Accounting disasters and cyberattacks don’t feel real until we experience them. But as more and more companies make headlines for defective security measures or questionable business practices, people are paying more and more attention to the operations behind them.
System and Organization Controls (SOC) reports assure customers and stakeholders that companies are adequately prepared to counter and address financial and data-related issues. To obtain these reports, companies undergo rigorous evaluations by trained accountants and cybersecurity auditors who give their stamp of approval.
But what exactly are SOC reports, and what do they mean?
In this article, we define SOC 1 and 2, reveal situations where companies may need both reports, and offer tips for preparing your organization for an audit.
What Is a SOC Report?
SOC reports verify a company’s commitment to and execution of accounting and data controls via audits conducted by third-party auditors. SOC reports were established by the American Institute of Certified Public Accountants, so auditors are Certified Public Accountants who typically have specialized knowledge in information security.
You can think of SOC reports as a kind of company “background check,” confirming that the company’s business practices around finances and data are sound. So just like when you accept an offer and HR orders a background check, organizations request copies of a company’s SOC report before doing business.
Overall, SOC reports increase a company’s long-term sustainability and credibility, which are key to growing their business.
SOC 1 Audits Explained
SOC 1 audits are conducted when a service organization needs to demonstrate its command over financial reporting. Examples of service organizations are companies that manage companies’ payroll or healthcare benefit processing, insurance trust departments, or custodians for investment companies.
During a SOC 1 audit, CPAs will review a company’s entire set of internal financial controls in relation to the type of services they provide and the regulations in that industry. While this process can be onerous and tedious, it’s worth it in the long run. Being able to show clients a successful SOC 1 audit and corresponding reports means that a company has the proper controls in place to deliver accurate, high-quality financial reports.
As we’ll discuss in a later section, the two types of SOC 1 reports indicate the suitability of a company’s controls at a point in time and over a certain span of time. Usually, companies interested in an organization’s services will want to see proof of both SOC 1 Type 1 and SOC 1 Type 2 reports.
SOC 2 Audits Explained
SOC 2 audits are conducted when an organization needs to demonstrate its command over internal data operations and compliance. SOC 2 audits are more complex than SOC 1 audits and are necessary for any company that accesses, stores, or uses another company’s data (even non-financial data). As you can imagine, SOC 2 is a must-have for most cloud-based software systems.
SOC 2 audits assess controls based on five Trust Service Categories:
- Security (required)
- Availability (optional)
- Processing integrity (optional and uncommon)
- Confidentiality (optional)
- Privacy (optional and uncommon)
Each category has globally accepted best practices that auditors look for, such as user authentication, network protection, compliance with privacy laws, full-disk encryption, and adherence to a Zero Trust model. Many of these categories have become even more important as a result of many more people working remotely.
So before undergoing an audit, upper management must review the current status of each of these categories in their organization and determine which one(s) they’d like auditors to review and include in their reports. Security is required, but the other four categories are optional.
SOC 2 reports are considered “restricted use,” meaning they are only distributed if a potential customer, existing customer, or business partner requests them. In general, SOC 2 reports reflect an organization’s devotion to their customers’ data integrity, confidentiality, privacy, and safety.
SOC Type 1 Vs SOC Type 2
There are two types of sub-reports within SOC 1 and SOC 2. Let’s take a moment to explain the differences between them.
Within SOC 1, the Type 1 report evaluates a company’s controls at the time of an audit. SOC 1 Type 2 takes this one step further and tests out the controls with real data in real time. Because some companies have hundreds of controls, securing a SOC 1 Type 2 report can take up to 6 months.
Just as with SOC 1, SOC 2 has Type 1 and Type 2 reports. Similarly, SOC 2 Type 1 reports on the design, comprehensiveness, and clarity of a company’s data controls at a single point in time. And as with SOC 1 Type 2 reports, SOC 2 Type 2 reports measure how well those controls work in practice by monitoring a company’s operations over a 6-month period.
Could You Need a SOC 1 and SOC 2 Report?
The quick answer to this question is yes. Some companies may only need a SOC 1, others may only need a SOC 2, and others may require both.
Companies hired by other organizations to complete an aspect of their financial reporting should focus on achieving SOC 1. Most organizations that hire a professional services company will ask for a SOC 1 report, so it’s important to have it handy. SOC 1 is also considered an unspoken prerequisite for businesses looking to IPO.
Software companies, specifically SaaS companies, are often good candidates for SOC 2 reports. Even though they may not be accessing, storing, or using customers’ financial data, they typically interact with company and personal data. So it’s no surprise that customers want to know that their data is as protected from breaches and cyberattacks as possible. SOC 2 reports reassure customers that auditors have examined the internal strategies and procedures you’ve implemented to safeguard data.
Sometimes, companies are both financial service providers and software companies一take accounting software Blackline, for example. For those organizations, obtaining both SOC 1 and SOC 2 reports help satisfy all of their stakeholders.
SOC Compliance Doesn’t Have to Be Difficult
Understanding what SOC reports are and how to achieve them can feel overwhelming. There are so many checklists to complete, and audits are very high stakes. Without SOC 1 or SOC 2 reports, companies put their reputation and potential profits at risk. But the good news is that passing SOC audits doesn’t have to be complicated if you lay the right foundation.
The JumpCloud Directory Platform allows IT to enact and enforce policies across your organization, no matter where they work. IT can update and deploy new policies, monitor user and device data, and create internal audit reports一all from one central console.
Admins can identify and resolve issues immediately, restoring balance to the organization and ensuring the business continues to operate consistently and reliably. JumpCloud also has an API that plugs directly into auditors’ third-party systems, making audit season a breeze.
Learn more about how you can treat compliance as a continuous, ongoing effort with JumpCloud’s approach across all users and devices.