What Is the Difference Between SOC 1 and SOC 2?
Understand the key distinctions between SOC 1 and SOC 2 reports. Learn which assurance report is right for your organization's needs.
System and Organization Controls (SOC) reports are a type of assurance report issued by independent Certified Public Accountants (CPAs). These reports provide valuable insights into the internal controls of service organizations that offer services to other entities. Their general purpose is to build trust and transparency by demonstrating to external parties how a service organization manages and secures its operations. This helps user entities, which are the organizations utilizing the service, understand the control environment of their service providers.
SOC 1 Report Overview
A SOC 1 report focuses on a service organization’s internal controls over financial reporting (ICFR). Its primary purpose is to provide information about controls relevant to a user entity’s financial statements, enabling user entities and their financial statement auditors to evaluate their effect on financial reporting.
The audience for a SOC 1 report typically includes the management of the service organization, user entities, and crucially, the financial statement auditors of those user entities. These reports are prepared in accordance with the American Institute of Certified Public Accountants (AICPA) guidance, AT-C section 320. There are two types of SOC 1 reports: a Type 1 report describes the design of controls at a specific point in time, while a Type 2 report assesses both the design and operating effectiveness of controls over a period, typically six months to a year.
SOC 2 Report Overview
A SOC 2 report addresses controls at a service organization related to the security, availability, processing integrity, confidentiality, or privacy of information. Its purpose is to provide assurance to various stakeholders that the service organization manages customer data securely and reliably. This report is particularly relevant for organizations that store, process, or transmit sensitive customer information, such as cloud computing vendors or SaaS providers.
The audience for a SOC 2 report is broader than for a SOC 1 report, including management of the service organization, user entities, regulators, and business partners. These reports adhere to AT-C section 205 and are based on the AICPA’s Trust Services Criteria (TSC). The five Trust Services Criteria are Security, Availability, Processing Integrity, Confidentiality, and Privacy, with Security being a mandatory criterion for all SOC 2 reports.
Comparing SOC 1 and SOC 2
The fundamental distinction between SOC 1 and SOC 2 reports lies in their primary purpose and the controls they evaluate. SOC 1 reports focus on internal controls over financial reporting (ICFR) that could impact a user entity’s financial statements. SOC 2 reports concentrate on controls related to non-financial operational aspects, such as data security, availability, processing integrity, confidentiality, or privacy.
The intended audience for each report also differs. SOC 1 reports are primarily for user entities’ financial statement auditors, helping them assess risks to financial reporting from outsourced services. SOC 2 reports cater to a wider range of stakeholders, including the service organization’s management, customers, and business partners, who are concerned with data protection and management.
The underlying frameworks and criteria used for these reports are another differentiator. SOC 1 reports are governed by AICPA guidance for financial reporting controls, with control objectives often customized to the service organization’s offerings. SOC 2 reports are based on the AICPA’s Trust Services Criteria, which provide standardized principles for evaluating controls over information and systems.
The scope of controls covered varies by report type. A SOC 1 report examines controls relevant to financial data processing that could affect a client’s financial statements, such as payroll processing or financial data management. A SOC 2 report’s scope includes controls pertaining to how a service organization protects the data it handles, ensuring its integrity, confidentiality, and availability.
Determining the Appropriate Report
Deciding between a SOC 1 and SOC 2 report depends on the nature of services a service organization provides and the concerns of its user entities or other stakeholders. If services could directly affect a client’s internal controls over financial reporting, a SOC 1 report is generally appropriate. This is often the case for service organizations handling financial transactions, payroll, or financial data processing.
If the service organization handles sensitive customer data and the primary concern is the security, privacy, or availability of that information, a SOC 2 report is more suitable. Many organizations, especially in technology and cloud services, find that a SOC 2 report addresses their clients’ data protection assurance needs. The decision often hinges on whether the user entity’s main interest is financial statement integrity or broader data protection and system reliability.