<img src="https://ws.zoominfo.com/pixel/pIUYSip8PKsGpxhxzC1V" width="1" height="1" style="display: none;">

TPRM 101: What are Audit Rights?

author
5 min read
Mar 27, 2025

Does your financial institution (FI) have the power and permission to audit vendors if needed? Do your vendor contracts explicitly mention audit rights?

If not, this is your wake-up call to include audit rights in your vendor agreements. While not every vendor warrants the same evaluation and continuous monitoring level, ensuring your vendor monitoring (including audit rights) adheres to regulatory standards and best practices is vital.

Here we discuss the purpose of audit rights, how to implement audit rights effectively, and how to address vendor red flags to improve your third-party risk management (TPRM).

Table of Contents

What are audit rights?

In TPRM, audit rights refer to a financial institution’s (or any organization's) contractual right to review and inspect a vendor’s records, operations, policies, and controls to ensure compliance with regulatory requirements, contractual obligations, and risk management expectations. Audit rights make it possible to proactively monitor vendors, which is an essential part of vendor management. The Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve emphasize the importance of ongoing monitoring as part of the vendor management lifecycle in the Interagency Guidance on Third-Party Relationships: Risk Management.  Other agencies, such as NCUA, have also focused on third-party monitoring in their supervisory guidance.

While not every vendor relationship presents the same level of risk and need for in-depth monitoring, ongoing monitoring ensures the strength of your vendors’ risk and compliance controls throughout the relationship.

There are many types of vendor monitoring, including but not limited to vendor policies and self-reporting documents (such as a Shared Assessment SIG), third-party independent audit reports (such as SOC audits), and the client’s right to audit contractual clause. These processes work separately and together to help ensure vendors are following through on established expectations.

Audit rights allow you to audit your vendors through a third party or for your employees to ensure the third party complies with contractual obligations, regulatory standards, and best practices.

Related: 3 Types of Vendor Monitoring

How to obtain audit rights

Audit rights are typically included in vendor contracts. These contracts serve as building blocks for your relationship by outlining key terms and provisions, including risk controls, metrics, and termination processes.

Here are some best practices for implementing or adding audit rights to vendor contracts:

  1. Negotiate audit rights from the start. The most opportune time to negotiate audit rights is at the beginning of a vendor relationship. Confirm and explicitly state the terms, including the audit’s scope, frequency, and access to fourth-party vendor and subcontractor due diligence.
  2. Clarify the audit methodology. Your FI or a third party may perform the audit. Clarify who will conduct audits and outline what documentation and systems the vendor must provide for auditing, such as financial statements, transaction records, or compliance certificates.
  3. Engage legal and compliance teams. Your legal team should review every part of a vendor contract, including audit clauses. This step ensures your audit rights align with industry regulations, best practices, and the risk management framework.
  4. Negotiate non-compliance penalties. While not ideal, there are circumstances when vendors fail to produce results, comply, communicate, or provide documentation as agreed upon in the contract. If that happens to your FI, having penalties and consequences previously outlined is crucial to maintaining transparency and mutual benefits within the relationship.
  5. Ensure risk management and ongoing monitoring. Once the audit rights have been established, you must communicate with the vendor regarding the audit process. Record audit-related activities, including audit requests, results, and corrective actions taken. Remember, if it isn’t documented, it didn’t happen.

How to use audit rights effectively

Audit rights act as a layer of protection in your vendor relationships. Let’s dive into some of the specific areas where having audit rights can be helpful:

  • Compliance with regulations. Vendor monitoring isn’t just best practice; it’s a regulatory requirement. As part of your initial and annual due diligence, you should ensure your vendors have adequately trained and experienced personnel, maintain secure technology and data protection controls, and maintain a vendor oversight program to ensure subservice vendors adhere to compliance requirements, such as the Gramm-Leach-Bliley Act (GLBA). If the vendor fails to provide adequate compliance documentation, an audit may be necessary to diagnose the underlying issues.
  • Risk management assessments. The State of Third-Party Risk Management 2025 survey report from Venminder by Ncontracts revealed that nearly 50% of respondent organizations manage 300 to 1,000-plus vendors. Appropriate classification or tiering will identify those critical and high-risk vendors you need to actively manage. Audits of those third-party providers’ finances, internal controls, business continuity planning, and other key areas provide the data an FI needs to conduct a risk assessment to understand and minimize the potential for operational disruptions, data breaches, or other significant events.
  • Protection against cybersecurity threats. Cyber monitoring is more important than ever. According to the 2024 Conference of State Bank Supervisors (CSBS) Annual Survey of Community Banks, roughly 42% of bankers expect cybersecurity risks to pose the most difficult challenge toimplementing new technologies over the next five years.
  • Continuous improvement. The financial services industry is constantly evolving, and your vendors should evolve, too. Audits can lead to actionable feedback and recommendations for your vendor to improve their processes, systems, or practices over time — a win-win for both parties.

 It’s important to note that audit rights do not give you unlimited access to your vendor’s internal controls. Proprietary products and details about systems, technologies, and solutions should remain confidential. However, pre-negotiated audit rights should give you access to independent third-party audits and policies covering security, confidentiality, and availability controls.

If you want more audits, your audit rights clause can give you access to additional data. The vendor will likely require you to pay for the audit, including the cost of its employees’ time. You will also need to schedule an audit well in advance to find a date that works for both parties. Some technology and fintech companies do not permit any client on-site audits by policy. You still need an audit clause in your contract to ensure you receive timely access to the due diligence you will need to monitor the vendor.

Download the Whitepaper: How to Negotiate Cost-Saving Vendor Contracts

How to address vendor red flags 

Audit rights and vendor contracts are critical to your compliance and business continuity management (BCM) programs. Difficulty obtaining audit rights or your vendor’s unwillingness to share essential documentation signals significant red flags.

If you’re experiencing issues with vendors, here are some steps to take to resolve the problems:

  • Communicate with the vendor: Discuss concerns honestly, clarifying the issues faced and their impact on both parties.
  • Update contracts: After initial conversations, ensure contracts are revised to address any red flags, potentially including requirements for sharing test results or recovery protocols.
  • Consult peers and leadership: If a vendor is unresponsive, seek advice from peers or escalate the issue to the vendor’s higher management.

There are times when a vendor relationship must end. In these circumstances, refer to the termination terms and conditions allowed in your contract and be prepared to onboard a new service provider to fill the gaps as necessary.

Related: How to Break Up with Your Vendor

While you may never use them, audit rights can help your FI evaluate vendors’ systems, processes, and metrics if needed. By following these implementation best practices and prioritizing key audit areas, you can help ensure your vendor relationships remain mutually beneficial and built for long-term success.

Want to learn more about vendor management best practices? Download our free vendor management buyer’s guide.

Download the Guide


Subscribe to the Nsight Blog