Professional model audit: keeping deal data secure

Data security and governance

In the high-stakes environment of multi-million-dollar financial transactions, model audits frequently involve reviewing bid-sensitive or market-sensitive information. For professional model auditors, ensuring the security of this data is paramount.

In previous articles, we discussed the importance of ethics, methodology, and rigorous quality management. Now, let’s delve into data security—an essential element in delivering a professional model audit.

Financial model auditing presents unique challenges in data security, especially in the following areas:

Two key risks to mitigate in model audits

1. Innovative processes: As model auditors adopt new technology, such as cloud-based collaboration tools or AI, including large language models (LLMs), it’s vital to manage these innovations securely. Without robust controls, these tools can inadvertently introduce data exposure risks.
2. Subcontracting risks: While subcontracting can lower costs, it often reduces control over critical processes, increasing the risk of data breaches.

These risks highlight the importance of a robust data security framework and an in-house approach for model audits.

Building an effective data security framework

A robust data security framework is essential to protecting sensitive financial data during the model audit process. Key components include:

1. Data encryption: All client data should be encrypted, both in transit and at rest, to prevent unauthorized access. Encryption safeguards sensitive information, ensuring that it remains secure and unreadable by potential intruders.
2. Access control mechanisms: Enforce strict access controls so that only authorized personnel can access sensitive data. Role-based permissions further limit risk, ensuring each team member has the appropriate level of access.
3. Regular security audits: Conduct frequent security audits, both internal and external, to ensure that the latest best practices are upheld. Regular audits allow organisations to proactively identify and address potential vulnerabilities.
4. Data governance policies: Establish comprehensive data governance policies detailing how data is managed, stored, and transmitted. Compliance with relevant regulations, such as GDPR, is essential to maintain ethical data practices and transparency.

Professional model auditors should be able to demonstrate external certification such as ISO 27001. This means that the firm is accredited to manage its information security policies and controls from within an ISMS (Information Security Management System). An ISMS is a systematic approach consisting of processes, technology and people that help firms protect and manage an organisation’s information through effective risk management.

Why keeping model audits in-house matters

When selecting a model auditor, it’s critical to understand whether they outsource any part of their audit processes. Outsourcing can bring cost efficiencies but often at the expense of security. Key risks of subcontracting include:

• Reduced oversight and control: Without full control over third-party processes, it can be challenging to enforce consistent security protocols, creating potential vulnerabilities.
• Inconsistent standards: Subcontractors may not always adhere to the rigorous standards necessary, raising the risk of security gaps.
• Data exposure risks: Each additional subcontractor in the data flow increases the likelihood of accidental data exposure or mishandling of sensitive information.
• Complex accountability: In the event of a breach, accountability can become difficult to trace, leading to delays in response and compliance issues.

Choosing a model auditor who maintains full control over the process—without subcontracting—mitigates these risks by ensuring:

• Enhanced control: Full internal control over data-related processes allows for strict adherence to security protocols.
• Consistency: An in-house approach ensures that every audit follows the same high standards, reducing the risk of inconsistencies.
• Ethical standards: As highlighted separately (The importance of ethical principles in financial model auditing), building an in-house culture which emphasises ethical standards will highlight the importance of confidentiality in dealing with client information.

Key takeaways

Financial models contain highly sensitive data, from financial forecasts to bid pricing. Ensuring the security of this information throughout the model audit process is essential for maintaining stakeholder trust, safeguarding business interests, and meeting regulatory requirements. Professional model auditors adopt a systematic and certified approach to data management and maintain control through an in-house approach.

In our next article, we will explore another vital consideration in providing a professional approach to model audit: financial stability and the ability to stand behind the opinions provided.