SOC1 vs SOC2

What Is SOC1 And SOC2?

SOC 1

SOC 1, or Service Organization Control 1, is a framework designed for service organizations that handle financial data. It focuses primarily on the internal controls that directly affect a user entity’s financial reporting. This means that companies utilizing third-party services can be assured of the integrity and reliability of the financial processes and controls in place at those service providers. A SOC 1 report is often crucial for auditors, as it provides an in-depth assessment of the service organization’s controls, helping to ensure compliance with financial regulations and enhancing trust amongst stakeholders.

SOC 2 

In contrast, SOC 2 is centered on data security, specifically for technology and cloud computing organizations. It evaluates the systems and processes a service organization has in place to protect customer data and uphold privacy. SOC 2 reports are based on five trust service criteria: security, availability, processing integrity, confidentiality, and privacy. This type of report is essential for organizations that prioritize the protection of customer data and is particularly relevant for businesses handling sensitive information.

Objectives Of SOC1 

The objectives of SOC1 report are to provide assurance to users of the financial statements that the service organization's controls over financial reporting are designed and operating effectively to achieve the following:

• Completeness and accuracy of financial data processing.

• Confidentiality and privacy of financial data.

• Availability of financial systems and data, ensuring that the systems and data are accessible when needed.

• Compliance with financial regulatory requirements.

• Detection and mitigation of fraud and errors in financial data processing.

By obtaining a SOC1 report, service organizations can demonstrate to their customers and stakeholders that they have effective internal controls in place to ensure the integrity of their financial statements.

When To Use SOC 1 Reports?

• SOC1 reports are typically used by service organizations that process financial transactions or are involved in financial reporting. This includes organizations such as banks, insurance companies, and accounting firms.

• SOC1 reports are also commonly used by service organizations that are subject to regulatory requirements, such as those in the healthcare or government sectors. 

• These reports help to demonstrate compliance with relevant financial reporting regulations and provide assurance to customers and stakeholders about the effectiveness of the organization's internal controls related to financial reporting.

Objectives Of SOC2 

The objectives of a SOC2 report are to provide assurance to users of the service organization's systems that the controls related to security, availability, processing integrity, confidentiality, and privacy are designed and operating effectively to achieve the following:

• Security: protect the system against unauthorized access, both physical and logical.

• Availability: ensure that the system is available for operation and use as agreed or as needed.

• Processing integrity: ensure that the system processing is complete, accurate, timely, and authorized.

• Confidentiality: protect confidential information from unauthorized disclosure.

• Privacy: collect, use, retain, disclose, and dispose of personal information in accordance with the organization's privacy notice and relevant privacy principles.

By obtaining a SOC2 report, service organizations can demonstrate to their customers and stakeholders that they have effective internal controls in place to ensure the security and privacy of their data. 

When To Use SOC2 Reports?

• SOC2 reports are typically used by service organizations that handle sensitive information or provide services that require a strong focus on security and privacy. 

• This includes organizations such as healthcare providers, financial institutions, software as a service (SaaS) providers, and data centers. SOC2 reports are particularly important for service organizations that handle personally identifiable information (PII) or confidential business information.

• Customers of these service organizations often require assurance that their sensitive information is protected and that the service organization has effective controls in place to prevent unauthorized access, disclosure, or alteration. 

By obtaining a SOC2 report, service organizations can provide this assurance to their customers and demonstrate their commitment to security and privacy.

Differences Between SOC1 And SOC2

The main differences between SOC1 and SOC2 are:

• Focus: SOC1 reports focus on the internal controls related to financial reporting, while SOC2 reports focus on the internal controls related to security, availability, processing integrity, confidentiality, and privacy.

• Audience: SOC1 reports are typically intended for external auditors of the service organization's customers who are responsible for the financial statement audit, while SOC2 reports are intended for a broader range of stakeholders, including customers, vendors, and regulators.

• Criteria: SOC1 reports are based on the Statement on Standards for Attestation Engagements (SSAE) 18 criteria, which are specifically designed for audits of financial statements. SOC2 reports are based on the Trust Services Criteria (TSC), which are a set of principles and criteria developed by the American Institute of Certified Public Accountants (AICPA) for evaluating and reporting on controls related to security, availability, processing integrity, confidentiality, and privacy.

• Structure: SOC1 reports have two types - SOC1 Type I and SOC1 Type II. SOC2 reports also have two types - SOC2 Type I and SOC2 Type II. However, the structure and content of the reports differ significantly. SOC1 reports are organized into sections that correspond to the financial statement assertions, while SOC2 reports are organized by the five Trust Services Criteria.

• Application: SOC1 reports are often used in industries where financial reporting is critical, such as banking and insurance. SOC2 reports are often used in industries where the protection of sensitive information is critical, such as healthcare and technology.

In summary, SOC1 reports are focused on financial reporting controls and are primarily used by external auditors of the service organization's customers.

SOC1 And SOC2 Audits 

SOC1 Audits

• SOC1 and SOC2 audits are both types of Service Organization Control (SOC) audits, which are performed by independent auditors to evaluate and report on the internal controls of a service organization. However, the scope and focus of these audits differ significantly.

• SOC1 audits, also known as SSAE 18 audits, evaluate the internal controls of a service organization related to financial reporting. These audits are typically performed by external auditors of the service organization's customers who are responsible for the financial statement audit.

• The scope of a SOC1 audit is limited to controls that are relevant to the accuracy, completeness, and timeliness of the financial reporting. 

• The audit results in a SOC1 report, which provides assurance to the customers of the service organization that the internal controls related to financial reporting are designed and operating effectively.

SOC2 Audits

• SOC2 audits, on the other hand, evaluate the internal controls of a service organization related to security, availability, processing integrity, confidentiality, and privacy. These audits are typically requested by customers of the service organization who are concerned about the protection of their sensitive information. 

• The scope of a SOC2 audit is broader than that of a SOC1 audit and covers controls related to all five Trust Services Criteria. 

• The audit results in a SOC2 report, which provides assurance to a wider range of stakeholders, including customers, vendors, and regulators, that the internal controls related to security, availability, processing integrity, confidentiality, and privacy are designed and operating effectively.

In both cases, the audit process involves a review of the service organization's internal controls, documentation of those controls, and testing of the controls to ensure they are operating effectively. The auditor issues an opinion on the effectiveness of the controls based on the results of the audit.

Conclusion 

SOC1 and SOC2 audits are important for service organizations to provide assurance to their customers and stakeholders on the effectiveness of their internal controls related to financial reporting and security, availability, processing integrity, confidentiality, and privacy.