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From Risk to Resilience: Enhancing SOX Compliance Through Third-Party Risk Management

With the increased reliance on third-party vendors, organizations are continuously relying on them to support critical operations, including those that directly impact financial reporting. While outsourcing often drives efficiency and innovation, it also introduces a complex layer of risk, especially for organizations that must comply with Sarbanes-Oxley (SOX). These risks may include loss of control over financial data, increased potential for errors or fraud, cybersecurity breaches, and challenges in maintaining adequate internal controls.

For organizations that must comply with SOX, any failure by a third-party to uphold these controls can expose a company to compliance violations, cybersecurity vulnerabilities, reputational damage, and financial misstatements. As regulatory scrutiny intensifies and the risk landscape evolves, companies must adopt a proactive and structured approach to third-party risk management that aligns with SOX requirements and supports overall governance objectives.

Understanding Third-Party Risk in the Context of SOX

Third-party risk refers to the potential exposure an organization faces when it relies on external entities, such as vendors, contractors, or service providers, to perform functions that influence its financial reporting or internal control environment. In a SOX-controlled setting, this risk becomes particularly significant when outsourced activities impact key controls over financial data, IT systems, or transaction processing.

For instance, a managed service provider responsible for maintaining an organization’s ERP system may have privileged access to financial data, system configurations, and change management processes. If these IT controls are not properly designed, implemented, or monitored, they could compromise the accuracy and reliability of financial reporting. SOX Section 404, which requires management to assess and report on the effectiveness of internal controls over financial reporting, implicitly extends to third-party activities that support these controls. As such, organizations must ensure that third-party IT relationships are not only operationally sound but also compliant with the control expectations set forth by SOX.

Regulatory Expectations and Audit Considerations

Regulators such as the Public Company Accounting Oversight Board (PCAOB) expect organizations to maintain effective internal controls over financial reporting, regardless of whether those controls are executed internally or by third parties. Simply put, outsourcing a process does not absolve management of its responsibility under SOX; it shifts the focus to oversight and assurance.

Auditors are increasingly scrutinizing how companies evaluate and monitor third-party controls, especially when those vendors have access to financial systems and data or perform key functions like transaction processing or IT support.

From an audit perspective, third-party risk is often assessed through the lens of control reliance and evidence. Auditors may request SOC 1 or SOC 2 reports to evaluate the design and operating effectiveness of a vendor’s controls. However, reliance on these reports alone is not sufficient; organizations must also assess the scope, timing, and relevance of the reports, and determine whether complementary user controls are being performed internally. Failure to do so can result in audit findings, control deficiencies, process breakdowns, or material weaknesses if the third party’s failure impacts financial reporting.

To meet regulatory expectations, companies should establish a formal third-party oversight program that includes risk assessments, control mapping, and documentation of monitoring activities. Ongoing monitoring of third-party vendors should be implemented by utilizing vendor questionnaires, audits, on-site visits (if applicable/able), monitoring of the service provider, and performing a thorough analysis of their continued performance, aligned with organizational goals and financial stability. Internal audit plays a critical role in evaluating the adequacy of these programs and ensuring that third-party risks are appropriately addressed within the SOX control framework.

Cybersecurity Considerations

Critical cybersecurity considerations should also be addressed as they relate to third-party risk management. When vendors have access to key systems and sensitive data, it’s imperative that cybersecurity concerns are addressed both internally and with the vendor. A lot of times, your third-party vendors are hacked to obtain access to another company’s data. If your vendors do not have sound cybersecurity practices, organizations are more susceptible to vulnerabilities that go undetected. Having safeguards in place with your vendors, including strict access controls, regular cybersecurity assessments, encryption, monitoring controls, contractual requirements, and a deeper understanding of the supply chain, will help reduce the impact of a cybersecurity attack.

Challenges and Best Practices

Managing third-party risk in a SOX environment presents several recurring challenges:

• Limited Visibility into Vendor Controls: Organizations often lack direct access to the internal control environment of their vendors, especially when dealing with cloud-based or offshore providers.
• Overreliance on SOC Reports: While SOC 1 and SOC 2 reports are useful, they may not cover all relevant controls or be current enough to support SOX testing timelines.
• Inconsistent Risk Assessments: Without a standardized framework, third-party risk assessments can vary widely in depth and quality across departments.
• Lack of Integration with SOX Control Framework: Third-party oversight is sometimes siloed from the broader SOX compliance program, leading to gaps in control coverage and documentation.
• Resource Constraints: Monitoring and testing third-party controls require time, expertise, and coordination; resources that are often stretched thin.
• Unidentified vulnerabilities: Organizations may not understand the cybersecurity posture of their vendors (or their vendors’ vendors), which leaves them vulnerable to attacks that could have been avoided (or reduced impact if unavoidable).

To overcome these challenges, leading organizations adopt a proactive and integrated approach:

• Centralize Third-Party Risk Governance: Establish a cross-functional team (e.g., risk, compliance, IT, procurement) to oversee third-party risk holistically.
• Embed SOX & Cybersecurity Requirements into Contracts: Include clauses that mandate control reporting, audit rights, cybersecurity baseline requirements, and timely notification of control failures or breaches.
• Use a Risk-Based Tiering Model: Classify vendors based on their impact on financial reporting and tailor oversight accordingly.
• Leverage Technology for Monitoring: Utilize GRC platforms or third-party risk management tools to automate assessments, track issues, and maintain documentation.
• Perform Periodic Control Testing and Assessments: Validate that key third-party controls operate effectively, especially those tied to SOX-critical processes. Monitoring vendors through periodic questionnaires or assessments will help identify gaps in the control environment or overall deliverables by the vendor.
• Align Internal Audit with Vendor Oversight: Ensure internal audit reviews include third-party risk considerations and that findings are integrated into SOX reporting.

Conclusion

As organizations continue to expand their reliance on third-party vendors, particularly in IT and financial operations, the need for robust third-party risk management within a SOX environment has never been more critical. Regulatory expectations make it clear: accountability for internal controls cannot be outsourced. Companies must take deliberate steps to assess, monitor, and document the effectiveness of third-party controls that impact financial reporting. By embedding third-party oversight into the SOX compliance framework, organizations not only reduce the risk of control failures but also strengthen their overall governance posture. In an era of increasing complexity and regulatory scrutiny, proactive third-party risk management is not just a best practice; it’s a business imperative.

How Centri Can Help

At Centri, we recognize that cybersecurity and third-party risk management are deeply intertwined within the SOX compliance landscape. Our IT Risk & Cybersecurity professionals work alongside your internal audit and compliance teams to design and implement cybersecurity protocols that align with SOX requirements. With Centri’s tailored approach, your organization can confidently manage third-party risk, enhance cybersecurity resilience, and maintain compliance with SOX and internal audit standards. Contact us to learn how we can help your organization turn regulatory complexity into a competitive advantage.

Karyn DiMassa

Managing Director | CPA, PMP, CISA, CFE

Karyn is a Managing Director in the IT Risk & Cybersecurity Practice at Centri Business Consulting. She has more than 15 years of combined experience in internal IT audit and external audit support (IT controls), third-party assurance (SOC 1 and SOC 2 reporting), internal controls consulting, project management, IT risk and cybersecurity, and system implementation support. View Karyn DiMassa's Full Bio

Ian O’Connor

Senior Manager | IT Risk & Cybersecurity | CRISC, CISA

Ian is a Senior Manager in the IT Risk & Cybersecurity practice at Centri Business Consulting. He has more than 8 years of combined experience in internal control consulting, IT risk, cybersecurity advisory, and risk-based internal audits and accounting. View Ian O’Connor's Full Bio