Audit Requirements in Third-Party Risk Management

Third-Party Risk Management (TPRM) audits are critical assessments conducted to evaluate and manage risks associated when your business opts to work with external partners and suppliers. Audit requirements in TPRM also serve to bolster your reputation as proof of due diligence, resulting in more reliable relationships and heightened stakeholder and consumer trust.

The primary risk when dealing with third-party vendors is related to mishandling sensitive consumer information or neglecting regulatory data compliance laws. Additional aspects of the TPRM risks include data and cyber security, compliance and operational processes.

At Captain Compliance, we help businesses create risk mitigation processes when selecting a third-party vendor and achieve data handling regulatory compliance. In this guide, we will explore the scope and planning of an audit and some practical insights on developing related risk mitigation strategies.

Key Takeaways

• Regular monitoring and reassessment are essential to address evolving risks and ensure ongoing compliance. This is especially true going into 2024 as we see a rapidly changing regulatory landscape, such as data handling, consumer rights compliance updates, and new laws being passed.

• It’s crucial for businesses to ensure that their third-party vendors are in compliance with relevant legal and industry-specific regulatory standards. This includes reviewing and verifying adherence to laws like the GDPR, HIPAA, or industry standards like PCI DSS, depending on the business sector.

• Implement Contractual Safeguards and Incident Response Plans: Clear audit rights, compliance clauses, and remediation protocols in contracts with third-party vendors are vital. Businesses should also have incident response plans in place to effectively address any breaches or non-compliance issues identified during the audit.

Audit Planning

The first step in audit planning within the realm of TPRM is to establish key audit objectives and determine areas for examination. This evaluation process involves determining which aspects of the third-party relationships are most critical to your business operations and carries the highest risk. 

This can be done with the help of risk assessment matrices, where you categorise risk based on how likely it is to occur and how disruptive its occurrence would be for your business. 

Such an audit should be comprehensive, including all vendor intersection points related to handling data along its entire life cycle. 

Knowing where your data originates from, where it gets deposited, and who has access to it are prerequisites to establishing an efficient compliance framework for the audit process. 

This way, you can discover which parts of its lifecycle data are most vulnerable, primarily when being handled by multiple third parties or reposited within cloud services or off-shore data warehouses.

Choosing the exact audit areas might vary based on your business type, location, and sector, but typically include areas such as data security, compliance with legal and regulatory requirements, operational resilience, financial stability, and the quality of services or products provided.

What Are The 8 Steps & Audit Requirements In TPRM?

Remember that not all third-party vendors are worth the same level of scrutiny based on the impact and importance they provide to your business operations. 

High-risk vendors should be prioritised based on aspects such as whether or not they handle classified or sensitive data and how critical they are to your business remaining afloat. 

These requirements typically include the following key components:

Step 1: Due Diligence and Risk Assessment:

• Conduct thorough initial and ongoing assessments of third-party vendors to evaluate their risk profiles.

• Assess the vendor’s financial stability, business reputation, legal and regulatory compliance, and operational resilience.

• Identify potential risks in areas like data security, privacy, and business continuity.

Step 2: Standard Compliance:

• Ensuring that third parties comply with industry standards and regulations relevant to the organisation’s sector, such as GDPR for data protection, HIPAA for healthcare, or PCI DSS for payment processing, etc. Read more on available PCI Compliance Services.

• Requiring third parties to have certifications or audits, such as ISO 27001 for information security management or SOC 2 for service organisation controls.

Step 3: Contractual Agreements:

• Include specific audit rights and compliance clauses in contracts with third-party vendors.

• Stipulate requirements for regular audits and reporting, as well as consequences for non-compliance.

Step 4: Regular Audits and Monitoring:

• Conduct regular audits of third-party operations, either internally or through external auditors.

• Ongoing monitoring of third-party performance and compliance through tools, reports, and KPIs.

Step 5: Data Security and Privacy:

• Verify that third parties have robust data security and privacy measures in place.

• Assess their ability to protect sensitive and confidential information.

Step 6: Business Continuity and Disaster Recovery:

• Evaluate the vendor’s business continuity and disaster recovery plans to ensure they align with the organisation’s requirements.

• Assess the third party’s ability to continue service delivery in the event of a disruption.

Step 7: Reporting and Documentation:

• Require comprehensive documentation and reporting from third parties on compliance and risk management activities.

• Maintain records of all audits, assessments, and remediation activities.

Step 8: Remediation and Action Plans:

• Implement procedures for addressing any identified issues or non-compliance during audits.

• Establish timelines and follow-up actions for vendors to remediate identified risks or gaps.

A great step before diving into drafting an audit procedure is having a clear Accountability Framework. If your business already has preset data protection standards, it can also drastically increase the speed of implementing an efficient audit process.

Now that you have a more precise overview of the leading audit requirements targeted in TPRM, let’s examine who is in charge of conducting such audits. 

Who Conducts Audits Commonly Used for TPRM?

In the context of regulatory compliance, TPRM audits mainly focus on ensuring that third-party vendors adhere to the relevant laws, regulations, and industry standards. This is crucial because non-compliance can lead to legal penalties, financial losses, and even hard-to-remedy reputational damage.

Examples include compliance with data protection regulations like GDPR in the European Union, HIPAA in the healthcare industry in the United States, or location-specific standards like the California Privacy Rights Act (CPRA).

• Internal Audit Teams: These teams, being part of your business, have a deep understanding of your internal policies, risk appetite, and compliance requirements. Their familiarity with specific operations enables them to effectively assess third-party risks to achieve corporate compliance.

• External Auditors or Consulting Firms: These external entities bring an independent perspective and may have specific expertise in certain industries or regulatory environments. Should you choose to outsource compliance, such external auditors can provide a more objective assessment of the third-party risks to compliance.

• Regulatory Bodies: For specific industries, regulatory agencies may conduct audits or require audits to be performed by accredited third-party auditors. These audits are focused explicitly on ensuring compliance with legal and regulatory standards pertinent to a specific industry.

• Third-Party Assurance Providers: Some businesses use third-party assurance services like SOC 1 and SOC 2 reports, which are conducted by certified public accountants (CPAs). These reports provide assurance on the controls at a service organisation, including those related to data security and privacy.

As there are so many ways to conduct one for your business, how does an audit process look like? 

A standard audit will typically review the third party’s policies, procedures, control environments, and operational practices to ensure they align with the necessary regulatory requirements. 

This might involve examining documentation, interviewing key personnel, and conducting on-site visits to verify that the third party’s practices are both practical and compliant.

Identifying & Performing TPRM Risk Assessments 

TPRM strategies should be developed in a way that they tackle specific areas that are deemed at the highest risk for your business operations. This process begins by identifying and analysing the various threat vectors that third-party relationships can introduce to your business. 

These risks can be diverse and multifaceted, encompassing areas such as:

1. Data Security Risks: Concerns about how third parties handle sensitive data, including consumer information, intellectual property, and trade secrets handed down from your business. This includes risks of data breaches, unauthorised access, and data mishandling.

2. Compliance Risks: Risks related to the third party’s adherence to legal and regulatory requirements, which could affect the organisation’s own compliance posture. This is especially crucial when you factor in the jurisdiction of area-specific consumer data laws like the CPRA.

3. Operational Risks: This includes the risk of disruption in operations due to the third party’s inability to deliver services or products as expected, impacting business continuity.

4. Reputational Risks: The potential for damage to the organisation’s reputation due to the actions or performance of the third party. Think in terms of second and third-order consequences, and not just the immediate fallout when a vendor’s reputation gets compromised.

5. Financial Risks: This involves the financial stability of the third party and the impact it could have on the organisation, including risks related to cost overruns, financial fraud, and contractual disputes.

Now that you have a better grasp on which venues of risk are the most prolific, you can examine your business’s response to each of them by using a comprehensive evaluation plan.

Evaluating Impact on Business Operations

Evaluating the overall impact of third-party data handling risks and threats on business operations is a critical aspect of risk assessment in the TPRM process. The average cost of a data breach as of 2023 is estimated at USD 4.45 million, and one of the primary venues for it was from a third-party vendor.

Correctly categorising the severity of the impact of a potential third-party infringement should not only factor in the fines and penalties but also the overall impact on consumer and stakeholder trust and other venues.

Here are a few key areas to assess when evaluating the impact of multi-faceted threats arising regarding TPRM:

• Severity of Impact: This process requires you to assess how severely each identified risk could affect your business. For instance, a data breach at a third-party vendor could have a severe impact if sensitive customer data is compromised.

• Probability of Occurrence: Estimating the likelihood of each risk materialising. This involves considering both external factors, such as the third party’s track record and industry standards, and internal factors, like the extent of engagement with the third party.

• Operational Dependencies: Understanding how closely your business’s operations are tied to the third party. The greater the dependency, the higher the potential impact of any disruption or issue.

• Mitigation Capabilities: Assessing your business’s ability to mitigate the impact of these risks, including existing controls, contingency plans, and response strategies.

Remember that, in the end, you can only mitigate risk to the best of your ability. In a perfect vacuum, it’s possible to account for most contingencies, but businesses always face many uncertainties. 

For this reason, having a contingency plan and quick incident handling response rates can mitigate or negate the great fallout of TPRM incitements such as sensitive consumer data theft.

What are Compliance Audits?

These audits are critical for verifying that the business operations, practices, and procedures align with the laws and regulations set by governmental bodies and regulatory agencies. 

Key aspects include:

1. In terms of review of Legal Compliance, Auditors examine whether the Third-Party Vendor or organisation complies with applicable laws, which may include tax laws, labour laws, environmental regulations, anti-corruption laws, and other statutory requirements. 

2. During the Examination of Data Handling Practices, it must be made explicitly clear if there are other intermediary vendors that handle the information and if it’s stored on servers or repositories in certain geographic locations.

3. Evaluation of Legal Documentation: This involves assessing legal document licenses for various processes, such as software used for data handling, certifications, permits, and records, to ensure they are up-to-date and in compliance with legal standards.

4. Preventative Rectification of Legal Risks: Compliance audits help identify areas where the third party might be at risk of legal non-compliance, providing an opportunity to rectify issues before they lead to legal repercussions or penalties. 

Overall, clear communication and on-site access are key when it comes to getting a good overview when vetting a third-party vendor. Read more on the importance of conducting a thorough Third-Party Vendor Risk Assessment. 

Closing

The word audit and the process of establishing an efficient audit process can be daunting, especially if you have dealt in this area of compliance audit for third parties. As businesses start to rely more and more on multiple vendors to conduct business in our globalised economy, a steep rise in risk factors occurs that you must start preparing for.

Meet Captain Compliance, where our lifelong mission is to help businesses become legally compliant when dealing with any data handling regulations and dealings with third-party vendors.

Contact us to discuss how your business can harness the power of third-party vendors whilst operating with as little risk as possible to avoid fines and non-compliance penalties. 

FAQs 

What is Third-Party Risk and Compliance?

Third-party risk and compliance refer to the management and oversight of risks associated with outsourcing services or operations to external organisations (third parties). 

This includes ensuring that these third parties adhere to relevant data handling laws, regulations, and best practices, particularly in areas like data security, legal compliance, operational reliability, and ethical conduct.

Read more on our guide to Third-Party Risk Assessment Checklist.

What is a Third-Party Compliance Tool?

A third-party compliance tool is a software or system designed to assist organisations in managing and monitoring the compliance of their third-party vendors with legal, regulatory, and security standards. 

These tools typically offer features like automated risk assessments, compliance tracking, reporting capabilities, and alerting mechanisms for potential compliance issues.

Discover the Top 12 Third-Party Risk Management Tools To Consider For Your Business

What are the 3 Phases of Compliance?

The three phases of compliance typically include:

1. Pre-Assessment: Identify applicable regulations and standards and evaluate the current compliance status.

2. Assessment and Implementation: Conduct thorough assessments to identify gaps, followed by implementing necessary policies, procedures, and controls to meet compliance requirements.

3. Monitoring and Review: Continuously monitor for compliance and review policies and procedures regularly to ensure ongoing adherence and to address any changes in regulations or operational circumstances.

Read more on How to Choose a Third-Party Risk Management Framework.

What is the Due Diligence Process for Third Parties?

The due diligence process for third parties involves identifying potential risks, gathering and analysing information about the third party’s compliance, financial stability, and operational capabilities, and then using this analysis to make informed decisions about engagement.

Read more on Data Protection Compliance Services: Which is Best?