Internal Audit of Your Third-Party Risk Management

December 14th, 2023 Hannah Tichansky Reading Time: 4 minutes
Business people at meeting

At the heart of effective TPRM lies the internal audit process, a pivotal mechanism that scrutinizes and strengthens the entire risk management framework. Internal audits serve as a critical line of defense, aligning the organization’s third-party engagements with its broader risk management strategies and compliance with relevant regulations.

By offering a pathway to robust risk management, internal audits ensure comprehensive oversight and control over external risks. Thus, audits empower the organization to make informed decisions and bolster its business health and compliance.

What Is the Role of an Internal Audit in TPRM?

Internal auditing within the context of Third-Party Risk Management (TPRM) is a critical, systematic, independent, and objective function. Its primary role is to evaluate and ensure the effectiveness of risk management strategies related to third-party collaborations.

By delving into the governance structures and risk management practices, internal audits ensure engagements with third parties are well-managed and align with organizational policies.

Internal audit teams play a significant role in overseeing vendor risk management. While not directly involved in vendor management decisions, their contribution to validating due diligence processes during vendor selection is pivotal.

Furthermore, they oversee ongoing vendor relationships to mitigate the emergence of new risks, thereby serving as vigilant guardians over organizational vulnerabilities.

Coupled with the responsibilities typically handled by Chief Risk Officers (CROs) or Chief Compliance Officers (CCOs), the unique perspective of internal auditors is indispensable. They bring necessary skills and insights to scrutinize the TPRM program, identifying potential gaps and areas for improvement.

This process promotes a culture of risk awareness and continuous improvement within the organization, essential for robust TPRM.

5 Benefits of Auditing in TPRM

Incorporating internal audit into your Third-Party Risk Management (TPRM) strategy brings many benefits. Each benefit is critical in navigating and managing the complexities and risks associated with third-party providers.

  1. Improved Compliance: The internal audit’s thorough evaluation of the TPRM program ensures adherence to regulatory requirements, thus minimizing legal liabilities and upholding the organization’s reputation. This vigilant compliance oversight helps maintain operational integrity.
  2. Identification of Systemic Risks: Through internal audits, you can identify interconnected risks that could impact the organization on a broader scale. This proactive identification prevents issues cascading through various aspects of the business.
  3. Enhanced Risk Response Strategies: Audits offer an objective lens through which procedural weaknesses are identified and rectified. This process leads to the development of stronger, more effective risk response strategies, thereby enhancing the organization’s overall resilience.
  4. Cultural Accountability and Transparency: Regular audits foster a culture of risk awareness and accountability within the organization. This culture extends to third-party providers, ensuring transparent and collaborative risk management practices.
  5. Strategic Decision-Making and Vendor Performance: Audit insights inform strategic decision-making, particularly in selecting and managing third-party relationships. This strategic approach often results in optimized vendor performance, aligning third-party actions with organizational standards and expectations.

Regular and thorough auditing enables organizations to anticipate and effectively mitigate third-party risks.

By staying ahead of potential issues and adapting swiftly, organizations can safeguard their operations and seize opportunities for growth and success. This forward-looking approach is essential for thriving in today’s dynamic business environment.

Challenges in TPRM Internal Audits

Executing internal audits within the TPRM framework can be challenging, given third-party relationships’ complexity and dynamic nature.

  • Identification of Relevant Third Parties: Discerning which third parties fall under the audit’s scope can be daunting due to their sheer number and the evolving nature of these relationships.
  • Assessing Compliance: Verifying adherence to compliance regulations, especially with global vendors subject to varying laws, presents significant challenges.
  • Data Collection and Analysis: Gathering and analyzing data to understand the risk profiles of third parties can be overwhelming and time-consuming.
  • Monitoring and Reporting: Continuously monitoring and reporting on third-party risks requires constant vigilance and can be resource-intensive.

Aravo’s Unique Positioning

In addressing these challenges, Aravo stands out with its TPRM Software solutions. Aravo aids in efficiently identifying and categorizing third parties, assessing compliance, and streamlining data collection and analysis.

Solutions support ongoing monitoring and reporting, ensuring that internal audits can effectively manage and address emerging risks. Understanding these challenges and Aravo’s capacity to mitigate them is crucial for making informed decisions about tools and strategies for TPRM internal audits.

Steps to Auditing Your Risk Management Process

In the context of TPRM, internal auditing is pivotal for effectively managing third-party risks.

This process encompasses several vital practices:

  1. Developing a Comprehensive Audit Plan: This crucial step involves establishing clear audit objectives, defining the scope, and selecting appropriate methodologies. A thorough plan ensures comprehensive coverage of all aspects of TPRM, including risk identification, assessment, and mitigation.
  2. Continuous Monitoring: Essential for early risk detection and ongoing compliance, this practice involves regular reviews of third-party engagements. It helps identify shifts in risk profiles and maintain the TPRM program’s effectiveness.
  3. Integrating Audit Findings with Enterprise Risk Management: Audit insights reinforce the overall risk management strategy. This integration is key to informed decision-making, particularly in managing third-party relationships.
  4. Risk Identification and Assessment: Auditors should ensure a thorough risk identification approach, encompassing internal and external factors. Consistent and comprehensive risk assessments are vital to align with the organization’s risk tolerance.
  5. Evaluating Risk Mitigation Strategies and Reporting: Assess the effectiveness of risk mitigation measures and the accuracy of risk reporting. This assessment includes evaluating the types of controls in place and the comprehensiveness of risk reporting.
  6. Enhancing the Risk Function’s Effectiveness: Analyzing the risk governance structure ensures clear responsibilities and accountability in risk management. The audit should also review the involvement of the risk function in strategic decisions, especially those involving third-party relationships.

By adhering to these practices, internal auditors can significantly bolster the organization’s ability to manage third-party risks, ensuring a robust and reliable TPRM process.

Does Auditing Improve Risk Management?

The internal audit function is a cornerstone in the architecture of third-party risk management. Beyond mere compliance, it actively enhances, informs, and shapes the TPRM process.

As the landscape of TPRM evolves towards more integrated, technology-driven, and proactive auditing practices, the role of internal audits in TPRM strengthens and becomes instrumental in enhancing organizational resilience and adaptability in managing complex vendor relationships.

Companies like Aravo are at the forefront of this evolution, offering strategic frameworks and technological solutions that navigate the complexities of TPRM with greater efficiency and foresight.

Hannah Tichansky

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

Hannah holds over 12 years of writing and marketing experience, with 6 years of specialization in the risk management, supply chain, and ESG industries. Hannah holds an MA from Monmouth University and a Certificate in Product Marketing from Cornell University.

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

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