What Does SOC Stand For in a SOC Report?

System and Organization Controls, or SOC, refers to a set of independent audit reports. These reports provide assurance about a service organization’s internal controls. As companies increasingly rely on third-party service providers, SOC reports help manage associated risks. They are an important tool for building trust and transparency in these business relationships.

Understanding SOC Reports

A SOC report is an independent auditor’s assessment of a service organization’s internal controls. Its primary purpose is to offer user entities and their auditors information about the controls in place. This information can relate to user entities’ financial reporting or other operational objectives.

These reports are issued by independent Certified Public Accountant (CPA) firms. The American Institute of Certified Public Accountants (AICPA) establishes the framework for SOC audits. User entities and their auditors are the main audience for these reports, using them for due diligence, risk assessment, and compliance purposes.

SOC reports foster trust and transparency in business relationships, especially when important functions are outsourced. They provide third-party verification that a service organization has appropriate controls to protect client data and ensure reliable service delivery. This helps user entities assess their service providers’ security and reliability.

Types of SOC Reports

The SOC framework includes several report types, each with a distinct focus and audience. Each report is prepared under the attestation standards issued by the AICPA.

SOC 1 Report

A SOC 1 report focuses on controls relevant to a user entity’s internal control over financial reporting (ICFR). The primary audience for this report is the user entity’s financial statement auditors. Organizations that provide services impacting client financial data, such as payroll processors, third-party administrators for employee benefits, or data centers handling financial transactions, often obtain a SOC 1 report.

The report helps user entities’ auditors assess the risks associated with outsourced financial processes. This assessment can then influence the scope of the user entity’s own financial statement audit. A SOC 1 report helps ensure controls related to transactions, processing, and reporting are accurate, complete, and secure.

SOC 2 Report

A SOC 2 report concentrates on controls related to security, availability, processing integrity, confidentiality, and privacy. These five areas are known as the Trust Services Criteria (TSC). The audience for a SOC 2 report is broader than for a SOC 1, including clients, regulators, business partners, and internal auditors.

Cloud service providers, Software as a Service (SaaS) companies, data analytics firms, and any service organization handling sensitive data often obtain SOC 2 reports. The Security criterion is mandatory for all SOC 2 reports, while the other four criteria (Availability, Processing Integrity, Confidentiality, and Privacy) are optional and included based on the service organization’s operations and client needs. A report might cover only Security, or Security and Confidentiality, depending on the services provided.

• Security: Ensures information and systems are protected against unauthorized access, disclosure, and damage. It addresses controls like logical and physical access, system operations, and risk mitigation.
• Availability: Focuses on whether the system is available for operation and use as agreed. It pertains to the accessibility of information and systems to the user.
• Processing Integrity: Addresses whether system processing is complete, valid, accurate, timely, and authorized. It ensures data is processed correctly to meet the entity’s objectives.
• Confidentiality: Ensures that information designated as confidential is protected. This includes controls over data classification, encryption, and access restrictions for sensitive information.
• Privacy: Addresses the collection, use, retention, disclosure, and disposal of personal information in conformity with the entity’s privacy commitments and generally accepted privacy principles. It covers how personally identifiable information is handled.

SOC 3 Report

A SOC 3 report is also based on the Trust Services Criteria, similar to a SOC 2 report. Its main difference lies in its design for general use and public distribution. Unlike SOC 2 reports, SOC 3 reports are less detailed and do not include specific control descriptions or testing results.

SOC 3 reports are often used for marketing purposes or to provide general assurance on a company’s website. They offer a high-level summary, confirming that the service organization has undergone an audit and adheres to specific trust services criteria.

Type 1 vs. Type 2 Reports

Both SOC 1 and SOC 2 reports can be issued as either Type 1 or Type 2. This distinction refers to the period covered by the audit and the depth of the auditor’s examination.

A Type 1 report provides an opinion on the fairness of the service organization’s description of its system and the suitability of its controls’ design at a specific point in time. It does not assess the operating effectiveness of these controls over a period. This report can be suitable for organizations undergoing their first SOC audit to establish a baseline of controls.

A Type 2 report includes everything in a Type 1 report but also provides an opinion on the operating effectiveness of controls over a specified period, usually ranging from three to twelve months. This report offers a higher level of assurance because it confirms that controls were not only designed appropriately but also functioned effectively over time. Many potential customers often prefer Type 2 reports due to this increased assurance.

Reading and Using SOC Reports

Once a SOC report is obtained, understanding its various sections is important for effective utilization. Each section provides insights into the service organization’s control environment and the auditor’s findings. Reviewing these reports helps user entities manage vendor risk and meet their own compliance obligations.

Key Sections to Review

Several sections within a SOC report require close attention for a thorough understanding. These sections describe the service organization’s controls and their effectiveness.

The Independent Service Auditor’s Report, often called the opinion letter, presents the auditor’s conclusion. This section details the engagement’s scope, including the system examined and the period covered. The key part is the auditor’s opinion on whether management’s assertion is fairly stated and, for Type 2 reports, whether controls operated effectively. Opinions can be “unqualified,” indicating controls are designed and operating effectively; “qualified,” suggesting some controls were not designed or operating effectively; or “adverse,” indicating significant deficiencies.

Management’s Assertion is the service organization’s own statement regarding its system and controls. This section confirms management’s belief that their controls are designed and, for Type 2 reports, operating effectively. It aligns with the auditor’s report but provides the organization’s perspective.

The System Description provides details about the service organization’s services, the system used to provide them, and the audit’s scope. This section outlines the processes, procedures, infrastructure, software, and personnel involved in delivering the services. It also includes information on complementary user entity controls (CUECs), which are controls the service organization assumes its clients have in place for its controls to be effective.

The Control Objectives/Criteria and Related Controls section details the control objectives for SOC 1 reports or the Trust Services Criteria for SOC 2/3 reports. It describes the controls implemented by the service organization to meet these objectives or criteria. This section provides the framework against which the auditor performed their testing.

For Type 2 reports, the Tests of Controls and Results section presents the auditor’s testing procedures and findings regarding the operating effectiveness of controls. This section shows which controls were tested, how they were tested, and the results, including any identified exceptions or deviations. This detailed information is important for understanding the effectiveness of the controls over time.

How to Use the Information

SOC reports serve multiple practical purposes for user entities. They are an important element for assessing third-party relationships and managing associated risks.

For vendor due diligence, user entities use SOC reports to assess the security and reliability of their service providers. The report offers an initial view into a vendor’s security posture and helps determine if the vendor has adequate controls to safeguard data. Reviewing the report allows organizations to confirm if the controls are sufficient for their needs.

In risk management, SOC reports help identify and mitigate risks associated with outsourcing. By understanding the service provider’s control environment, user entities can assess potential vulnerabilities and implement their own compensating controls if necessary. The report helps identify gaps in the vendor’s operations.

For compliance, SOC reports help user entities meet various regulatory or contractual requirements. Many regulations and industry standards require organizations to ensure their third-party service providers also maintain appropriate controls. A SOC report provides documented evidence of such controls.

Regarding internal audit and financial reporting, user entities’ auditors use SOC reports to obtain assurance about the controls at the service organization. For financial statement audits, a SOC 1 Type 2 report can allow the user entity’s auditor to reduce the scope of their own testing related to outsourced processes, relying on the service auditor’s work. For operational reviews, a SOC 2 Type 2 report can provide similar efficiencies.

When reviewing a report, it is important to consider the report’s scope and the period covered by Type 2 reports. Any exceptions or findings noted in the auditor’s report or the tests of controls section should be evaluated. These details indicate areas where controls may not have been fully effective and might require further inquiry with the service organization.