Management, compliance & auditing

Overview: Understanding SOC compliance: SOC 1 vs. SOC 2 vs. SOC 3

What is SOC compliance?

SOC compliance refers to a type of certification in which a service organization has completed a third-party audit that demonstrates that it has certain controls in place. Generally, this refers to SOC 1, SOC 2, or SOC 3 compliance; however, SOC for Cybersecurity and SOC for Supply Chain certifications exist.

When does my organization need a SOC Audit?

SOC compliance and audits are intended for organizations that provide services to other organizations. For example, a company that processes payments for another organization that offers cloud hosting services may need SOC compliance.

SOC compliance is designed to prove to a service provider’s customers that a company can provide the services that it is contracted for. In most cases, a company’s customers do not have deep visibility into their environments, making it difficult to trust that a company properly protects sensitive data etc. A SOC audit involves a third-party auditor validating the service provider’s controls and systems to ensure that it can provide the desired services.

Unlike many compliance regulations, SOC compliance is typically not mandatory to operate in a given industry like PCI DSS compliance is for processing payment card data. In general, companies need a SOC audit when their customers request one.

Differences between the SOC types

SOC compliance comes in a few different flavors. As mentioned above, SOC compliance typically refers to SOC 1, SOC 2 and SOC 3.

These three types of SOC audits are designed to achieve different goals or to address different audiences. The objectives of each are:

• SOC 1: focused solely on controls that affect the customer’s financial reporting. If an organization is processing payment data for a healthcare provider, they need to undergo a SOC 1 audit to ensure that they are properly protecting that financial information.
• SOC 2: more general and assesses the service provider’s controls for various Trust Services Criteria (TSCs), including security, confidentiality, availability, processing integrity and privacy. An SOC 2 audit does not need to cover all of these TSCs. The security TSC is mandatory, and the other four are optional. SOC 2 compliance is typically the big one for technology services companies like cloud service providers.
• SOC 3: provides the same information as SOC 2 compliance but at a higher level. For example, SOC 2 compliance is typically intended for an audience of client companies and their shareholders. SOC 3 compliance, on the other hand, is intended for the general public. For example, a cloud services company like AWS might include a SOC 3 certification badge and report on their website for the general public but provide a SOC 2 report to enterprise customers upon request.

In addition to SOC 1, SOC 2 and SOC 3 compliance, there are also Type 1 and Type 2 reports. Any SOC report, but typically SOC 1 or SOC 2, can be Type 1 or Type 2. For example, a company may have a SOC 1 Type 1, SOC 2 Type 1 etc.

The difference between the different types of SOC audits lies in the scope and duration of the assessment:

• Type 1: audits provide a snapshot of the company’s compliance status. The auditor tests one control to verify that the company’s description and design are accurate. If this is the case, the company is granted a Type 1 compliance certification.
• Type 2: tests an organization’s ability to sustain compliance. The auditor tests the company’s compliance controls over a set period. If the company remains compliant over the evaluation period, then a Type 2 compliance report is granted.

Type 1 compliance is essentially a watered-down version of a Type 2 compliance report. It’s always better to seek Type 2 compliance as soon as possible since this is the type that customers will be looking for.

Benefits of the different types

SOC 1, SOC 2 and SOC 3 audits are designed to achieve different purposes. SOC 1 compliance is focused on financial reporting, while SOC 2 and SOC 3 have a wider view and are better suited to technology service organizations. The main difference between SOC 2 and SOC 3 is their intended audiences.

When choosing which SOC to pursue, consider your company’s business model and the target audience. If you only handle non-financial data and want to prove your capabilities to customers, then SOC 2 is the right answer. If you need Sarbanes-Oxley (SOX) compliance when becoming a publicly-traded company, then a SOC 1 audit can be invaluable.

Between a Type 1 and Type 2 audit, the only advantage of Type 1 is that it is faster to achieve. Since most customers know the limitations of a Type 1 audit, they will be looking for Type 2.

Challenges and timelines of the different types

Most businesses do not need SOC compliance when they are first starting. In general, SOC compliance is needed to stand out in the marketplace and land more significant deals. Ideally, customers should look to achieve SOC compliance before asking for the right to audit their systems.

Since a Type 2 audit requires evaluating a company’s environment over some time, it is important to plan. Auditors won’t grant a compliance report until the six-month or yearlong audit period is complete, so it is important to start the process before you need to.

Achieving SOC Compliance

The American Institute of CPAs (AICPA) is the organization behind the SOC certification. They provide resources for organizations looking to achieve SOC 1 and SOC 2 compliance, including choosing the right SOC report and preparing for a SOC audit.

 

Sources

• SOC for Cybersecurity, AICPA
• SOC for Supply Chain, AICPA
• SOC for Service Organizations, AICPA
• SOC 1 vs. SOC 2 vs. SOC 3, WorkOS
• System & Organization Controls (SOC) Reporting, Baker Tilly