Due to the newfound emergence of cloud computing and data centers, organizations rely on service providers to streamline their day-to-day operations and ensure continued functionality. However, with the ease and convenience of these third-party service providers, the degree of inherent risk has also increased.
Last year, Volkswagen Group of America had a data breach. Over 3 million customers were affected, and 97% were Audi customers and potential buyers. They later revealed that one of their vendors had left unsecured data on the internet.
Security incidents like this can negatively impact a third-party service provider by causing ripple effects that last for months or even years. To ensure the internal controls are operative and effective, all third-party services must conduct a System and Organization Controls (SOC) audit.
The American Institute of Certified Public Accountants (AICPA) has designed SOC reports - SOC 1, SOC 2, and SOC 3 - wherein an independent CPA evaluates the organization. This is aimed to help organizations build trust and confidence in their services. Before comparing each type of report, let's find out what they stand for.
What are SOC 1, SOC 2, and SOC 3 reports?
A SOC 1 report is based on the SSAE 18 standard. It reports on the effectiveness of internal controls at a service organization relevant to the client's internal control over financial reporting (ICFR).
A SOC 2 report evaluates internal controls, policies, and procedures that directly relate to the security of a system at a service organization. This report was based on 5 Trust Service Criteria: security, availability, processing integrity, confidentiality, and privacy.
Similar to SOC 2, the SOC 3 report has been developed based on AICPA's 5 Trust Service Criteria. It is a public report of internal controls over security, availability, processing integrity, and confidentiality.
Below is a tabular summary of usage, control objectives, and distribution of SOC 1, SOC 2, and SOC 3 reports.
Report TypeUseControl objectives Distribution SOC 1Systems processing transactions that affect their customers Internal Controls over Financial Reporting. Ex: Payroll processingDefined by service organization Users of the system and their auditorsSOC 2Systems processing transactions that affect the security, availability, processing integrity, confidentiality, and privacy of customer data. Ex: Cloud services & SaaS providersDefined by the AICPA as Trust Services CriteriaUsers of the system and their auditorsSOC 3This functions the same way as a SOC 2 report, the only difference is that it can be used for marketing compliance to the general public. Ex: Cloud services & SaaS providersDefined by the AICPA as Trust Services CriteriaAnyone
To properly distinguish between the three types of SOC reports, it is imperative to have a detailed understanding of each.
SOC 1 Report: Overview
SOC 1 compliance secures a service organization's interaction, transmission, or storage of users' financial statements. A SOC 1 report helps management, investors, auditors, and customers evaluate internal controls that pertain to financial reporting based on the guidelines laid out by the AICPA.
This report consists of two types: SOC 1 Type 1 and SOC 1 Type 2
SOC 1 Type 1 audit evaluates an organization's systems and produces a point-in-time assessment of the controls on a specific date.
In comparison, a SOC 1 Type 2 audit covers the operating effectiveness of the controls over a specific period.
A SOC 1 audit is conducted by an independent and licensed Certified Public Accountant to examine the service organization's system-level and entity-level controls. The auditor determines whether the organization has defined its structure and if it has performed formal risk assessments. It also cross-checks if the organization has implemented policies and procedures to address all mentioned controls.
Who is SOC 1 audit for?
Here is a list of types of organizations that SOC 1 audit is applicable for (but not limited to)
Cloud service providers
Medical claim processors
Accounting and financial services
Why is SOC 1 report important?
Achieving SOC 1 compliance shows that organizations can securely interact with, transmit, and store the financial statements of customers. It shows the management, auditors, investors, and clients that the organization's internal controls meet AICPA's guidelines.
Benefits of SOC 1 report:
Helps the organizations to verify that they have appropriate controls to deliver high-quality services.
Helps in identifying vulnerabilities in systems and provides remediation for the same
Evaluates the policies and procedures
Strengthen infosec posture and minimize the risk of data breaches.
Builds trust between service providers and the organization
Strengthens the organization's environment and ensures they adopt industry best practices.
SOC 2 Report: Overview
A SOC 2 audit is responsible for ensuring whether service providers are securely managing customers' data.
Like SOC 1, this report is also divided into two types: SOC 2 Type 1 and SOC 2 Type 2
A SOC 2 Type 1 report determines if an organization's system controls are correctly designed
A SOC 2 Type 2 report, on the other hand, checks if those controls function as intended.
SOC 2 reports differ from other information security standards and frameworks. They are based on 5 Trust Service Criteria - security, availability, processing integrity, confidentiality, and privacy - developed by the AICPA. It means that any service organization can choose to demonstrate they have controls in place to mitigate risks to the service they provide. Among the 5 TSCs, all the SOC 2 reports must include a security trust service. The other 4 TSCs are optional and can be added to the examination at the discretion of management.
Who is SOC 2 audit for?
Here is a list of types of organizations that can apply for SOC 2 audit (but not limited to);
Cloud service providers
Managed IT and security service providers
Organizations that store customer's information in the cloud
Organizations that provide business intelligence, analytics, and management services
Why is SOC 2 audit important?
A SOC 2 audit is conducted by an independent, licensed Certified Public Accountant (CPA) to evaluate if the organizations adhere to best practices when securing sensitive internal and customer data.
Benefits of SOC 2 report:
It builds brand reputation – SOC 2 report is evidence that the organization has taken all necessary measures to prevent a data breach.
Having a SOC2 report gives organizations an edge over others in the industry.
It increases transparency and visibility for customers, thereby unlocking infinite sales opportunities.
Provides valuable insights into your organization's risks like security posture, vendor management, internal controls, governance, and regulatory oversight.
What are SOC 2 Trust Service Criteria (TSC)?
To achieve SOC 2 reportnd meet the latest SOC 2 report framework standards, organizations must implement Trust Service Criteria (TSC). TSC is a framework for designing, implementing, and evaluating information system controls. There are five trust service criteria, and they are as follows;
The security trust criteria help in protecting information throughout its course in an organization. It protects the data from unauthorized access or disclosure.
The availability of trust criteria determines whether the organization's employees, clients, and partners can rely on its systems to do their work.
The processing integrity trust criteria is focused on data accuracy and the completeness of the end-to-end process of ensuring that applications function without delay, error, omission, or accidental data manipulation.
The confidentiality trust criteria evaluate how organizations protect confidential information – limit access, storage, and use. It ensures that only authorized individuals can view sensitive information like legal documents or Personally Identifiable Information (PII).
The privacy trust service criteria evaluate how organizations protect customers' personal information like name, address, email and any other identification info.
SOC 3 report: Overview
Similar to SOC 2, SOC 3 reports are for reporting on controls based on 5 Trust Service Criteria (TSC) - security, availability, processing integrity, confidentiality, and privacy.
However, they are written for people with a general interest in the service organization without getting into the specific details about the controls. Unlike SOC 1 and SOC 2, SOC 3 reports can be distributed publicly, and the audited companies can use them for marketing purposes.
Who is SOC 3 audit for?
Here's a list of organizations that are applicable to the SOC 3 audit (but not limited to);
Cloud service provider
Data center colocation facility
IT systems management who want to communicate controls effectively minus the complexity of a SOC 2 report.
SOC 1 And SOC 2: Differences
A SOC 1 report is for organizations whose internal security controls impact a customer's financial statements. It assures customers that their information is handled securely.
On the other hand, SOC 2 reports are used to meet the needs of a broad range of users who are involved with the service organization's controls relevant to the Trust service criteria (TSCs) outlined by the AICPA.
Both SOC 1 and SOC 2 reports help the organizations attest that their security controls are in place. SOC 1 and SOC 2 both offer Type I and Type II reports.
SOC 2 And SOC 3: Differences
Since the same AICPA standards govern SOC 2 and SOC 3 reports, the audit performed by the CPA for these two reports is quite similar.
The only difference between these two reports is the information that goes within the report.
SOC 2 reports are restricted reports intended for the use of the service organization's management, auditors, and customers. Whereas SOC 3 report is a general use report that can be distributed freely by the organization.
SOC 3 reports do not have detailed descriptions of the controls tested by the auditor. Thus, the test procedures and the results of the test procedures are publicly available.
What Are The Best Ways To Accelerate The SOC 2 Audit Process?
SOC 2 audit can be a long-winded process, but here are a few steps your organization can take to accelerate it.
Avoid Analysis paralysis
Select SOC 2 report type
Find an auditor
Choose the right project manager
Get executive buy-in
You can find more details on ways to accelerate the SOC 2 audit process here.
It can be difficult for organizations to choose which SOC audit to go for, and understandably so. Which is why, we recommend you get in touch with experts at Scrut to understand what SOC audit works best for your organization and why.
Start your compliance process with us!
Scrut Automation is a smart and radically simple Governance, Risk, and Compliance automation platform for growing startups and mid-market enterprises. With Scrut, Compliance teams can reduce ~70% of their manual effort in continuously maintaining compliance towards SOC 2, ISO 27001, GDPR, PCI DSS, and privacy laws like HIPAA, GDPR, and CCPA. Schedule your demo today to see how it works.