Evaluating the Effectiveness of Compliance Auditing in Mitigating Regulatory Risks in Financial Institutions

Posted: Jul 28, 2023

• Gianna Alvarez
• Milo Kim
• Parker Foster

Abstract

This research presents a novel framework for evaluating the effectiveness of compliance auditing in mitigating regulatory risks within financial institutions, employing a hybrid methodology that combines computational linguistics, network analysis, and predictive modeling. Traditional compliance auditing approaches have largely focused on retrospective analysis and rule-based checking, which often fail to capture the dynamic and interconnected nature of modern regulatory risks. Our study introduces the Regulatory Risk Interdependence Mapping (RRIM) framework, which models regulatory requirements as interconnected nodes in a complex network and analyzes how compliance failures propagate through this network. We developed a specialized natural language processing algorithm to extract semantic relationships from regulatory documents and map them to operational processes within financial institutions. The methodology was validated using data from 45 financial institutions across three regulatory jurisdictions, comprising over 12,000 audit findings and 3.5 million compliance-related data points collected between 2018 and 2023. Our results demonstrate that traditional binary compliance assessments significantly underestimate systemic risk exposure, with our framework identifying 47