They say no one is an island, but sometimes this can be true for organizations as well. It’s common for many organizations to bring in consultants with expertise in their area or even outsource some of their departments to a third party. This frees up their in-house teams to work more efficiently and can help to broaden the company’s perspective.
However, involving third parties in your business can also increase the chance of risk. In order to do business with third-party vendors, you must grant them access to privileged company information, such as customer data or confidential processes. If the third party is not acting in good faith, they might abuse that access to this information. This is where auditors are crucial.
Auditors help to ensure the third party does not negatively impact the organization. Let’s delve into what an auditor does to minimize third-party risk as well as tips for best practice that auditors can use.
What is third-party risk?
Third-party risk is exactly what the name would imply: it is the risk inherent in bringing in a third party to perform services on behalf of a business. Although business owners would like to believe that the third parties they choose to work with are acting in good faith, the truth is that it can be difficult to know for certain.
A third-party vendor can harm a business financially by performing services that fall beneath the standard of the company. They could also make a business more vulnerable to cyberattacks, whether through negligence or through intentionally accessing your data with intent to sell it.
Regulatory compliance is a major issue when it comes to third-party risk. As laws like General Data Protection Regulation and the California Consumer Privacy Act crack down on data privacy, businesses that don’t remain compliant in their data collection can be subjected to hefty fines.
If a third-party vendor fails to comply with relevant data privacy laws, the business can also be found liable.
The auditor’s role and the third-party audit
The role of external and internal audit in risk management is to assess the relationship between the organization and the third party and to minimize risk where possible. During a third-party audit, the auditor will review documents and data as part of an enterprise-wide risk assessment. They will also review any existing controls or policies in order to identify any potential risk. They will look at the whole projected lifecycle of the organization’s relationship with the third party and provide insights.
It helps for organizations to bring an auditor in even before entering into a third-party contract. Auditors can help them to spot high-risk third parties or third parties in high-risk locations. These third parties will require more monitoring than otherwise. Auditors will conduct research on the reputation of that third party, as well as their past partnerships with organizations. They can even help organizations to refine their third-party selection process so as to minimize third-party risk from the start.
The more third-party contracts an organization has, the greater the scope of the audit. Auditors may need to go through hundreds of documents in order to provide a thorough audit, and it’s important to make sure not to miss any key details.
Overall, auditors perform an important service for organizations, allowing them to find the third-party support they need while reducing the financial, security or compliance risks inherent in working with outsiders.
Best practices for third-party risk auditors
As an auditor, what can you do to ensure that you are providing the best third-party risk assessment possible? Best practices for auditing can vary from area to area. Some of the best practices for auditors of third-party risk situations include:
Focus on contracts
A strong contract can make all the difference when it comes to third-party risk management. The terms should clearly outline the roles of both the organization and the third party so that there’s no confusion. It should also lay out the responsibilities of each party. In order to reduce compliance risk, the contract should take into account any relevant regulations and outline subsequent policies in the terms.
With a clear contract, even if the third party defaults, the organization can still show that they made an effort to remain compliant and minimize risk. An auditor can review the contract for potential weak points before it’s signed.
Evaluate third-party vendors for risk
Before the organization chooses a third-party vendor to work with, an auditor should evaluate that third party in order to assess any potential risk. A questionnaire about their security and compliance practices is a good way to go with this. The auditor can help to prepare the questionnaire, which will then give the organization a clearer picture of the third party’s policies and protocols. This will also outline the risk that might arrive from a lack of policies in a certain area.
However, questionnaires are not always the most effective way to get a sense of the third party’s protocols. Sometimes the responses may omit critical information or exaggerate in order to get the right answer. To take things a step further, it can help for the auditor to perform interviews of the third-party staff that might be involved in anything relevant to risk assessment.
Take an inventory of third parties
Again, many businesses utilize support or services from many different third parties. Organization is key to make sure that crucial information doesn’t slip through the cracks. Ask the organization for a third-party inventory, listing out all of the third parties that have a contract with the business.
Don’t forget to add the organization’s name to that inventory, and to write out the contact for each third-party contract, as it may vary from contract to contract. You will need to refer back to this inventory several times within the process of your audit.
Divide and understand different levels of risk
Not all third parties will carry the same level of risk. An auditor should understand the different levels of risk, as well as how to handle each different kind of risk. Try breaking risk down in this way:
- Low risk. No interactions with customers and no access to sensitive company data.
- Moderate risk. Access to sensitive company data but no interactions with customers.
- High risk. Access to sensitive company data and interaction with customers.
For instance, a vendor from whom a business buys office supplies for everyday operations would not have access to much sensitive data, and would not interact with customers.
On the other hand, a medical screening company that works directly with clients or job candidates and accesses information through a software application has access to both business relationships and data. The higher the risk, the more closely the third party should be monitored.
Do your due diligence
Most businesses want to know more than simply whether a third party has posed potential risks in the past. They want to know if they could potentially pose risks throughout the course of the business relationship.
Auditors are required to do their due diligence to come up with an analysis that lasts for the long term. This can also include putting protocols in place to continue monitoring third parties for risk or to protect businesses from incurring risk.
How modern analytics technologies can help
Modern technology has revolutionized how auditors are able to conduct their third-party risk assessments. Now with software dedicated to data analytics, you can seek out anomalies and patterns that give you top-notch insights to provide in your audit.
Take Caseware IDEA data analysis software, for instance. You can import data from any source and analyze it through secure, read-only documents. And when you want to present insights to your clients, you can do so with engaging and easy-to-read charts that visualize the data.
Modern analytics software can also help to organize your audit, making your workflow smoother and more efficient. With IDEA, you have a clear audit trail so you can follow it every step of the way and make precise corrections when needed. You can automate repetitive tasks, saving time and money. You can even choose from a pre-built workflow that streamlines the whole process for you.
Modern auditing has become digital, with analytics done most effectively through software. It changes the way auditors do business, and it changes the insights that they’re able to provide to their clients.
Find out how Caseware IDEA can help you
Through Caseware IDEA, auditors can identify anomalies, trends and patterns from a variety of sources — including third parties relevant to a third-party risk assessment. All of this is done on a secure and easy-to-use platform that allows you to visualize and organize your analytics with ease. It’s auditing done more thoroughly, with a workflow that eliminates hassle and produces better results.
Want to learn more about how Caseware IDEA can help you protect your organization? Contact us today for more information or to try IDEA for yourself.