Beyond the Red Flags: Responding to a Failed Vendor Audit

Picture this: your vendor’s latest security audit just landed in your inbox, and you spot multiple failure points. What’s your immediate action plan? Failed vendor audits are an uncomfortable but increasingly common reality as reliance on third-party vendors grows, and handling them poorly can lead to data breaches, costly compliance violations, and serious operational disruptions. Knowing how to respond effectively isn't just good practice—it's essential risk management.

This blog provides a roadmap for handling failed vendor audits, from identifying common failures to establishing remediation processes. Consider this your playbook for turning a potentially risky situation into a managed, documented, and ultimately more secure vendor relationship.

Vendor audits: Setting the security standard

Before addressing how to respond to a failed audit, we must first  cover the fundamentals. Understanding why vendor security audits are conducted and what kinds of issues audits commonly uncover provides crucial context for evaluating findings and determining appropriate next steps.

Why vendor security audits are non-negotiable

With near-universal reliance on third-party vendors (cloud hosting, SaaS, etc.), businesses are deeply interconnected, and these vendors often access, store, or process sensitive information. Vendors extend your organization’s risk landscape exponentially. You only need to look at the increase in supply chain attacks cybercriminals are leveraging against less secure vendors to understand that vendor security is now a fundamental business risk.

Vendor security audits evaluate a third party's security controls against recognized standards like SOC 2 or ISO 27001, or industry-specific requirements such as HIPAA or PCI DSS. Audits verify security claims and ensure operational resilience, providing stronger evidence than contractual assurances. Additionally, regulations like GDPR and CCPA also mandate thorough vendor due diligence, typically requiring these audits for compliance.

Understanding common audit pitfalls

It's relatively common for audits to uncover areas needing improvement, and such findings don't automatically mean the vendor relationship must end. The key is to differentiate findings based on the risk they represent: minor administrative gaps may require lighter corrective actions, whereas critical security flaws indicate substantial risk and demand significant attention. Audit failures often cluster around specific control domains. Including the following key areas:

• Weak access controls: Insufficient user access reviews, overly permissive roles, lack of MFA on critical systems
• Poor vulnerability management: Inadequate patching cadence, lack of regular vulnerability scanning, failure to remediate known critical vulnerabilities
• Inadequate data encryption: Sensitive data not encrypted at rest or in transit
• Lack of formal policies and procedures: Missing or outdated documented security policies, incident response plans, or change management procedures
• Insufficient employee security training: Lack of regular security awareness training for vendor employees handling your data

Identifying findings in these or other areas should trigger the need for a thorough investigation and a structured response process.

Your immediate response plan to a failed audit

If your vendor fails a security audit, don’t panic. Following a clear process to manage the situation and mitigate any additional risks is crucial. Here’s a three-step process to immediately respond to a failed vendor audit.

Step 1: Dissect the audit findings

After receiving a failed vendor audit, the first step is to thoroughly review the complete audit report. The full report's findings, auditor commentary, and evidence descriptions are critical for accurately understanding the nature and severity of the issues identified. Ensure you involve your technical security and IT teams in this analysis, as this deep dive provides the factual basis for subsequent risk assessment and vendor communication.

Focus on these key pieces of information from the full report:

• Specific failed controls: Precisely identify which security controls listed in the framework were found deficient or non-compliant.
• Auditor's commentary and evidence: Pay close attention to the auditor's description of why the control failed, the evidence examined, and the potential risks.
• Root cause analysis: Look for any underlying reason for the failure, and if not explicitly stated, try to infer potential root causes based on the findings.
• Severity and impact assessment: Note how the auditor classified the severity of the finding (if applicable) and their assessment of its potential impact.
• Vendor's management response (if included): Some reports include the vendor's official response to the findings, which can offer initial insight into their perspective and remediation intent.

A detailed analysis of the report findings is non-negotiable—it ensures your subsequent actions are based on a clear understanding of the specific deficiencies rather than assumptions.

Step 2: Assess your organization's exposure

Once you understand the vendor's specific audit failures, the next step is to translate those findings into your organization's risk exposure. Audit failings are concerning for vendors, but the real significance depends on how that failure could potentially impact your organization. This assessment evaluates the concrete "so what?" for your business. Consider the following topics as you assess your organization’s exposure:

• Data sensitivity and scope: Assess the data accessed, processed, or stored by the vendor and the direct impact of failed controls on its confidentiality, integrity, or availability.
• Business process dependency: Identify core processes dependent on the vendor and the potential operational impact of exploiting the audit vulnerability or causing a service disruption.
• Compliance and legal implications: Review any regulatory violations or contractual breach notifications triggered by a vendor’s control failure.
• Potential reputational damage: Consider the potential damage to your organization's reputation if a security incident occurs due to the vendor's vulnerabilities, factoring in the specific services provided and the sensitivity of the data involved.

Collaborate with team members across Legal, Compliance, IT, Security, Procurement, and any business units that rely on the vendor. These combined perspectives are essential to fully understand the overall risk and decide if immediate actions are necessary to mitigate exposure.

Step 3: Initiate clear vendor communication

With your internal impact assessment complete, formally engage the vendor regarding the audit findings. Clear, prompt, and documented communication is essential at this stage, including keeping detailed records of all interactions related to this process. Don't rely on informal chats—initiate official contact to express your concerns based on the audit report and your internal assessment of potential risks to your organization.

Communication should aim to achieve several key objectives:

• Formal notification: Clearly state that you have reviewed the specific audit report and have concerns about the documented failures or findings.
• Share concerns appropriately: Briefly explain why these findings matter to your organization, referencing any potential impacts without necessarily revealing overly sensitive internal details.
• Request dialogue: Ask for a formal meeting or call with the appropriate vendor contacts (including security and relationship managers) to discuss the findings in detail.
• Request their plan: Explicitly request the vendor's official written response to the findings, including their root cause analysis (if available) and their proposed corrective action plan (CAP) with timelines.

Assess the vendor's initial response, focusing on transparency, acknowledgment of issues, commitment to remediation, and overall cooperativeness, as this informs future decisions.

The crossroads: Decide between remediation and termination

Following your initial assessment and communication with the vendor, you arrive at a critical crossroads: should you work with the vendor to remediate the identified issues, or is it time to terminate the relationship?

Building the case for remediation

Remediation is often a preferred method for specific vendor scenarios, including when:

• A vendor is critical to your operations and difficult to quickly replace
• The vendor can fix the audit failures within an acceptable timeframe
• The vendor shows a genuine willingness and capacity to address issues transparently

Additionally, if the residual risk after successful remediation falls within your organization’s risk tolerance level, working together on a fix is usually viable.

Identifying when termination is necessary

On the other hand, termination may be necessary for vendors when:

• The audit reveals critical, systemic failures that pose an unacceptable risk to your organization
• Failures are repeat offenses from previous assessments
• The vendor is unwilling to acknowledge issues and cannot propose a credible remediation plan

It’s helpful to also consider the availability of more suitable and secure alternative vendors when weighing termination. At the end of the day, if there is a general loss of trust between the vendor and your organization, the relationship may not be salvageable.

Making and documenting your decision

Ultimately, deciding whether to remediate or terminate must align with your organization's defined risk appetite and Third-Party Risk Management framework. Whatever path you choose, thoroughly document all the factors considered, the rationale behind the decision, and the final outcome. 

Don’t forget to consult with your legal counsel to review contractual obligations, termination clauses, and potential implications before finalizing a decision.

Beyond the audit: Managing remediation & ongoing oversight

Choosing to remediate with a vendor is not the end of the process—it’s the start of a critical new phase. You’ll need diligent oversight to ensure the vendor addresses identified audit failures and maintains a strong security posture moving forward.

Overseeing an effective remediation plan

The key to a successful remediation process with a vendor is a formal corrective action plan (CAP). A CAP is a critical document that details the specific actions a vendor will take to address each audit finding, including identifying responsible individuals, realistic completion dates, and evidence to prove completion.

When a vendor provides you their CAP, establish regular check-in meetings to monitor their progress against agreed-upon timelines. This process ensures the vendor is held accountable and provides regular updates to your team.

Verifying that security fixes actually work

Once a vendor informs you that issues are fixed, you’ll need to confirm the remediation. This is especially important for critical findings, and it’s helpful to define upfront how remediation effectiveness will be validated. Typical methods include updated policy documents, configuration screenshots, vulnerability/penetration test results, or other tangible proof.

For significant security gaps, consider requiring validation from an independent third party or a follow-up audit focused on the identified control before closing out the findings.

Establishing continuous vendor monitoring

Point-in-time audits only provide a snapshot of your vendor’s current security posture. Effective vendor risk management requires ongoing vigilance, which is where continuous vendor monitoring comes into play. Ongoing monitoring allows you to maintain visibility between formal audits and address issues before they become an audit failure.

Continuous vendor monitoring strategies include:

• Periodic security questionnaires
• External attack surface scanning
• Security ratings
• Data leak detection services
• Monitoring public breach notifications
• Reviewing threat intelligence feeds concerning the vendor

The frequency and intensity of monitoring can be tailored to a vendor’s inherent risk level and their track record, including their performance during the current remediation process.

Proactive Vendor Risk Management with UpGuard

Effectively navigating a failed vendor security audit demands a structured, risk-informed response. This encompasses a thorough evaluation of audit findings, the implementation of a clear remediation process, and diligent ongoing oversight. Effectively managing this entire lifecycle is fundamental to establishing and maintaining a resilient third-party risk management program. 

Streamlining this complex lifecycle is crucial, and a dedicated TPRM platform like UpGuard Vendor Risk provides the necessary tools to manage the entire process efficiently. UpGuard helps you move from initial assessment through remediation tracking and into proactive ongoing oversight. Specific features relevant to handling audit failures and managing vendor risk include:

• Security questionnaires: Streamline the assessment process with automated questionnaires (using standard frameworks or custom templates) and risk identification tools.
• Remediation workflows: Track specific findings (like audit failures), assign corrective actions to vendors or internal teams, collect evidence, and monitor remediation progress through a centralized workflow.
• Continuous monitoring and security ratings: Gain ongoing visibility into vendor security posture between audits using dynamic, data-driven Security Ratings and external attack surface scanning.
• AI-Powered assessments: Leverage AI to accelerate risk assessments based on questionnaires, security ratings, and document analysis for faster insights.

By combining a robust internal process with the enhanced visibility and workflow efficiency offered by UpGuard, organizations can confidently manage vendor risks and build a more secure digital supply chain. Learn more and get started today at upguard.com/demo.