Three Types of SOC Reports Explained

Doing business successfully is all about trust. Clients need to trust their service providers and vendors need to show they can be trusted.

In reality, however, when it comes to the security of data – it’s the vendor’s clients who suffer more from data loss.

For example, if your vendors get hacked or mishandle your financial data, the effects will trick down to how you do business. You can lose customers due to cases of fraud or even from data loss if it breaches data protection and privacy laws.

Similarly, when you’re the service provider, aka vendor, you need to earn the client’s trust by implementing the proper controls to protect their data integrity and security.

The good news is that SOC reports are here to prevent this. They help service providers prove that they are trustworthy enough to work with. Ideally, there are three types of SOC (service organization controls) reports, and understanding the report you should be concentrating on as a vendor or a client to a service provider is essential.

Here are the differences between SOC 1, SOC 2, and SOC 3:

The SOC 1 Report

The report looks to scrutinize a service organization’s financial reporting systems. If a service organization has any control over your financial information, they need to present you with a SOC 1 report. Some of the service companies that are affected by this include:

• Payroll processors
• Datacenter companies
• Medical claim processors
• Lending services
• Human resource support services
• Cloud service providers
• SaaS companies

SOC 1 reports can either be presented in one of two ways; type 1 and type 2. The former report tests the adequacy of a service organization’s internal financial controls design. It details how well these controls have been implemented on a given date.

SOC 1 Type 2, on the other hand, helps to prove that an organization has implemented the necessary financial controls within a designated time. Ideally, producing this report calls for at least six months of control operations. SOC 1 reports can generally be quite helpful in complying with Sarbanes-Oxley’s section 404 requirements since they help demonstrate that the company in question has adequate internal controls that cover financial reporting.

The SOC 2 Report

While SOC 1 reports mainly analyze an organization’s financial reporting controls, SOC 2 deals with data security. Ideally, your service organization has to ensure that you meet all five trust service criteria while handling data. These trust criteria require you to uphold data processing integrity, security, privacy, availability, and confidentiality.

Data security is continuously being emphasized in a world where the cloud is increasingly becoming mainstream and organizational budgets are tightening. When deciding between cloud providers and other SaaS companies, you need to pick providers who will help keep your data security from current and upcoming security threats. Like SOC 1, SOC 2 is also divided into two types of reports; SOC 2 Type 1 and SOC 2 Type 2.

Type 1 reports offer descriptions by the management of a service provider that they have implemented sustainable control designs. The words showcase that the auditors have observed the effectiveness of the control design at a particular time.

Type 2 reports, on the other hand, showcase a service organization’s management’s description of the system and sustainability of control designs as well as their effectiveness. It also attests that these controls are adequate over a while.

The SOC 3 Report

The SOC 3 report is quite similar to the SOC 2 report in that it proves that a service organization can meet the five trust service principles. However, there is a significant difference in how both are disclosed.

For SOC 1 and SOC 2, your service organization will only be required to share the information with you if you work with them. On the other hand, SOC 3 should be shared publicly.

As a result, the report only contains a summary of what would be found on the SOC 2 report. Plus, it’s a summary that barely touches on the intricate details of how the organization is run. Your vendors may post this report on their website, and it doesn’t necessarily require you to sign an NDA to gain access.

What Report Should You Concentrate On?

Whether you are a service organization or a client to a service organization, concentrating on the right report will ensure that your business can run smoothly. If you are working with a company that will affect your financial reporting, ask the vendor for a SOC 1 report.

If your main concern is the security of your data when working with a service organization, ask vendors for a SOC 2 or SOC 3 report. The choice between the reports will depend on the depth of information you need.

While SOC 2 will give you a deep dive into the controls vendors have implemented to meet the five trust service principles, SOC 3 will only give you an overview. SOC reports standardize how businesses can tell between the vendors to trust and those not to.

In a world rife with financial fraud and cyber-security threats, these reports are a must-have to reduce the risk of doing business. Ask your vendors for the report that applies to you for a smooth time doing business.