Why your business needs a third-party risk management audit program

As organizations increasingly rely on third parties to deliver elements of their service, third-party risk increases. As a result, it becomes increasingly important to know that your third-party risk management is effective. But how can you measure this? The answer: implement a third-party risk management audit program.

What Is Third-Party Risk?

Third-party risk is the risk of your organization suffering an adverse event due to actions taken (or not taken) by a third party you outsource operations to. Examples of third-party risk include:

• The software company you use to host client data suffers a breach
• The supplier that produces your product packaging has a fire, putting their factory out of commission
• Your cleaning contractor goes out of business, threatening your ability to keep your premises clean

Regulatory and governmental bodies are paying increasing attention to third-party risk, and businesses are recognizing the need for a diligent approach to mitigating the risks inherent in third-party relationships.

It’s therefore vital that you understand all the third-party risks your organization faces and implement an effective third-party risk management (TPRM) program to manage these risks.

This is particularly the case regarding IT and cyber risks. Here, the stakes are high, and the threats are becoming more prevalent. The World Economic Forum noted in June 2022, "Losses, disruptions and damages due to cyber attacks have become a major risk to governments and businesses alike.”

And with such risks “amplified significantly during times of conflict or instability”, against the background of war in Ukraine, your third-party risk management program needs to be watertight.

How do you know if this is the case? By putting in place a third-party risk management audit program.

What Is a Third-Party Risk Audit?

Audit is the essential third line of defense in your enterprise risk management strategy, and a third-party risk audit is a vital element of this.

Your third-party risk management program, sometimes called third-party management, is a proactive strategy to manage and mitigate third-party risk. Your third-party risk management audit program tests the effectiveness of this third-party risk management approach.

Why You Need a Third-Party Risk Audit Program

Conducting a third-party risk audit ensures you take a comprehensive, methodical approach to identifying, monitoring and mitigating the third-party risks you face.

The audit will assess how well your third-party risk management framework is working. Does it accurately assess the risks third parties bring across your entire operation? Is it able to immediately identify any shortfalls or breaches, and are there clear action plans to address them?

Your third-party risk assessment process should be responsible for reviewing potential suppliers during supplier selection. It should risk assess any new third party relationships before onboarding, oversee the contracting process to ensure risks are adequately addressed and set expectations around performance and communication.

Ongoing, your third-party risk assessment process will take care of risk monitoring and strategies to address any threats that arise via the use of third parties. Importantly, it will also include a process for contract termination, either as a result of the due date being reached, or because of any contract breach that requires contract termination. This latter scenario, in particular, can lead to an increase in third-party risk.

How To Implement a Third-Party Risk Audit Program

The third-party risk audit is designed to test how well this third-party risk assessment and your third-party risk management program overall work. In conducting the audit, you need to consider:

• Does your business have a comprehensive inventory of all third-party providers? An accurate record is needed to ensure all third-party risk is addressed.
• Is there a list of all the threats posed by these third parties? These might include financial risks, risks to your regulatory compliance, operational risk, strategic risk, financial risk and reputational risk; something that can result from failings in all risk categories.
• Are there sufficient, robust processes in place to monitor and mitigate the risks posed?
• Do the third parties you use meet all their obligations around regulatory compliance, ethical operations and data security processes?
• What measures are in place to deal swiftly with any issues that arise. If risks come to pass, does the risk management program include clear actions to tackle them swiftly?
• The roles of and your relationships with, all your third parties. Over time, some third-party suppliers become more like business partners or even akin to a part of your business.
• How does this impact your approach to third-party risk with these providers?

The audit must be impartial; therefore, a separate team must carry it out to the one responsible for the third-party risk management program.

Super-charge Your Third-Party Risk Management

However good your risk management strategy is, a third-party risk management audit program is an essential tool in your box of checks and balances.

But you can make your auditors’ life easier by making your third-party risk management as robust as possible. Particularly when it comes to cyber-risk, this is an unending challenge, as the threats become more frequent, more inventive and more damaging.

Diligent’s whitepaper, Technology and Risk Management: A Checklist for Successfully Managing IT Risk & Third-Party Risk is a detailed roadmap for IT and third-party risk management, with insights into the ways organizations can protect themselves. Download a copy to learn how your organization can enhance its third-party risk management today.