A Street Partners is proud to be SOC Certified for Service Organization
Many service providers struggle to decide whether a SOC 1 or SOC 2 audit is the best fit. Service Organization Control audits (SOC) are increasingly becoming a necessity to keep and engage new customers. These two audit activities are largely similar in terms of procedure, but they serve very different purposes for the clients.
A SOC audit addresses third-party risk by objectively verifying and doing a SOC reporting to your clients that your company has adequate and efficient internal controls in place. For the purpose of SOC compliance requirements, your clients may be required to get a SOC report from you.
Understanding the differences between SOC 1 and SOC 2 will help you build a comprehensive and robust due diligence package that provides your clients with the peace of mind they need.
This article will explore the primary differences between a SOC 1 report and a SOC 2 report.
A SOC 1 audit assists a service company in examining and conducting financial reporting on the controls applicable to its clients' financial statements.
A SOC 2 audit, on the other hand, reviews and reports on the organization's controls related to consumer data protection, data availability, data processing integrity, data confidentiality, and data privacy.
Control priorities for a SOC 1 audit include controls for processing, managing, and protecting customer personal information in business processes and IT processes.
The monitoring goals of a SOC 2 audit is usually a combination of some or all five criteria. Some service agencies, for example, may need to examine all five depending on the type of their activities and the regulatory specifications. In contrast, others may only need to cover data protection and data processing integrity.
SOC1 can be a good fit for a company that provides contracted out payroll services. Clients who request a payroll processing and data protection controls audit can receive a SOC 1 report.
SOC 2, on the other hand, would be great for a data centre that provides a secure data centre for its customers' vital infrastructure.
Instead of requiring customers to conduct regular inspections at the site, the data centre should provide them with a SOC 2 report that outlines and validates existing controls.
External auditors and the customer's management are often readers and users of a SOC 1 report. They are designed to assist a user entity and Certified Public Accountants who audit and do financial reporting on its financial statements in understanding the impact of the
service organization's controls on the statements of the user entity.
A SOC2 report is majorly read and used by the customers' management, corporate partners, potential customers, SOC compliance authorities, and external auditors.
Service company oversight, internal corporate governance, vendor management systems, risk management procedures, and regulatory oversight are common uses for a SOC 2 report.
A SOC 1 audit allows a service company to review and do financial reporting on its internal controls applicable to its customers' financial statements.
The American Institute of Certified Public Accountants developed the Statement on Standards for Attestation Engagements (SSAE) 18 AT-C Section 320, which governs a SOC 1 report (AICPA).
A service company is responsible for assessing key control priorities for the services it provides to its customers while planning for a SOC 1 audit. Control goals apply to company and personal information management processes (for example, controls associated with processing and protecting a clients' information).
A business that provides outsourced payroll services is an illustration of a service organization that requires a SOC 1 study. When customers ask for permission to audit their payroll preparation and data protection controls, the contracted out payroll provider can instead give them a completed SOC 1 report as proof of providing good controls that an independent Certified Public Accountant firm audited.
Customers' managers, SOC compliance authorities, and external auditors are often readers and users of a SOC 1 report.
Sections AT-C 105 and AT-C 205 of the Statement on Standards for Attestation Engagements (SSAE) 18 norm apply to SOC 2 reports. However, unlike SOC 1, the SOC 2 study focuses on the service organization's controls as well as compliance, as specified by the AICPA's Trust Services Criteria.
A SOC 2 audit aids a service company in examining and reporting on internal controls related to consumer data protection, data availability, data processing integrity, data confidentiality, and privacy.
When planning for a SOC 2 audit, a service organization's responsibility is to determine which among the Trust Services Criteria are applicable to the services it provides to its customers. Some service companies, for example, may have their SOC 2 audit focused on the criteria of protection and availability.
In contrast, others may be expected to be audited in all five criteria owing to the nature of their activities and regulatory requirements.
A data center that provides its customers with a safe storage space for critical infrastructure is an illustration of a service organization that requires a SOC 2 study. Instead of requiring customers to regularly review the data center's physical and environmental protection, the data center may provide them with a SOC 2 report that outlines and validates the controls in place covering the protection and availability of the client's critical infrastructure data stored within the data center.
Customers' management, corporate partners, potential customers, compliance authorities, and external auditors are often readers and users of a SOC 2 report.
After determining which SOC report best suits its reporting requirements, a service agency can choose between the different types of SOC reporting: SOC type 1 and type 2. Both choices are contingent on how well-prepared the service agency is for the audit and how quickly the audit must be completed.
Suppose a service organization has never undergone an audit or has recently revamped and enhanced its controls, practices, and procedures but has been asked by customers to undergo an audit as soon as possible. In that case, a type 1 audit might be a good choice.
A type 1 audit assesses and gives reports on the nature of the controls and procedures in effect at the audit time. It requires a service organization to review and report on the nature of its controls as of a particular date that meets the audit timeliness criteria of the requested party.
A type 2 audit takes the process mentioned above a step further by allowing a service organization to report on its controls' operational effectiveness over time and the controls' nature and design.
A type 2 audit enables a service company to look at how its controls performed for six to twelve months, giving clients and prospects a better understanding of its controls, policies, and procedures.
A SOC audit of a service organization should cover at least 12 months and have its audit conducted annually going forward. This will help provide transparent and ongoing coverage and confirmation of the controls to get the most value and profit out of a type 2 audit.
It can be difficult for service organizations that are unfamiliar with audit specifications to decide which service organization's control audit and what kind a customer indeed requires. However, service companies benefit from ensuring current and potential clients that their data is safe and in good hands. Clients are more at peace when they know that their data is secure. So if you haven't had a SOC audit before, now is the time.
The choice between the different types of SOC reporting will depend on your company's design and requirements. Most companies need both.
Sources
1. https://www.ispartnersllc.com/blog/soc-1-soc-2-reports-difference/
2. https://www.wipfli.com/insights/articles/ra-soc-1-vs-soc-2-whats-the-difference
3. https://socreports.com/audit-overview/soc-1-vs-soc-2
4. https://reciprocitylabs.com/resources/soc-1-vs-soc-2-whats-the-difference/
5. https://blog.rsisecurity.com/soc-2-type-1-vs-type-2-whats-the-difference/
6. https://socauditservices.com/2019/02/14/differences-between-soc-1-and-soc-2/
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A Street Partners in Southern California and Salt Lake City Utah
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