What Is a SOC Report, and Why Is It Important?

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This article was updated August 10, 2023.

System and organization control (SOC) examinations aren’t formally required, but they’re increasingly requested by businesses.

The purpose of a SOC examination is to report on the effectiveness of an organization’s internal controls and safeguards they have in place while providing independent and actionable feedback.

Financial statement auditors use them to reduce audit procedures, and sophisticated users of service organizations push for them as confirmation that systems are secure and data is protected.

The following questions about SOC reports are answered below:

Understanding SOC Reports

There are three types of SOC reports: SOC 1, SOC 2, and SOC 3.

chart explaining the focuses and uses of the different types of SOC reports.

What Is a SOC 1 Report?

SOC 1 is a report on service organization controls relevant to a user entity’s internal control over financial reporting.

These reports are specifically intended to meet the needs of user entities and the CPAs that audit the user entities’ financial statements—user auditors— in evaluating the effect of the service organization’s controls on the user entities’ financial statements.

Typically, these reports are restricted to the management of the service organization, user entities, and user auditors.

When Do You Need a SOC 1 Report?

A SOC 1 report generally would be needed when an organization is relying on the controls at the service organization to achieve effective controls over financial reporting processes.

For example, when using a payroll provider, some of the controls related to processing payroll are being performed by the payroll provider. Access to the provider’s SOC 1 reports would provide evidence of those controls’ operating effectiveness.

What Is a SOC 2 Report?

SOC 2 is a report on service organization controls relevant to the trust services criteria:

  • Security
  • Availability
  • Processing integrity
  • Confidentiality
  • Privacy

Service organization management is responsible for selecting the trust services categories within the scope of the examination based on management’s understanding of the user entities’ needs and what the organization wants to communicate to those user entities.

These reports can play an important role in:

  • Oversight of the organization
  • Vendor management programs
  • Internal corporate governance and risk management processes
  • Regulatory oversight

SOC 2 reports are also restricted to specific users, similar to a SOC 1.

When Do You Need a SOC 2 Report?

A SOC 2 report is often needed when the vendor is providing outsourced or digital services.

For example, if the organization uses a data center or a cloud-based software, a SOC 2 report would provide assurance over the service organization’s internal controls relevant to the security, availability, and confidentiality of customer data.

What Is a SOC 3 Report?

SOC 3 is also a trust services report for service organizations. It covers the same subject matter as a SOC 2 report but with some key differences.

One difference is SOC 3 doesn’t include a description of the service auditor’s tests of controls and results. Also, the description of the system is less detailed than that in a SOC 2 report.

When Do You Need a SOC 3 Report?

The use and distribution of a SOC 3 report isn’t restricted. Service organizations often obtain a SOC 3 report because it doesn’t have restricted distribution and can be posted on the organization’s website.

Click here to download a SOC report guide

What Is the Difference Between Type 1 and Type 2 SOC Reports?

There are two types of SOC 1 and SOC 2 reports referred to as Type 1 or Type 2.

What Is a SOC 1, Type 1 Report?

A SOC 1, Type 1 report focuses on descriptions of the following:

  • Service organization’s system
  • Suitability of system controls’ design to achieve the related control objectives included in the description as of a specified date

What Is a SOC 1, Type 2 Report?

A SOC 1, Type 2 report contains the same opinions as a Type 1 report with an important addition—an opinion on the operating effectiveness of the controls to achieve the related control objectives included in the description throughout a specified period.

A Type 2 report also includes a detailed description of the service auditor’s tests of controls and results.

What Is a SOC 2, Type 1 Report?

A SOC 2, Type 1 report includes management’s description of a service organization’s system including service commitments, system requirements, and the suitability of the controls’ design.

What Is a SOC 2, Type 2 Report?

A SOC 2, Type 2 report includes the same description as a SOC 2, Type 1 report, but it also includes the operating effectiveness of controls and a detailed description of the service auditor’s controls and results tests.

A SOC 2, Type 2 report is generally preferred over Type 1 reports by a user organization because the former tests the operating effectiveness of the service organization’s controls.

How Do You Know What Type of SOC Report You Need?

SOC 1 and SOC 2 are now being used by service organizations in a host of industries, but technology, financial services, and health care IT are particular growth sectors.

For technology companies, the main reasons driving adoption of SOC reporting include the rapid rate of cloud adoption, cybersecurity threats, and compliance involving the Cloud Security Alliance (CSA), the International Organization for Standardization, and the National Institute of Standards and Technology.

Compliance issues for technology and health care related to HIPAA and HITRUST are powerful drivers when it comes to trust criteria within security, confidentiality, and privacy of information.

But SOC examinations aren’t just for technology corporations. They benefit a range of entities, from financial services to benefit plan administrators and not-for-profit organizations.

Traditional outsourcing arrangements apply to:

  • Financial institutions
  • Bank trust departments
  • Credit unions
  • Collection agencies
  • Hedge fund accounting services
  • Data analysts
  • Payroll bureaus
  • Third-party administrators
  • Benefit plan administrators
  • Document management
  • Specialized services
  • Software as a service (SaaS)
  • Infrastructure as a service (IaaS)
  • Platform as a service (PaaS)
  • Cloud providers
  • Big data technologies
  • Advanced analytics
  • Artificial intelligence-focused companies
  • Managed services

For a thorough breakdown of each report and what it can provide, please see our Guide—SOC Reports: Protect the Integrity of Your Internal Controls.

We’re Here to Help

If you have any questions regarding SOC reports or the type of SOC report your organization may need, please contact your Moss Adams professional.

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