How to Build and Automate Compliance Testing Programs

Had a few too many negative findings on that last audit for your — and your board’s — comfort? Chances are that could have been avoided with an effective compliance testing program.

Compliance testing is a vital tool for any organization that wants to make sure it’s always audit-ready. Robust compliance testing ensures that systems and controls are operating as intended and identifies vulnerabilities in existing risk management controls so they can be addressed before the auditors find them.

Neglecting compliance testing or delaying the remediation of findings can expose your organization to compliance risk and potential financial, operational, and legal problems. 

In this article, we’ll explore the concept of compliance testing, why it’s so important, and how it effectively reduces residual risk exposure.

What is compliance testing?

Compliance testing evaluates how well a company adheres to specific standards, regulations, and requirements. Testing different systems, controls, processes, and products helps gauge whether they meet established criteria,identifies where they deviate from desired standards, determines the source of those departures, and mitigates any associated risks. By proactively assessing compliance, companies can address non-compliant practices and vulnerabilities before they lead to negative consequences and financial impact.

While most compliance testing generally follows the same basic principles, it looks a bit different at every organization. That’s because an organization’s compliance requirements vary based on industry, company size, operational nuances, and the specific standards or regulations that apply to the company. Regardless, effective compliance testing requires an established and repeatable process to minimize a company's risk.

What is compliance risk?

Compliance risk occurs when companies fail to follow industry laws, regulations, internal policies, or best practices. Compliance risk opens companies up to potential legal action, monetary fines, or reputational damage.

To mitigate this risk, companies can deploy compliance testing to identify and correct any issues before they become costly errors.

Types of compliance testing

Compliance testing takes various forms based on the company’s objectives and the stakeholders involved. The multiple forms of compliance testing generally fall within four categories: internal, external, mandatory, and voluntary. 

Internal

Internal compliance testing checks whether products, services, policies, and processes meet the company's standards and requirements. Internal stakeholders like the internal audit function do this type of testing, which involves assessing internal controls and ensuring they align with the company's desired outcomes. 

External

External compliance testing involves verifying whether products, services, and processes meet regulatory requirements set by external agencies. External parties or regulatory bodies typically determine compliance with government regulations, industry standards, and other external guidelines. Failure to meet standards can result in monetary fines, legal action, or even loss of license. 

Mandatory

Mandatory compliance testing occurs between partner organizations to ensure pre-agreed standards for products and services are met. This type of testing involves two or more participating organizations and is essential for maintaining strong relationships and meeting contractual obligations. Failure to meet standards in mandatory testing could lead to contractual fines, contract termination, or a lawsuit.

Voluntary

Voluntary compliance testing satisfies compliance testing requirements set by accrediting agencies and organizations. Examples of these organizations include The Joint Commission on Accreditation of Healthcare Organizations, Service Organization Controls (SOC), the International Organization for Standardization (ISO), and the National Institute of Standards and Technology (NIST). This includes obtaining certifications or accreditations demonstrating the organization's commitment to meeting specific industry or regulatory standards. 

Obtaining such certifications can be a good way to quickly demonstrate compliance with various standards when evaluating third-party relationships or being evaluated by a potential customer or investor. Compliance testing makes it more likely that you’ll be able to meet these standards.

Why is compliance testing necessary at every organization?

Compliance testing should be a priority for every organization. It can help you avoid costly fines and penalties and ensure that your organization is as secure as possible. That helps avoid downtime and reassure customers, clients, investors, and other stakeholders.

The benefits of having effective compliance testing in place are myriad:

1. It helps organizations mitigate compliance risk by avoiding the potential violation of laws, regulations, industry standards, or internal policies. Organizations can identify and rectify non-compliant practices by conducting compliance testing, reducing the likelihood of legal issues, penalties, and reputational damage.
2. It ensures the safety of employees, consumers, and end-users. Ensuring that products and services meet quality standards minimizes the risk to users. Compliance testing proactively identifies defects, hazards, or non-compliance issues that could compromise consumer safety and satisfaction and contribute to an unsafe work environment.
3. It makes it easier for organizations to meet legal and regulatory requirements. Different industries are subject to laws and regulations regarding data protection, financial reporting, environmental protection, workplace safety, and more. Compliance testing ensures companies adhere to relevant requirements, minimizing the potential for legal consequences and financial losses.
4. It enables organizations to demonstrate conformance to industry standards and best practices. Adhering to recognized standards enhances an organization's credibility, competitiveness, and trustworthiness among stakeholders and customers.

How effective compliance testing can reduce residual risk exposure

Compliance testing is for more than just making sure your organization is audit-ready. It's an essential process ensuring your internal and external controls work. More importantly, it can also help reduce the chances of an adverse risk event due to residual risk exposure.

Every operation has an inherent level of risk, no matter how many controls or mitigation measures you put in place to reduce it. This is known as residual risk. Regularly verifying that controls are working effectively reduces the chances of experiencing risk events due to residual risks and ensures residual risk stays within the company’s risk appetite. Compliance testing provides insights into potential vulnerabilities, allowing organizations to proactively mitigate risks and enhance overall operational resilience.

How to build an effective compliance testing program

Building a proper compliance testing program requires careful planning and execution, but introducing effective compliance testing by leveraging modern GRC technology enhances your overall operational resilience. Here’s how to do it:

Identify your compliance requirements

Since compliance testing is all about making sure you’re adhering to the relevant laws, regulations, industry standards, and internal policies for your company’s operations, the first step in building a good compliance testing program is making sure you actually understand them all. 

Capturing a comprehensive list of your entire regulatory and compliance landscape will require cross-functional collaboration, interdepartmental input, and in some cases, a subject matter expert. Once your list is finalized, map each requirement to the business and operating functions that are most affected by it and communicate the potential risks and impact of failing to comply with it.

Develop a compliance testing methodology to establish how to test requirements and their associated controls. A clearly defined methodology can assist with communicating the purpose of testing, getting buy-in from relevant parties, and reporting results.

Note: Centralizing the list of relevant standards and the compliance testing methodology and frequency in a shareable, read-only requirements library will ensure a thorough, repeatable, and automated compliance testing process. Modern GRC platforms typically support this type of automation and reporting.

Collect compliance data and evidence

Now, you’ll need to gather the fuel for your compliance tests, and that means collecting data and evidence.

For each standard or regulation, identify the information and data you’ll need to test the effectiveness of the controls associated with it for your compliance risk assessment. Preferably, centralize all of this information in a single place, and automate updating it to keep everything as accurate as possible at all times.

Analyze data or submit to external auditors

Depending on the purpose and scope of the testing, thoroughly analyze the collected data to identify any non-compliance issues or areas for improvement.

Alternatively, organizations may involve external auditors who can conduct independent assessments to identify issues or control gaps. Auditors should have expertise in the standards and regulations being tested and experience within the industry. 

Conduct the audit

Use the data analysis results to perform an audit based on your program's compliance requirements and testing methodologies.

Review the report and develop action plans

Review the audit report, identify gaps or areas of non-compliance, and develop action plans to address them. Whether analysis is internal or external, determine the root cause of each issue and which department will be responsible for remediating these gaps. Assign responsibilities to the relevant division and personnel and set timelines for implementing corrective measures.

If phishing simulation data shows cause for concern in your audit, for instance, you’ll know that your cybersecurity training may need to be improved. That means presenting the results to your cybersecurity team and revising the training programs. By the time external auditors roll through, you’ll have your cybersecurity training program in top shape.

Note: A robust GRC system can help implement an issues management process to systematically identify, record, assign, and remediate gaps.

Automate to continuously monitor compliance

Using automation tools to continuously monitor compliance ensures adequate oversight of controls at all times and makes compliance testing and auditing much easier. These tools provide real-time insights and alerts, and having continuous monitoring in place also evaluates the effectiveness of remediation efforts on an ongoing basis, so you’ll always be improving your controls and audit-ready.

Common standards and frameworks for compliance testing

Various compliance testing frameworks and standards can guide organizations in their testing efforts. Some well-known examples include ISO 27001 for information security management, PCI DSS for payment card industry compliance, HIPAA for healthcare data protection, NIST for cyber risk management, and the SOC 1 and 2 (Service Organization Control) standards for service providers. Companies should consider adopting the compliance testing standards relevant to their industry and organizational maturity.

What to look for in an external auditor

When selecting an external compliance testing auditor for compliance testing, consider their expertise, experience, reputation, and independence. Verify whether they possess the needed certifications and accreditations and thoroughly understand the industry and its specific compliance requirements. Additionally, verify their ability to provide unbiased assessments and professional recommendations.

Using modern GRC technology to automate and streamline compliance testing

Modern GRC technology like LogicGate Risk Cloud allows organizations to improve, automate, and streamline compliance testing processes. These tools provide a centralized platform for managing compliance requirements, automating testing procedures, and generating comprehensive reports. 

Risk Cloud's customizable Regulatory Compliance and Controls Compliance Solutions help companies implement a robust compliance testing program that enhances efficiency, reduces manual efforts, and ensures continuous compliance monitoring. Schedule your demo today.