of business includes an extensive network of third — and even fourth — parties, organizations are finding that a degree of automation can make monitoring more robust. The benefits of compliance solutions are well-documented, but when it comes to monitoring, they can be particularly helpful, automatically creating audit-ready reporting and clear dashboards that help all stakeholders to understand the current picture.

 

Elements of a Compliance Monitoring System

There are different ways to monitor compliance. When applied together, each review makes for a more cohesive compliance monitoring system that proactively identifies risks. Include each of the following in your organization’s compliance best practices.

Operational and Performance Reviews

Documenting your policies and procedures is one thing. But that doesn’t mean your employees follow these processes or are as effective as you think. Though performance reviews don’t fall directly under the compliance team’s oversight, an employee can and should be evaluated based on their level of compliance. 

Performance reviews should occur at set intervals and follow a prescribed measurement approach related to each employee’s duties. These reviews should also help evaluate communication or operational issues, HR procedures and anything else that might get in the way of compliance. 

Policy Reviews

The business landscape changes quickly. Regulations evolve, as do technologies and ways of working. That means an effective and compliant policy one year might be outdated the next. Effective compliance systems should review the organization’s policies and procedures at least once a year. 

Compliance teams can divide and conquer how they review policies and procedures by prioritizing the areas of most significant risk first, so long as all policies are reviewed within the year. Extensive organizational changes or new laws impacting the organization should also trigger a policy review. 

 

Why Is Compliance Monitoring Important?

At a basic level, monitoring ensures that your organization’s operations are happening and working as they should. More broadly, it can identify any areas of noncompliance, whether with internal policies or external regulations — and whether accidental or intentional. But compliance monitoring can have positive impacts across the organization. 

These include: 

  • Proves Compliant Policies and Procedures: By documenting the existence of a process, monitoring can help an organization to evidence that correct procedures are the norm and that they are usually robust in enforcing them. This helps to mitigate the negative impact should any instances of noncompliance slip through the net.
  • Improves Performance: To improve performance — whether in compliance or any other area of operations — monitoring is an essential first step. Understanding where you stand is the vital starting point for improvement. You can only be confident that you’ve identified gaps in your approach when you have developed a full scorecard and conducted rigorous checks against it. No wonder, then, that monitoring your current approach is one of the recognized five stages of an effective compliance program.
  • Achieves Regulatory Compliance: In many cases — as with the UK’s FCA, as mentioned above — demonstrating that you have a robust and comprehensive compliance monitoring program is integral to either being given or retaining regulated status.
  • Creates More Thorough Documentation: The detailed audit trails created as a matter of course by automated compliance solutions can be a huge help here, reducing the risks and potential for slip-ups when collating records manually, as well as increasing efficiency by reducing the paperwork and admin your compliance, risk and audit teams have to tackle.

 

Improve Monitoring With Compliance Monitoring Software

Compliance touches on all areas of corporate life; even organizations that aren’t regulated by their own sector will need to comply with governmental or other industry-wide rules. That’s why, no matter how large or skilled your compliance team is, they can’t always keep an eye on every policy or department. But what if they could? 

Compliance monitoring software allows teams to implement effective and continuously monitored control frameworks that not only remediate issues but also demonstrate compliance for stakeholders. Good governance isn’t optional, neither is compliance; compliance software can be invaluable in helping to smooth the path to more robust reporting and, in turn, a more compliant operation.

Find out how Regulatory Compliance Management and Policy Management from Diligent can automate processes integral to an effective compliance monitoring program.

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Michael Nyhuis
Michael Nyhuis is the former Director of Audit & Compliance at Diligent and a modern governance expert with over 25 years of experience.