Your First SOC 1 Audit: Essential Prep Steps for Success

A SOC 1 audit examines the internal controls over financial reporting (ICFR) a service provider has in place to ensure transaction processing or data manipulation on behalf of its customers is done consistently and reliably. A clean SOC 1 report provides assurance that transaction and data processing is performed consistently, and the information and can be relied upon by the service organization’s customers and their financial statement auditors.

Planning for an effective SOC 1 audit involves answering a series of questions:

  • Which teams should be involved? This will depend on the product features and processes that can affect client financials.
  • What monitoring period dates should we choose? This will depend on how soon you need a completed audit.
  • How do we identify relevant controls? Focus on the product features that affect your client’s financials and the controls in place to make sure those features operate appropriately.

Scoping conversations about your SOC 1 audit should take place early in the process and will typically involve your auditors. Often times, the scope of the SOC 1 can be determined by the purpose of the SOC 1, who is requesting the SOC 1, and what business functions they want coverage over.

Mastering SOC 1 Readiness

An effective SOC 1 audit starts with the readiness phase. Before the audit, you’ll want to establish control objectives, identify the appropriate controls to meet those objectives, and draft control language. Ensuring your controls are best suited and assigned for the purpose of your software and planning for your auditors to walk through your processes, paves the way for a smooth and successful SOC 1 audit.

Most service organizations will have controls within several broad categories:

  • Internal controls over financial reporting. These will typically include the organization’s structure, policies, and procedures; access controls; transaction processing controls; segregation of duties; system monitoring; and other controls to support effective risk management and financial reporting.
  • Entity-level controls that describe how the organization is governed and managed. Common examples include controls over employee onboarding and offboarding, tone at the top, and other key processes and policies.
  • IT general controls, such as customer data at rest being encrypted and the approval process for system changes.

If a service organization has a completed SOC 2 audit, many of these controls can be mapped over to a SOC 1 report.

If your company only needs a SOC 1, it may make sense to obtain project management resources to work with the company on the core elements of a SOC 1 control environment, such as policies and procedures, entity-level controls, and other key details. Someone with SOC and controls experience can greatly benefit the company.

To learn more, our guide, Getting Your First SOC 1 Report, highlights the compelling benefits a SOC 1 report provides service organizations, and the value of leveraging a completed SOC 2 audit to launch a SOC 1 audit. 

Understanding Bridge Letters for SOC 2: What They Are and Why They Matter

When it comes to maintaining the integrity and trustworthiness of your organization’s information security practices, SOC 2 attestation is a critical component to help provide assurance to customers, their auditors, and potential business partners.

However, there are instances where the reporting period of a SOC 2 audit does not align perfectly with a company’s fiscal year or dating requirements of other stakeholders. This is where bridge letters come into play.

What Is SOC 2?

Before diving into bridge letters, let’s recap what SOC 2 is. SOC 2 (System and Organization Controls 2) is a type of audit report that evaluates an organization’s controls relevant to the AICPA’s Trust Services Criteria: security, availability, processing integrity, confidentiality, and privacy.

Obtaining SOC 2 attestation is crucial for service organizations that handle sensitive customer data because doing so assures clients and stakeholders that the service organization maintains robust data security measures. Many customers, especially large enterprises, consider a clean SOC 2 report as a basic requirement as they evaluate potential service providers.

To gain a deeper understanding of SOC 2 reports and their components, please refer to our article, “Key Elements of a SOC 2 Report”.

What Is a Bridge Letter?

A bridge letter, also known as a gap letter, is a document provided by a service organization (not the service auditor) to address the gap between the SOC 2 audit reporting period and the current date. The bridge letter provides interim (and unverified) assurance that the controls evaluated in the last SOC 2 audit report are still in place and operating effectively.

What is a bridge letter graphic. It shows a bridge between when you get a SOC report and the current date.

Why Are Bridge Letters Important?

Bridge letters provide several benefits, including continuity of assurance. Clients and stakeholders rely on SOC 2 reports to assess the security posture of a service organization. A bridge letter ensures there is no gap in assurance between the end of the audit period and the next scheduled audit.

Bridge letters also help service organizations meet their Contractual obligations. Many contracts and regulatory requirements stipulate continuous compliance with internal controls. Bridge letters help organizations provide assurance they are meeting these obligations during the interim period.

They also support business continuity during situations such as mergers, acquisitions, or new business deals, where having an up-to-date assurance of SOC 2 compliance is crucial. A bridge letter provides the necessary assurance for participants to proceed with confidence.

Key Elements of a Bridge Letter

A well-crafted bridge letter typically includes the following elements:

  • Statement of Continuity: A declaration that the controls outlined in the most recent SOC 2 report remain in place and are operating effectively.
  • Period Covered: A clear indication of the dates covered by the bridge letter. This is typically from the end of the last audit period to the current date, or the date of the next audit.
  • Changes and Updates: Disclosures of any significant changes in the organization’s control environment since the last SOC 2 report.
  • Signatory: The bridge letter should be signed by an authorized representative of the service organization, typically the chief information security officer (CISO), compliance officer or a similar authority.

Best Practices for Issuing Bridge Letters

Service organizations issuing bridge letters should keep the following in mind:

  • Timeliness: Ensure the bridge letter is issued promptly to avoid gaps in assurance.
  • Transparency: Outline clearly any changes or incidents that may have affected the service organization’s internal control environment since the last audit.
  • Regular Updates: Revise bridge letters as needed, especially if there are significant changes in the control environment.
  • Consultation with Auditors: Engage with your auditors to ensure the bridge letter reflects the current state of controls accurately and addresses any concerns they may have.

Bridge letters play a crucial role in maintaining continuous assurance of a service organization’s SOC 2 control environment. They provide customers, stakeholders, and regulatory bodies with assurance the organization’s controls remain robust and effective between audit periods.

By understanding and using bridge letters effectively, service organizations can provide ongoing trust and compliance in their data security practices.

To learn more about SOC 2 audits and the role of bridge letters, get in touch with our team.

Everything You Must Know About SOC 1 Reports

For service organizations that process transactions, manipulate data or store financial information on behalf of their customers, a SOC 1 (short for Service Organization Controls) report provides assurance that the processing of those transactions and data is done consistently and can be relied upon by your customer, and even more relevantly, your customer’s auditors.

What Is a SOC 1 Report?

A SOC 1 examination centers on the internal controls over financial reporting (ICFR) a service provider has in place to ensure transaction processing or data manipulation is done consistently and reliably. The SOC 1 standard is established and maintained by the American Institute of Certified Public Accountants (AICPA) and the examination is typically conducted by auditors from an independent accounting firm.

SOC 1 engagements require specialized auditor skills, including understanding the relevant standards as well as the business processes of their clients. The auditor provides an opinion upon completion of a SOC 1 engagement with the objective of a successful engagement offering a “clean” opinion that is attached to the SOC 1 report.

SOC 1 Type 1 vs. SOC 1 Type 2

A SOC 1 report may be completed in one of two forms. A SOC 1 Type 1 report examines the service organization’s ICFR at a specific point in time and provides evidence on whether the controls are designed properly. A SOC 1 Type 1 report is usually done, if at all, on the initial SOC 1 engagement and as a precursor to the SOC 1 Type 2 report.

However, when your customer asks you for a SOC 1 report, they almost invariably mean a SOC 1 Type 2 report. The fundamental difference is that a SOC 1 Type 2 report tests those controls and their performance over a period such as six months or a year. As such, the SOC 1 Type 2 not only covers whether the controls are properly designed; the controls are also tested to determine if they are operating effectively over the relevant period. SOC 1 Type 2 engagements are by far the most common report, with most covering one year.

SOC 1 vs. SOC 2

SOC 1 and SOC 2 reports have some overlap, but there are fundamental differences with SOC 1 vs. SOC 2.

A SOC 2 report reviews the controls that address the Trust Services Criteria (primarily security, but there are five criteria to choose from) and is relevant for service organizations that have custody of their customer’s data. The Trust Services Criteria provide a framework that can be applied to a wide range of service providers.

On the other hand, a SOC 1 report is focused on business processes specific to the service organization and thus there is significantly more variability because the control environment, and the related controls, will be specific to the service organization.

The testing procedures for a SOC 1 will focus on financial controls and transaction processing, while a SOC 2 will examine general IT controls (ITGC) testing and validation. This is where the overlap comes in. As most SOC 1 systems are built on information technology systems, many controls from a SOC 2 report can be mapped to a SOC 1 report.

Depending on the industry a service organization serves and its customer expectations, a provider may need to obtain both types of reports. If so, there can be efficiency and cost benefits to undergoing both types of audits at the same time.

Who Needs a SOC 1 Report?

Because a SOC 1 report is focused on financial reporting controls, it’s best suited for organizations that process or store financial data on behalf of their customers. Typical types of service organizations that may need a SOC 1 include:

  • Software-as-a-Service (SaaS) providers that process financial data.
  • Payment processors.
  • Payroll processors.
  • Claims processing and billing providers.
  • Benefits administrators.
  • Collections organizations.

Beyond these organizations, any company that processes or stores financial data for a customer may be asked for a SOC 1 report. Often the request for a SOC 1 report will be generated from your customer’s accounting and finance function, or you may get direct requests from a customer’s financial statement auditors (the intended reader of a SOC 1 report). For more information on who needs SOC 1 reports and why they matter watch the video below.

The Benefits of a SOC 1 Report

Obtaining independent verification that a service organization’s ICFR is performing effectively, known as a “clean” audit report, can provide several benefits such as:

  • Ensuring the organization is protecting customer and partner financial information. An audit can verify that the organization’s controls and processes are operating as designed, or it can identify areas that need remediation.
  • Demonstrating the organization’s commitment to data security and governance.
  • Assuring customers your systems are processing transactions consistently and reliably.
  • Identifying opportunities to increase risk management and operating efficiency within your systems and processes.
  • Reducing overhead from multiple auditors of your customers asking to meet with you to understand your system and how you process transactions.

Beyond compliance, a clean SOC 1 report can provide compelling benefits in attracting and retaining customers:

  • Providing a SOC 1 report is becoming a common contractual requirement, especially among large enterprise customers. These organizations want to ensure their data will be processed consistently and accurately, and increasingly rely on SOC 1 reports for that assurance.
  • Obtaining a SOC 1 report can differentiate a service organization from competitors that have not undergone a SOC audit.
  • Having a SOC 1 report can help service organizations properly respond to your customers and their auditors’ inquiries as to how your environment reliably processes transactions.

To learn more about SOC 1 reports and the benefits they can provide your service organization, contact us.

Getting Your First SOC 1 Report

SOC 1 reports, which describe how service organizations process data and transactions that can affect their customers’ financial reporting, have emerged as important tools in vendor selection and risk management.  

Our guide, Getting Your First SOC 1 Report, highlights:

  • The Importance of SOC 1 in Auditing 
  • How SOC 1 Interplays With SOC 2 
  • Types of Controls 
  • SOC 1 Starting Point Scenarios 
  • Scoping Your First SOC 1

Learn how to leverage the similarities between SOC 1 and SOC 2 to streamline the process and make it more manageable.  

SOC 1 Reporting for SaaS Companies

One of the most effective ways for Software as a Service (SaaS) companies to demonstrate the reliability, accuracy, and security of their services is by obtaining a SOC 1 report.

The Service Organization Controls (SOC) 1 report centers on the controls an outsourced service provider has in place to ensure the transactions or data processing that affect a customer’s financial reporting are completed accurately and reliably. A SOC 1 report focuses on processes and controls specific to the service organization and demonstrates that the provider uses industry-recognized best practices to assess and manage data accuracy risks.

The service organization’s customer is commonly known as a user entity, who typically uses a SOC 1 report’s findings during vendor selection and reviews. Additionally, a SOC 1 report is generally requested in financial reporting audits.

Why SaaS Companies Need SOC 1 Reports

SaaS companies vary from email and CRM providers to companies offering accounting and ERP applications. The risk profile of the SaaS provider varies according to the applications they provide and the data they generate or process for their customers. SaaS platforms that affect their customers’ financial reporting (i.e., commission platforms, or sales and revenue platforms) need to reassure their customers and prospects that their data is accurate, and transactions are processed reliably.

The scope of a SOC 1 audit will include the SaaS provider’s internal controls over financial reporting (ICFRs) and its IT general controls (i.e., change management, logical access, system operations). The provider’s management will identify control objectives that address specific risks they wish to mitigate, as well as controls that are in place to support these control objectives.

Examples of ICFR-related controls for SaaS providers may include data input validation, record maintenance, and transaction reconciliations, or any other measure designed to ensure the validity of financial data and the provider’s security practices.

During the examination, the independent audit firm will review those objectives, test controls, and issue an opinion on the operating effectiveness of the controls that are in place.

SOC 1 Flexibility

Unlike a SOC 2 report, in which a service organization’s practices are compared against specific Trust Services Criteria, SOC 1 control objectives are flexible so providers can align with specific services affecting customer data and industry best practices.

In order to design SOC 1 control objectives effectively, SaaS providers need to focus on the features that effect their clients’ financials. Often times, this can be a daunting and overwhelming task that takes time and effort from the company. However, with the help of Sensiba and our SOC 1 readiness program, we provide consulting services for designing control objectives and identifying supporting controls.

The Benefits of a SOC 1 Report

For SaaS companies, a SOC 1 report can provide several benefits:

  • Ensuring the provider has controls in place ensuring the accuracy of client data.
  • Demonstrating a commitment to data security and governance.
  • Assuring customers that the platform is processing transactions consistently and reliably.
  • Identifying opportunities to increase risk management and operating efficiency within your systems and processes.

Providing a SOC 1 report is becoming a common contractual requirement as customers want assurance their financial data will be processed consistently and accurately.

To learn more about SOC 1 reporting for SaaS companies and how it can benefit you, contact us.

ISO 27001 vs. SOC 2: Do You Need Both? 

The ISO 27001 certification and the SOC 2 report are perhaps the leading frameworks for companies to demonstrate their commitments to securing customer data. Some service providers, depending on their customers and the types of information they handle, can benefit from obtaining both.  

Understanding the uses of each framework, where they overlap, their intended audiences—and whether an organization needs one, the other, or both—can play a large role in helping a service organization enhance its risk management efforts and highlight its security capabilities to current and prospective customers. 

What is SOC 2?

A SOC 2 report provides service organizations with an external opinion on their compliance with a standardized set of industry-neutral controls based on the AICPA’s Trust Services Criteria—security, availability, processing integrity, confidentiality, and privacy.  

Under SOC 2, only the security criterion is mandatory. Deciding whether to include any of the other criteria depends on the types of information a service provider handles and its customers’ requirements.  

SOC 2 is not a certification. Instead, it is an audit opinion on the description of the system (a written narrative describing the infrastructure, data, people, processes, and boundaries of the system), and the controls implemented. 

What is ISO 27001? 

An ISO 27001 Information Security Management System certification provides service organizations with a framework that’s more prescriptive than the SOC 2 criteria. ISO 27001 helps organizations manage and protect their information assets by developing policies, procedures, and controls to protect information from unauthorized access, alteration, theft, or destruction. 

An ISO certification requires a statement of applicability, risk assessment, internal audit, and management review. The certification also prescribes the number of days, primarily based on the organization’s headcount, an audit will require.  

Certification vs. Attestation 

A key difference between the two is that SOC 2 is not a certification. A SOC 2 report is an attestation by an independent audit firm as to whether the organization under review reasonably meets the standards outlined in the SOC 2 criteria.  

Required Information for Each Review 

Both reviews look at the following:

  • Risk assessment 
  • Vulnerability management 
  • Policies and procedures 
  • Internal controls 
  • Monitoring and review
  • Third-party risk management
  • Compliance 

ISO 27001 adds the following requirements:

  • Statement of applicability 
  • Internal audit 
  • Management review 

SOC 2 adds the following:

  • Written system description
  • Higher sample requirements than ISO 27001 
  • Processing integrity (optional)

The ISO 27001 Process  

The ISO certification is a three-year certification standard, starting with two stages in the first year. The stage one process is essentially a readiness review to ensure the organization has the information needed for the stage two audit. This will include, for example, items such as the organization’s internal audit function, risk assessment, and key policies and procedures.  

If this initial review identifies any areas of concern, the organization will typically have 30 to 60 days to remediate those issues. Once the areas of concern are addressed, the deeper-dive stage two audit will occur.  

After an organization receives ISO 27001 certification, surveillance audits are required for two years before its compliance needs to be recertified.  

ISO 27001 Process

Which Organizations Need ISO Certification?  

ISO is an international standard, while SOC 2 focuses on North America. Service organizations supporting international customers outside of North America will benefit from an ISO certification.   

Similarly, companies based outside North America hoping to do business in the U.S., Canada, or Mexico will likely have an ISO certification but should consider obtaining a SOC 2 report to capture market opportunities in those markets.  

Service organizations operating globally would benefit from undergoing both audits. The good news is the types of information each review requires are similar enough that an organization undergoing one review will be about 70% of the way toward completing the other.  

ISO 27001 Internal Audit 

Under the ISO 27001 standard, internal audits are required annually and must be conducted by someone who is both competent in auditing against the 27001 standard, as well as independent from the information security management system being reviewed.  

Because of these two requirements, most organizations interested in ISO certification outsource their internal audit function to a third party. For all but the largest organizations, someone on staff who is competent in the ISO standard is unlikely to be independent. In addition, outsourcing the internal audit function often results in a more thorough evaluation of their management system.  

Optimizing Audit Scheduling  

Organizations interested in pursuing ISO 27001 and SOC 2 reviews can streamline the process by scheduling both examinations carefully. For instance, SOC 2’s higher sampling requirement means the information gathered for that audit can also be used as part of the ISO certification, if the audits are timed correctly.   

Similarly, the organization should align the periods when auditors will be reviewing evidence with less-busy times of the fiscal year. Conducting both reviews at once can reduce the administrative overhead on their internal teams.   

Service organizations that process personal health information and need to demonstrate compliance with Health Insurance Portability and Accountability Act (HIPAA) security and privacy safeguards can also incorporate that examination with a SOC 2 audit.  

To learn more about ISO 27001, SOC 2, and the potential benefits of undergoing both reviews, contact us.  

ISO 27001 vs SOC 2: Do I Need Both?

Join us as we explore ISO 27001 and SOC 2. We’ll discuss the elements that businesses need to consider and ultimately answer the important question “do I need both?” Gain powerful insights to leverage both certifications.

 

 

 

 

Understanding SOC 3 Reports: A Seal of Assurance for Security and Privacy

With data security and privacy paramount concerns for businesses and consumers, organizations are increasingly seeking ways to demonstrate their commitment to safeguarding sensitive information. One powerful tool for demonstrating assurance is the SOC 3 (System and Organization Controls 3) report.

A SOC 3 report is an external audit report based on the AICPA’s Trust Service Criteria. It encompasses categories related to:

  • Security
  • Availability
  • Processing integrity
  • Confidentiality
  • Privacy

Major service organizations spanning industries like cloud computing, SaaS, internet services, and telecommunications are making their SOC 3 reports available publicly. For example, AWS, Google Cloud, and Azure publish their reports to showcase how they prioritize security and privacy standards.

SOC 2 vs. SOC 3 Reports

While similar to SOC 2 reports, SOC 3 reports have a distinctive feature–they are designed for public distribution. This means the information within these reports is designed to be understood easily by a broad audience, making them a valuable asset for businesses seeking to build trust and transparency.

In layman’s terms, a SOC 3 report is the public-facing version of a SOC 2 Type report, and in fact, it is actually a summarized version of the SOC 2 Type 2. As such, it can only be issued in connection with the SOC 2 Type II report.

Benefits of a SOC 3 Audit

1. Public Assurance

SOC 3 reports serve as a seal of assurance that can be displayed prominently on a company’s website or within its marketing materials. This seal communicates to customers, prospects, partners, and the general public that the organization has undergone an independent audit and adheres to robust controls in key areas.

2. Broad Transparency

Unlike SOC 2 reports, which are often shared with specific parties under non-disclosure agreements, SOC 3 reports are intended for public consumption. A completed SOC 2 audit and a SOC 3 report demonstrate a proactive approach to security and privacy, potentially attracting clients who prioritize working with organizations committed to safeguarding their data.

3. Enhanced Customer Trust

A SOC 3 report is not just a compliance checkbox; it’s a testament to an organization’s dedication to protecting its customers’ data. This enhanced level of transparency fosters trust and confidence, crucial elements in building lasting customer relationships.

4. Risk Mitigation

By undergoing a SOC 2 audit and getting a SOC 3 report, a company can identify and address potential vulnerabilities in its systems, controls, and processes. This proactive approach to risk management can save an organization from future security incidents and associated reputational damage.

5. Global Recognition

As data protection regulations evolve globally, a completed SOC 2 audit and SOC 3 report can be advantageous for organizations operating in international markets. It showcases a commitment to aligning with industry best practices and compliance standards.

Elevating Your Security and Privacy Standards

Obtaining a SOC 2 audit and SOC 3 report is not just about meeting compliance requirements – it’s a strategic move toward building a reputation for excellence in security and privacy. SOC 3 goes beyond the checkboxes, instilling confidence in customers, prospects, and partners.

In a digital age where trust is currency, this step can be your organization’s key to unlocking new opportunities and fortifying its standing in the marketplace. To learn more about the potential benefits of a SOC 2 audit and a SOC 3 report, contact us.

 

Key Elements of a SOC 2 Report

One of the most effective ways for service organizations—a broad category that includes cloud service providers — to demonstrate they have implemented security controls for safeguarding sensitive data to meet their service commitments is by obtaining a System and Organization Controls (SOC) 2 report.

What is a SOC 2 Report?

Developed by the American Institute of CPAs (AICPA), a SOC 2 report offers a framework that allows a third-party accounting firm to examine a service organization’s security practices and controls, and to prepare an objective attestation whether the provider’s security measures are designed and operating effectively.

Trust Services Criteria

The report is based on five Trust Services Criteria (TSC) highlighting various aspects of a service organization’s information protection posture. Typically, a service organization will have to meet the Security (also known as the “Common Criteria”) criterion to undergo a SOC 2 examination. However, organizations can opt into four additional Trust Services Criteria based on their service commitments and customer requirements.

The other criteria are Availability, Confidentiality, Privacy, and Processing Integrity. For cloud service organizations, a combination of Security, Availability, and Confidentiality represents the most common selection.

Deciding whether to include categories beyond the required security criteria depends on factors including specific customers’ or prospects’ concerns, the types of data a service provider handles on behalf of its customers, or the service organization choosing to present as comprehensive of a report as possible.

A SOC 2 report is considered “restricted use,” and is intended to be shared only with customers, prospects, business partners, and regulators. Because the report includes detailed system information and a controls matrix specific to the service organization, which may include proprietary information, it should not be shared publicly.

What Are the Other SOC Reports?

A SOC 2 is not the only type of report a service organization may be interested in obtaining. A SOC 1 report is a formal audit of a company-specific service provider’s controls that could affect their customers’ financial reporting. The other type of report is known as a SOC 3, which is a summarized version of a SOC 2 type 2 report. This report, intended to be used as a marketing tool to an unrestricted audience, provides a generalized opinion on controls related to one or more of the Trust Service Criteria.

SOC 2 Type 1 vs. SOC 2 Type 2

Service organizations can elect to undergo two different SOC 2 audits. A Type 1 report evaluates whether controls are designed properly at a specific point in time. A SOC 2 Type 2 evaluates whether those controls are designed and functioning as intended over a specified period of time, typically six or 12 months. When customers are asking for a SOC 2 report, they are generally referring to a SOC 2 Type 2. The Type 1 report is usually performed as part of initial readiness at the beginning of your SOC 2 journey.

The Audit Process

To prepare for a SOC 2 audit, a service organization will develop comprehensive documentation of systems, processes, and controls. A SOC 2 readiness tool, such as Drata or Vanta, can help service organizations implement necessary controls based on the applicable Trust Services Criteria for their organization.

During the review, an independent audit firm will assess and validate the service organization’s controls before issuing a report summarizing its findings. The best outcome for the service organization is when the audit firm issues an “unqualified opinion” that the organization under examination can achieve its service commitments and its controls are designed and operating effectively.

A SOC 2 audit is typically performed annually, so the service organization will likely use the report’s findings to fine-tune and maintain its controls before its next examination.

The Benefits of a SOC 2 Report

Having a SOC 2 attestation to share with prospects and customers can provide many benefits for service organizations. For example, a SOC 2 report is often considered a qualifying factor in the due diligence process as companies (especially large enterprises) evaluate potential vendors.

Similarly, undergoing a SOC 2 audit may be a contractual requirement between a service organization and its clients. Some customers may accept a SOC 2 report in place of a security questionnaire.

In short, a SOC 2 report provides assurance that a service organization or other service organization has implemented strong security controls and procedures to conform with industry security best practices for protecting systems, data, and managing risk.

To learn more about SOC 2 reports and how they can benefit your organization, contact us.

Comparing SOC 1 vs. SOC 2 Reports

Service organizations such as cloud providers and Software as a Service (SaaS) companies look to demonstrate they have effective internal controls and comply with security and privacy standards. To do so, they often pursue a Service Organization Control (SOC) audit and, most often, a SOC 2 report.

SOC 2 reports are a standardized way to validate security, privacy, and processing integrity. The next question considered is whether a SOC 1 audit may be beneficial (or required).  

This decision depends on factors including the types of controls that will be examined and the end users of the report. Both SOC standards are established and maintained by the American Institute of Certified Public Accountants (AICPA), and a SOC examination is usually conducted by auditors working for an independent accounting firm. 

Key Similarities Between SOC 1 and SOC 2

SOC 1 and SOC 2 reports look very similar and there is some overlap between the two, but there are fundamental differences between the reports and their audiences. 

Both reports are valuable in assuring customers, prospective customers, regulators, and other stakeholders that the service organization can protect data and manage risk effectively. The SOC audit process also provides insight to help the service organization evaluate and enhance its security and data governance processes.

Providing a SOC 2 report is becoming a common contractual requirement, especially within the vendor qualification requirements of large enterprise customers. In some cases, the SOC 1 report will be an additional requirement that may show up for new customer opportunities, or the request for the SOC 1 will come from long term customers. These organizations want to ensure their data will be processed consistently and accurately, and increasingly rely on SOC 1 reports for that assurance. 

The testing procedures for SOC 1 will focus on financial controls and transaction processing, while SOC 2 will examine general IT controls (ITGC) testing and validation. As most SOC 1 systems are built on information technology systems, many controls from a SOC 2 report can be mapped to a SOC 1 report.

Understanding SOC 1 and SOC 2

A SOC 1 examination centers on internal controls over financial reporting (ICFR) a service provider has in place to ensure transaction or data processing is done consistently and reliably. A SOC 1 report focuses on business processes specific to the service organization and there is more variability than in a SOC 2 report, because the control environment will be specific to each service organization.

A SOC 2 report examines controls that address the Trust Services Criteria (primarily security, but there are five criteria to choose from) and is relevant for service organizations entrusted with custody of their customers’ data. The Trust Services Criteria provide a pre-defined framework that can be applied to a wide range of service providers. 

Trust Services Criteria for SOC 2

The relevant trust services criteria are:

  • Security. The only required objective, this criterion evaluates the organization’s controls against unauthorized data disclosure, access, or manipulation.
  • Availability. Keeping systems operational.
  • Confidentiality. Protecting sensitive information throughout its lifecycle.
  • Processing integrity. Ensuring systems operate without unexplained errors.
  • Privacy. Protecting personal information related to customers, employees, and other stakeholders.

Our article “Choosing the Right Trust Services Criteria for Your SOC 2 Audit” provides more details on identifying relevant SOC 2 criteria.

Choosing a SOC 1 or SOC 2 Report

Selecting the most appropriate report depends on the intended audience and the factors leading you to consider a SOC audit. Does your organization touch customer’s financial data and reporting? Are customers asking about information security and data governance?

A SOC 1 report, with its focus on ICFR and the related IT controls, is best suited for evaluating the security of financial data and processing. The primary audience is the organization’s management, customers, and the organization’s external financial statement auditors.

A SOC 2 report, aligned with the trust services criteria listed above, has the same audience and adds potential customers and business partners evaluating the service organization as part of their vendor selection or due diligence process.

For more information and help determining whether a SOC 1 vs. SOC 2 audit report is best suited for your needs, get in touch with our team.

AICPA Emphasizes Auditor Independence in the SOC 2 Industry

As demand grows for SOC 2 reports and the market for GRC compliance tools expands, the AICPA is reminding companies and providers about the importance of auditor independence in delivering audit and nonattest services, as well as the risks of an audit provider reviewing its own work.

The new guidance comes after market changes in which some SOC 2 readiness and audit firms are developing offerings and tools that blur sector lines by offering services traditionally done by the other type of provider. In late 2022, the most recent changes to the AICPA’s SOC 2 Guide placed a heavy emphasis on the concepts of independence and “nonattest” services in response to how much the SOC 2 industry has changed over the last several years.

Surge in Demand for SOC 2 Reports and the Rise of the SOC 2 Readiness Industry

During the last several years, SOC 2 has exploded in popularity. Combining the trends in cloud computing and outsourcing, and the significant emphasis on vendor risk management, has led to a perfect confluence driving exponential growth in SOC 2 demand.

This surge has spurred a whole new SOC 2 readiness industry. Numerous GRC platforms and SOC 2 readiness tools are rushing to market, some backed by major venture and private equity investors seeking to take advantage of this mini-goldrush.

Because they have tremendous amounts to spend on marketing, many of the SOC 2 readiness platforms and GRC providers act as a funnel for the numerous companies that need SOC 2 reports and are referred to CPA firms to conduct audits and issue the reports.

A Focus on Independence

A pillar of the AICPA standards for audit and attestation engagements is that a CPA should be “independent” of the entity they are auditing or providing attestation services to. For example, the CPA should not have financial or other interests in their clients.

The AICPA also focuses on the important concept that CPAs should not audit their own work. In the context of SOC 2, this would mean an auditor should not implement controls, take management responsibility, or insert themselves as a decision-maker in the design and operations of a system. This makes sense as objectivity and independence are central to the ultimate value of the SOC 2 opinion.

Nonattest Services

As noted above, the SOC 2 readiness industry, which would meet the definition of a nonattest service, has been a huge money-maker. But if you look at the total opportunity, readiness is only one part of what is charged to the customer, with the audit firm getting the other portion for executing the audit and providing the audit opinion.

Some readiness platforms have seen this and have spun up their own audit firms. At the same time, some CPA firms have seen explosive growth on the readiness side and, looking to take advantage of demand, are creating readiness tools and GRC implementations to drive revenue.

Other nonattest services that need to be considered include penetration testing, vulnerability management, and incident response. All of those services are central to the control environment, and thus represent a threat to independence if such services are delivered by the same entity responsible for auditing the client’s environment.

AICPA’s Guidance for Auditor Independence

The recently updated SOC 2 Guide is the primary guidance provided by the AICPA defining SOC 2, and built up the AICPA audit and attest standards including professional conduct for CPAs. In reference to SOC 2, the AICPA has established Statements on Standards for Attestation Engagements (SSAE) that specify how the CPA should engage with their clients, perform their work, and handle client interactions effectively.

At the end of the day, the new AICPA guidance is a re-emphasis on independence and specifically focuses on the threats to independence created by nonattest services. This is especially true for auditors reviewing their own work, which is a real risk if the auditor is also providing readiness services.

The AICPA is not an enforcement agency; however, they have made it clear that they see the proliferation of services that are central to the system being threats to auditor independence if they are provided by the CPA firm. We fully grasp this concept, and believe it is central to the objective insights and value that we provide. Contact us for your SOC 2 readiness and audit needs while ensuring auditor independence.

Choosing the Right Trust Services Criteria for Your SOC 2 Audit

A SOC 2 audit is like a report card that shows clients you’ve got your act together when it comes to handling their sensitive information. It’s proof that your systems and processes have been thoroughly checked and approved by objective, third-party experts.

What’s unique about a SOC 2 report is that you get to define the scope. Every service organization gets evaluated on security, but choosing the other security and privacy considerations that get audited—known as the Trust Services Criteria—is up to you.

Which Trust Services Criteria Should You Choose?

The Trust Services Criteria are a set of five IT security principles developed by the American Institute of Certified Public Accountants (AICPA) to help organizations safeguard their sensitive information and assets.

In this article, we’ll outline each Trust Services Criteria category and provide guidance on whether you should consider including it in your SOC 2 scope.

Security

The security category focuses on protecting information and systems from unauthorized access, use, disclosure, disruption, modification, or destruction. This includes protecting systems both physically (on location) and from remote threats like hacking, viruses, and other cyber attacks.

Important security-related controls and processes include the use of passwords, authentication systems, segregation of duties, encryption, and firewalls.

Security is required for all SOC 2 reports and, therefore, is sometimes referred to as the “common criteria.”

Availability

Availability means ensuring information and systems are accessible to authorized users when needed. This includes minimizing downtime and maintaining system performance. Relevant controls may include redundant servers, backup and recovery systems, load balancing, and disaster recovery plans.

If you answer “yes” to any of these questions, consider including availability in your audit scope:

  • Do you have service level agreements (SLAs) related to system uptime or performance?
  • Would system downtime significantly impact your customers’ operations?

Processing Integrity

When looking at processing integrity, auditors want to know your systems are handling information accurately and reliably, without experiencing errors, omissions, incorrect processing, or unauthorized or accidental manipulation.

If you answer “yes” to any of these questions, consider including processing integrity in your audit scope:

  • Do your customers rely on your systems to perform critical operational tasks like financial or data processing?
  • Would inaccurate or unreliable data produced by your systems negatively impact customers?
  • Do you transform, manipulate, or analyze customer data in your systems?

Confidentiality

Here, auditors are looking at how you protect information designated as confidential. This may include trade secrets, intellectual property, or client financials. Confidentiality controls may include data classification rules that govern who can access certain information.

Examiners may also ask about audit trail capabilities, meaning your ability to monitor who accessed sensitive information and what actions they took (e.g., copying, deleting, or editing data).

If you answer “yes” to any of these questions, consider including confidentiality in your audit scope:

  • Do you handle sensitive data protected by NDAs or regulations?
  • Do you collect and store intellectual property, trade secrets, or client financials?
  • Do your contracts with customers require you to delete their data when no longer needed?

Privacy

Privacy specifically focuses on controls to protect personally identifiable information (PII). Auditors will be looking to see if you operate in accordance with client agreements, as well as any applicable laws or regulations.

Privacy controls often include issues of notification, choice, and consent. This means you’ve let people know how you collect, use, and retain their information so they can make an informed decision about whether to share it with you.

Privacy criteria may also deal with issues of access, such as giving customers a way to view the information you’ve collected so they can ask you to correct it. In addition, auditors will be looking at your disclosure and notification policies, such as defining how you’ll detect data breaches and notify customers if a breach occurs.

If you answer “yes” to any of these questions, consider including privacy in your audit scope:

  • Do you collect PII from customers such as Social Security numbers, birthdays, or healthcare data?
  • Do you need consent management tools to collect customer PII?
  • Are you subject to data privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA)?
  • Do you run an e-commerce platform?

Can’t decide between privacy and confidentiality (or both)? See our related article Understanding the Privacy and Confidentiality Criteria in a SOC 2 Examination.

Choose the Trust Services Criteria Your Customers Expect

Evaluating your customers’ key concerns will help determine which Trust Services Criteria to include in your SOC 2 audit. A more comprehensive audit can demonstrate a stronger commitment to security and satisfy a greater number of potential customers.

Our goal is to make your SOC 2 audit as straightforward as possible, with a practical approach that addresses your concerns in a cost-effective manner. For more information and help defining your SOC 2 audit scope, get in touch with our team.

5 Common Mistakes to Avoid Before Starting a SOC 2 Audit

SOC 2 report can be a powerful tool in demonstrating your company’s commitment to securing your customers’ data. And while the benefits are compelling, several common mistakes or misunderstandings about SOC 2 audits can make the process more complicated, lengthy, and expensive.

A SOC 2 compliance report summarizes the results of an external auditor’s evaluation of your company’s policies, processes, and controls for protecting customer data in five key areas:

  • Security
  • Availability
  • Processing integrity
  • Confidentiality
  • Privacy

A SOC 2 Type 1 report tests control designs at a specific point in time, while a more comprehensive Type 2 report tests controls repeatedly over a period of time to confirm operating effectiveness.

Customers depend on the SOC 2 audit results as they conduct due diligence on prospective and current cloud service vendors. They want assurance they can safely integrate their internal and customer data. SOC 2 compliance is an important consideration or requirement for many companies as they choose technology partners.

5 Common SOC 2 Audit Mistakes

The following five mistakes can complicate the SOC 2 audit process or hinder your ability to take advantage of the assurance a SOC compliance report offers your customers.

1. Not Designating a Project Manager

As you’re planning for a SOC 2 audit, naming a project manager is essential in streamlining the flow of information within your organization and with your external auditor. A SOC 2 audit’s broad scope means you will collect information and documentation from business functions, including HR, operations, systems admins, database professionals, and others.

Each control will require someone with subject matter expertise to provide evidence of that control’s effectiveness for the auditors to review. If you don’t designate someone to coordinate that information flow, the auditors must track down documentation function by function. This complex process will extend the life of the project considerably.

Instead, choosing a single point of contact can make this process faster and more efficient. If you do not have someone with project management experience on staff, consider bringing in an external project manager on a consulting basis.

2. Not Performing a Readiness Assessment

Before you engage an auditor, it’s crucial to conduct a readiness assessment to identify the controls that will be examined during the audit, any missing controls, and any controls that lack documentation.

Failing to perform these basic steps before the audit begins can easily lead to unexpected control gaps and failures during the audit that, in turn, can hamper your ability to obtain a report documenting SOC 2 compliance. As with project management, a consultant with readiness assessment expertise can help streamline the process and enhance your capabilities.

3. Not Performing Interim Testing During an Audit

It’s important to test your controls during the first reporting period covered by your SOC 2 assessment. For instance, if you’re performing an audit based on six months, you should test your controls after three months to ensure they have been operating effectively for that timeframe.

This interim testing allows you to identify and mitigate any control exceptions, so you’d have the rest of the period for that control to operate effectively. Interim testing is optional, but it’s far more effective than waiting for the end of the period and discovering deficient controls that force you to extend the review period as you mitigate issues.

4. Expecting Customer Security Questionnaires to Stop

Although most clients who ask about your information-protection policies and controls will be satisfied with a SOC 2 report, companies with security questionnaires will likely continue to issue them. Because each company’s operating environment (and questionnaire) are different, merely handing over a SOC 2 report is unlikely to satisfy their request for information. You may be able to pull information from the report in answering the questionnaire, but don’t expect questionnaires to become a memory.

5. Assuming SOC 2 Is One and Done

When you receive a SOC 2 compliance report, that doesn’t mean the process is over. Effective risk management is an ongoing process, which means that, for subsequent periods, you’ll have to stay on top of the controls and operations covered in the initial report.

This will require ongoing risk assessments, updating policies and procedures as changes occur in your environment, vulnerability scanning and penetration testing, updating business continuity and disaster recovery plans, and other assessments.

By avoiding these common mistakes, you’ll receive a SOC 2 report demonstrating your commitment to securing and protecting customer data and a report you’ll be pleased to hand to any prospect or customer who asks for one.

Need help preparing for your SOC 2 audit? Contact us.

How to Read a SOC Report in 5 Minutes (or Less)

TL;DR: Open the SOC report, click Ctrl+F, and search for “Opinion.” If the audit opinion states, “In our opinion, in all material respects …” the report gets a gold star. See? That was even less than five minutes!

After performing SOC audits day-in and day-out and issuing hundreds of SOC reports to clients, it recently occurred to me that I may take for granted that everyone knows how to determine if a SOC report was a “pass” or a “fail.”

I’m not saying you shouldn’t read the entire SOC report, because you should; there’s a lot of essential and detailed information in those reports, but let’s be honest—reading that 100-page report could take some serious time. So, as an alternative to reading every page, there is an easy and quick way to summarize the results of a SOC 1 or SOC 2 report, and there are a few variations of “pass” and “fail.” Let’s clear those up first, then I’ll tell you exactly where to find them in the report.

“Pass” and “Fail” Opinions

Unqualified Opinion

The best outcome for the SOC report is when the audit firm states an “unqualified opinion.” This simply means the auditors have determined that the organization under examination can achieve its service commitments and system requirements as described in the report. This is also known as a “clean opinion,” which everyone wants to see. The unqualified opinion will use the following language: “In our opinion, in all material respects …”

Qualified Opinion

The second level of pass is in the form of a “qualified opinion.” This isn’t a bad thing, but it’s not a clean opinion either. A qualified opinion means the audit firm has determined that some controls at the organization aren’t designed well or aren’t operating as they should be. These can be minor and correctable (and explainable) issues that organization management acknowledges and has a reasonable plan to correct.

No one’s perfect, and a slip in control can happen from time to time. If you see a qualified opinion, you’ll want to dig deeper into the report to evaluate what “exceptions” were found by the auditor and management’s remediation plan. The qualified opinion will use the following language: “In our opinion, except for the matter referred to in the preceding paragraph …”

Adverse Opinion

The third type of opinion would move into the failure column. This is when the audit firm issues an “adverse opinion” in the report. This typically means the system description was not presented accordingly, the controls were not appropriately designed, or they did not operate effectively—all meaning that the organization would have trouble meeting its service commitments and system requirements.

This opinion should give you pause if you’re relying on that organization to provide any service to your business. The adverse opinion will use the following language: “In our opinion, because of the matter referred to in the preceding paragraph …”

Disclaimer Opinion

The fourth and final opinion, is the dreaded “disclaimer of opinion.” This is the unicorn of SOC reports—it’s so rare that I’ve never seen one (and our firm has never issued one). But you can probably guess why these are never seen—what organization would ever distribute this version of their SOC report? A “disclaimer of opinion” means the audit firm has concluded that they could not validate if any of the controls were operating during the reporting period and were unable to complete the audit.

Where to Find the Auditor’s Opinion

Where can we find the auditor’s opinion in the report? There are typically four sections of the report and you will want to locate the section titled “Independent Service Auditor’s Report.” This is usually either Section I or Section II of the report.

Once you find the auditor’s report section, scroll down to the “Opinion” section. Here’s where you’ll find out if the report is a pass or fail. Again, if the opinion is unqualified, you can put the report down with confidence and enjoy that second cup of coffee. If it’s any of the other opinions we discussed above, you’ll probably want to dig deeper into the details to learn what the findings mean.

I’m a visual person, so keep this in mind when reviewing the auditor opinions:

Unqualified Opinion =

Qualified Opinion =

Adverse Opinion =

Disclaimer Opinion =

For more information or help preparing for your SOC audit, please get in touch with our team.

Why You Can’t Freely Share Your SOC 2 Report

“Why can’t I share my SOC 2 report?” It’s a question we’re asked a lot, and given the time and expense of acquiring a SOC 2 report, it’s understandable. You can share it, but your report is restricted and there are good reasons behind this restriction.

SOC 2 Is a Restricted Use Report

The SOC 2 report is, by definition, a restricted use report. As such, it’s not suitable for public distribution. If you think about it, a SOC 2 report includes a detailed system description and a matrix of controls specific to your company that often includes proprietary information. From a process and security stance, it makes sense not to publish this information for your competitors or people with nefarious intentions to see. This is why if you do a Google search for “example SOC 2 report”, you can’t easily find one.

Suppose you use AWS or Microsoft Azure as your subservice organization and need a copy of their SOC 2 report. In that case, there’s a specific process to verify whether you should be given access to this information. Further, the AICPA standards look to the “intended reader” of the report and whether that reader has sufficient knowledge to understand the report’s content.

Case in point: The following excerpt is standard audit opinion language that appears in all SOC 2 reports detailing “Restricted Use.” You’ll notice that it reinforces the AICPA’s “intended reader” standards:

This report, including the description of tests of controls and results thereof in the section of our report titled “Description of Test of Controls and Results Thereof” is intended solely for the information and use of [Service Organization Name]; user entities of [Service Organization Name]’s [insert title of the description] during some or all of the period [Month XX, 20XX] to [Month XX, 20XX], business partners of [Service Organization Name]’s subject to risks arising from interactions with [Service Organization Name]’s processing system; practitioners providing services to such user entities and business partners; prospective user entities and business partners; and regulators who have sufficient knowledge and understanding of the following:

  • The nature of the service provided by the service organization.
  • How the service organization’s system interacts with user entities, subservice organizations, and other parties.
  • Internal control and its limitations.
  • Complementary user entity controls and complementary subservice organization controls and how those controls interact with the controls at the service organization to achieve the service organization’s service commitments and system requirements.
  • User entity responsibilities and how they may affect the user entity’s ability to effectively use the service organization’s services.
  • The applicable trust services criteria.
  • The risks that may threaten the achievement of the service organization’s service commitments and system requirements and how controls address those risks.

This report is not intended to be and should not be used by anyone other than these specified parties.

The Difference Between SOC 2 vs. SOC 3

For more general use, a SOC 3 report is an optional add-on for a SOC 2 report that omits detailed control listings and sensitive information and employs modified system descriptions. In effect, it is a summarized version of the SOC 2 Type 2 report. As such, it is defined as a “general use report” and can be distributed freely.

In contrast to the challenges of obtaining Amazon or Microsoft’s SOC 2 reports, both share their SOC 3 reports publicly.

For more information on why SOC 2 reports are restricted use and examples of other, more general alternatives, check out the AICPA’s guidance on the available SOC reports. If you’re considering a SOC 2 report, don’t hesitate to reach out to our team or visit our SOC 2 services page.

SOC 2 Case Study: EPK