SOC 1 vs. SOC 2: A Simple Yet Complete Guide
But the truth is that once you understand a few key (and simple) concepts, SOC reports are pretty straightforward.
We’ll discuss the main differences between SOC 1 and SOC 2 reports, as well as the specific requirements and specifications of each.
But first, let’s add a bit of context to make sure we’re all in sync.
Who gets SOC audits?
Not all organizations are created equal.
The main difference between organizations lies in the impact their products and services have on user operations.
For example, a payroll software provider serving large manufacturing companies will have more data responsibility than a marketing agency.
The payroll company is dealing with sensitive information about their users’ employees. Without solid controls in place, that information could be compromised.
That’s why service providers that manage users’ sensitive information must provide structured documentation detailing what they’re doing to protect users’ information.
Here’s where SOC examinations come into play.
SOC stands for Service Organization Control, and it’s a type of examination geared toward entities that provide services directly related to a user’s control systems.
- SaaS (Software as a Service)
- Financial reporting organizations
- Data centers
- Managed security providers
- Payment processors
- Cloud service providers
- Trust companies
The main objective of SOC reports is to provide comfort to the user’s organization as it relates to security. This report can help users know that their processes and controls are in good hands.
By having an independent, third-party auditor examining your controls, your current users (or prospective users) can see that you’re operating in an ethical, safe way. This makes them more likely to trust your company with sensitive data.
Why do service organizations need SOC reports?
Back in the 1990s, if a given organization wanted to inform users about internal controls, they could perform a Statement on Auditing Standards (SAS) No. 70.
A certified public accountant (CPA) would audit the organization's controls and release an opinion on their performance based on specific industry standards.
For years, SAS 70 was enough.
But as organizations evolved, so did their complexity.
Things like SaaS, infrastructure management, and information security came in. With them came the need for a better way to understand and audit an organization’s controls.
To deal with these changes, the American Institute of Certified Public Accountants (AICPA) released the Statement on Standards for Attestation Engagements (SSAE) No. 16, aiming to help technology-based service organizations report to users more efficiently and completely.
In June 2010, the AICPA got rid of the SAS 70 examination and introduced the idea of SOC reports, mirroring the International Standard on Assurance Engagements (ISAE) No. 3042.
According to the Sarbanes–Oxley Act, public companies must ensure their controls over financial reporting are secure and reliable.
They’re fully responsible for it.
If a prospect or client suspects that your organization might harm their compliance status, they may not do business with you at all.
That’s why SOC reports are so important.
Tangibly proving to users that you’re doing everything right to protect their information and help them stay compliant is a true competitive advantage.
And that’s just one of the many reasons you should consider becoming SOC compliant.
Other major benefits include:
- Improved prevention: Reduce risk and prevent unnecessary problems related to users’ integrity.
- Better positioning: Position yourself as an organization that’s ethical, reliable, and compliant.
- More control: Get more control over your processes and operations.
- Improve your processes: Find potential leaks in your controls and plug them before they start snowballing.
- Higher client retention and satisfaction: Build trust with your clients and make them feel comfortable working with you.
What are the different SOC reports?
As you may already know, SOC reports can be split into three main categories:
- SOC 1: Focuses on service organizations' controls over financial reporting
- SOC 2: Examines a service organization's controls based on AICPA’s trust principles (security, availability, processing integrity, confidentiality, and privacy)
- SOC 3: Explores the same criteria of a SOC 2 report, documented for a more general audience (i.e., stakeholders)
For the sake of brevity, though, we’ll focus on the two more popular SOC report categories: SOC 1 and SOC 2.
What is SOC 1?
A SOC 1 report is an organizational controls audit that aims to analyze a business’s controls relevant to its users’ financial operations.
SOC 1 can be considered “attestation” reports, which means an external auditor (typically a CPA) must provide an opinion on the performance of your controls.
First, the organization’s management should define the controls that are directly related to user financial operations. Then, a CPA will analyze those controls and release a ruling on whether they’re effective.
Usually, this opinion should include:
- Scope: What is the scope of the engagement?
- Responsibilities: What are the responsibilities of the organization?
- Design: What is the design of the controls?
- Description: What is the description management provided regarding the controls?
- Type: What is the type of report being used?
- Opinion: What was the auditor’s opinion after conducting all the testing and examination?
Once you have this document in place, you can send it to your clients and stakeholders so they can use it whenever they’re going through a financial audit themselves.
SOC 1 audits help you validate your controls and communicate to users that you have secure processes. This will help them feel more secure and comfortable about their internal controls.
These reports aren’t mandatory, but clients might request them at some point, so you should be prepared.
If a company relies on a third-party service provider to perform crucial financial reporting processes (e.g., an outsourced payroll management system or a revenue reporting platform), they’ll probably ask those service providers for a SOC 1 report.
So, how do you know if your business needs a SOC 1 examination?
It all comes down to how you answer the following question:
Does your service impact the financial operations of your users?
If the answer is a clear “yes,” then you need a SOC 1 audit.
- Payroll processing software
- Billing management platforms
- Trust companies
- Financial reporting software
These are all just a few examples of businesses that need to be SOC 1 compliant. Bottom line, if you impact the financial statements of users in some way, you need this.
But what if you provide a service that doesn’t impact your users’ financial information?
Here’s where SOC 2 comes in handy.
What is SOC 2?
- Security (also known as “common criteria”): Is your service organization protected against unauthorized access?
- Availability: Are your services available at all times? Are services restricted?
- Processing integrity: Are your processing systems working reliably? Are they providing timely, accurate data to users?
- Confidentiality: How are you managing confidential data? Is it classified and protected? Who can access such information?
- Privacy: Are you dealing with users’ sensitive information? If so, what are you doing to keep that data protected?
Even though all principles are important, when you’re trying to protect users’ sensitive information, the only principle required for SOC 2 compliance is “Security.” That’s why it’s called “common criteria.”
Like SOC 1, an SOC 2 is an attestation report where an external auditor needs to come in, analyze your controls, and issue an opinion report.
The AICPA provides no specific guidelines to prepare for a SOC 2 audit. It really depends on specific industry regulations and the type of service your organization provides.
The best way to prepare is by analyzing how your services impact your users’ organizations and identifying which risks and potential issues are involved.
For example, if you’re a payment processing company for e-commerce businesses, you might want to consider the processing integrity principle in your controls.
On the other hand, if your business provides HR management services, you may want to consider other principles, like confidentiality and privacy.
The AICPA doesn’t list specific controls you should have in place to comply with SOC 2, which can make the process more confusing.
At this stage, a readiness assessment can be helpful for figuring out the current status of your controls, spotting potential gaps in your systems, and better preparing for the actual audit.
Most accounting firms that have experience with SOC reports can perform readiness assessments to help you mitigate potential issues with your current controls prior to your SOC 2 examination.
If your organization deals with sensitive information non-related to financial reporting, then you may need SOC 2 compliance.
- Cloud service provider
- SaaS provider
- HR management service
- Recruitment platform
- Host data center
Add to this list any type of service-based organization that affects the operations of internal controls, excluding financial operations, for its users.
What are the different SOC report types?
This may sound a bit confusing, but both SOC 1 and SOC 2 reports can be split into two main types: Type l and Type ll.
In other words, we have SOC 1, Type l and Type ll, and SOC 2, Type l and Type ll.
Both report types have some similarities, including:
- Objective: Both report types aim to explore a service organization’s controls
- Attestation: Both report types should provide an opinion from an external CPA
- Controls: Both report types should include the different controls used by the organization
But if you’re a service-based organization looking to become SOC compliant, it’s important that you understand the main differences between these report types.
In short, the main difference between Type I and Type II reports lies in the length and depth of the audit in question.
Let’s explore this point a bit further.
Type I SOC reports
Type I SOC reports aim to explore the functionality of a service-based organization’s controls at a single point in time. For example, “audit report for November 30, 2021.”
Type I reports try to answer the question: Are your controls compliant for SOC 1 or SOC 2 right now?
This type of report usually covers whether your internal controls are properly designed according to the proprietary criteria of SOC 1 (control objectives) or SOC 2 (trust principles) in the context of the service you’re providing.
Some of the main components of a Type I SOC report include:
- Fairness: Auditor’s opinion on the fairness of management’s description of control objectives
- Suitability: Auditor’s opinion on the suitability of control design in the context of the service provided
- Performance: Auditor’s opinion on the performance of controls at a single point in time
Type II SOC reports
Type II SOC reports, on the other hand, aim to test the controls of a service organization in a range of time, typically six to 12 consecutive calendar months. For example, “audit report for the period of November 30, 2021, to May 30, 2022.”
For that reason, Type II SOC 2 reports are much more comprehensive than Type I SOC reports and usually cover the continuous functionality of internal controls over longer periods. This will give users more confidence in your processes.
Keep in mind; Type II reports cover the exact same criteria as Type I (fairness, suitability, and performance).
The only difference is that Type II reports explore the organization's controls over six to 12 months and provide more thorough descriptions of how each control performed.
Type II reports also add an extra section related to the tests performed by the service auditor on the operating effectiveness of such controls.
How can you choose the right report type?
Your client will often define the type of report you need for your SOC audit. What does your client need?
When users request a SOC report for their own auditing process, they typically want the most comprehensive version, and that is a Type II report.
But suppose you’re just getting familiar with SOC reports. In that case, whether it’s SOC 1 or SOC 2 — we suggest you start with a Type I report to get a better understanding of your organization’s controls, as well as knowing the auditing process first-hand.
If your client isn’t clearly asking for a Type II report, a Type I report will help you understand how the service auditor works and get help actually designing your organization’s controls. You’ll also be able to verify the accuracy of your controls description.
Getting a Type I SOC report first will help you prepare for Type II and set the right expectations for your team.
What if your client requests a Type II report?
In that case, you’ll need additional testing from the auditor to ensure that you have the right controls in place. They will analyze whether these controls are working properly over the defined period.
In summary, Type I SOC reports are the best place to start because they help you design the right controls from the beginning. Type II SOC reports require you to already have such controls working over a long period of time.
In essence, a SOC 1 report is financially focused, whereas a SOC 2 report aims to audit an organization’s controls in the context of compliance and operations.
Hopefully, you now have enough information to understand what you need, along with how to execute both reports.
And, if you need help with your security compliance, Secureframe can help you streamline your SOC 2 process in weeks, not months. To learn more about our process, we suggest you read our product overview page.