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 recognize the need for a diligent approach to mitigating the risks inherent in third-party relationships.

Therefore, you must understand all your organization’s third-party risks 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 the 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 defence 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? Can it 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 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 using third parties. Importantly, it will also include a contract termination process, either because of the due date being reached or any contract breach requiring 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 tests how well this third-party risk assessment and your third-party risk management program work. In conducting the audit, you need to consider the following:

• Comprehensive Inventory: Ensure a complete list of all third-party providers.
• Risk Assessment: Identify financial, regulatory, operational, strategic, and reputational risks.
• Robust Processes: Ensure processes are in place to monitor and mitigate risks.
• Compliance and Security: Verify third parties meet regulatory compliance and data security obligations.
• Swift Issue Resolution: Have measures to quickly address issues that arise.
• Impartial Audit: Conduct the audit with a separate team to ensure impartiality.

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. This is an unending challenge, particularly regarding cyber risk, as the threats become more frequent, inventive and damaging.

Diligent’s eBook, 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 how organizations can protect themselves.

Download a copy to learn how your organization can enhance its third-party risk management today.