In the fast-paced world of business, especially for growing SaaS companies targeting mid-size clients, trust is crucial. But how can you prove your commitment to security and operational excellence? Meet SOC compliance – the gold standard for demonstrating robust internal controls and safeguarding sensitive customer data.
SOC (Service Organization Control), reports aren’t just another checkbox; they’re a powerful tool for building trust with potential clients and partners. These third-party audits delve deep into your organization’s security, availability, processing integrity, confidentiality, and privacy controls. The result? A comprehensive report that showcases your dedication to protecting your customers’ information.
In this article, we’ll break down the different types of SOC versions, explain their significance in the realm of IT security, and provide actionable insights on how your organization can leverage SOC compliance to not only mitigate risks but also accelerate growth.
What Is a SOC Report?
SOC reports can be considered a competitive advantage benefiting an organization in terms of money and time. It utilizes third-party and independent auditors to examine different aspects of an organization, including:
- Availability
- Confidentiality
- Privacy
- Processing integrity
- Security
- Controls related to cybersecurity
- Controls related to financial reporting
SOC reports enable a company to feel confident that potential service providers are operating compliantly and ethically. Although audits can be tricky, they can offer immense security and trust. SOC reports help establish the trustworthiness and credibility of a service provider.
Furthermore, SOC reports are useful for:
- Vendor management programs
- Oversight of the organization
- Regulatory oversight
- Risk management process and internal corporate governance
Why Is a SOC Report Essential?
Several service organizations, such as data center companies, SaaS providers, loan servicers, and claim processors, are needed to undergo a SOC examination. These organizations need to store their clients’ or user entities’ financial data or sensitive data.
So, any company providing services to other companies or users can be befitted from the SOC examination. A SOC report not only lets your potential clients know that the company is legitimate, but also reveals before you the flaws and weaknesses of your controls or clients through assessment processes.
What Can You Expect from a SOC Assessment?
Before going through a SOC assessment process, you must determine which type of SOC report you need that can suit your organization the most. Next, an official process will begin with the readiness assessment.
Service organizations prepare themselves for the examination by identifying potential red flags, gaps, deficiencies, and more. This way, the company can understand the available options to repair these flaws and weaknesses.
Who Can Perform a SOC Audit?
SOC audits are performed by independent Certified Public Accountants (CPAs) or accounting firms.
AICPA establishes professional standards that are meant to regulate SOC auditors’ work. In addition to this, certain guidelines regarding execution, planning, and oversight must be followed by organizations.
Every AICPA audit then undergoes peer review. CPA organizations or firms also hire non-CPA professionals with information technology and security skills to prepare for a SOC audit. But, the final report must be checked and disclosed by the CPA.
Let’s go through each report separately to understand how they work.
What is SOC 1?
SOC 1 main goal is to control objectives within the SOC 1 documents and process areas of internal controls that are relevant to the audit of the user entity’s financial statements. Simply put, it tells you when the organization’s services impact a user entity’s financial reporting.
What Is a SOC 1 Report?
A SOC 1 report determines service organization control applicable to the user entity’s control over the financial reporting. It is designed to meet the demands of the user entities. In this, the accountants evaluate the effectiveness of the service organization’s internal controls.
There are two types of SOC 1 reports:
- SOC 1 Type 1: This report focuses on evaluating the design and implementation of a service organization’s internal controls over financial reporting (ICFR) as of a specific point in time. It assesses whether the controls are suitably designed to meet the organization’s control objectives. The audience for this report is typically limited to management, auditors, and user entities (customers of the service organization) who require an understanding of the controls in place at a particular moment.
- SOC 1 Type 2: Building upon the Type 1 assessment, this report goes further by evaluating the operating effectiveness of the ICFR over a specified period, usually six to twelve months. It assesses the design of controls and tests whether they operate effectively in practice to achieve the control objectives. This report provides a higher level of assurance and is often required by user entities to assess the ongoing effectiveness of a service organization’s controls.
What Is the Purpose of SOC 1?
As we already discussed, SOC 1 is the first part of the Service Organization Control series that addresses internal controls across financial reporting. It is applicable to businesses that directly interact with financial data for partners and customers.
Thus, it secures an organization’s interaction, storing users’ financial statements and transmitting them. However, SOC 1 report helps investors, customers, auditors, and management evaluate the internal controls around financial reporting within the AICPA guidelines.
How to Maintain SOC 1 Compliance?
SOC 1 compliance defines the process of managing all SOC 1 controls added within the SOC 1 report over a defined period. It ensures the effectiveness of the operation of SOC 1 rules.
The controls are generally IT controls, business process controls, etc., used to offer a reasonable assurance based on the control objectives.
What Is SOC 2?
SOC 2, developed by AICPA, describes the criteria for controlling or managing customer information based on 5 principles to provide trusted services: These principles are:
- Availability includes disaster recovery, security incident handling, and performance monitoring.
- Privacy: It includes encryption, two-factor authentication (2FA), and access control.
- Security: It includes intrusion detection, two-factor authentication, and network or application firewalls.
- Confidentiality: It includes access controls, encryption, and application firewalls.
- Processing integrity: It includes processing monitoring and quality assurance.
SOC 2 is unique for every organization because of its rigid requirements, unlike PCI DSS. With specific business practices, every design has its control to comply with multiple trust principles.
What Is a SOC 2 Report?
A SOC 2 report allows service organizations to receive and share a report with stakeholders to describe general; IT controls that are secure in the place.
There are two types of SOC 2 reports:
- SOC 2 Type 1: It describes the vendor’s systems and tells whether the vendor’s design is suitable to meet trust principles.
- SOC 2 Type 2: It shares the details of the operational effectiveness of the vendor’s systems.
SOC 2 differs from organization to organization regarding information security frameworks and standards, as there are no defined requirements. AICPA provides criteria that a service organization selects to demonstrate the controls they have in place to safeguard the services offered.
What Is the Purpose of SOC 2?
Compliance with SOC 2 indicates that the organization controls and maintains a high information security level. Strict compliance enables organizations to ensure that their critical information is safe.
By complying with SOC 2, you will get:
- Enhanced data security practices where the organization defends itself from cyberattacks and security breaches.
- Competitive advantage as customers wants to work with service providers with solid data security practices, especially for cloud and IT services.
It restricts the unauthorized use of the data and assets that an organization handles. The security principles require organizations to add access controls to secure data from malicious attacks, misuse, unauthorized disclosure or alteration of company information, and unauthorized data deletion.
How to Maintain SOC 2 Compliance?
SOC 2 compliance is a voluntary standard developed by AICPA that specifies how an organization manages its customer information. The standard is described with five Trust Services Criteria, i.e., security, processing integrity, confidentiality, privacy, and availability.
SOC compliance is tailored to the needs of every organization. Depending on the business practices, an organization can choose design controls that should follow one or more Trust Service Principles. It extends to all the services, including DDoS protection, load balancing, attack analytics, web application security, content delivery via CDN, and more.
In simple terms, SOC 2 compliance is not a descriptive list of tools, processes, or controls; instead, it cites the need for criteria crucial to maintaining information security. This allows each organization to adopt the best processes and practices relevant to its operations and objectives.
Below is the checklist of basic SOC 2 compliance:
- Access controls
- System operations
- Mitigating risk
- Change management
What Is SOC 3?
A SOC 3 report is an attestation report issued by an independent auditor that assesses the internal controls of a service organization relevant to security, availability, processing integrity, confidentiality, or privacy. These controls are evaluated based on the Trust Services Criteria (TSC), which include:
- Security: Protection against unauthorized access, disclosure, or damage to systems and information.
- Availability: Ensuring systems and information are accessible and operational when needed.
- Processing Integrity: Accuracy, completeness, timeliness, and authorization of system processing.
- Confidentiality: Protection of information designated as confidential.
- Privacy: Appropriate collection, use, retention, disclosure, and disposal of personal information.
SOC 3 reports help service organizations demonstrate their commitment to these principles and provide assurance to their customers that their data is handled securely and responsibly.
What Is a SOC 3 Report?
SOC 3 reports have the same information as SOC 2 but differ in terms of the audience. A SOC 3 report is intended only for general audiences. These reports are short and do not precisely include the same data as a SOC 2 report. They are built suitable for stakeholders and informed audiences.
Since a SOC 3 report is more general, it can be shared quickly and openly on a company’s website, along with a seal describing its compliance. It helps in keeping pace with international accounting standards.
For example, AWS allows public downloads of the SOC 3 report.
What Is the Purpose of SOC 3?
Companies, especially small or startups, usually don’t have enough resources to control or maintain certain essential services in-house. Therefore, these companies often outsource the services to third-party providers instead of investing extra effort or money in building a new department for those services.
Thus, outsourcing is a better option but can be risky. The reason is that an organization shares customer data or sensitive information with third-party providers, depending on the services the organization chooses to outsource.
However, organizations must partner only with vendors that demonstrate SOC 3 compliance.
SOC 3 compliance is based on AT-C Section 205 and AT-C Section 105 of SSAE 18. It includes the basic information of the independent management’s description and auditor’s report. It applies to all the service providers storing customer information in the cloud, including PaaS, IaaS, and SaaS providers.
How to Maintain SOC 3 Compliance?
SOC 3 is the subsequent version of SOC 2, so the auditing procedure is the same. Service auditors are seeking the following policies and controls:
- Disaster recovery
- Intrusion detection
- Performance monitoring
- Quality assurance
- Two-factor authentication
- Security incident handling
- Processing monitoring
- Encryption
- Access controls
- Network and application firewalls
Once the audit is complete, the auditor generates a report based on the findings. But a SOC 3 report is far less detailed, as it only shares the information necessary for the public. The service organization freely shares the results after completing the final audit for marketing purposes. It tells you what to focus on to pass the audit. So, the service organization is advised to:
- Carefully select the controls.
- Conduct an assessment to identify gaps within the controls
- Figure out the regular activity
- Describe the next steps for incident alerting
- Search for a qualified service auditor to perform the final examination
Now that you have some idea of each compliance type, let’s understand the differences between the three to know how they help every firm to stand in the market.
SOC 1 vs SOC 2 vs SOC 3: Differences
The following table describes the purposes and benefits of each SOC report.
| SOC 1 | SOC 2 | SOC 3 |
|---|---|---|
| It gives opinions on type 1 design and type 2 design or operation, including testing procedures and results. | A single deliverable to address demands from partners on the organization’s operations, including results and procedures. | Similar to SOC 2 compliance but contains less information. It doesn’t include test procedures, results, or controls. |
| It controls requirements essential to the internal controls around financial reporting. | Non-financial controls are assessed with the five Trust Principles essential for the subject matter. | It also depends on the five Trust Services Criteria. |
| Limited distribution to customers and auditors | Limited distribution regulators, customers, and auditors will be defined in the report. | Assist in client marketing. Unrestricted distribution |
| Maintains transparency on the system’s description, control, procedure, and result. | It provides a level of transparency precisely similar to SOC 1 | General distribution of the reports for marketing benefits. |
| It focuses on financial controls. | It focuses on operational controls. | It is similar to SOC 2 but with less information. |
| It describes the service organization’s systems. | It also describes the service organization’s systems. | It describes the CPA’s opinion on the entity’s adequate controls over the system. |
| It reports internal controls. | It reports availability, privacy, confidentiality, processing integrity, and security controls. | Similar to SOC 2 |
| Users controller’s office and user auditor use SOC 1. | It is shared under NDA by regulators, management, and others. | It is available to the public. |
| Most auditors are “Need to Know.” | Most stakeholders and customers “Need to Know.” | General public |
| Example: medical claims processors. | Example: cloud storage company. | Example: a public enterprise. |
Conclusion
Deciding which SOC compliance will be the most suitable for your organization requires you to visualize the type of information you are dealing with, whether it’s your customers’ data or yours.
If you are offering payroll processing services, you might want to use SOC 1. If you are processing or hosting customer data, you might need a SOC 2 report. Similarly, if you need less formal compliance, which is best for marketing purposes, you might want to go with a SOC 3 report.