Can your organization assure stakeholders, management, regulators, and clients that IT systems and data are adequately protected, controlled, and processed?
Service Organization Controls (SOC) reports are used to help organizations provide their customers with reassurance about the security of their data and infrastructures. These reports verify that an organization is following best practices relating to finances, security, and privacy. Essentially, these detailed audits help companies give their customers added trust in service delivery and controls.
Types of SOC Reports
Depending on the types of organizations involved, the information needed and what service is being provided, the SOC reports come in three forms, namely:
1. SOC 1 Reports
These reports are intended mostly for the service organization users and their auditors. They are reports that have an immediate effect on a user’s entity’s financial statements specifically the Internal Control over Financial Reporting as per the SSAE 18 reporting standard.
Some of the different organizations that tend to receive SOC 1 reports include payroll processing businesses, loan servicing companies, medical claims processors, certain investment service providers or any service providers that process financial transactions for user organizations.
There are two types of SOC 1 reports:
- Type 1 reports which is a specific snapshot in a period of time that includes a review of the design of the controls.
- Type 2 reports which review controls over a period of time that states how the control design suit the stated control objectives.
Type 1 reports are typically helpful in the first year. After, customers almost always require Type 2 reports.
It is important to remember that SOC 1 reports often have sensitive information, so they cannot be shared with anyone. It is only shared with specified users such as management of the company who is having the test performed, user organizations and their financial auditors of the organization, and certain other business partners who have knowledge and understanding of the specific services provided.
2. SOC 2 Reports
These are reports related to security, availability, processing integrity, confidentiality and privacy known as the Trust Services Criteria. A service organization chooses the specific criteria applicable to services provided. For a SOC 2 report, the security criteria, also know as the criteria common to all the criteria, is mandatory. The applicability of the remaining criteria will depend on services provided and the usefulness of the SOC 2 report report criteria to customer, or user organizations. These reports are also limited distribution reports designed only for management of the service organization, specified user organizations and their management and auditors, and other user organizations or business partners with knowledge of the services provided. Service organizations such as data centers, cloud service providers, managed services providers and other service providers in which users are concerned about IT and data security and availability, processing integrity, confidentiality or privacy.
Often it can be difficult, even for professionals, to determine if a SOC 1 or SOC 2 is needed by user organizations. We often see that user organizations requesting such reports may not understand the difference. This confusion is further complicated by the two types of reports, Type 1 or Type 2, which is available for both SOC 1 and SOC 2 reports. Basically, if a service organization processes transactions for customers or provides IT systems or services utilized to process financial transactions, a SOC 1 will apply. If not, a SOC 2 could apply. Both can also apply if a service organization processes transactions for customers or provides IT systems or services utilized to process financial transactions, and user organizations are also very concerned about security, availability, processing integrity, confidentiality or privacy. In these circumstances, negotiations with customers can be helpful for mutual understanding of the specific benefits of both SOC 1 and SOC 2 and the costs of compliance which may have to billed back to customers.
There are two types of SOC 2 reports:
- Type 1 reports which is a specific snapshot in a period of time that tests the design of these controls.
- Type 2 reports which review controls over a period of time that tests the operating effectiveness designed to mitigate the risk of risking customer data.
As explained above, Type 1 reports are typically helpful in the first year. After, customers almost always require Type 2 reports.
3. SOC 3 Reports
These reports are public-facing versions of the SOC 2 Type II report that do not include any of the customer’s confidential information. This version of the SOC report provides a high-level summary for the general public minus details regarding internal controls. SOC 3 reports are utilized by organizations that have a robust control environment; these reports can be distributed free to anyone who needs them or posted on a service organizations website. The work required for a SOC 3 report is the same as a SOC 2 report, which is why most customers will almost always require a SOC 2 report, even if a SOC 3 report is available.
The Benefits of SOC Reports
- SOC 1 Reports – this report focuses on the accurate presentations of management’s description and the suitability of the controls designed to meet specific objectives that directly impacts a user entity’s financial reporting. The report allows customers and stakeholders to develop confidence in your organization and may also provide your service organization with an advantage over less control conscious competitors.
- SOC 2 Reports – this report focuses on the accurate presentations of management’s description and the suitability of the controls designed to meet applicable criteria. The report allows customers and stakeholders to develop confidence in your organization while also providing you with an advantage over less control concerned competitors.
- SOC 3 Reports – these reports can be used as a marketing tool for an organization and they don’t contain sensitive information.
Are Your IT Systems & Data Properly Protected?
At Accounting and Business Consultants, LLC we specialize in performing Cybersecurity, SOC 1, SOC 2 and SOC 3 audits for businesses and service organizations. Contact us for more information about our services.