Compensating Controls

The ideal control is not always possible. A small finance team may not have enough people to separate every incompatible duty. A legacy system may not support a required security setting. A business need may require an exception to a policy. In these cases, organizations use compensating controls: other measures that address the same risk in a different way. If one person must both enter and approve certain transactions, for example, a manager might review a report of all such transactions each week. The risk is still managed, even though the preferred control is missing. The key is that the alternative addresses the same risk with similar reliability.

The term is used in internal control, SOX compliance and audit, where compensating controls can reduce the severity of a control deficiency. It also has a specific meaning in the PCI DSS payment card security standard, which allows compensating controls when an entity cannot meet a requirement as written, provided they meet the intent and rigor of the original requirement and are documented. For finance, security, compliance and audit teams, compensating controls are a practical way to manage risk when the standard approach does not fit.

Definition of Compensating Controls

Compensating controls are controls that achieve the objective of another control, or reduce the risk that control was meant to address, when that control is absent, impractical or ineffective, and that provide a level of protection comparable to the original.

They are a common response when segregation of duties is not possible, are evaluated during control testing and are part of the wider set of internal controls.

When Compensating Controls Are Used

Limited staff can make full segregation of duties impossible, especially in small teams or remote locations. This is one of the most common reasons for using compensating controls.

Technical limitations, such as legacy systems that cannot enforce certain settings, can prevent the standard control from being implemented. Replacing the system may be planned, but not possible immediately.

Business needs may require a policy exception, such as an employee needing broader access for a specific project.

Control deficiencies found in testing may be offset by other controls while the primary control is being fixed.

Cost can also be a factor when the standard control would be disproportionately expensive for the risk involved.

Characteristics of Effective Compensating Controls

They address the same risk as the original control, not a different or related risk. A control over a related risk does not compensate for the missing one.

They provide comparable assurance, meaning they would catch or prevent problems as reliably as the original control.

They are documented, including why the primary control is not used, how the compensating control works and who performs it.

They are tested, since a compensating control that does not operate effectively provides no protection. Testing should confirm both that the control is performed and that it would catch real problems.

Under PCI DSS, they must also go beyond other requirements, rather than relying on controls that are already required anyway.

Importance of Compensating Controls in Risk and Compliance

Compensating controls keep risk managed when ideal controls are not possible. Without them, organizations would face a choice between unrealistic controls and unmanaged risk. They allow risk management to adapt to real constraints.

They can reduce the severity of deficiencies. Auditors consider compensating controls when evaluating whether a control deficiency is significant or a material weakness.

They also support practical compliance. Frameworks such as PCI DSS explicitly allow them, giving organizations flexibility to meet requirements in ways that fit their environment.

Compensating Controls and Financial Management

Compensating controls can be far cheaper than hiring extra staff or replacing systems solely to meet a control requirement.

Detective compensating controls, such as management reviews of exception reports, often add only a few hours of work each month.

Relying on compensating controls for too long can become costly if they are manual and labor-intensive, so they should be reviewed against permanent fixes.

Weak or undocumented compensating controls can lead to audit findings, increasing audit and remediation costs.

Common Challenges

Compensating controls are sometimes claimed without real evidence that they address the same risk. Auditors will look closely at whether the claimed control would actually catch the problem.

Management reviews used as compensating controls can become superficial sign-offs that would not catch errors. Reviews should leave evidence of what was examined and what questions were asked.

Temporary compensating controls can become permanent without anyone deciding that they should. Setting an expiry date for each one prompts a decision.