When it comes to service providers handling sensitive user data, having a robust framework for security and compliance is non-negotiable. That's where SOC examinations enter the picture. Short for System and Organization Controls, SOC evaluations are specifically tailored for companies that directly interact with user control systems—think SaaS providers, financial reporting firms, data centers, and payment processors.
Now, you might have heard about different types of SOC reports, each fulfilling unique user requirements. In this article, we'll delve into the crucial distinctions between SOC 1 vs. SOC 2 reports, helping you pinpoint which one aligns best with your needs.
SOC 1 vs. SOC 2 Report
The main difference between SOC 1 and SOC 2 reports lie in the types of controls they assess and the specific user needs they address.
SOC 1 is all about the financial controls a service organization has in place. If you're a company that needs to know how a service organization impacts your financial reporting, then you'd typically ask for a SOC 1 report. This is especially useful for auditors who need to check financial statements.
Contrarily, SOC 2, on the other hand, casts a wider net. It digs into five key areas: security, availability, processing integrity, confidentiality, and privacy. This is the go-to report if you want a comprehensive view of how a service organization handles user data, from keeping it secure to maintaining its privacy. So, depending on what you need, you'll opt for one report over the other.
Let’s have a look at both report types below:
Header | SOC 1 | SOC 2 |
|---|---|---|
Focus | Controls over financial reporting | Controls based on security, availability, processing integrity, confidentiality, and privacy |
End Users | Customers & auditors | Customers & prospects |
Applies To | Service organizations that impact the financial operation of users | Service organizations that deal with sensitive information not related to financial reporting |
What is SOC 1?
A SOC 1 report evaluates the controls a service provider has in place that affect their clients' financial reporting. This audit ensures that the organization is adequately safeguarding financial data and is crucial for clients and auditors who rely on these financial statements.
How to obtain a SOC 1 Report?
To obtain a SOC 1 report, the process begins with your organization's management outlining the controls related to user financial transactions. Once these controls are established, an external auditor, usually a CPA, assesses their effectiveness and provides a formal opinion. This opinion typically covers the following aspects:
Scope:
Defines the extent of the audit engagement.
Responsibilities:
Outlines the duties of your organization in maintaining controls.
Design:
Describes how the controls are designed to work.
Description:
Gives details provided by management about the controls.
Type:
Specifies whether it's a Type I or Type II report.
Opinion:
Shares the auditor's final verdict after testing and evaluation.
Once this SOC 1 report is complete, it serves as a valuable resource for your clients and stakeholders, particularly when they're undergoing their own financial audits.
Types of SOC 1 Reports
SOC 1 reports come in two distinct forms, each serving specific purposes:
Header | SOC 1 |
|---|---|
Type 1 | Examines design of financial controls at a specified date |
Examines design and operating effectiveness of financial controls throughout a specified period |
Both types provide valuable insights but serve different auditing needs.
What is SOC 2?
SOC 2 reports emphasize operational and compliance aspects. SOC 2 audits rely on the Trust Services Criteria, formulated by the AICPA, which consists of the following components:
Security:
This criterion evaluates the measures in place to defend against unauthorized access to your systems.
Availability:
This looks at the consistent accessibility of your services. Are there any restrictions on service availability?
Processing Integrity:
This examines the reliability and accuracy of your data processing systems. Questions might include whether your system processes data in a timely and accurate manner, and if it integrates with other organizational systems.
Confidentiality:
This assesses how confidential information is managed. Are there proper classifications and security measures in place? Who has access to such data?
Privacy:
This is concerned with how personal and sensitive user information is handled and protected.
Like SOC 1 reports, SOC 2 reports are not obligatory, but they serve as an asset in demonstrating to clients that their data is securely managed. By obtaining an SOC 2 report, you can cultivate greater trust and transparency in your organization's services, giving you a competitive advantage in the marketplace.
How to Obtain a SOC 2 Report?
Obtaining an SOC 2 (System and Organization Controls 2) report involves a rigorous auditing process conducted by an external, independent CPA (Certified Public Accountant) or auditing firm. SOC 2 reports are designed to provide assurance about the effectiveness of controls in place at a service organization relevant to the security, availability, processing integrity, confidentiality, or privacy of data. Here's a typical SOC 2 report timeline:
Types of SOC 2 Reports
In the realm of SOC 2 audits, there are two distinct kinds of reports:
Header | SOC 2 |
|---|---|
Type 1 | Examines designs of controls related to Trust Services Criteria, with focus on security at a specified date |
Examines design and operating effectiveness and controls related to Trust Services Criteria, with focus on security throughout a specified period |
Choosing which SOC Report do you need
Choosing the right SOC report primarily depends on two key aspects: the specific controls you wish to have evaluated and the requirements of your user base. The tabular comparison below demonstrates the criteria for both report types, SOC 1 vs. SOC 2:
Header | SOC 1 | SOC 2 |
|---|---|---|
What does it Covers? | Financial reporting controls | Security, availability, processing integrity, confidentiality, and/or privacy of a system |
What User Needs Are Met? | Financial accuracy for user entities' financial statements | Assurance on system controls related to data security, privacy, etc. |
Organization type that needs it | Service organizations impacting user entities' financial reporting | Organizations providing services where data security, availability, processing integrity, confidentiality, or privacy is crucial |
Types of Reports | Type I: Examines design of financial controls at a specified date | Type I: Examines designs of controls related to Trust Services Criteria, with focus on security at a specified date
|
Auditor Opinion Covers | The fairness of the presentation of management’s description of the service organization’s system and the suitability of the design of the controls to achieve the related control objectives included in the description as of a specified date. | The fairness of the presentation of management’s description of the service organization’s system and the suitability of the design and operating effectiveness of the controls to meet the criteria for the applicable trust services criteria. |
Conclusion
In a nutshell, SOC 1 reports focus on financial controls relevant to audits, while SOC 2 reports cover non-financial controls related to security and privacy. The right choice depends on your organization’s specific needs and compliance requirements. Unsure which SOC report is right for you? Book a strategy call with us today for expert guidance.
Last Updated 2 months ago
