If your company is considering a merger, an acquisition, or any other major investment in another company, conducting a security audit of the target is a critical step in deciding whether the move is a wise one.

In a business landscape where cyber threats are on the rise, and where a single data breach can cost a business millions and inflict lasting reputational damage, a comprehensive security audit stands as your first line of defense against making a bad investment — more specifically, investing in a company that may be vulnerable to significant financial losses or major legal liabilities due to a lack of adequate data security. 

Never conducted a security audit or been involved in one before? Don’t worry, we’ve got you covered.

Let’s go over what a security audit is, its benefits, and how to effectively carry out one. 

 

What Is a Security Audit?

A security audit is a thorough examination of a company’s information system to determine the robustness of its security measures, policies, or infrastructure.

Your security system is typically measured against a security audit checklist consisting of industry best practices or standards, and/or relevant laws and regulations.

The following are some of the elements that might be examined during a security audit:

  • Data handling procedures
  • User access controls
  • Encryption standards or methods
  • Backup and recovery processes
  • Physical security measures for hardware and facilities

 

Benefits of Conducting a Security Audit

Security audits are important for several key reasons. 

 

Risk Identification and Mitigation

Security auditing provides a detailed assessment of a target company’s security vulnerabilities. This insight is important in making informed decisions, particularly in evaluating the potential costs or liabilities associated with merging with or acquiring a company that has weak security policies and protocols.

 

Ensuring Compliance

In highly regulated industries, such as healthcare, security auditing helps confirm whether a target company is compliant with relevant data protection and privacy laws. It helps you identify any compliance gaps that might pose legal or financial risks in the future.

 

Valuation Accuracy

The insights gained from a security audit can impact the target’s company valuation. For example, discovering serious security flaws or compliance issues can lead to adjustments in the buying price to reflect the costs needed for remediation, or for bringing the target company’s data security environment to an acceptable standard.

 

Integration and Continuity Planning

Understanding the security protocols and infrastructure of the target company can lead to a smoother integration post-acquisition or merger.

For example, the process can provide insights into how well the target company’s systems can integrate with those of the acquirer. With this knowledge, proactive measures can be taken to align the two entities’ information security protocols or infrastructure, ensuring a more seamless transition once the deal is completed.

 

Increasing Investors’ and Stakeholders’ Confidence

A thorough security audit can greatly enhance the confidence of investors and stakeholders, particularly those who are uncertain about the transaction. Carrying out this assessment demonstrates a proactive approach to risk management and, depending on the findings, can affirm the investment or transaction as financially sound.

 

Types of Security Audits 

You can conduct a security audit in various ways, depending on your needs and objectives. Below is a look at the most common types of audits. Each type serves a specific purpose, and together, they provide a holistic overview of the target’s cybersecurity environment.

 

Compliance Audits

A compliance audit is performed to verify compliance or adherence to specific regulations, laws, or standards. These audit types are especially important in heavily regulated industries with highly sensitive data like healthcare and banking. For example, you can perform a compliance audit on a company in the health sector to ensure HIPAA compliance

 

Risk Assessments

A risk assessment involves evaluating potential risks that could affect the target company’s information assets. They focus on identifying, analyzing, and prioritizing the potential risks based on their likelihood of happening and their potential impact.

 

Vulnerability Assessment

As the name suggests, these assessments aim to identify, quantify, and prioritize vulnerabilities within a system. They map out the security weaknesses in the target company that need addressing. Vulnerability assessments can cover aspects like software flaws, network weaknesses, misconfigurations, and so on.

 

Penetration Tests

These are simulated cyberattacks on the target company’s system to identify exploitable vulnerabilities. Penetration testing can help you understand the target’s defense capabilities — giving you a gauge of how well it can withstand real-world attacks.

 

Steps in Conducting a Security Audit of a Target Company

The process of auditing a target company’s security protocols or infrastructure generally involves the following steps:

 

Planning

Start by defining the scope of the audit, i.e., what systems, networks, and data will be audited, along with the specific objectives of the audit.

Next, assemble an audit team. The team should consist of individuals with relevant skills and experience. This may include IT professionals, cybersecurity experts, and compliance specialists.

Then develop an audit plan. This is essentially a script outlining the steps that will be taken during the audit, the methods and tools, as well as timelines and milestones. Having a plan ensures the audit is done systematically and efficiently, and that it’s aligned with the overall goals of the transaction.

 

Trust CapLinked to protect your confidential information and streamline your workflow.

Execution

With a clearly defined scope, a skilled security team, and a comprehensive audit plan in place, it’s time to carry out the actual audit. The specific actions here will vary depending on the type and scope of the audit, but they might include:

  • Conducting security scans, i.e., scanning systems for vulnerabilities and common security misconfigurations.
  • Reviewing security logs to identify any suspicious activities or potential security incidents.
  • Interviewing personnel to learn about the target company’s security practices and processes.
  • Observing the target company’s operations and reviewing relevant security documentation to identify risks or vulnerabilities.

 

Reporting

The final step is preparing a comprehensive report detailing the audit’s findings. The report should include all the identified security gaps, associated risks, and any recommendations for remediation.

 

Common Security Audit Findings

When conducting a security audit, here are some of the typical flaws or vulnerabilities you might encounter:

  • Weak passwords: This includes the use of simple, easily guessable passwords or the failure to change default passwords, which makes information systems more vulnerable to hacking and other forms of unauthorized access.
  • Outdated software: This is running software that is not up-to-date. Outdated software can leave systems exposed to known security vulnerabilities that newer software versions have fixed.
  • Misconfigured security settings: This is where the setting configurations of various IT systems or applications have been erroneously implemented, leaving room for unauthorized or illegal access.
  • Unpatched vulnerabilities: This refers to systems or applications that have known security flaws but have not been updated with necessary patches or security fixes, leaving them open to exploitation.
  • Inadequate access controls: This is where systems or applications don’t properly restrict or enforce access to certain sensitive data, e.g., databases, directories, files, application functions, network resources, and so on. This means malicious actors could access these resources.

 

Best Practices for Conducting a Security Audit

Here are a few best practices to follow when conducting a security audit to improve the efficiency and effectiveness of the process.

 

Liaise with the Target Company and Involve Them in Planning

Before commencing the audit, make sure to liaise with the target company and its management. Involving them in the planning process will ensure that you have the necessary resources, access, and support, facilitating a more comprehensive and seamless process.

 

Select your Audit Team Wisely

Select an audit team consisting of individuals who aren’t just qualified but also have extensive experience in security auditing. Look specifically for people who have industry-specific knowledge relevant to the target company and its operations.

 

Communicate Audit Findings in a Clear and Concise Report

The final audit report should be clear, concise, and where applicable, include actionable recommendations. Use simple and straightforward language that all parties who will read the report will understand.

 

Communicate Findings Promptly

Equally as important as presenting your findings in a clear and concise manner is doing so promptly. Timely communication of the security audit findings allows for quicker decision-making (e.g., whether to proceed or abandon the transaction) or the planning of remedial actions to address identified vulnerabilities or gaps.

 

Respect the Target Company’s Time and Resources

The audit should be conducted efficiently, with as little disruption to the target’s operation as possible. Being mindful of their time and resources helps maintain a positive relationship between your company and the target during the whole process.

 

Wrapping Up

Conducting a comprehensive security audit of a target company is a critical part of due diligence in business transactions like mergers and acquisitions.

It reveals the current state of a company’s security posture, helping guide informed decision-making. Additionally, it lays the groundwork for enacting necessary security improvements post-transaction.

As part of this process, it’s essential that you have the right tools and platforms to manage and share sensitive files and data securely.

With robust security measures, including advanced encryption and customizable permission settings, CapLinked’s virtual data rooms (VDRs) ensure that your sensitive information is protected during security audits while also allowing seamless collaboration among stakeholders.

 

Request a free trial today to see if CapLinked is right for you. 

 

Sources

IBM: Cost of a Data Breach Report 2023

US Department of Health and Human Services: Summary of the HIPAA Security Rule

 

Sean LaPointe is an expert freelance writer with experience in finance and tech. He has written for several well-known brands and publications, including The Motley Fool and Angi/HomeAdvisor.