Performing a cybersecurity audit of your third-party vendors and partners is critical to ensure they’re taking proper measures to protect your data when it’s in their hands.
Industries do not exist in isolation. They are an interconnected archipelago of cooperation, interdependence and collaboration. To enhance their overall performance and functionality, businesses branch out their operations to interact with third-party partners and vendors, which offer various specializations and services, including third party risk management audit.
But when dealing with external parties, data privacy must still be of paramount importance. This is when third-party risk management comes into play. This is a process in which data is protected and secured to minimize the chances of cybersecurity breaches and hacks.
A third-party risk management audit will look into the effectiveness of this program in place. It will also make a checklist of regulatory guidelines that the business and its third-party vendors must comply with.
Understanding Third-Party Risks
In the context of industries, a third party is an external company or specialist that provides a service or specialization — but is not part of that organization.
This encompasses several types of services, including the following:
- Human resources and payroll
- IT data centers
- Cloud facilities
- Medical services
- Legal management
Companies gain greater flexibility by outsourcing aspects of business operations that they require from third-party partnerships, instead of developing an in-house team. Instead of training their specialists, lawyers and doctors, companies can just seek collaborations with a third-party provider.
But because of the professional relationship between organizations and third-party vendors, these external agents will gain access to critical internal company data. A sizable chunk of the risks comes in here.
This is why companies must have a reliable Third-Party Risk Management (TPRM) audit program in place. This system will study and control any risks that may arise because of the business relationship with the third-party vendor. Various aspects of the company can be affected or compromised by these risks, such as:
- Data privacy
Even with the added benefits of third-party partners in today’s industries, these risks should not be swept under the rug. MetricStream Research survey about third-party risk management reveals that 21% of the participants have experienced exposure risks because of a third-party provider.
How significant are these exposures? Another MetricStream Research report entitled “How Organizations Are Managing Third-Party Risks” indicates that 25% of businesses that shared financial impact data had losses that amounted to $10 million. That’s an exorbitant amount of money. It could have been avoided if there was a proper audit that addressed these risks efficiently.
Companies should have auditors that can investigate and find vulnerabilities in the Third-Party Risk Management program that may have been overlooked or may have become obsolete. The audit findings are relevant in helping companies make informed decisions about the health of their third-party partnerships.
Over the last several years, numerous government regulations have changed when it comes to third-party risk management. Expert guidance is necessary to navigate all these updates without compromising compliance.
Types of Inherent Risks
These are third party providers that do not face your clientele and do not have access to restricted company data. These have a low level of disruption.
These third-party vendors have access to restricted company data, but they do not have face-to-face exposures to clients. They have a moderate level of disruption.
These third-party providers are handling services with high or moderate risks. They are client-facing and can access critical data.
Lines of Defense for Third-Party Risk Management
An excellent strategy to manage the risks of third-party partnerships is to establish three lines of defense. This will serve as a guide for swift and decisive actions to protect against cybersecurity threats.
First Line of Defense
This level starts with the individual business units that manage the third-party partnership. This is the self-regulatory aspect where third-party providers are tasked with identifying, mitigation, and assessing risks. They are given the responsibility to formulate best practices consistent with the partner company’s policies.
Second Line of Defense
The Third-Party Risk Management program is in charge of this line of defense against risks. The tasks include the creation and implementation of the risk framework. They will review the third-party vendors to see if they are compliant with company policies and procedures.
Third Line of Defense
The audit is the third line of defense. They are tasked with the independent verification and evaluation of internal policies against risks. Auditing third-party risk management will result in a report that will reflect the program’s effectiveness and cost-efficiency.
The Process of Third Party Risk Assessment
A well-planned system will help ensure the correct assessment of risks in third party providers. This will help anticipate any potential problem or contingency.
Planning / Risk Assessment
When a company has a target third party provider for outsourcing, the first step is creating a plan to manage the business relationship. A careful study of the risk profile of the third party provider should be studied. It is crucial to determine the vulnerability of the data privacy of the potential third-party provider.
Contracting / Monitoring
Once both sides have agreed, the contract must clearly outline the partnership’s expectations, responsibilities, and terms. Contract clauses are essential because they limit the company’s liability should something go awry and it mitigates any conflict or dispute that may arise from unexpected and surprise performances.
Clear communication lines are necessary to reduce risks consistently. It also enables the effortless exchange of resources for cyber risk management. New threats are emerging daily, making it essential to continually update the cybersecurity database.
Compliance is also an integral aspect of monitoring. All the data storage of third party partners must comply with government regulations. Network, system and authorization access must be protected from compromises. If there are issues encountered, there must be a response system, remediation, and escalation.
For future flexibility, there must also be measures for efficient transitioning to an in-house team or another third-party provider, once the contract is over.
An exit strategy is also essential when the contract is over. There must be risk mitigations in case of termination. Situations that may require the ending of a contract include the following:
- Changes in the business strategy of the company or the third-party vendor
- The terms of the contract have been accomplished.
- Contract default.
- Service failure / Consumer complaints
- Data breaches or a similar cybersecurity incident
- Non-compliance of government regulation
- Discontinuation of a service or product
Guide in Conducting an Audit
The audit team must have a plan when they check the effectiveness of the Third-Party Risk Management program. It must maintain impartiality. As the third line of defense, it must not be influenced by the first and second lines of defense.
When the audit is evaluating the TPRM, it must check if it has a comprehensive inventory of third party providers to make sure it has the best partner for the job. The organization must also have a list of risks that the third parties may pose from compliance, finances, operations, strategy and reputation.
Down the line of the supply chain, how involved should the third parties be? What is their effect on the continuity of the business going forward? These are some of the considerations during an audit. There must be a way of measuring or metrics to assess the third-party provider’s performance within its risk tolerance.
Should problems arise, the audit must determine the company’s steps to recover damages from third-party providers.
The audit must consistently check if the third party partners comply with law regulations, ethical considerations and technical specifications for data security. Any neglect they may cause will reflect poorly on the company — even if they are just external contractors.
Benefits of Due Diligence in Risk Assessment
A properly conducted audit of Third-Party Risk Management will save vital resources such as time and money when done expertly. It will also prevent being reactive to problems. A comprehensive audit will find gaps, vulnerabilities and potential liabilities, even before they happen.
If the audit job is done effectively and efficiently, it will also decrease the number of on-site audits needed. There will also be an improved reporting of risk assessment status to all stakeholders of the company. Everyone in charge will be updated about crucial details of the Third-Party Risk Management.
Due diligence in the assessment will cause a positive and independent analysis over a sustained time and not just a single instance. It will also reduce the assessment life cycle of the audit.
Clients will also benefit because it increases their business confidence, especially with more premium given to data privacy.
Implications of Third Party Failure
Third-Party Risk Management is critical because companies will suffer significant losses when necessary third-party providers fail to meet the agreement’s terms.
It can result in operational, reputational and financial damage to the company that may be greater than any loss the third party will experience. Data breaches are more hampering, specifically. With more laws focusing on personal data protection, any neglect or mishandling of data privacy by third party providers will reflect poorly on the company.
It is the company that will bear the brunt of the reputational damage, not the third-party provider. These public relations stains are hard to predict and anticipate, further elevating the importance of due diligence in Third-Party Risk Assessment and Monitoring.
Note that these risks are not exclusive to the impact on your clients. Even the relationship with additional service providers or suppliers can be affected if the third-party providers don’t hold up to their end of the contract.
This is why auditors are very crucial. They can discover operational risks, fraud vulnerabilities and lost revenue and savings opportunities within the third-party partnership. These are factors that contribute to failure if left unchecked. Auditors as gatekeepers can contribute significantly to the success of these partnerships if they conduct their investigations well.
Trusting Your Third-Party Risk Management Services to RSI Security
RSI Security brings years of experience and expertise across multiple industries to auditing third-party risk management services. With several technical specifications and complexities involved in these partnerships, trust RSI Security to handle these IT aspects with utmost cost efficiency.
Our core values revolve around a proactive and collaborative approach. We know there is no silver bullet that will answer all problems when it comes to Third Party Risk Management. It must always be personalized and tailored according to the needs of your company.
Here is an overview of RSI Security services to attend to your third party management needs:
- Vendor Assessment. RSI Security will assist in third-party risk assessment to identify vulnerabilities in the data of your third-party partners.
- Risk Management. We have Managed Vendor Risk Management Services centers that will focus on working hands-on with third-party partners to reduce unnecessary risks.
- Managed Security. Our team has a comprehensive set of cyber risk management services to protect your company’s data privacy and your partners’ data. The integrity of company data should always be maintained, especially personal data collected and stored from consumers. During this day and age, companies can never afford to have a data breach. The damage will be severely significant.
- Regulatory Compliance. Various government rules and regulations may be tricky if not dealt with by industry experts. RSI Security will help maintain the compliance of all third-party and partner data with the relevant laws.
Third-Party Risk Management Audit is the last defense line in protecting data privacy, ensuring government compliance, and safeguarding your company’s reputation. Trust RSI Security to handle your audit for cost-efficient and excellent results.