Vendor Management and the SAS 70 Replacement

Vendor Management and the SAS 70 Replacement

I’ve written about the replacement for the SAS 70, which officially phases out on June 15th, previously.  But because this one report is being replaced with 3 new reports, financial institutions have an additional challenge that they didn’t have before.  Your vendor management program must now determine the most appropriate report to request based on your specific concerns regarding the vendor. Of course, once the correct report is identified, you must then acquire and review it…this step doesn’t change from the old SAS 70 world.

In the past, determining the correct report wasn’t really necessary, as the SAS 70 was the only reporting tool available if you needed to validate the security controls in place at a service provider.  With the SAS 70 being replaced with the SOC 1, SOC 2, and SOC 3, you have 3 options to choose from (and with Type I and Type II versions for the SOC 1 and SOC 2, you really have 5 options!).   So how do you choose?  It might make sense at this point to back up and take a look at the overall vendor management process.

The FFIEC considers risk management of outsourced services to consist of the following components:

  1. Risk Assessment (assessing the risk of outsourcing)
  2. Service Provider Selection (the due diligence process)
  3. Contract Issues (prior to signing the contract)
  4. Ongoing Monitoring (post contract)

Most institutions believe that their vendor management program begins once the contract is signed, i.e. once the vendor become a vendor.  But it’s clear that the vendor management process must begin well before that, and in fact third-party reviews like the old SAS 70, and the new SOC reports, should be obtained during the due diligence phase.  This is the proposal phase (step 2 above), well before the decision to engage the vendor.

According to the FFIEC, the due diligence process should determine the following about the vendor:

  • Existence and corporate history;
  • Qualifications, backgrounds, and reputations of company principals, including criminal background checks where appropriate;
  • Other companies using similar services from the provider that may be contacted for reference;
  • Financial status, including reviews of audited financial statements;
  • Strategy and reputation;
  • Service delivery capability, status, and effectiveness;
  • Technology and systems architecture;
  • Internal controls environment, security history, and audit coverage;
  • Legal and regulatory compliance including any complaints, litigation, or regulatory actions;
  • Reliance on and success in dealing with third party service providers;
  • Insurance coverage; and
  • Ability to meet disaster recovery and business continuity requirements.

That is a lot of information to obtain from a non-vendor, but the new SOC reports, and the SOC 2 report in particular, will go a long way towards addressing many of the above concerns.  Specifically; systems architecture, internal controls, any third-party providers, insurance coverage, and business continuity would all be addressed in a SOC 2 Type II* report.

I’ve developed this flowchart to assist you with the correct SOC report selection process, and I encourage you to discuss it with your auditor.  Of course once the correct report for that vendor has been determined, you must then obtain and evaluate it…that is a topic for a future post.

*Note:  We are still waiting for the AICPA to finalize the work program for the SOC 2 and SOC 3 reporting format.  Check with your auditor for additional guidance.


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Tom Hinkel
As author of the Compliance Guru website, Hinkel shares easy to digest information security tidbits with financial institutions across the country. With almost twenty years’ experience, Hinkel’s areas of expertise spans the entire spectrum of information technology. He is also the VP of Compliance Services at Safe Systems, a community banking tech company, where he ensures that their services incorporate the appropriate financial industry regulations and best practices.

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