The Ultimate Manual To SOC Reports
Data security and privacy are becoming significant business challenges, as organizations worldwide are increasingly outsourcing operations and sharing confidential data with third-party service providers.
Businesses require a way to evaluate the credibility and information handling capacity of service providers they trust with their critical business data.
This is where SOC reports come in.
SOC reports provide well-defined standards for service providers to ensure the appropriate and secure handling of consumer data.
In the following section of this article, we’ll understand SOC reports in detail, how they work, and why service providers need them.
What are SOC Reports Anyway?
Service Organization Controls (SOC) reports represent a set of well-defined standards that govern the information handling processes, practices, and capacity of service providers.
It is a set of reports developed by the American Institute of Certified Public Accountants (AICPA) that organizations around the world accept as a reasonable standard for evaluating service providers.
The purpose of SOC reports is to certify that a specific service provider follows the recommended information security and data privacy practices.
As a result, any financial institutions, manufacturers, and service providers can trust a SOC-certified company to handle their data securely without compromising its integrity.
It helps filter out low-quality service providers whose data handling capabilities aren’t up to international standards. As a result, it significantly reduces the chances of cybercrimes and data breaches and reduces the overall vendor recruitment and management cost.
Over the last few years, SOC reports have become an essential requirement for technology service providers working with some of the world’s biggest companies.
In many cases, SOC certification is a pre-qualification requirement for vendors, which means without an active certification, their proposals are not even considered.
Because of this, technology service providers are increasingly investing in developing their information security systems in line with the standards defined in SOC certification requirements.
To become a SOC certified service provider, organizations need to go through various SOC audits by accredited CPAs.
Let’s look at the audit process in more detail.
SOC Report Audits
The eligibility of a company for SOC certification is determined through independent SOC report audits. These audits are conducted by certified public accounts (CPAs) approved by the AICPA.
Audits by firms or professionals not registered with the AICPA are not recognized and cannot be used for SOC certifications.
The audit process usually depends on the type of SOC report, the scope of the audit, the existing systems and methods of an organization, and any audit pre-requisites.
The audit duration can vary from a couple of months to more than a year, depending on its scope.
Once a company is successfully audited and certified for a SOC report by AICPA, its certification remains active for a specific period (1 to 2 years), after which it needs to go for a re-audit to stay certified.
The cost of a SOC report depends on the audit type. In general, it can fall anywhere between $15,000 and $100,000 depending on the audit’s scope and the existing system of the audited organization.
How SOC Reports Work
SOC reports allow service providers to stand out from the crowd and establish themselves as credible brands with the necessary systems, processes, and personnel to collect, store, host, and manage customer data securely.
However, SOC reports is a broad term that represents three different reports and certifications audits. Each SOC report type is different from the other and serves a unique purpose.
The requirements of every report type are also different from the others. This means if a company is certified for one type of SOC report, it doesn’t automatically qualify for the other types.
The certification audit for every report type is conducted separately by an independent CPA firm or professional approved by the AICPA.
To understand how SOC reports work, you must understand the differences between their types.
Types Of SOC Reports – SOC 1, SOC 2, SOC 3
The three main types of SOC reports are SOC 1, SOC 2, and SOC 3.
Let’s discuss each type in detail to understand how it works.
SOC 1 Report
SOC 1 report certification defines information security and privacy standards for financial data. According to AICPA, SOC 1 addresses Internal Control over Financial Reporting (ICFR).
SOC 1 reports are specifically intended to meet the needs of entities that use service organizations (user entities) and the CPAs that audit the user entities’ financial statements (user auditors) in evaluating the effect of the controls at the service organization on the user entities’ financial statements.
In simpler words, SOC 1 reports evaluate the processes and systems of a service provider to ensure it can sufficiently protect the confidential financial data of a company.
Banks, insurance companies, eCommerce companies, and various financial institutions usually require vendors to successfully pass SOC 1 audits.
There are two types of SOC 1 audit reports called Type 1 and Type 2 reports.
SOC 1 Type 1 Report
The SOC Type 1 report evaluates the information security standards, data privacy practices, infrastructure, and personnel skill set of a service provider to securely collect, save, manage, and transfer confidential financial records and data. Instead of evaluating these standards for a specific period, the Type 1 report gives readers a snapshot of the standards for a particular date.
SOC 1 Type 2 Report
The SOC Type 1 report evaluates the information security standards, data privacy practices, infrastructure, and personnel skill set of a service provider to securely collect, save, manage, and transfer confidential financial records and data. This report evaluates the standards of a service provider for a specific period which is mostly 6 to 12 months. To pass the certification audit, a service provider needs to maintain the certification audit’s minimum compliance.
SOC 2 Report
The SOC 2 report is a certification standard that qualifies service providers based on their information security, data privacy, and consumer info handling procedures and infrastructure.
This report is mainly used by service providers outside the financial sector. A SOC 2 auditor evaluates various aspects of a company’s systems and processes. Some of them are:
- Server management and infrastructure
- Data access rights
- Data security checks
- User accessibility hierarchy
- Data handling processes and documentation
- Information access details and protocols
- Disaster management plan
Apart from these areas, an auditor also evaluates the expertise and skill levels of a company’s data security teams and any employees involved in customer data handling.
In general, SOC 2 audits evaluate the ability of an organization to ensure information security and confidentiality based on five audit principles.
- Security: It states that a SOC 2 compliant organization must ensure complete security of customer data from unauthorized access, theft, manipulation, alteration, destruction, or any other change from its original form.
- Availability: This principle requires that a SOC 2 compliant service provider ensures service availability and accessibility to its users at all times.
- Process Integrity: This principle states that a SOC 2 compliant service provider should ensure that the system achieves its purpose by servicing the correct data, in a complete form, at the right time. The data should always be complete, valid, accurate, timely, and authorized.
- Confidentiality: The confidentiality principle requires that SOC 2 compliant service providers ensure the complete security and confidentiality of sensitive data. Data is considered confidential if its access is limited to specific individuals or entities.
- Privacy: The privacy principle requires that SOC 2 compliant service providers develop a mechanism that addresses the system’s collection, use, retention, disclosure, and disposal of personal information in conformity with an organization’s privacy notice and with the criteria determined by AICPA.
Out of these five trust principles, Security is a mandatory part of every SOC 2 audit. However, organizations can choose the remaining principles based on their need and the scope of the audit.
Like SOC 1, SOC 2 reports also have two types.
SOC 2 Type 1
Type 1 reports analyze the information security policies, data management practices, server and technical infrastructure, and other compliance requirements in a service provider for a specific date.
SOC 2 Type 2
Type 2 reports evaluate the same factors as a Type 1 report but do it over a more extended period (6 to 12 months).
SOC 3 Reports
SOC 3 reports are usually summary documents of an organization’s compliance practices. It is a public document that regular consumers can request to review. This is why it does not include any confidential information that a service provider seeks to keep away from the public eye. It is extracted from the content of SOC 1 and SOC 2 reports.
Example 1: SOC 1 Certified Payment Services
SOC 1 reports evaluate and certify a service provider’s information security and data handling procedures for financial data.
PayPal is a classic example of a service provider that handles numerous financial transitions and has access to the financial data of thousands of companies across the world.
To ensure that the financial data of PayPal customers is secure, it has successfully completed the SOC 1 evaluation and is certified by an independent auditor.
Example 2: SOC 2 Certified Email Marketing Company
SOC 2 reports mainly evaluate a service provider’s information security standards and data handling procedures except for financial data.
Mailchimp, a leading email marketing service, handles the contact information and various other data types of thousands of customers.
To ensure that Mailchimp’s customer data is secure, it has completed the SOC 2 audit certification available on its website.
Example 3: SOC 3 Report Of An eCommerce Company
Shopify is among the biggest eCommerce companies in the world. It has access to the complete data of millions of eCommerce businesses built on its platform.
Shopify is SOC 2 certified company and offers a SOC 3 report on its website for anyone to download and review its data security practices and processes.
How to Get Started With SOC Reports
Every SOC report type follows a different procedure. However, generally, the following steps are common in all report audits.
Need Analysis
The first step of becoming SOC certified for any report type is determining the type of audit your company needs.
If your target audience primarily consists of financial intuitions and companies dealing in financial matters, SOC 1 might be the right certification for you.
However, SOC 2 might be a better option if your prospects are SaaS companies, tech startups, or any business outside the financial sector.
After determining the SOC report types, you need to define the scope of your audit. You can only do that after analyzing your company’s existing standing concerning the requirements of the SOC report you’ve selected.
Readiness Assessment
A readiness assessment is often conducted by an independent firm to determine if your company is ready to go into a SOC report audit. However, some companies conduct readiness assessments with their internal quality teams as well.
The results of a readiness assessment highlight the gaps in your process and the areas that you need to improve before heading into an audit.
Remediation Of Control Gaps
In this step, your company improves its systems and processes to ensure that they’re in line with the recommendations and minimum standards defined in the relevant SOC report.
Commissioning The Audit
Once you’ve revised your systems and brought them in line with the recommendations of the relevant SOC report, you’re finally ready to conduct the audit.
SOC report audits are conducted by CPA professionals or firms licensed by the AICPA. The audit firm works with your internal technical and quality assurance teams to review your processes, systems, infrastructure, and documentation during the audit. At the end of the audit, the audit team writes a comprehensive report highlighting everything they’ve audited. Based on this report, your company is granted the SOC audit certification valid for up to one year.
