SOC audits — the acronym for “Systems and Organization Controls” — assure the effectiveness of internal controls at service organizations such as advisory firms, technology vendors, and other businesses. SOC reports come in several forms, notably SOC 1 and SOC 2.
Don’t let the similarity in their names fool you; SOC 1 and SOC 2 reports and the steps a vendor must undertake to comply with each one are starkly different.
Indeed, SOC 1 and 2 reports have only a few things in common:
- Both are based on a set of auditing standards developed by the American Institute of Certified Public Accountants (AICPA), known as the Statement on Standards for Attestation Engagements 18 (SSAE-18, previously known as SSAE-16).
- Both reports address service organizations rather than publicly traded companies.
- Both can generate Type I and Type II reports, which we’ll explain shortly.
Beyond those three essential points, SOC 1 and SOC 2 reports quickly part ways. They focus on different subjects and involve other procedures.
Which type of SOC report your business should obtain depends on the nature of your organization, its needs, and what assurance you want — either from your vendors or that you wish to provide to clients. Often, companies will want both.
What Is SOC 1?
A SOC 1 report assesses the effectiveness of an organization’s Internal Control over Financial Reporting (ICFR). A SOC 1 audit, performed by a certified public accountant, will review the organization’s controls that affect the enterprise’s financial statements. The report answers questions such as: Are the internal controls well designed? Do they work, helping the organization to meet its financial goals?
These reports focus on entity-level controls (including data protection) over the service provider’s financial statement assertions to ensure that it meets regulatory requirements for financial reporting.
Publicly held companies must engage in SOC 1 reporting to comply with the Sarbanes-Oxley Act, which requires publicly traded companies to maintain effective ICFR. SOC 1 reports assure that if the company relies on third parties for its financial reporting processes, those organizations have secure ICFR and won’t risk the company.
What Is SOC 2?
SOC 2 reports assess the effectiveness of an organization’s controls over data security, availability, processing integrity, confidentiality, or privacy. These elements comprise the five “trust services criteria” or “trust services principles.”
These reports address cybersecurity controls, including organizational oversight, vendor management, internal corporate governance and risk management, and regulatory oversight.
Service organizations such as Software-as-a-Service (SAAS) providers, data center providers, and cloud computing hosts may provide SOC 2 reports to senior management, boards of directors, customers, regulators, business partners, and suppliers.
Key Differences Between SOC 1 and SOC 2
When choosing between a SOC compliance audit, it’s essential to understand the key differences between these report types. This will allow you to select the best fit for your business needs.
Here are some of the significant differences between SOC 1 and SOC 2 reports:
- Purpose: SOC 1 focuses on financial controls, while SOC 2 covers security, availability, processing integrity, confidentiality, and privacy.
- Scope: SOC 1 only covers controls relevant to financial reporting. SOC 2 is broader and focuses on controls related to the Trust Services Principles.
- Criteria: SOC 1 reports are prepared under SSAE 18 attestation standards. SOC 2 reports adhere to AICPA Trust Services Criteria.
- Audience: SOC 1 reports are primarily for auditors of user entities and stakeholders who need assurance on controls relevant to financial data. SOC 2 reports are more customer-facing to demonstrate trust and transparency over customer data and information security.
- Testing: SOC 1 testing procedures focus on financial transactions and balances. SOC 2 includes IT general controls testing and validation of non-financial reporting controls related to data security and privacy.
Types of SOC Reports
SOC 1 and SOC 2 reports can be of Type 1 or Type 2.
Type 1 reports only review whether the organization’s controls are designed effectively and that management’s description of internal control is accurate. Essentially, Type 1 reports only examine an organization’s internal controls simultaneously.
Type 2 reports incorporate all the same information as Type 1 reports and then go further, assessing whether the internal controls work as intended. In other words, Type 2 reports examine the performance of internal controls over an extended time, typically one year.
What is the Difference Between a Type I and a Type II in a SOC Report?
The main difference between a Type 1 and Type 2 SOC report lies in the testing procedures:
- Type I: The auditor expresses an opinion on whether the organization’s description of its system fairly presents the system as designed and whether the controls are suitably designed to achieve the specified control objectives—only tests design effectiveness.
- Type II: Includes everything in a Type I report, plus detailed testing of the operating effectiveness of the organization’s controls over a specified period. It tests both design and operational effectiveness.
Type II reports provide more assurance since the auditor tests how well the controls work throughout the review period. However, Type I reports can still offer value by verifying the organization’s controls are designed appropriately.
Additional SOC 2 Reports
The AICPA has developed several more SOC 2 reports addressing other subjects and criteria. In collaboration with the Cloud Security Alliance (CSA), the AICPA established an assessment of cloud providers known as the CSA Security Trust and Assurance Registry (STAR) Attestation.
The “SOC 2 Report with the Criteria in the Cloud Security Alliance (CSA) Cloud Controls Matrix (CCM)” guides auditors when assessing the design and operating effectiveness of internal controls aligned to traditional SOC 2 reports while also incorporating the criteria of the CSA CCM.
Yet another SOC 2 report focuses on controls specific to organizations that must comply with the Health Insurance Portability and Accountability Act (HIPAA). The AICPA collaborated with the Health Information Trust Alliance (HITRUST) to incorporate the HITRUST Common Security Framework (CSF) and map those criteria to the trust services criteria.
SOC 2 compliance does not guarantee that you will comply with the International Organization for Standardization’s ISO 27001 standard. ISO 27001 also focuses on security controls but is more rigorous than SOC 2.
SOC 1 vs SOC 2: Which One Should You Choose For Your Business
Deciding between SOC 1 and SOC 2 depends primarily on your business focus and intended report users. SOC 1 is ideal if you must demonstrate adequate financial controls to auditors, investors, regulators, and other user entities – it’s commonly used by financial institutions, payroll processors, etc.
SOC 2 makes more sense if you want to showcase controls relevant to security, privacy, and availability to current and prospective customers – it’s essential for SaaS, cloud services, data centers, etc.
In some cases, for service organizations with integrated financial and information systems, both SOC 1 and SOC 2 reports may be recommended to address all control domains fully. Work with experienced risk management advisors to conduct a gap analysis and determine which type of SOC report is right for your objectives.
FAQs About SOC 1 and SOC 2
How Long Does It Take To Prepare For a Soc 1 Report?
The length of time needed to prepare for a SOC 1 audit engagement depends on the maturity of the organization’s existing controls. On average, expect 3-6 months of preparation to implement necessary controls, write policies and procedures, and gather required documentation.
How Long Does It Take To Prepare For a Soc 2 Report?
For SOC 2, organizations should budget 4-9 months for pre-audit preparation. More preparation time is usually needed for an initial SOC 2 engagement versus renewal audits.
Does Every Organization Need a Soc 1 Report?
SOC 1 reports are only required for organizations that need to report on controls relevant to financial statement audits. Not all businesses need a SOC 1. Professional guidance can determine if SOC 2 or other SOC reports better fit your needs.
SOC Compliance Management With RiskOptics ROAR
Going through any kind of SOC audit is a challenging task. It requires vendors to go through laborious processes for assessing risk, documenting business processes, testing controls, remediating weak management, and then documenting their final control posture.
Doing all this work manually with spreadsheets is folly; more details will be noticed or recorded correctly. Organizations need a dedicated software tool to automate as much of the work as possible and to guide them through the process. This is where RiskOptics ROAR from Reciprocity can help.
ROAR’s simple dashboard allows you to see your progress on compliance with SOC reports or numerous other regulatory burdens, such as HIPAA, GDPR, or SOX. It helps you identify holes in your documentation and procedures and guides you in addressing them.
RiskOptics ROAR compliance, risk, and workflow management software is a user-friendly platform that keeps track of your processes and helps you spot high-risk areas before they become a real problem.
Schedule a demo to see how the ROAR Platform can help your company with its compliance initiatives.