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The key to understanding SOC reports

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In today’s digital world, data security and privacy are essential components of business success. But how do you show that you’re doing what it takes to keep your data secure? SOC reports are one powerful way to prove to current and potential customers that you can be trusted with their data.

Each SOC report type — SOC 1, SOC 2, or SOC 3 — highlights different aspects of security and privacy measures, tailored to meet specific user needs and industry standards. By understanding the importance of these reports and working toward the appropriate documentation, companies demonstrate their dedication to protecting sensitive information.

Ready to learn more? Let’s get into the details. 

What is a SOC report exactly?

A SOC report (system and organization report, formerly known as a service organization report) is the documentation that proves a company is meeting either SOC 1 or SOC 2 standards. These reports are prepared by independent auditors and provide an understanding of the controls an organization has in place to mitigate common risks. 

Put simply, the point of a SOC report is to prove that a company has managed its risk well in order to keep its data secure and the privacy of its customers intact. 

SOC 1 vs. SOC 2 vs. SOC 3 reports

There are several types of SOC reports, each serving different purposes. In this post, we’ll look at SOC 1, SOC 2, and SOC 3 reports.

SOC 1 report

A SOC 1 report evaluates an organization's internal controls related to financial reporting and is typically aligned with the COSO (Committee of Sponsoring Organizations) framework. There are two types of SOC 1 reports: SOC 1 Type 1 and SOC 1 Type 2. Type 1 reports on the design of controls at an organization at a specific point in time, typically during the initial year of an engagement or after significant changes have been made to an organization's control environment. Type 2 reports on the design and operating effectiveness of an organization's controls over a specified period of time, typically six to 12 months.

SOC 2 report

SOC 2 reports are focused on controls relevant to security, availability, processing integrity, confidentiality, or privacy. These reports are based on one or many of the Trust Services Criteria, which are designed to address the needs of a broad range of users that need detailed information and assurance about such controls.

As with SOC 1, there are two types of SOC 2 reports: SOC 2 Type 1 and SOC 2 Type 2. Type 1 examines the suitability of the design of controls at a single point in time, and SOC 2 Type 2 examines the suitability of the design and the operating effectiveness of controls over a specified period — also usually between six and 12 months.

SOC 3 report

The SOC 3 report is a general-use report that provides only the auditor's report on whether the system covered the Trust Services Criteria selected for reporting, without a detailed description of the system and controls. In other words, it’s a less-detailed and more public-facing version of the SOC 2 report.

The importance of SOC reports for businesses

A SOC report provides transparency into a company’s risk management actions to demonstrate that its data security (and privacy, when relevant) practices meet relevant standards and regulatory requirements. It’s a trust asset — a piece of proof that a company can be trusted. And it’s a very valuable piece of documentation. 

Here’s why:

Create business opportunity and nurture customer loyalty

SOC reports prove to current and potential customers that your company can be trusted with their data. This means current customers are more likely to stay with you and new customers are more likely to choose you over the competition.

Real world scenario — An established HealthTech company wants to outsource its payroll processing to a third-party service provider. Since the financial transactions and reporting involved in distributing payroll directly impact financial statements, the HealthTech company knows it’s essential that the payroll processor have secure data practices. When choosing among different payroll processors, the HealthTech company is far more likely to choose a payroll processor that has a SOC 1 report to prove it will handle payroll data responsibly.

Meet industry and regulatory requirements

A SOC report proves that your company is complying with industry expectations and can also help you on the path towards achieving compliance with government regulations like HIPAA and FERPA

Real world scenario — A public school would like to implement a game-based math platform from a growing EdTech company. To use it, each student must create an account. Because the school must ensure that not just it, but any vendor they contract with is adhering to FERPA regulations, the EdTech company needs a way to prove that it is FERPA compliant. A SOC report is one step on the path to demonstrating that the company is implementing effective data protection controls to put the school buyer’s mind at ease. 

How to read and interpret a SOC report

Now that you understand what a SOC report is on a conceptual level, let’s take a look at the key components of the report, which differ slightly for SOC 1, SOC 2, and SOC 3 reports.

→ Check out a complete SOC report example

A typical SOC 1 or SOC 2 report contains these sections:

Management’s assertion

This statement from management explains that the described controls were accurately represented and effective at mitigating risk during the assessment period.

Opinion letter or auditor’s report

This is the independent auditor's opinion on the fairness and effectiveness of the controls at meeting objectives or criteria.

In a Type 1 report, it shows whether the controls were designed well. In a Type  2 report, it judges whether the controls were both designed well and were operating effectively over a certain period of time.

System description

The system description is created by the organization being audited and explains the boundaries of the system that is described in the report. This description encompasses all aspects of the system, including people, processes, data, controls, and technology. It can also serve other important roles like creating trust in company leadership.

Controls, control objectives, and test results

This section differs a little for SOC 1 and SOC 2 reports.

In a SOC 1 report, it includes specific details about control objectives. In a SOC 2 report, it describes details about the Trust Services Criteria met and the tests conducted by the auditor to evaluate how effectively the company’s controls mitigate risk.

Other information provided by the organization

Sometimes, the organization may include additional information not covered by the auditor’s report, such as future plans for control improvements or the management’s response to exceptions.

Should my company get a SOC report? And if so, how?

The key value of a SOC report is that it helps your company prove that it’s taking the right actions to protect customer data and, if relevant, data privacy, which is the fast track to building customer loyalty and securing your competitive advantage. 

If you’re a company that does any kind of financial reporting or if your company handles customer data, odds are you could benefit from a SOC 1, SOC 2, or SOC 3 report. The big remaining question is: how?

In the past, getting a SOC report meant working your way through lengthy compliance checklists with manual spreadsheets and lots of people-hours invested. That’s no longer the case.

Ebook → Learn how a risk-based approach can streamline compliance

Strike Graph’s risk-based compliance platform gives you the tools to quickly assess your company’s unique risks and then assign pre-mapped controls to mitigate them. The software collects evidence of your controls’ efficacy automatically. And then Strike Graph takes you all the way through to your SOC report — guaranteed. 

It’s your one-stop solution for SOC 1 and SOC 2. 

Ready to get started? Schedule a demo with one of our SOC experts or create a free account today.

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