A service organization often goes through an audit of its systems and controls in order to obtain a SOC report. The SOC 1 report is pretty popular with service organizations since it provides comfort over systems and controls that are key to a user entity’s financial reporting process. SOC doesn’t stop at SOC 1 reports. There are also SOC 2 reports. In this article, we will define the SOC 2 report and determine what it’s used for. We will also compare the difference between a SOC 1 report and SOC 2 report.
Recap On What Is a SOC Report?
SOC is short for System and Organization Controls and the number after the SOC is simply to identify the purpose of the SOC report since there are different variations of SOC reports (such as SOC 1, SOC 2, SOC 3).
In business, there are many companies that act as service providers to other companies. In fact, some companies may outsource a portion of their operations to another company that specializes in the outsourced activity. The purpose of a SOC report is to provide comfort that a service provider is compliant with internal policies and is ethical. It basically gives peace of mind to a company hiring a third-party to act as their service provider that the third-party protects the company’s data and acts effectively. A SOC report may examine controls, privacy, confidentiality, security, and so on.
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SOC 2 Report [Explained]
The SOC 2 report focuses on the privacy and confidentiality of data kept at the service organizations. It relies on the Trust Services Criteria which comprise of confidentiality, security, processing integrity, availability, and privacy. Each of these criteria are defined below:
- Confidentiality: This criteria ensures that any information considered to be confidential or sensitive is protected.
- Security: This criteria ensures client data obtained by a service organization and stored physically or virtually in systems are protected and only authorized people can have access to the data.
- Processing integrity: This criteria ensures the systems are processing the data accurately and in a timely manner. This means that there should be no unauthorized changes in data and the system keeps the data integrity throughout the processing.
- Availability: This criteria ensures the systems are available to be operated and used.
- Privacy: This criteria applies to personal information and ensures that data collected, retained, used or disposed are handled by respecting the privacy policies of the service organization.
The Trust Services Criteria dictates how client data should be managed. While the SOC 2 relies on the Trust Services Criteria, not all criterias need to be covered in the SOC 2 report. In fact, only security is mandated in order to get a SOC 2 report while the other four criterias are optional. It really depends on the company’s needs; all five criterias can be included or only one or two.
The SOC 2 report is split into two types; the SOC 2 Type 1 and the SOC 2 Type 2.
- SOC 2 Type 1: This type of report contains the service organization’s management’s description of their systems and controls. The SOC 2 Type 1 report is as of a specific date rather than covering a specific period. The auditors delivering a SOC 2 Type 1 report will provide an opinion on whether the systems and controls comply with the predetermined Trust Services Criteria in regard to the safeguarding of data.
- SOC 2 Type 2: The SOC 2 Type 2 report is an improved version of the SOC 2 Type 1 report. This is because the Type 2 report will include everything from the Type 1 report in relation to the description of systems and controls with the opinions but it also includes whether the controls are operating in an efficient manner in dealing with client data The SOC 2 Type 2 report will be covering a specific period rather than only for a specific date.
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Difference Between SOC 1 and SOC 2 Reports
The main difference between a SOC 1 and a SOC 2 report is their respective purpose and focus.
A SOC 1 report’s main purpose is to evaluate the design and operating effectiveness of the internal controls of a service organization which are related to the financial reporting function of the user entities.
A SOC 2 report focuses on whether the systems and controls comply with the Trust Service Criteria in terms of the safeguarding of client data along with IT security.
SOC 2 Report: What It Is Used For and Why Does a Company Need It?
A SOC 2 report is mostly intended for management of the service provider or a user entity (the client). Contrary to financial statement audits where it could be basically intended to anyone who has an interest in a company, a SOC 2 report has no significant use for someone who does not have a direct stake in the service organization. After all, a SOC 2 report does not discuss the performance of a company, rather, it discusses the compliance of an entity’s systems and controls with data management.
A SOC 2 report is completely voluntary so a service organization can either get one or completely pass on it. For organizations that do decide to get a SOC 2 audit completed, it can increase confidence from current and potential customers of a service organization in how they handle data. It shows an organization is reliable and it establishes a certain level of trust in the way the service organization protects data in respect to the Trust Service Criteria.
SOC 2 Report: Final Thoughts
A SOC 2 report is primarily focused on the compliance of an entity’s systems and controls over client data management. It relies on the Trust Service Criteria where security is a key criteria to obtain a SOC 2 report. The other four criterias; confidentiality, privacy, processing integrity and availability, are optional and depend on a company’s business strategies and needs.
The SOC 2 report differs from the SOC 1 report in the fact that the SOC 1 is focused on the systems and controls relevant for the financial reporting process of a user entity. For a service organization, having a SOC 2 report completed can increase the level of confidence in customers.
