What does 'compliance risk' refer to?

Compliance risk specifically refers to the potential for damage that arises when an organization fails to adhere to applicable laws, regulations, standards, or guidelines. This includes legal penalties, financial losses, and reputational harm that can result from violations. Organizations must ensure compliance to mitigate these risks, as non-compliance can lead to severe consequences, including fines, legal action, and loss of customer trust.

In contrast, other options address different types of risks. For instance, financial loss due to market fluctuations pertains to market risk, whereas operational failures relate to operational risk. Employee misconduct is associated with behavioral or conduct risk, which also differs from compliance risk as it focuses more on internal ethical standards and policies rather than external legal requirements.