Businesses today frequently rely on cloud service providers and SaaS vendors to handle essential functions, making outsourcing a standard practice.
However, this requires sharing sensitive data with third parties which enhances the risk of data breaches or data thefts.
That's why businesses need assurance that the organizations they are outsourcing their functions to can be trusted and have secure systems and controls in place. This is where the SOC report comes into the picture. A SOC report demonstrates the trustworthiness and credibility of a service organization.
In this article, we discuss what does SOC stand for, what SOC report is and its importance for your organization.
What is a SOC Report?
SOC stands for Service Organization Controls. It is a comprehensive audit of a service organization’s information security management systems and the procedures and controls employed by it to protect those systems.
SOC report audit is generated by an independent audit organization accredited by the American Institute of Certified Public Accountants (AICPA).
An SOC report helps businesses or user entities verify that a service organization they partner with has necessary checks and balances in place to protect their sensitive data. These checks and balances are associated with the finances, security, privacy, and processing integrity of the organizations.
These service organizations usually deal with critical data and offer financial and technology-enabled services such as payment processing, cloud hosting, data centers, business financing, healthcare, HR management, third-party software, and financial reporting.
The report provides independent assurance to businesses looking to start new business partnerships or just reviewing existing business relationships. It also helps organizations build a reliable reputation in the industry and attract new customers.
What are the Different Kinds of SOC Report?
SOC reports are further classified into many types based on the controls and criteria they follow. These types are:
1. SOC 1 report
SOC 1 report covers the internal controls and procedures associated with financial reporting. These reports are needed by organizations that provide a service that impacts their customers' financial statements.
SOC 1 report is further divided into Type 1 and Type 2 reports. SOC 1 Type 1 report audits the internal controls of financial reporting at a specific point in time, while the SOC 1 Type 2 report examines the system's designs and operating effectiveness and is implemented over a particular period.
2. SOC 2 report
SOC 2 report is the most common form of SOC compliance report. It is based on Trust Services Criteria that include security, privacy, processing integrity, availability, and confidentiality. These criteria address internal controls that are not related to an organization's financial reporting.
Service organizations use SOC 2 reports to showcase details related to their risk management strategy and control frameworks to prospective or existing clients.
SOC 2 report is also divided into Type 1 and Type 2 reports. A SOC 2 Type 1 report examines the system designs of an organization at a specified time, while a SOC 2 Type 2 report evaluates the operational effectiveness of those systems over a specified period.
3. SOC 3 report
SOC 3 report is just like the SOC 2 report, but without any confidential information and is much shorter. It includes the same information as the SOC 2 report and is issued to the larger public for marketing purposes.
4. SOC for Cybersecurity
This SOC framework is a recent development by AICPA in the SOC suite. It includes the relevant information associated with an organization's cybersecurity risk management programs.
It helps organizations demonstrate their commitment towards best practices in data security. Unlike SOC 2 report, SOC for Cybersecurity is for general use and doesn't include confidential data.
5. SOC for Supply Chain
This is also a newly added framework by AICPA. It helps organizations communicate their supply chain risk management processes with their business partners and customers. This report evaluates the supply chain management controls based on the five Trust Services Criteria.
SOC for the supply chain is suitable for organizations involved in the production, manufacture, shipping, and distribution of certain products.
What are the Components of a SOC Report?
The content of a SOC report varies based on the type of the report. However, most of the components are the same. These include:
1. Management Assertion: This section includes the opinion on systems and controls but from the perspective of service organization based on their internal audit.
2. Auditor’s Opinion: This is the summary of the auditor's opinion on whether the organization has passed the inspection or not.
3. System Description: This section has details about the internal controls, infrastructure, and systems of the organization. It also includes operating processes, types of services offered, and specific controls that mitigate risks.
4. Criteria and Controls Analysis: This includes the breakdown of controls and operations of organization based on the Trust Services Criteria.
5. Test of Controls: This includes the procedures and methodologies employed by auditors to examine the operating effectiveness of the organization. Along with that, it also includes tests performed to evaluate the controls and their results.
Why SOC Report Matters for Your Organization?
Having a SOC report sends a strong message to customers that your organization follows safe and secure systems and procedures for data security. Let's understand the importance of the report in detail.
- It helps build greater transparency by providing detailed information about the organization's internal controls and systems.
- It highlights vulnerabilities and flaws in the existing procedures and controls and allows the organization to discover and correct these.
- SOC audits help organizations address their non-compliance and inconsistencies, which results in greater efficiency.
- A successful SOC report of an organization builds trust in existing customers and ensures long-term business success. It also attracts new business partners and provides a competitive edge.
How to Ensure SOC Compliance?
To ensure SOC report compliance, service organizations need to perform risk assessment. If there are any flaws in it, they must come up with an effective risk management strategy. For SOC 2 report and SOC for cybersecurity compliance, organizations must have a secure information security management system in place.
A compliance management platform like Effivity provides a comprehensive Risk Management Module which helps identify, analyze, evaluate, and address risks from your organization’s valuable data and information assets. It provides a systematic framework to manage risk within the company and ensure ISO compliance.
Similarly, the Information Security Management Software from Effivity develops a line of defense against all digital threats and safeguards essential data of your organization.
Apart from this, continuous evaluation with the help of a specific audit preparation team is required to update the controls and systems in accordance with latest standards.
Final Thoughts
SOC report helps service organizations send a strong signal that they can safely and securely handle the sensitive data of their customers. For compliance with the established industry standards, understanding SOC report meaning becomes crucial to assure your existing and prospective customers that you are reliable and trustworthy.
