Third Party Risk Management and the Role of Internal Audit
“The success of any organization is dependent on the strength of its risk management and internal audit processes. Together, they create a powerful foundation for success!” Third-party risk management has become increasingly important as organizations outsource more of their operations to external vendors, suppliers, and service providers. These third parties can introduce a range of risks, including cybersecurity, operational, financial, legal, and reputational risks. To manage these risks effectively, organizations need to implement a robust third-party risk management (TPRM) program. In this article, we will discuss TPRM and the role of internal audit in it.
What is Third-Party Risk Management (TPRM)?
Third-party risk management is the process of identifying, assessing, and controlling risks associated with the use of third-party vendors, suppliers, and service providers. The goal of TPRM is to ensure that the organization’s operations are not disrupted, data is not compromised, and the organization’s reputation is not damaged due to the actions of third parties. TPRM involves several steps, including:
Identification of third-party vendors, suppliers, and service providers.
• Risk assessment of third-party vendors, suppliers, and service providers. • Risk mitigation and management of third-party vendors, suppliers, and service providers. • Monitoring and reporting on third-party vendors, suppliers, and service providers. • The Role of Internal Audit in Third-Party Risk Management
Role of Internal Audit in Third Party Risk.
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Internal audit plays a critical role in TPRM by providing independent assurance that the organization’s TPRM program is effective, efficient, and aligned with the organization’s risk management objectives. Internal audit can also provide insights and recommendations to enhance the organization’s TPRM program.
Internal audit can perform the following tasks in TPRM:
• Evaluate the effectiveness of the TPRM program. • Identify gaps in the TPRM program. • Assess the adequacy of risk mitigation strategies for third-party risks. • Review the contracts with third-party vendors, suppliers, and service providers to ensure they include appropriate provisions for risk management. • Assess the monitoring and reporting processes for third-party vendors, suppliers, and service providers.
Internal audit can also provide insights on emerging risks and help the organization stay ahead of potential threats. By collaborating with stakeholders, including the procurement, legal, compliance, and risk management functions, internal audit can provide a comprehensive view of the organization’s third-party risks. The following will be done in internal audits;
Sourcing: Sourcing will be done to check whether governance and approval processes were executed according to the organization’s TPRM policies. An assessment of third-party failure to meet expectations and the resulting impact is included in the business case. Internal audit will also check the sensitivity of cost-benefit analysis to assumptions and the review of third-party risk classification.
Due Diligence: Development of the due diligence program & checklist will ensure that proper due diligence and risk assessments are conducted, gaps are identified and controls are implemented.
Contracting: This will cover the review of contract clauses; such as Right to audit, roles & responsibilities of 3rd/4th/5th parties, indemnities & Penalties and business continuity.
Monitoring: Internal audits will ensure that outsourcing done to third parties is adequately monitored and risks are well mitigated.
Issue Resolution: This aims at examining the organization’s escalation process for elevating concerns regarding third-party risk, exposure levels, non-performance, lack of quality etc. Confirm that management is addressing potential contract breaches appropriately by modifying SLAs, monitoring processes, etc
Termination: Internal audit generally would not be involved in the termination process of third-party relationships. Confirm thorough descriptions of termination conditions in each contract as part of routine audit procedures to ensure that business continuity is maintained and customer service and regulatory compliance is not affected. It also ensures that seamless data migration / purging is conducted on a regular basis. Third-party risk management is essential for organizations to mitigate the risks associated with outsourcing their operations. Internal audit plays a crucial role in TPRM by providing independent assurance, evaluating the effectiveness of the TPRM program, and identifying gaps in the program. By working closely with stakeholders, internal audit can help organizations stay ahead of potential threats and enhance their TPRM program. To digitise and automate your internal audit all you need in eTHIC. eTHIC is the perfect tool to help you digitise and automate your internal audit process. Streamline your workflow and save time with eTHIC.