Information systems is a growing industry that requires transparency and trust. Some companies provide these information systems as services. One of the best ways to ensure the quality of these services is to learn SOC reporting requirements.
In a nutshell, SOC refers to System and Organization Controls. These are a suite of validated reports that document the internal controls of these services revolving around information systems.
An Overview of Benefits
SOC provides a sustainable and organized means of communicating essential details of information systems to various stakeholders. As defined by the American Institute of Certified Public Accountants (AICPA), there are different types of SOC reports. All these reports have in common that there are benefits to meeting the SOC audit requirements.
Here is a rundown of optimum benefits that SOC reports can provide:
- These documents reduce compliance costs, saving time when filling out vendor questionnaires during audits.
- These fulfill contractual obligations through a flexible means of reporting. It provides improved communication with external and internal stakeholders. The compilation of a single report makes it easier to attend to the collective needs of multiple beneficiaries.
- It fine-tunes the oversight over third parties or sub-service organizations to customers and clients. There is a foresight of risk anticipation, prevention and mitigation. The SOC reports evaluate the optimum performance of controls for both service organizations and user entities.
- The reports improve customer care, management and retention. It can boost brand reputation by emphasizing the sterling compliance and performance of the service organization compared to competitors.
Understanding the Types of SOC Reports
Certified Public Accountants can choose among a suite of service offerings of System and Organization Controls (SOC). All of these provide a clear picture of system-level controls within a service organization:
SOC for Service Organizations
Service organizations are companies that offer essential information systems to users and clients. This SOC focuses on the internal control reports to transparently reference the service organization’s processes, which must identify and assess the potential risks that can be faced by the service.
There are three specific types of SOC for Service Organizations:
SOC 1 — SOC for Service Organizations: ICFR
ICFR stands for Internal Control over Financial Reporting. This is important for auditing essential financial statements. This report’s priority is to find potential vulnerabilities or issues within the internal controls that can affect this financial information.
SOC 1 is under AT-C section 320 Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting.
SOC 2 — SOC for Service Organizations: Trust Services Criteria
Companies that are service organizations in information systems should devote a particular focus on SOC 2.
The AICPA describes SOC 2 as Reporting on an Examination of Controls at a Service Organization. The basis of the assessment revolves around five attributes that are collectively called Trust Service Principles. These include:
- Processing Integrity
These Trust Service Principles provide service auditors with a guide on reporting on a service organization’s internal controls. These examinations are done under SSAE 18 (Clarified Attestation Standards) and have been updated since January 1, 2018.
These factors are used to reference attestation and evaluation controls within an organization’s cybersecurity risk management program.
Management may also apply these criteria to study the suitability and effectiveness of design and controls.
SOC 3 — SOC for Service Organizations: Trust Services Criteria for General Use Report
This report is intended for users who require assurance about the controls of a service organization. It is more or less the same as SOC 2 but without the technical details and is intended for general use. This can also be freely distributed.
It provides an overall picture of the service organization’s status and performance with the Trust Service Principles as reference. These include security, processing integrity, availability, confidentiality, and privacy.
SOC for Cybersecurity
In this framework, the service auditor can communicate essential information about its optimal cybersecurity risk management program’s optimal performance.
CPAs can also use this report to express information and findings of the company’s information needs.
Cybersecurity is a vital concern in service organizations nowadays, and a positive report will reflect well on a company.
SOC for Supply Chain
An internal controls report on an entity’s system and rules for producing, manufacturing, or distributing goods to better understand their supply chains’ cybersecurity risks.
Types 1 and 2 Specific Reporting
For SOC 1 and SOC 2, the AICPA defines two more sub-levels of reporting: Type 1 and Type 2.
With its premium on financial reporting, SOC 1 has two varieties of reports that can provide stakeholders with more vital information and assessment.
- The SOC Type I report focuses on the fairness and accuracy of the service organization’s information system description. It also looks into the effectiveness of the internal controls to achieve the objectives of the company.
- The SOC Type II is almost the same, but it is an attestation of the internal controls of a service organization within a minimum period of six months.
The differences are not that far off from each other. But expert auditors advise that the SOC 1 Type I report may be more suitable in the beginning. As the environment evolves and improves over time, the service organization can then move on to a Type II audit.
These two SOC 1 reports can be found on the auditing standard Statement on Standards for Attestation Engagements no. 18 (SSAE 18), particularly section 320, which discusses “Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting.”
Trust Services Criteria
SOC 1 and SOC 2 also have two sub-level reports that can provide more comprehensive information for risk analysis and compliance with the Trust Service Principles.
- The SOC 2 Type I examines internal controls to check if it complies with the Trust Service Principles. Such a report can conclude that an organization has a practical and cost-efficient design in place.
- The SOC 2 Type II will include the same information as Type I. It will also indicate the specific testing of the service organization’s internal controls within a set time.
The SOC 2 report is vital for companies that offer co-location, Software-as-a-Service (SaaS), data processing, or data hosting. The report will verify and assess if privacy protocols are followed during the transmission, storage, maintenance, processing and disposal of data.
The SOC 2 report provides customization for businesses depending on their practices and needs. The controls are carefully designed so that organizations can comply well with the Trust Service Principles.
For compliance, the SOC 2 report is a requirement under the SSAE 18 standard. It is mainly referred to in sections AT-C 105 and AT-C 205.
The controls that service organizations must follow are also outlined in the Trust Services Criteria of the AICPA, namely security, availability, processing integrity, confidentiality and privacy. It must be relevant to operations, compliance and services. The only required criteria that must be included in SOC 2 is security.
Difference Between SOC 1 and SOC 2
It is essential to know the intricacies between the two System and Organization Controls (SOC) reports. This is to gather the best facts available in order to make decisions.
A SOC audit is one of the best means to assess third-party risk. It is also an independent platform to communicate to clients that sufficient and adequate internal controls are in place within the organization.
It is even possible that customers will secure a SOC report from you to fulfill their compliance requirements.
The two reports’ significant distinguishing factor is that a SOC 1 Audit is created for financial reporting and internal controls. On the other hand, the SOC 2 Audit focuses on information systems and IT security.
Also, in a SOC 2 Audit, controls meeting the trust criteria are identified and tested. In SOC 1, controls are only tested.
The Rationale Behind SOC 1
Accomplishing a SOC 1 report indicates that a service organization has put in due diligence and reinforcement regarding its effects on the client’s financial reporting.
Financial services should have a SOC 1 report. These include claims processing or billing. A third party SOC Audit Services Team should prepare this report for compliance.
The report will also fulfill the auditor requirements of a client and help set an advantage among competitors.
The report will reflect the steps that a service provider has done to identify, assess and mitigate risks to protect financial information and stability.
The SOC 1 falls under SSAE 18 AT-C 320 (previously SSAE 16 or AT 801). Its focus includes the controls of a service organization that are relevant to the financials of the client. Assisted by auditors, the service organization will pinpoint the critical control objectives that the services are providing to clients.
The control objectives will be narrowed down to the service organization’s business processes and information technology processes.
The Rationale Behind SOC 2
The SOC 2 report is an effective platform for transparency that can convey assurance and confidence to customers, inventors, auditors, and stakeholders of a service organization. It is a strong statement that the service organization has sufficient and appropriate controls for information security.
The information security controls of a service organization that a SOC 2 report can reflect are immense. It encompasses infrastructure, software, personnel, handling of data, and technological preparations when processing customer information.
Ultimately, the report will answer what steps the service provider has undertaken to protect data privacy and security. It is a vote of confidence that the service organization is doing well.
The Methodology Behind the Reports
A SOC report engagement begins with an assessment of readiness within an organization. After this inspection, the service organization will be provided with a checklist of control gaps or opportunities to improve vital processes.
This will also depend on whether it is a Type 1 or Type 2 report. The management will then have a chance to implement these changes before starting the period covered by the SOC report.
The SOC engagement will be accomplished time and again by creating an updated SOC report so that the service organizations can continually update their systems and controls.
For example, an SOC 2 Type 2 engagement has a coverage period of January 1 up to September 30, with a bridge letter provided to user entities for the calendar year’s entirety.
Advanced Technical Assistance from the Experts
For the sustained productivity of a service organization, its SOC must be prepared and written well, particularly SOC 2 reports. These have to be meticulously accomplished because they are customized according to the needs of the organization.
RSI Security has the expertise and experience to help your organization with the compliance process and fulfill SOC reporting requirements and the Trust Service Principles. Our team of professionals will secure your data in a cost-efficient manner to give you and your client base the peace of mind you deserve.
Samsung, Verizon, and Cisco are among a long line of reputable brands that have chosen RSI Security as their partner. Our work will guarantee increased client trust, brand reputation boost and more robust data privacy and confidentiality.
For more details, you can contact RSI Security at firstname.lastname@example.org or reach us via 858-240-9258 and 858-225-6910.