SOC Reporting: A Powerful Differentiator

Companies commonly outsource various business activities, such as payroll, IT, investment advisory, and claims processing, to service organizations. When so doing, it is important for the company to have a transparent view into the control environment within the service organization to properly assess any risk that could be associated with partnering with that organization. To address that need, the American Institute of Certified Public Accountants (AICPA) developed System and Organization Controls (SOC) reporting, a suite of reports that must be issued by a qualified Certified Public Accounting firm.

Issuing a SOC report is a strategic move that goes beyond mere compliance. By undergoing the rigorous examination process required to obtain a SOC report, your organization demonstrates a commitment to transparency and the establishment of robust controls. This commitment, in turn, fosters trust among current and potential business partners, providing them with assurance regarding the effectiveness of your internal controls.

The trust you earn through a SOC report serves as a valuable differentiator in a competitive business landscape. Potential clients are more likely to choose a service provider with a documented and independently verified commitment to data security and operational integrity. This competitive advantage can lead to increased market share and broader access to customers who prefer to work with organizations that prioritize and validate their control environment.

Moreover, the issuance of a SOC report streamlines the due diligence process. It reduces the need for customers and their auditors to extensively query your organization about control practices. The report serves as a comprehensive source of information, saving time for both parties and facilitating smoother business interactions. This efficiency not only enhances client relationships but also positions your company as one that is proactive and values open communication.

Beyond its immediate benefits, a SOC report becomes a valuable tool for ongoing monitoring and improvement. Regular assessments help your organization identify any potential breakdowns in controls, allowing for prompt remediation. Such a proactive approach not only ensures continuous compliance but also contributes to the overall enhancement of operational efficiency and risk management. It becomes a dynamic instrument for maintaining and evolving the robustness of your internal controls, aligning your organization with best practices in governance and risk management.

Types of SOC reports

Selecting the appropriate report requires consideration of the type of business activity being provided to customers and the needs of the audience using the report. The most common SOC reports issued by service organizations include:

SOC 1

A SOC 1 report provides assurance about the internal controls over financial reporting at a service organization. These reports are generally issued by service organizations that process financial data or are involved in financial reporting. The report includes the identification of specific control objectives and the corresponding activities implemented to achieve them. These control objectives cover both IT general controls and critical business process controls that impact financial reporting. SOC 1 reports are critical tools for stakeholders, user entities, and their auditors in assessing the reliability of financial information processed by the service organization.

SOC 2

SOC 2 reports are based on the Trust Service Criteria, a set of criteria developed by the AICPA to assess the effectiveness of controls related to security, availability, processing integrity, confidentiality, and privacy. Service organizations must include the security criteria, also referred to as the Common Criteria, in their SOC 2 examination. Service organizations may also choose one or more additional criteria based on the nature of their services and the specific areas they want to assess. SOC 2 reports are essential for users and stakeholders who require assurance about the effectiveness of a service organization’s commitment to safeguarding sensitive information and ensuring the availability, integrity, and confidentiality of systems and data.

SOC 3

SOC 3 reports also cater to those requiring an understanding of controls related to security, availability, processing integrity, confidentiality, and privacy. While providing valuable insights, SOC 3 reports offer less detail than SOC 2 reports. Recognized as “general use reports,” they offer a concise overview and can be freely distributed, making them a versatile tool for stakeholders seeking high-level information on an organization’s control environment. A SOC 2 report is required for the generation of a SOC 3 report.

Difference between SOC 1, SOC 2, and SOC 3

What is coveredInformation on controls relevant to user financial reportingInformation on controls relevant to security, availability, processing integrity, confidentiality, or privacyInformation on controls relevant to security, availability, processing integrity, confidentiality, or privacy

Type I vs. Type II

SOC 1 and SOC 2 reports are issued as either a Type I or Type II report. The key difference between Type I and Type II reports lies in the period covered and the level of assurance provided. A Type I report is a point-in-time report that evaluates both the design and implementation of the controls. A Type II report is a period-of-time report (typically six months or greater) that evaluates the design, implementation, and operating effectiveness of the controls over the period. There is not a Type I or Type II option available for SOC 3 reports.

How to prepare for a SOC engagement

The SOC reporting process typically begins with a SOC readiness assessment consulting engagement, which takes place prior to the SOC examination. Services provided in a readiness assessment can include an evaluation of appropriate scope of the business to include the SOC report, developing the control objectives (SOC 1), or selecting the appropriate Trust Service criteria (SOC 2). Another step in the readiness assessment is to walk through key business processes to help management identify documentation deficiencies, control weaknesses, and control gaps that could prevent achievement of the specified control objectives or selected Trust Service Criteria and result in modifications to the opinion issued by the service auditor. These findings will be aggregated and delivered in a report to the service organization management. When management has assessed and remediated the identified weaknesses and gaps, the SOC examination process can begin.

In conclusion, obtaining a System and Organization Controls (SOC) report is a strategic move that reflects your unwavering commitment to transparency and the establishment of robust controls. The SOC report becomes a tangible testament to an organization’s dedication to data security and operational integrity, positioning it as a reliable and secure service provider. The SOC report is a powerful differentiator in a competitive business landscape, attracting clients who prefer working with organizations that validate and prioritize their control environment. This advantage can not only bolster your market share but expand your access to customers seeking documented and independently verified commitments to safeguarding sensitive information.

For more information on how HBK can help you with your SOC 1, 2 or 3 reporting needs, please contact Joel Van Horn, CPA/CITP, CISA at jvanhorn@hbkcpa.com.