Vendor Risk Management: Evaluating Third-Party Controls
Your company depends on software vendors you’ve never fully vetted. It’s not theoretical risk anymore.
Every time your team uploads data to a cloud platform, integrates a SaaS tool, or tests an AI solution, you’re extending your company’s security perimeter beyond your walls. And most finance leaders have no idea what internal controls those vendors actually have in place.
This isn’t a compliance nice-to-have. It’s a line item that affects your audit opinion, your insurance coverage, and ultimately, your reputation.
Key Takeaways
- Vendor risk is now part of your enterprise risk profile, and auditors are increasingly asking pointed questions about third-party controls and security certifications.
- SOC 2 Type II and SOC 1 Type II reports and similar certifications reveal whether a vendor has undergone independent audits of their operational and security controls.
- AI-powered tools without industry-standard certifications introduce unknown risk into your workflows, especially around data handling and system reliability.
- Evaluating vendor SOC reports and other information security compliance reports requires more than a checkbox, it requires understanding control scope and whether the vendor’s controls actually align with your risk tolerance.
- A structured vendor risk management program saves time, reduces audit friction, and demonstrates board-level governance to stakeholders.
How auditors now evaluate your third-party vendor controls
For years, “third-party risk” meant a compliance checkbox. Your external auditor asked about vendor management policies, you pulled together a vendor list, and life went on.
That era is ending.
Today’s auditors are diving deeper. They want to know specifically which vendors touch sensitive data. They want evidence that you’ve reviewed those vendors’ controls. And they’re particularly interested in vendors you rely on for mission-critical functions.
If you’re using a third-party payroll processor, a cloud accounting system, or any software that connects to your financial data, your auditor is going to ask about their security certifications. Your board is asking about AI risk. Your insurance broker is pricing policies based on your vendor ecosystem.
The shift happened quietly, but it’s real. You can either get ahead of it or scramble when audit season arrives.
What does a SOC 2 Type II report actually tell you about vendor controls?
A SOC 2 Type II report is an independent audit of a vendor’s internal controls. It’s conducted by a third-party auditor and covers everything from data security to system availability to staff training.
Here’s what most finance leaders get wrong: they think “SOC 2” is a binary checkbox. Either the vendor has it or they don’t.
In reality, SOC 2 reports vary wildly in scope and depth. Two vendors can both have SOC 2 Type II certifications and have completely different control environments. One report might cover all the controls critical to your use case. Another might exclude exactly the areas you care about.
When you’re evaluating a vendor, you need to actually read the report. Not skim it. Read it. Look at the specific controls that were tested. Check whether the auditor found any exceptions or control deficiencies. Understand what systems and data the certification actually covers.
This is where most companies fail. They collect the report for compliance purposes but never dig into what it actually says about the vendor’s controls.
For internal controls over financial reporting, you will need to also review the vendor’s SOC 1 Type II report.
Why AI tools without certifications create hidden data risks
AI adoption is accelerating everywhere. Your team is probably already using generative AI tools. Some are approved. Some aren’t.
Here’s the uncomfortable truth: most consumer-grade and many enterprise AI platforms don’t have SOC 2 Type II certifications. Some don’t have any third-party control certifications at all.
This creates a specific problem. When your team feeds customer data, financial information, or proprietary documents into an uncertified AI tool, you’re creating a data leakage vector you can’t audit. You have no independent verification of how that vendor stores your data, who has access to it, or how long they retain it.
Some AI vendors use your data to train their models. Others claim they don’t, but provide no audited proof. And plenty of teams are using these tools without even informing their security or compliance teams.
The risk compounds when you multiply it across your organization. One person using ChatGPT for email drafts is one thing. A whole department using uncertified AI tools for document analysis is a different risk profile entirely.
You can’t eliminate AI from your workflow anymore, and you shouldn’t try. But you absolutely can control which tools your team uses and why. That requires a deliberate policy and the ability to evaluate vendors based on actual security evidence, not marketing promises.
How to build a vendor risk management program that works
The organizations getting this right are being methodical.
- Create a vendor inventory tied to data sensitivity and business criticality. Know which of your vendors touch sensitive data and which ones are genuinely mission-critical. Not all vendors require the same level of scrutiny. Paying for office supplies doesn’t need the same due diligence as using a vendor to process payroll.
- Tier your vendors by risk and define control requirements for each tier. Once you’ve tiered your vendors by risk, establish what you actually need from each tier. For high-risk vendors, SOC 2 Type II might be table stakes. For medium-risk vendors, you might accept SOC 2 Type I or other certifications. For lower-risk vendors, a security questionnaire might be sufficient.
- Actually review SOC 2 reports instead of filing them away. When you do receive a SOC 2 report, have someone actually review it. This doesn’t require hiring a specialist. A CFO or controller with finance experience, or other experienced IT or business team members, can read through the report and focus on the control narratives and any exceptions. Ask yourself: Do the controls cover the functions I care about? Were any controls tested and found deficient? Is the report qualified, which would indicate broad control failures? Does this report actually reduce my risk?
- Document your vendor assessment findings and maintain an audit log. Keep a log of which vendors you’ve reviewed, what certifications you’ve seen, and any gaps you’ve identified. This log is gold during audit season. It demonstrates to your auditor that you’ve thoughtfully managed third-party risk, not just crossed your fingers.
- Establish a clear AI tool approval policy with security requirements. For AI tools, be explicit about which ones your team can use and which are off-limits. Require any approved vendors to provide security documentation. Make it easy for your team to comply by giving them approved alternatives.
The business case for vendor risk management
You’re under pressure from multiple directions. Revenue targets, cost constraints, digital transformation expectations, and now deepening vendor due diligence requirements.
But here’s the thing: a structured vendor risk program doesn’t add burden to your finance team. It removes it.
When your auditor asks about third-party controls, you have documented evidence ready. When a data breach happens at one of your vendors, you can explain to your board exactly what controls you required and verified. When your insurance company asks about your risk management practices, you have specifics, not generalities.
This is particularly important for companies in heavily regulated industries or those preparing for acquisition. Private equity firms are increasingly using vendor risk assessments as part of their due diligence. If you’ve already done the work, you’re ahead of the game.
The alternative is reactive risk management, where you scramble when something goes wrong or when an auditor asks a question you weren’t ready for. That costs time, creates friction with your audit team, and leaves you exposed.
Frequently asked questions
SOC 2 Type II audits test whether vendor controls work effectively over 6 to 12 months, while SOC 2 Type I verifies controls existed at a single point in time. For mission-critical vendors or sensitive data handling, Type II is stronger because it provides evidence of sustained control performance over time.
You can use a vendor without SOC 2 certification, but you must document an alternative control evaluation method such as a detailed security questionnaire, your own internal security assessment, or requiring ISO 27001 or another third-party certification. The key requirement is documenting which controls you reviewed and why you accepted that vendor’s risk level for your specific use case.
If a vendor refuses to share their SOC 2 report, you should treat this as a red flag and ask them directly why they won’t share it. For mature vendors processing critical data, providing SOC 2 documentation should be standard practice, and refusal is grounds to escalate the decision to leadership or find an alternative vendor that meets your control requirements.
AI tools without SOC 2 certification are not automatically too risky, but the risk depends on the type and sensitivity of data you’re processing. Using an uncertified AI tool to draft email without confidential data carries lower risk than uploading customer data or financial records, so you should evaluate the specific data flows, assess exposure if compromised, then document your risk acceptance decision and communicate it to stakeholders.
Your CFO, controller, or senior level IT or business team members can review SOC 2 reports without specialized security training by focusing on control narratives to understand what the vendor actually controls and checking for auditor-identified exceptions or deficiencies. If you encounter unfamiliar concepts, ask your auditor or the vendor for clarification rather than glossing over unclear areas.
As a good rule of thumb, you should reassess high-risk vendors annually or whenever they release a new audit report, typically annual for SOC 2 Type II, and request updated certifications during vendor renewal or contract negotiations. For medium and lower-risk vendors, reassess every two to three years unless a significant security incident occurs or your use case for that vendor changes materially. The frequency of reviews can depend on your business and specific risks.
Take control of your vendor risk today
Third-party risk isn’t an IT problem or a compliance checkbox anymore. It’s a business decision that affects your audit, your insurance, your board conversations, and your operational resilience.
The good news is that addressing it doesn’t require you to become a security expert or hire a massive new team. It requires discipline, documentation, and someone who’s willing to actually read the vendor reports you’re collecting.
If you’d like guidance on building a structured vendor risk management program or need help evaluating your current vendor controls, we work with finance leaders across industries to implement practical, scalable approaches that satisfy both your audit team and your business requirements.
Start with one conversation.
Tell us what’s keeping you up at night about your vendor ecosystem, and we’ll help you figure out where to focus first.
Get in touch with our risk management team today.
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