SOC 1 vs. SOC 2: The Guide to Differentiation
If your organization provides services to other companies, your customers may require System and Organization Control (SOC) reports for assurance. SOC is a suite of reports from the American Institute of Certified Public Accountants (AICPA) that can be issued by independent third-party auditors over a service organization’s systems and controls. There are multiple different SOC reports: SOC 1, SOC 2, SOC 3, and SOC for Cybersecurity. While similar in some respects, each type of report is designed to achieve different goals and for different audiences.
SOC reports have become increasingly important in today’s business environment. As threat landscapes continue to expand, more organizations are at risk of compromising personal and customer information. SOC reports help solve this by communicating an organization’s cybersecurity practices to potential customers. In today’s business world, undergoing a SOC audit and supplying the report to customers and partners has become an expectation of most vendors.
With multiple types of SOC reports to choose from, it can be daunting to determine which one is right for your organization. Let’s take a closer look at two popular types of SOC reports: SOC 1 and SOC 2.
Understanding SOC 1
SOC 1 reports are most applicable for organizations that perform financial transaction processing or support transaction processing systems. Obtaining a SOC 1 report is ideally suited for service organizations that handle information for their clients that impacts the customer’s financial statements or internal controls over financial reporting.
These reports use no pre-established control objectives and instead use objectives that fall within general business processing and general information technology controls of the system. SOC 1 reports are subject to limited distribution to user organizations and their financial statement auditors.
There are two types of SOC 1 reports: SOC 1 Type I and SOC 2 Type II. A SOC 1 Type I report focuses on a description of the organization’s controls, how the controls are designed to achieve the control objectives, and whether the controls are properly implemented at a point in time. A SOC 1 Type II audit contains the same opinions as a Type I, but includes an opinion on the operating effectiveness of a control to achieve the related control objectives during a reporting period.
Exploring SOC 2
A SOC 2 report demonstrates an organization’s commitment to its customer and partner requirements and cybersecurity best practices. This detailed report applies to a broad variety of systems used by customers and specified parties. SOC 2 reports include one or a combination of the AICPA trust services criteria: security, availability, processing integrity, confidentiality, and privacy. Let’s take a closer look at these criteria:
Security: Information and systems are protected against unauthorized access and unauthorized disclosure, including potentially compromising damage to systems. Information (or data) should be protected during its collection or creation, use, processing, transmission, and storage.
Availability: Data and systems are available for operation and use. Systems include controls to support accessibility for operation, monitoring, and maintenance.
Confidentiality: The organization should protect information designated as confidential (i.e. any sensitive information).
Processing Integrity: System processing (particularly of customer data) is complete, valid, accurate, timely, and authorized to meet the entity’s objectives.
Privacy: Personal information is collected, used, retained, disclosed, and disposed of in accordance with relevant regulations and policies.
While security is the only required criteria, organizations may choose to add other trust services criteria within the scope of their audit.
There are five sections to a SOC 2 report, as detailed below:
Auditor’s Report: the first section of a SOC 2 report provides the auditor’s opinion, which is categorized as either qualified or unqualified. A qualified opinion means that the auditor found at least one issue of a control not working effectively throughout the reporting period. An unqualified opinion means the auditor did not find any issues with the effectiveness of the organization’s controls throughout the reporting period.
Management Assertion: section 2 of the report provides an overview of the organization undergoing the audit, stating that the respective controls were designed and implemented within the reporting period and that the controls operated effectively during the period. This section serves as a precursor to section 3.
System Description: this section is arguably the most important section of a SOC 2 report, and contains important information on the people, processes, and technology that supports the organization’s service. It serves as an overview of the organization’s entire system and the controls they have in place.
Description of Criteria: section 4 of the report contains all of the controls that were evaluated during the audit. It’s typically the most detailed section of the SOC 2 report.
Other Information: This section is an optional part of the report where your organization can provide relevant information to the audit.
Similarly to SOC 1, there are also Types I and II for SOC 2 reports. The SOC 2 Type I Report includes an opinion over the suitability of the design of controls at the service organization at a specific point in time. The SOC 2 Type II Report includes an opinion over the suitability of the design of controls at the service organization and the operating effectiveness of the controls throughout a specified period of time.
Comparison: SOC 1 vs. SOC 2
While a SOC 1 report is designed to address controls over a service organization’s financial reporting, a SOC 2 report addresses the service organization’s control relevant to their security operations and compliance. SOC 2 reports are most commonly considered a “deeper dive” than SOC 1 reports into operational controls at the service provider.
The audience for each report also differs. SOC 1 reports are typically restricted to user entities (the “consumer” of SOC 1 reports), financial auditors, and managers of the service organization. The audience for a SOC 2 report is typically restricted to current and prospective customers, business partners, and auditors providing services to the organization.
When deciding which SOC report to pursue, an organization should consider their business model and target audience. If the organization only handles non-financial data and would like to provide overall security assurance to their customers, then SOC 2 may be the right report. If the organization handles financial data or data that may impact their customers’ financial reporting, a SOC 1 report may be the right answer. To determine which report is right for an organization, best practice is to consult with a trusted cybersecurity or audit partner that can guide the organization in the right direction.
The Audit Process
Regardless of whether an organization decides to pursue a SOC 1 or SOC 2 report (or both), it’s helpful to be prepared for the audit process. Many organizations choose to complete a readiness assessment prior to their SOC audit. The readiness assessment helps to prepare the organization’s policies and procedures so that the audit runs smoothly.
Depending on the organization, it may also be useful to partner with a third-party automation platform to help streamline the process of documenting the organization’s policies and procedures.
The assessment phase follows the readiness phase. It’s the “main event” of a SOC examination—this is where an organization works with their auditor to plan and assess the controls through walkthroughs and ultimately lead to the final deliverable. A walkthrough is a meeting, or series of meetings, to discuss the design and operation of an organization's control environment. A final report is issued after the assessment phase of the audit concludes. The entire audit process can take anywhere from three to 12 months.
With multiple different types of SOC reports to choose from, having a trusted security partner can ensure the SOC process goes smoothly. In addition to conducting a successful readiness assessment and engagement, the right partner can help an organization leverage security as a differentiator and successfully reach their business and compliance goals.
Interested in learning more about the differences between SOC reports or need help deciding which report is right for your organization? Contact us today at information@goaudora.com.
