System and Organization Controls (SOC) reports enable companies to feel confident that service providers, or potential service providers, are operating in an ethical and compliant manner. No one likes to hear the word audit, but SOC reports establish credibility and trustworthiness for a service provider — a competitive advantage that’s worth both the time and monetary investment.
SOC reports utilize independent, third-party auditors to examine various aspects of a company, such as:
What are the different types of SOC reports?
SOC reports are governed by the American Institute of Certified Public Accountants (AICPA) and focus on offering assurance that the controls service organizations put in place to protect their clients’ assets (data in most cases) are effective. There are four main types: SOC 1, SOC 2, SOC 3, and SOC for Cybersecurity, with subsets of each.
SOC 1
The biggest difference between a SOC 1 vs. SOC 2 report is the focus of examination. A SOC 1 report focuses on outsourced services performed by service organizations which are relevant to a company’s (user entity) financial reporting.
SOC 2
A SOC 2 report is also an attestation report issued by an independent Certified Public Accounting (CPA) firm. Its focus addresses operational risks of outsourcing to third-parties outside financial reporting. These reports are based on the Trust Services Criteria which include up to five categories: security, availability, processing integrity, confidentiality, and/or privacy.
SOC 3
A SOC 3 report — formerly known as a SysTrust or WebTrust —covers similar reporting areas as the SOC 2, but isn’t as comprehensive. It excludes certain details of the description and all of the detailed controls/results of testing. Whereas a SOC 2 report restricts users, the benefit of a SOC 3 is that it is a general-use report making it a great tool for marketing purposes.
What is the benefit of obtaining a SOC report?
A number of service organizations are required to undergo a SOC examination, including payroll or medical claims processors, data center companies, loan servicers, and Software as a Service (SaaS) providers that may touch, store, process or impact financials or sensitive data of their user entities, or clients.
However, any company with a business model based on providing a service to another company can benefit from a successful SOC examination. First and foremost, a SOC report is an independent, third-party validation of a service organization’s commitment to evidencing the design and effective operation of their controls. It not only lets potential clients know that your company is legitimate, but going through the assessment process can point out weaknesses and flaws before a client does.