SOC audits assure the effectiveness of internal controls at service providers such as advisory firms, technology vendors, and other businesses. SOC reports (the acronym for “Systems and Organization Controls”) come in several forms, notably SOC 1 and SOC 2.
While the names may sound similar, SOC 1 and SOC 2 reports are distinct, and the steps a vendor must undertake to comply with each one vary significantly.
Both SOC 1 and SOC 2 reports are based on auditing standards developed by the American Institute of Certified Public Accountants (AICPA), known as the Statement on Standards for Attestation Engagements 18 (SSAE-18, previously known as SSAE-16). Both reports also address service providers rather than publicly traded companies, and both can generate Type I and Type II reports.
Beyond those similarities, however, SOC 1 and SOC 2 reports have distinct focuses and involve different procedures. Which type of SOC report your business should obtain depends on the nature of your organization, its needs, and the assurance you want. Often, companies will find value in pursuing both types of reports.
What Is SOC 1?
A SOC 1 report assesses the effectiveness of an organization’s internal control over financial reporting (ICFR). A certified public accountant performs a SOC 1 audit, reviewing the organization’s controls that affect the enterprise’s financial statements. The report answers questions such as: Are the internal controls well designed? Do they work, helping the organization to meet its financial goals?
These reports focus on entity-level controls (including data protection) over the service provider’s financial statement assertions to confirm that it meets regulatory requirements for financial reporting.
Publicly held companies must comply with the Sarbanes-Oxley Act, which requires them to maintain effective ICFR. SOC 1 reports assure that if the company relies on third parties for its financial reporting processes, those organizations have secure ICFR and won’t pose risk to the company.
What Is SOC 2?
SOC 2 reports assess the effectiveness of an organization’s controls over data security, availability, processing integrity, confidentiality, or privacy. These elements are known as the five “Trust Services Criteria” or “trust services principles.”
These reports address cybersecurity controls, including organizational oversight, vendor management, internal corporate governance and risk management, and regulatory oversight.
Service providers such as Software-as-a-Service (SAAS) providers, data center providers, and cloud computing hosts may provide SOC 2 reports to senior management, boards of directors, customers, regulators, business partners, and suppliers. The goal is to demonstrate that customers can trust your business with their confidential data.
Differences Between SOC 1 and SOC 2
Here are some of the significant differences between SOC 1 and SOC 2 reports:
| Difference | SOC 1 | SOC 2 |
| Purpose | Focuses on financial controls | Covers security, availability, processing integrity, confidentiality, and privacy |
| Scope | Covers controls relevant to financial reporting | Broader focus on controls related to the Trust Services Principles |
| Criteria | Prepared according to SSAE 18 attestation standards | Adheres to the AICPA Trust Services Criteria |
| Audience | Primarily for auditors of user entities and stakeholders concerned with financial data | More customer-facing to demonstrate trust and transparency over customer data and information security |
| Testing | Testing procedures focus on financial transactions and balances | Includes IT general controls testing and validation of non-financial reporting controls related to data security and privacy |
Similarities Between SOC 1 and SOC 2
SOC 1 and 2 reports have only a few things in common:
| Similarity | Description |
| Auditing Standards | Both SOC 1 and SOC 2 reports are based on the Statement on Standards for Attestation Engagements 18 (SSAE-18, previously known as SSAE-16) developed by the American Institute of Certified Public Accountants (AICPA). These standards provide guidelines for conducting audits and reporting on controls at service organizations. |
| Target Organizations | Both reports address service organizations rather than publicly traded companies. Service organizations can be cloud service providers, data centers, and business process outsourcing firms. |
| Report Types | SOC 1 and SOC 2 engagements can generate Type I and Type II reports. A Type I report provides an opinion on the design of controls at a specific point in time. A Type II report includes an opinion on the operational effectiveness of controls over some time (typically 6 to 12 months). |
| Third-Party Assurance | Both SOC 1 and SOC 2 reports are intended to provide third-party assurance to the service organization’s customers (user entities) about the effectiveness of its controls. |
Types of SOC Reports
SOC 1 and SOC 2 reports can be either Type 1 or Type 2.
Type 1 reports only review whether the organization’s controls are designed appropriately and that management’s description of internal control is accurate. Essentially, Type 1 reports only examine an organization’s internal controls at a single moment in time.
Type 2 reports incorporate all the same information as Type 1 reports and then go further, assessing whether the internal controls actually work as intended. In other words, they examine the performance of internal controls over an extended time, typically six months to one year.
What is the Difference Between a Type I and a Type II in a SOC Report?
The main difference between a Type 1 and Type 2 SOC report lies in the testing procedures:
- Type I: The auditor expresses an opinion on whether the organization’s description of its system fairly presents the system as designed and whether the controls are suitably designed to achieve the specified control objectives. There is no test of operational effectiveness.
- Type II: This report includes everything in a Type I report plus detailed testing of the operating effectiveness of the organization’s controls over a specified period. It tests both design and operational effectiveness.
Type II reports provide more assurance since the auditor tests how well the controls work throughout the review period. Type I reports, however, can still offer value by verifying that the organization’s controls are designed appropriately.
Additional SOC 2 Reports
The AICPA has developed several more SOC 2 reports addressing other subjects and criteria. In collaboration with the Cloud Security Alliance (CSA), the AICPA established an assessment of cloud providers known as the CSA Security Trust and Assurance Registry (STAR) Attestation.
The “SOC 2 Report with the Criteria in the Cloud Security Alliance (CSA) Cloud Controls Matrix (CCM)” guides auditors when assessing the design and operating effectiveness of internal controls aligned to traditional SOC 2 reports while also incorporating the criteria of the CSA CCM.
Yet another SOC 2 report focuses on controls specific to organizations that must comply with the Health Insurance Portability and Accountability Act (HIPAA). The AICPA collaborated with the Health Information Trust Alliance (HITRUST) to incorporate the HITRUST Common Security Framework (CSF) and map those criteria to the trust services criteria.
SOC 2 compliance does not guarantee that you will comply with the International Organization for Standardization’s ISO 27001 standard. ISO 27001 also focuses on security controls but is more rigorous than SOC 2.
SOC 1 vs SOC 2: Which One Should You Choose For Your Business
Deciding between SOC 1 and SOC 2 depends primarily on your business focus and intended report users. SOC 1 is ideal if you must demonstrate adequate financial controls to auditors, investors, regulators, and other user entities. It’s commonly used by financial institutions, payroll processors, and so forth.
SOC 2 makes sense if you want to showcase controls relevant to security, privacy, and availability to current and prospective customers. It’s essential for SaaS, cloud services, data centers, and the like.
In some cases, for service organizations with integrated financial and information systems, both SOC 1 and SOC 2 reports may be recommended to address all control domains fully. Work with experienced risk management advisers to conduct a gap analysis and determine which type of SOC report is right for your objectives.
FAQs About SOC 1 and SOC 2
How Long Does It Take to Prepare for a Soc 1 Report?
The length of time needed to prepare for a SOC 1 audit engagement depends on the maturity of the organization’s existing controls. On average, expect several months of preparation to implement necessary controls, write policies and procedures, and gather required documentation.
How Long Does It Take to Prepare for a Soc 2 Report?
For SOC 2, organizations should budget four to nine months for pre-audit preparation. More preparation time is usually needed for an initial SOC 2 engagement versus renewal audits.
Does Every Organization Need a Soc 1 Report?
No. SOC 1 reports are only required for organizations that need to report on controls relevant to financial statement audits. Not all businesses need one. Professional guidance can determine whether SOC 2 or other SOC reports better fit your needs.
Can a Company be Both SOC 1 and SOC 2 Compliant?
Yes, an organization can comply with both SOC 1 and SOC 2 standards. Some companies, particularly those that provide services relevant to both financial reporting and data security or privacy, may pursue both reports to meet the needs of different stakeholders.
Is SOC 2 Type 2 better than Type 1?
Some industries consider a SOC 2 Type 2 report more valuable than a SOC 2 Type 1 report because it both evaluates the design of controls (like Type 1) and tests the operational effectiveness of those controls over time. That said, Type 2 reports will be more expensive than Type 1 — so think carefully about whether that greater cost will be worth it.
Which Industries Typically Require a SOC 1 or SOC 2 Report?
Industries that handle sensitive data or provide critical services to other organizations require SOC reports. It includes cloud service providers, data centers, managed service providers, Software-as-a-Service (SaaS) companies, and healthcare, finance, and e-commerce organizations that must meet data security standards such as PCI DSS or the predecessor SAS 70.
How Do SOC 1 and SOC 2 Audits Differ From ISO 27001 Certification?
While SOC audits and ISO 27001 certification relate to information security, they have different scopes and purposes. SOC reports evaluate an organization’s system of controls and processes, while ISO 27001 is an internationally recognized standard for implementing and maintaining an information security management system (ISMS). Organizations may pursue SOC reports and ISO 27001 certification for comprehensive security assurance and suitability to meet the Trust Services Criteria (TSC).
SOC Compliance Management With RiskOptics ZenGRC
Any kind of SOC audit is challenging. It requires vendors to undergo laborious processes for assessing risk, documenting business processes, testing controls, remediating weaknesses, and then reporting their final control posture.
Doing all this work manually with spreadsheets is folly; details will be overlooked or recorded incorrectly. Organizations need a dedicated software tool to automate as much of the work as possible and to guide them through the process. This is where RiskOptics ZenGRC from RiskOptics can help.
ZenGRC’s dashboard allows you to see your progress on compliance with SOC reports or numerous other regulatory burdens, such as HIPAA, GDPR, or SOX. It helps you identify holes in your documentation and procedures and guides you in addressing them.
Schedule a demo to see how the ZenGRC Platform can help your company with its compliance initiatives.