We dive into the three types of SOC reports and offer practical scenarios to help you determine which one aligns with your organization’s needs.
To ensure vendors provide protective and reliable services, your organization can request a system and organization controls (SOC) report from vendors. Conducted by an external auditor, a SOC report is an official document that reviews vendor practices to verify you can trust the vendor with sensitive information.
SOC reports help businesses gauge how reliably their vendors protect their data and reveal any potential vulnerabilities in their vendors’ services. By requesting and properly evaluating SOC reports, organizations can make informed decisions to mitigate cybersecurity risks.
Because there are three types of SOC reports, selecting which one to request from a service provider can be tricky. Choosing the right SOC report ensures you are evaluating a vendor for services that are essential to your daily operations. If you don’t choose the right SOC report, you might be assessing your vendors for less critical services, thereby missing crucial insights into their operations.
In this blog, we will break down the variations of SOC reports so you can choose the one that aligns with your organization’s needs and protects its greatest assets.
The Three SOC Reports
The basic intentions of the three reports are as follows:
- SOC 1 – related to internal control over financial reporting.
- SOC 2 – related to evaluating the five trust service criteria, which include security, availability, processing integrity, confidentiality, and privacy.
- SOC 3 – This report presents a simplified summary of the same principles in SOC 2, but it is geared toward and available for public use. We will not cover the SOC 3 report in detail here given that most of the questions we receive relate to SOC 1 and SOC 2 reports.
SOC 1 and SOC 2 Reports
Below, we elaborate on what SOC 1 and SOC 2 reports entail, who the intended user is, and what organizations would benefit the most from each:
- SOC 1 – This report evaluates how accurately and securely a service provider oversees their internal control over financial reporting by examining whether its processes protect financial data and whether its controls prevent reporting errors. SOC 1 is intended for the auditor or internal auditor of a user organization. If your organization uses a vendor to manage payroll, financial transactions and financial data, then SOC 1 is right for you.
- SOC 2 – This report assesses how well a service provider safeguards an organization’s sensitive information, including preventing security breaches, providing convenient access to its systems, processing data correctly, protecting confidential information and respecting its client’s privacy. SOC 2 is intended for security, compliance and operations departments at an organization. If your organization uses a vendor for cloud computing services, CRM systems or cybersecurity management, then SOC 2 is right for you.
Type 1 and Type 2 SOC Reports
Another consideration is whether to obtain a Type 1 or Type 2 SOC report.
- Type 1 – This report is centered on the description of a service organization’s system and the design of the service organization’s controls. The reports are issued as of a specific date.
- Type 2 – This report includes the same information as a Type 1 report but adds an opinion on the operating effectiveness of the controls at the service organization. Type 2 reports are issued over a specific time period, usually from six to twelve months. It also includes detailed descriptions of the service auditor’s tests of controls and results of those tests, noting whether testing passed or exceptions were noted.
Type 1 reports can provide extensive detail about a service organization’s purpose and controls. When you need more rigor and due diligence, Type 2 tests those controls to assess their operating effectiveness.
Three SOC Scenarios
An example of a situation requiring a SOC 1 would be ABC Inc., a publicly traded company that outsources its payroll processing to a vendor. ABC’s financial auditor and internal audit department will need to obtain a SOC 1 Type 2 report to gain comfort over the controls at the payroll processing vendor in terms of internal control over financial reporting.
In this case, both management (typically through their internal audit department) and external auditors are the intended users of the report for their purposes and goals. They need comfort in internal control over financial reporting to properly support their related certifications and opinions.
An example of a situation involving a SOC 2 would be BCD Bank which outsources its data center function to an external data center company. The security, compliance, operations and other functions at BCD Bank want to gain comfort over one or all the five trust principles at the data center provider.
A report focused on internal control over financial reporting may touch on those principles but would not provide the comfort in those areas that a SOC 2 report does. SOC 2 shows whether the controls at the service organization address the trust services principles. It will provide evidence on whether the service organization is operating controls as committed or agreed.
Soc 1 and Soc 2
A question that often follows these descriptions is – Are there companies that should issue both a SOC 1 and SOC 2? Increasingly, the answer is becoming yes.
In our second example of BCD Bank, let’s add that BCD is a publicly traded entity or one that has a strong need related to internal control over financial reporting. BCD’s financial auditors and internal auditors would want to see a SOC 1 report related to the data center in addition to other department needs for the detail and rigor of SOC 2 surrounding the trust services principles. With that fact pattern, both SOC 1 and SOC 2 apply.
In this blog, we provided some high-level facts about a detailed and complicated process. Understanding the nuances of SOC reports will empower your organization to make informed decisions about the quality of services its vendors provide. Choosing the right SOC report tailored to your organization’s specific needs and concerns is essential to secure your sensitive information and minimize risks.
In our upcoming articles, we will explain how you should review a SOC report and evaluate the external auditor’s opinion so you can strengthen your organization’s cybersecurity defenses and enhance its overall wellbeing.