Why Audit Rights Are Essential to Your TPRM Program
Cheryl Grizzard is manager and regulatory compliance counsel at Ncontracts, Brentwood, Tenn.
Does your financial institution have the right to audit your vendors when needed?
Audit rights are a critical but often overlooked component of a strong third-party risk management (TPRM) program. They allow financial institutions to check if third parties are fulfilling their responsibilities and meeting regulatory requirements.
Not every third-party relationship needs the same level of scrutiny, but it’s crucial to ensure that your contracts allow for proper oversight. Let’s look at the importance of audit rights, how to include them in vendor contracts, and how to use them to manage risk and identify potential problems with vendors.
What Are Audit Rights?
Audit rights are contract terms that give your institution the legal authority to review and assess a vendor’s operations, controls, and documentation — especially those related to information security and cybersecurity, business continuity, subcontractor oversight, complaint management, compliance, financial health, and performance. These rights are critical for confirming vendor compliance with regulatory requirements, contractual obligations, and internal risk standards.
Audit rights are recognized by regulators — including the OCC, FDIC, Federal Reserve, and NCUA — as part of a sound oversight program. The Interagency Guidance on Third-Party Relationships: Risk Management emphasizes ongoing monitoring as a regulatory expectation.
While some vendors may only require less oversight, others — particularly critical or high-risk vendors — require deeper scrutiny. This can include a review of:
• Vendor internal policies and controls
• Independent audit reports (e.g., System and Organization Controls (SOC) reports)
• Client-performed audits as outlined in the contract
Audit rights help make proactive monitoring possible — a must in today’s evolving risk landscape.
How to Obtain Audit Rights
Audit rights should be clearly stated in vendor agreements. If they are not documented, you have no guaranteed access to due diligence documents. Here are key practices to consider when adding or updating audit clauses:
• Negotiate early. The best time to secure audit rights is during early contract discussions. Clearly define the scope, frequency, and access expectations, including whether audits can extend to subcontractors or fourth parties.
• Confirm methodology. Specify whether audits will be conducted by internal teams or third-party assessors. Determine which records or systems the vendor must make available, such as compliance certifications, security controls, or financial data.
• Involve legal and compliance. Have your legal team review every section of a vendor contract to ensure audit clauses align with your institution’s risk framework and industry regulations.
• Define penalties for non-compliance. If a vendor refuses to comply with audit provisions or fails to provide required documentation, clear consequences should be outlined in the agreement.
• Support ongoing monitoring. Once audit rights are secured, document all related communications, audit requests, findings, and remediations. Remember: if it’s not documented, it didn’t happen.
How to Use Audit Rights Effectively
Audit rights are more than a formality; they’re a risk mitigation tool. When used effectively, they help:
Ensure Compliance
Vendor audits can uncover gaps in regulatory compliance, such as data protection issues under the Gramm-Leach-Bliley Act (GLBA) or poor training practices. If a vendor fails to deliver adequate evidence during routine monitoring, audit rights offer a direct path to assess and remediate concerns.
Inform Risk Assessments
Audit results provide key inputs for risk tiering and third-party assessments. For vendors deemed critical or high-risk, you may need to audit areas such as financial health, operational resilience, business continuity and disaster recovery, information security and privacy, and cybersecurity.
Support Cybersecurity Resilience
According to Ncontracts’ 2025 Third-Party Risk Management Survey, nearly half of financial institutions experienced a third-party cyber event last year. Vendor audits can validate that appropriate protections against cyber incidents are in place.
Drive Continuous Improvement
Audit findings can lead to actionable insights — not just for compliance but for vendor performance. In many cases, this process benefits both parties by identifying opportunities for improvement.
How to Address Vendor Red Flags
Sometimes, the challenge isn’t having audit rights — it’s exercising them when vendors don’t cooperate. If your institution is facing vendor resistance, here are some recommended steps:
• Initiate direct communication. Open a transparent dialogue to clarify concerns, outline expectations, and document the conversation.
• Amend contracts as needed. If red flags persist, update agreements to include clearer provisions for audits, data sharing, and performance expectations.
• Escalate internally and externally. If discussions stall, consult with your leadership or peers to determine the appropriate next steps. In some cases, engaging the vendor’s executive team may be necessary.
• Be prepared to transition. If the vendor relationship is no longer viable, ensure you have exit strategies in place, including documented termination clauses and a transition plan to a new provider.
Incorporating audit rights into your TPRM program is essential for strong vendor oversight and compliance. By ensuring that your vendor agreements establish audit conditions, methodologies, and consequences for non-compliance, you can enhance your institution’s resilience against potential risks.
A comprehensive vendor management solution can help streamline your processes, ensuring effective monitoring and documentation of audit activities. This proactive approach not only mitigates risks but also fosters a culture of continuous improvement, ultimately benefiting both your institution and its vendors.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
