What is SOC 1 Type 2?
SOC (Service Organization Control) 1 Type 2 reports assess the operational security of a company's financial reporting systems. This article will explain what SOC 1 Type 2 reports are and why they matter. We will explain how to obtain a SOC 1 Type 2 report and explore how Type 2 reports fit into the general SOC reporting system.
SOC 1 Type 2 definition
SOC 1 Type 2 reports assess the financial reporting security of service organizations. Type 2 reports involve auditing security controls and policies to meet American Institute of Certified Public Accountants (AICPA) standards. They audit security over time to check that service organizations follow continuous compliance.
SOC 1 Type 2 reports audit the control environment. The control environment includes technical controls like firewalls and encryption to guard against data breaches. Auditors check risk assessment procedures and verify training and security communication processes. They check physical controls and also assess monitoring activities.
History and background of SOC 1 reports
SOC 1 reports emerged from the AICPA's long-standing efforts to enforce auditing standards throughout the American economy. In 1992, the AICPA introduced Statement on Auditing Standards No. 70 (SAS 70), which created a standard set of auditing recommendations for service organizations.
Service Organization Control (SOC) reports appeared in 2011 with the Statements on Standards for Attestation Engagements 16 (SSAE 16). SSAE 16 updated AICPA's auditing standards, adding new Trust Services Criteria (TSCs).
AICPA modernized the framework further with SSAE 18 in 2016 — the most recent iteration. The current SSAE system uses SOC reports to present audit findings. SOC 1 Type 2 reports focus on financial reporting security. They show compliance with AICPA best practices over time.
Key differences: SOC 1 Type 1 vs. SOC 1 Type 2
Choosing the correct SOC report matters, as costs and organizational needs vary. Within the SOC 1 framework, security teams can choose between SOC 1 Type 1 and Type 2 reports.
SOC 1 Type 1 | SOC 1 Type 2 |
|---|---|
Assesses security controls at a specific point in time. | Evaluates controls over 3–12 months. |
Evaluates the design of security systems and controls. | Verifies that security controls are effective over time. |
Easier and quicker to achieve compliance, usually within weeks. | Provides more in-depth information on the effectiveness of controls. |
Suitable for demonstrating compliance quickly. | Ideal for building long-term trust with security-conscious clients. |
SOC 1 reports always deal with financial reporting. Areas covered include the processing integrity of financial data and preventing unauthorized access. Compliant organizations implement appropriate controls to guard transactions and prepare financial statements. They must also ensure the availability of financial data and apply data security systems to block malicious agents.
SOC 1 reports are also confidential documents. They are not for public distribution. Auditors share reports with service organizations and user entities. They may also provide documents to regulators. But the contents are not generally freely available.
Having stressed the similarities between SOC 1 Type 1 and 2 reports, there are some critical differences.
- SOC 1 Type 1 reports assess security issues at a single moment. A Type 1 audit investigates the security system design and checks that the design matches real-world controls and processes.
- SOC 1 Type 2 reports extend assessment over time. Audits can last between 3 and 12 months. Assessors revisit service organizations to verify that controls and processes operate continually. Assessment over time provides deeper insights into the effectiveness of controls.
Type 1 reports are less detailed, but achieving compliance is simpler. Companies can secure a positive audit within weeks of engaging an auditor. They can then use the Type 1 report to demonstrate compliance with financial reporting standards.
Type 2 reports provide more information. They are suited to organizations that must establish operational trust with user entities. Over time, compliance provides robust assurance for security-conscious clients.
The importance of SOC 1 Type 2 in today's business landscape
SOC 1 Type 2 compliance is critically important in today's thriving digital landscape. Almost all companies now use cloud computing services. And 82% of cloud users provide third parties with privileged access to confidential data.
Companies are becoming dependent on cloud service providers and vendors. As they do so, they hand over vast amounts of financial data to external organizations. In that business context, companies need reliable and secure cloud partners.
SOC 1 reports fill that gap. SOC is a widely respected security framework. Positive audit outcomes enhance the trustworthiness of cloud vendors. They make it easier for user organizations to choose third parties that meet high regulatory standards. They also focus on financial data - a key pain point for companies as they carry out cloud transformations.
Process of obtaining a SOC 1 Type 2 report
SOC 1 Type 2 reports follow an audit assessment, and companies need to prepare meticulously to ensure a successful outcome. The guide below explains every step in the process.
- Initial Assessment: Understanding the prerequisites and preparations. Organizations should study AICPA's five TSCs: data integrity, availability, security, confidentiality, and privacy. Build financial reporting controls that meet the trust criteria. If needed, hire external experts to carry out a gap analysis.
- Engagement and planning: Mapping out the audit journey. Engage a qualified CPA from AICPA's database. Auditors will attend your premises and assess existing controls. They will agree to an audit period of 3–12 months.
- Execution and Testing: Diving deep into the evaluation process. Audits test threat detection and access management systems. Assessors arrange transaction walkthroughs to model data flows and sample operational controls and policies. Fieldwork includes employee interviews to verify training procedures and observation of general security practices.
- Report delivery and review: Analyzing and interpreting the results. At the end of the audit period, auditors deliver a SOC 1 report. Service organizations analyze the document and identify areas of improvement. Report interpretation can lead to amendments if the organization has already made corrections. Following remediation, the auditors finalize and publish their Type 2 report.
Case studies: Real-world applications of SOC 1 Type 2
SOC 1 reports are commonly used compliance tools. They can be used in many business situations to verify cloud vendors, build customer trust, and improve organizations' security of financial data.
Financial organizations of all sizes and nature use the SOC 1 framework. Banks, insurers, payment processors, brokers, and financial advice companies use SOC 1 reporting to prove compliance with strict financial reporting standards.
SOC 1 audits are vital for cloud processors handling financial data. For instance, IaaS companies may store banking or customer data on behalf of eCommerce clients. Clients must know that the data is safe and that storage partners respect data integrity.
Healthcare organizations seek SOC certification to boost Health Insurance Portability and Accountability Act (HIPAA) compliance. The HIPAA regulatory context requires robust financial controls for insurers and providers. SOC 1 Type 2 reports help fine-tune controls and give healthcare partners operational assurance.
Generally speaking, SOC 1 assessments are suitable for third-party vendors that handle financial data and need to establish business credibility. In addition to the above examples, this could include leisure booking apps, payroll processors, SaaS apps, and IT outsourcers.
FAQs on SOC 1 Type 2
Which sectors or industries frequently require a SOC 1 Type 2 report?
Sectors commonly requiring a SOC 1 report include finance, eCommerce, IT outsourcing, cloud storage, and healthcare. SOC 1 compliance is advisable for all cloud companies that receive, process, or store financial information.
What's the typical duration for a SOC 1 Type 2 audit process?
The SOC 1 Type 2 audit process takes 3-12 months. An organization's initial audit will take longer and often lasts for the maximum audit period. Subsequent audits are less time-consuming because auditors check operational security systems.
Are there significant costs associated with securing a SOC 1 Type 2 report?
Yes. All SOC audits come with a price tag. SOC 1 Type 2 audits usually cost between $30,000 and $45,000. However, the total cost rises with scope. Companies that need to secure more sensitive data or require new security technology will pay more.
How often is it recommended that firms update or renew their SOC 1 Type 2 certification?
SOC certification lasts for 12 months. Companies usually choose annual certification renewal with the same auditor. Audit packages cut costs and simplify the compliance process.
Related standards and frameworks
SSAE 18 is not the only possible compliance framework for cloud providers and financial data processors. Alternatives to SOC 1 Type 2 include:
- The NIST Cybersecurity Framework. A voluntary framework designed to improve cybersecurity risk management. The Cybersecurity Framework complements SOC 1. Companies can use the SOC 1 report to evidence data integrity and confidentiality. They can follow NIST guidance to prove their cybersecurity credentials.
- ISO/IEC 27001. ISO 27001 advises companies about designing an Information Security Management System. This standard also works with SOC 1 to improve security. ISO 27001 controls cover broad information security concerns. A SOC 1 report provides fine-grained advice about financial reporting.
- SOC 2. Also maintained by AICPA, SOC 2 takes a broader view of data security. A SOC 2 report is preferable for companies that handle personally identifiable information and financial data. SOC 2 is more expensive but provides extra assurance in complex data environments.
Conclusion
SOC 1 Type 2 reports are pivotal for service organizations in the digital economy. Third-party vendors use SOC 1 compliance to prove they can protect financial data. Partners know that SOC-compliant companies have robust data integrity, privacy, and confidentiality systems. This assurance makes forming long-lasting and secure business relationships much smoother in an increasingly risky environment.