What Is SOC Reporting and What Are the Different Types?
Understand SOC reporting: how service organizations demonstrate assurance over internal controls for security, privacy, and financial operations.
System and Organization Controls (SOC) reports are independent evaluations of a service provider’s internal controls. Conducted by certified public accountants (CPAs), SOC reports verify that an organization adheres to established best practices, especially concerning data handling and financial processes. These reports offer assurance to clients and other stakeholders about the organization’s infrastructure, controls, and the effectiveness of its control environment.
Understanding SOC Reports
SOC reports provide assurance regarding the design and operating effectiveness of controls. Service organizations, such as cloud providers, data centers, and Software-as-a-Service (SaaS) companies, issue these reports to demonstrate their commitment to security, compliance, and operational excellence. Clients, referred to as user entities, require these reports to assess risks associated with outsourcing functions to third-party providers. These reports help user entities understand how a service organization safeguards sensitive data or processes information that could impact their own operations or financial reporting, thereby providing crucial transparency.
These reports focus on specific control areas. Some emphasize controls relevant to internal control over financial reporting, while others expand to controls related to security, availability, processing integrity, confidentiality, or privacy of data. This assessment helps service organizations build trust and transparency with stakeholders. Obtaining a SOC report can help manage third-party risk, strengthen operations, and reduce procedures for financial audits.
Distinct Types of SOC Reports
The System and Organization Controls framework includes several report types, each designed for different purposes and audiences. The three main types are SOC 1, SOC 2, and SOC 3, with SOC 2 widely used by technology companies and cloud service providers. Understanding these distinctions is important for both service organizations and their clients.
SOC 1 Reports
SOC 1 reports focus on controls relevant to a client’s internal controls over financial reporting (ICFR). Service organizations providing services impacting clients’ financial statements, such as payroll processors or financial institutions, obtain these reports. The audience for a SOC 1 report is the user entity’s financial statement auditors, who use the report to evaluate risks associated with the outsourced services.
SOC 2 Reports
SOC 2 reports address controls related to operations and compliance, focusing on the American Institute of Certified Public Accountants (AICPA) Trust Services Criteria: security, availability, processing integrity, confidentiality, and privacy. These reports are relevant for organizations handling sensitive customer data, like cloud service providers and SaaS companies, as they demonstrate adherence to information security standards. The reports are shared with customers and prospects under non-disclosure agreements due to their detailed nature.
SOC 3 Reports
SOC 3 reports are general-use reports that also focus on the Trust Services Criteria. They are less detailed and intended for public consumption, often used for marketing or posted on an organization’s website. These reports provide a high-level summary of control effectiveness without including specific details of the auditor’s tests or results, making them suitable for a broader audience.
Type 1 vs. Type 2 Reports
Both SOC 1 and SOC 2 reports come in two types: Type 1 and Type 2. A Type 1 report provides a snapshot of controls at a specific point in time, describing management’s assertion regarding the design of controls and their suitability to achieve objectives. A Type 2 report examines the operating effectiveness of controls over a period, such as three months to a year. This report includes details on the auditor’s tests and results, offering higher assurance of consistent control operation.
Components of a SOC Report
A SOC report contains several components. The independent service auditor’s opinion, issued by a CPA firm, assesses whether the service organization’s system description is fairly presented and whether controls are suitably designed and, for Type 2 reports, operating effectively. An unqualified opinion signifies that controls were found to be effective and reliable.
Management’s assertion is a statement from the service organization’s management taking responsibility for the accuracy of the system description and the effectiveness of the controls. The report also includes a detailed description of the service organization’s system, outlining its environment, infrastructure, software, people, data, and procedures within the audit scope.
For SOC 1 reports, applicable control objectives are detailed, while SOC 2 and SOC 3 reports include the relevant Trust Services Criteria. For Type 2 reports, the document provides specifics on the tests performed by the auditor, the methodology used, and the results of those tests. Any identified control deviations, exceptions, or deficiencies are also noted.
The SOC Reporting Engagement
Obtaining a SOC report involves a structured process. The first step often involves a readiness assessment, an internal preparation that helps identify and address control gaps before the formal audit. This proactive step allows organizations to strengthen their control environment. Defining the engagement’s scope is an early step, determining which systems, services, and control objectives or Trust Services Criteria will be included, aligning with business objectives and client requirements.
Service organizations select a qualified independent service auditor, typically a CPA firm with experience in conducting SOC audits within their industry. The audit fieldwork phase involves the auditor collecting evidence and testing controls. This includes reviewing documentation, interviewing personnel, and performing detailed tests to verify the design and operating effectiveness of controls over the specified period.
Following fieldwork, the auditor drafts the SOC report, incorporating all findings, opinions, and descriptions. The report is then issued to the service organization, which can share it with user entities and other stakeholders. Many organizations engage in ongoing monitoring and plan for subsequent engagements to maintain continuous compliance and assurance.