Understanding Compliance Audit Exceptions

By Calli Schlientz, Director of Compliance, DataBank

What They Are, Why They Matter, and How to Respond 

Compliance audits are a critical component of organizational governance, designed to ensure that companies adhere to established policies, procedures, and regulatory requirements. However, even the most well-intentioned organizations may encounter situations where actual practices don’t align perfectly with documented standards.

What Is an Audit Exception?

A compliance audit exception is a finding or deviation and occurs when an auditor, either internal or third-party (external), identifies a discrepancy or deviation from defined policies or procedures or required control parameters. Ultimately, this means something went wrong and what is required is not what is actually happening.

There are four key areas of an exception:

1. Nonconformance: The activity or evidence that did not meet the defined policy or compliance requirements (control).
2. Impact: The exception represents some sort of risk, inefficiency, or security vulnerability.
3. Documentation: The exception is formally documented by the auditor within the audit/assessment report.
4. Remediation: The organization receiving the exception is required to address the issue and implement corrective actions. Typically, this is done in the form of a management response, root cause analysis, and corrective action plan. These actions could be taken to correct the error, mitigate (or partially reduce the risk), or accept the risk posed by the deviation.

The following are real-life examples that might trigger these types of exceptions:

• A terminated user account that wasn’t disabled within the documented service-level agreement (SLA) for that system.
• An accounting process to change an ACH recipient was completed without validation and second-party verification as required by documented policies or procedures.
• Configurations were not aligned with approved security baselines (e.g., firewall rules, system hardening, etc.).
• Fire inspections that weren’t conducted within the annual timeline requirement.

Why Do Audit Exceptions Matter?

Audit exceptions, or non-conformities, matter because they highlight potential or actual weaknesses or failures in processes, policies, or controls. If they are left uncorrected, they can have a significant impact on the organization, and potentially, its customers. Additionally, an exception or non-conformity outlines what is not being done: where data is not protected, or where access points are weakened and easily exploited (physically or logically).

Depending on severity, these exceptions can:

• Signal systemic process or training issues
• Affect audit opinions, resulting in a qualified or adverse opinion:
  • Qualified: Everything is fairly presented except for a specific area where there is a limitation or deviation (“Mostly Compliant”).
  • Adverse: There are issues so serious that the report does not fairly present the organization’s controls (“Non-Compliant”).
• Affect customer trust.
• Impact customers’ or DataBank’s regulatory standing.
• Lead to noncompliance penalties or overall audit failures.
• Contribute to security breaches.
• Result in financial loss due to incident cost, reputation damage, and customer turnover.
• Cause business disruptions (which, if exploited can result in costly incidents).

How Should Organizations Handle Audit Exceptions?

Audit exceptions should be addressed in a timely manner with a well-documented and transparent response. One best-practice response is to follow a few steps that are well defined and repeatable (not that you want to have to repeat them).

Step 1: Validate and respond to the exception

• Upon communication from the assessor, do not react immediately, but rather review it. Review internal data and documentation to validate the alleged exception.
• Document for management all the data gathered during the internal investigation as part of the validation.
• Draft a response for management’s review to respond to the alleged exception.

Step 2: Acknowledge the exception

• Document the exception and management’s response to the exception by including what control(s) or processes were involved, a description of the issue, the date of discovery, and impact to the organization or system (risk level, all affected systems).

Step 3: Perform a root cause analysis (RCA)

• Determine the reason why the control failed.
• Consider if the failure was a process gap, human error, lack of resources or training, technical failure, system failure, vendor, or supply chain issue, etc.
• Document the root cause and how it was determined.

Step 4: Create a corrective action plan (CAP)

• Define specific steps to correct the issue, including:
  • Identifying the owner – who is responsible for each part of the correction.
  • Establishing the timeline for each step of the resolution.
  • Creating specific milestones – key points within the correction that should be targeted and any dependencies for each of these.
  • Documenting any changes to policy, procedure, or systems that are a result of this exception and action plan.

TIP: Your CAP should be auditor-ready and clearly assign responsibility and deadlines.

Step 5: Communicate transparently

• Be honest with stakeholders. Customers and partners value remediation and accountability more than silence.

What to Look for in a Provider’s Audit Report

When reviewing a provider’s audit report, there will inevitably be several key red flags and confidence indicators within it. These should be brought up as part of each review, typically held annually, of all of your organization’s critical vendors. It is important to look for these, but if you have any questions, be sure to ask key vendors about exceptions and corrective action plans.

Where you’ll see exceptions documented:

• SOC 1/SOC 2 reports
• PCI-DSS ROC (Report on Compliance)
  • NOTE: Most providers will only give the Attestation of Compliance so ask for details related to areas of non-compliance
• ISO 27001 certificates and reports
• FedRAMP SAR (Security Assessment Report), RET (Risk Exposure Table), and POA&M (Plan of Action and Milestone) documents, which are accessible only through Connect.gov through the FedRAMP Access Request Process for those with a .mil or .gov email address.

Key evaluation factors:

• Severity: Does the exception affect sensitive data or privileged access?
• Frequency of numbers: Is it a one-time lapse, a single incident in a sample stack, or a recurring failure?
• Cumulative numbers: Is the report littered with exceptions, or are there just one or two?
• Remediation timeline: Is there a clear plan with ownership and due dates?
• Management response: Is the organization proactive in resolving and documenting the issue?
• Audit opinion: Is the audit opinion clean (unqualified) or qualified/adverse?

Ask this: “What actions has the provider taken since this exception was discovered?”

After collecting all of the data, your organization can make an informed decision on the level of risk that may impact your overall operations and whether or not a key vendor fits within your risk appetite.

Final Thoughts

Compliance audit exceptions are not just check-the-box findings as part of a larger compliance program. They are indicators of where systems, processes, or behaviors have deviated from expectations. Whether the result of human error, outdated procedures, or technical gaps, exceptions give organizations the opportunity to improve. When approached with transparency, accountability, and a structured response, exceptions can drive real progress toward a stronger security and compliance posture.

For both organizations and their partners, how exceptions are identified, managed, and resolved speaks volumes about operational maturity and risk awareness. Ultimately, a proactive approach to audit exceptions isn’t just about passing, it’s about building resilience, trust, and long-term success.