Every business, large and small, faces some degree of risk. Risk can come from a variety of sources: the economy, natural disasters, market fluctuations and so on.
But one of the biggest risks that businesses face is a third-party risk. It occurs when a company does business with another organization or individual and that partner introduces a risk to the first company.
The price to pay for the lack of third-party risk management (TPRM) can be high. An IBM report revealed that the cost of a data breach increased by almost 3% from 2021 to 2022, amounting to $4.35 million.
It’s not just large companies that are at risk either. Small businesses are often even more vulnerable to third-party risks because they typically don’t have the same resources to devote to TPRM as larger enterprises do.
Businesses can take essential steps to minimize their risks. These include IT audits. But first, let’s talk about the reasons for TPRM.
The Purpose Of Third-Party Risk Management For Financial Institutions
Third-party risk management (TPRM) is the process of assessing, monitoring and managing risks that come from engaging with external parties.
For financial institutions, TPRM is essential for minimizing operational risks and protecting against potential financial losses. Furthermore, the process can:
1. Ensure That Third-Party Relationships Align With The Institution’s Risk Appetite
TPRM provides a systematic way to identify, assess and monitor risks associated with engaging third parties. In turn, it allows financial institutions to make informed decisions about whether it is safe to enter into or continue a relationship with other organizations or businesses, even those outside the industry.
Also, by understanding and managing the risks associated with engaging third parties, financial institutions can more confidently pursue opportunities while still adhering to their overall risk appetite.
2. Reduce Compliance Costs And Improve Operational Efficiency
A well-run TPRM program helps ensure that an institution is adhering to regulations, especially industry, state, federal and international laws. It can minimize compliance costs associated with non-compliance, such as fines and penalties.
TPRM can also improve operational efficiency by standardizing the way risks are identified and assessed. Additionally, it can help reduce the need for manual processes and duplicate work across departments.
3. Enhance Risk Mitigation Efforts
By understanding the risks associated with third-party relationships, financial institutions can develop and implement more effective risk mitigation strategies. TPRM can also help identify potential risks early on, which can minimize the impact of those risks if they do materialize.
Further, TPRM can help financial institutions build strong relationships with their third-party service providers. These connections can lead to improved communication and collaboration around risk management, which can further enhance risk mitigation efforts.
4. Maintain Business Reputation And Foster Investor Confidence
TPRM can help financial institutions avoid or resolve reputational risks that could come from engaging with third parties. Additionally, by effectively managing risks associated with third-party relationships, financial institutions can foster investor confidence and maintain a positive reputation in the marketplace.
IT Audit For Third-Party Risk Management
An IT audit of a financial institution’s TPRM can provide assurance that the program is designed and operated in a way that aligns with the institution’s overall risk management strategy.
It usually involves the following stages:
1. Risk Assessment
One of the key phases of any IT audit is risk assessment. This is when the auditor will attempt to identify and assess any risks that may be associated with the use of third-party services.
The goal is to pinpoint any potential areas of vulnerability that could lead to a data breach or other security incident. To do this, the auditor will review the organization’s policies and procedures related to third-party service providers. They will also interview key personnel and conduct a review of past incidents.
By identifying and assessing the risks associated with third-party service providers, the auditor can help the organization take steps to reduce those risks and improve its overall security posture.
2. Risk Management Planning
Once the team identifies third-party risks, as well as gaps and opportunities for improvement, they proceed to the next phase, which is risk management planning.
It typically involves input from various stakeholders, including IT professionals, business leaders and external auditors. The process can be lengthy, depending on the complexity of the system under review. However, taking the time to carefully recognize and assess risks can help ensure a successful audit.
Some critical aspects covered by this phase include:
• Determining the objectives of the TPRM program.
• Identifying which risks need to be mitigated.
• Developing policies and procedures for managing third-party risks.
• Selecting and implementing controls to mitigate identified risks.
3. Implementation Testing
After the risk management plan is in place, the auditor will conduct implementation testing to ensure that the controls put in place are effective. This usually involves conducting a review of documentation and interviewing key personnel.
The auditor will also likely conduct some form of on-site testing, such as:
• Penetration Testing: This type of test is used to assess the security of the systems and controls in place by simulating a real-world attack.
• Vulnerability Scanning: This test uses automated tools to identify potential security vulnerabilities in the system.
• Security Assessments: This test is conducted by a team of security experts who manually test the system for vulnerabilities.
4. Reporting
After auditing, the auditor will prepare a report that details their findings. This report will include an overview of the TPRM program, as well as recommendations for improvement.
The goal is to provide the organization with a clear understanding of its strengths and weaknesses, as well as recommendations on how to improve its overall security posture.
5. Monitoring And Maintenance
The final phase of the IT audit process is monitoring and maintenance. This is when the auditor will ensure that the recommendations from the report are being implemented and that the TPRM program is being effectively managed.
Courtesy- https://www.forbes.com/sites/forbestechcouncil/2022/08/26/the-five-stages-of-third-party-risk-management-for-financial-institutions/?sh=786e33ef2072