Third-party vendor compliance has emerged as a key organizational priority as financial institutions increasingly rely on outsourcing to reduce operating costs and gain greater efficiencies. While vendor relationships can be very beneficial, even critical, to an organization’s success, they also pose a major compliance risk. In other words, liability cannot be outsourced.
Recently, regulators upped the ante by issuing new U.S. third-party vendor management requirements to help safeguard financial institutions against compliance risk. Some of the safeguards include:
- Risk scoring
- Ranking
- Onsite visits and audits
- Performance benchmarks
- Information security
- Legal and compliance
- Business continuity plans
- Dispute resolution and terminations rights
These new requirements are straining financial institutions’ resources and creating much longer sales cycles. And, as the Consumer Financial Protection Bureau increasingly directs its regulatory scrutiny on vendor management, financial institutions are encouraged to demand verification that their third-party vendors’ processes are in compliance. The best way to ensure vendor compliance is to ask them to have an audit performed. An audit is an independent review of an organization’s controls to certify the integrity of their operations.
The Service Organization Control (SOC) 2 is the industry-standard audit that helps enforce compliance with principles established by the American Institute of Certified Public Accountants (AICPA). SOC 2 certification ensures that vendors are providing financial institutions with the highest level of operational excellence, security levels, system integrity, and application and data controls for information.
SOC 2 was specifically designed to provide a means for service organizations to quantify their adherence to the Trust Service Principles, which are specific controls relevant to security, availability, processing integrity, confidentiality and privacy. Each control has defined criteria that must be met to demonstrate adherence to the Principles and produce an unqualified opinion, which means no significant exceptions were found during the audit.
With the huge adoption of managed IT services (better known as SaaS or cloud services), an SOC 2 audit provides a definitive statement of security assurance. This warrant is exactly the kind of information that financial institutions need when evaluating managed service providers. In other words, rather than spend countless hours trying to get third-party vendors to answer security questionnaires, or spend a lot of money to hire staff who do nothing but review controls inside a potential vendor’s infrastructures, an SOC 2 audit is a much shorter and cheaper path to having vendor due diligence completed and on file.
The benefits of an SOC 2 audit for an organization are numerous. Aside from having a detailed description of a service organization’s adherence to the Trust Service Principles, the audit report also includes the service auditor’s testing procedures. The audit report allows management to assess the strength of a potential provider at a detailed level. Other benefits of having an SOC 2 audit performed include:
- Instant credibility
- Independent assessment of controls to give to customers annually
- Potential to win more business (many companies require an SOC audit as a contractual obligation)
- Reduction of third-party self-assessment questionnaires
- Satisfaction of multiple customers through one audit
An SOC 2 report can help an organization improve its business operations, become more efficient and provide assurance when selecting third-party vendors. And, as vendor compliance continues to be a hot issue for regulators, SOC 2 audits will become increasingly important for both financial institutions and the third-party vendors they employ.
