What is a SOC Report? Do I Need One?
16 February 2024
SOC REPORTING 101: Does My Organization, or My Third-Party Business Partners Need One?An Increasingly Complex World
In today’s increasingly complex and interconnected business environment, organizations are outsourcing more functions, and have more third-party partners than ever before. With this increased complexity comes greater risks for your organization, your customers, and your stakeholders.
Due to this ever-evolving risk landscape, savvy customers are requiring their third-party partners to provide SOC reports (System and Organization Controls Reports) to demonstrate the effectiveness of the control environment over the services they provide. In short, if you haven’t already been asked for a SOC report, chances are high that you’ll be asked to provide one in the near term.
SOC reports play an integral role in evaluating and assessing control environments. They help establish trust with stakeholders and provide organizational value by showcasing the effectiveness of their control environment over their service offerings.
Having a SOC report can differentiate an organization from its competitors. A SOC report demonstrates an organization’s commitment to controls and can be the deciding factor when selecting a service provider.
Organizations who are beginning their SOC journey have a lot of questions, such as:
- What exactly is a SOC report and what does it cover?
- Do I need a SOC report if I haven’t historically been asked to provide one?
- When should I be asking my vendors and third-party business partners to provide SOC reports?
- What are the different types of reports?
What is a SOC Report?
System and Organization Controls Reports, also known as SOC reports, are defined by the American Institute of Certified Public Accountants (AICPA) and are a suite of different reports designed to provide customers and stakeholders with information about the service organization’s controls, in order to help customers and stakeholders assess and address the risk associated with doing business with third parties or of an outsourced function.
SOC reports are applicable to what are known as ‘service organizations’ or businesses that provide services to other organizations. A few examples of some common services that service organizations may provide are software hosting, cloud hosting, IT infrastructure, data processing, billing, claims processors, credit card payment processors, transaction processing, payroll processors, investment advisors, recordkeepers, custodians and transfer agents, to name a few.
What is a SOC 1 Report?
If the services you provide to customers has an impact, either directly or indirectly, on a customer’s financial reporting, a SOC 1 report would be applicable. The purpose of a SOC 1 report is to provide an independent auditor’s opinion over a service organization’s internal controls over financial reporting to its customers and stakeholders. SOC 1 reports can cover a variety of areas, including transaction processing and or information technology general controls.
What is a SOC 2 report?
If your organization handles data for your customers, a SOC 2 report is likely relevant. SOC 2 reports are intended to meet the needs of a broad range of users that require information and assurance over controls at a service organization relevant to the security, availability, processing integrity, confidentiality, or privacy, of the services provided by the service organization. SOC 2s are commonly used in industries where data security is critical, such as technology, healthcare, and finance.
SOC 2 reports play an important role in:
- The oversight of the organization
- Vendor management programs
- Regulatory oversight
Why would a company want to get a SOC Report?
Service organizations oftentimes have access to key client systems, sensitive customer data, or own an important outsourced function. Given these facts, how do you know whether your service organization is performing their obligations correctly? How do you know if they have the appropriate safeguards in place and whether or not their controls are designed and operating effectively? That is where a SOC report comes into play. A SOC report provides independent assurance over the service organization's control environment and that the right safeguards are in place to reduce the risk of errors or data loss.
How does a company get a SOC Report?
Only Certified Public Accountants (CPA Firms) can perform SOC examinations and issue SOC Reports. Before performing a SOC examination, it is common to first start with a SOC readiness assessment, where your control environment is assessed in order to identify any potential gaps or steps you should take before performing a SOC examination.
By having a SOC report, organizations differentiate themselves by establishing trust and demonstrating to their customers and other stakeholders that they have implemented sufficient controls and processes to protect their data and uphold their contractual obligations, thereby enhancing their overall credibility and competitiveness in the marketplace.
For more information, reach out to our SOC Reporting Leader:
Jeffrey R. Ritchie, CPA - Principal
/ 315.928.7445
Jeff Ritchi
Jeff has extensive experience in System and Organization Controls reporting (SOC 1 and SOC 2), enterprise risk management, internal control transformation projects, SOX 404 compliance, IT control assessments, process improvement and control readiness assessments.
Jeff is a CPA licensed in New York and is a member of the American Institute of Certified Public Accountants (AICPA). He obtained his B.S. and M.S. in Accounting from Siena College and resides in Syracuse.
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