By: BT Team | 01/09/25
As organizations face increasing risks from third-party relationships and cyber threats, understanding how to navigate these challenges is paramount. System and Organization Controls (SOC) reports have become indispensable tools for assessing internal controls and ensuring compliance with industry standards. These reports, issued by independent audit firms, provide organizations with the transparency and assurance they need to build trust with stakeholders. This article delves into the primary types of SOC reports available and offers guidance on choosing the right SOC report for your organization’s unique needs.
System and Organization Controls (SOC) reports are independent audit reports designed to evaluate and attest to the effectiveness of an organization’s internal controls. These reports provide detailed insights into how an organization manages risks, particularly in areas such as financial reporting, security, confidentiality, privacy, availability, and processing integrity.
SOC reports were developed by the American Institute of Certified Public Accountants (AICPA) to address the growing need for third-party assurance in business relationships. These reports play a vital role in fostering trust by offering transparency about a service provider’s control environment.
Key features of SOC reports include:
SOC reports are not one-size-fits-all; instead, they are tailored to address specific business and customer needs. The three primary SOC report types include SOC 1, SOC 2, and SOC 3. Below, we explore these in additional detail.
A SOC 1 report assesses internal controls relevant to financial reporting, often referred to as Internal Control over Financial Reporting (ICFR). This report is typically used by organizations whose services directly impact the financial information of their customers. Examples include payroll processors, financial institutions, and accounting software providers.
Types of SOC 1 Reports:
Use Case: If your organization provides services that influence your clients’ financial data, such as bookkeeping or payroll processing, a SOC 1 report is essential.
A SOC 2 report evaluates the effectiveness of controls related to the AICPA’s five trust service categories:
SOC 2 reports are highly customizable, allowing organizations to choose trust service categories that align with their business goals.
Types of SOC 2 Reports:
Use Case: Ideal for SaaS providers, cloud storage companies, and IT service organizations that need to demonstrate robust data management and security practices.
A SOC 3 report is a high-level version of the SOC 2 report, intended for public distribution. It provides assurance about the organization’s controls without delving into technical details, making it suitable for marketing and informational purposes.
Use Case: Organizations looking to provide prospective customers with a general overview of their control environment while protecting sensitive details.
Investing in a SOC audit is more than a regulatory checkbox; it’s a strategic move that positions your organization as a trustworthy and reliable partner. Below is an expanded view of why these reports are essential, with real-life examples to contextualize their impact:
Transparency is a cornerstone of long-lasting business relationships. By undergoing this audit, an organization signals its commitment to strong internal controls and adherence to industry standards.
Example: A Leading Cloud Service Provider
A leading cloud service provider regularly undergoes SOC 2 audits to provide its customers with assurance about data security and privacy. These reports allow the provider to foster trust with enterprise clients in highly regulated industries such as healthcare and finance.
Result: The cloud service provider’s ability to demonstrate its control environment has been a key factor in retaining large clients who require stringent data protection measures.
SOC audits help organizations identify and address vulnerabilities in their systems and processes, enabling them to proactively remediate potential issues before they escalate.
Example: A SaaS Provider
A SaaS company offering customer relationship management (CRM) software completed its SOC 2 audit. The audit identified gaps in its access control mechanisms, where several inactive accounts still had system access. Addressing these vulnerabilities not only improved security but also reduced the likelihood of a breach.
Result: The company avoided potential data breaches that could have led to regulatory fines and reputational damage, ultimately saving millions in potential costs.
Customers often mandate SOC reports through contractual requirements to ensure that their partners and vendors operate securely and ethically, as well as in ways that promote regulatory compliance. SOC reports are particularly important for companies in regulated industries to demonstrate alignment between regulatory requirements and operational practices.
Example: Payroll and Accounting Firm Subject to SOX
A payroll processing firm that supports Fortune 500 companies undergoes annual SOC 1 Type II audits. This is essential for its customers to comply with the Sarbanes-Oxley Act (SOX), which is intended to promote reliable and sound financial reporting practices and internal control.
Result: By providing SOC 1 reports to its customers, the firm helps ensure its clients meet their SOX compliance obligations, retaining its status as a trusted partner in financial reporting.
Vendors often receive repeated inquiries from clients about their risk management practices, controls, and compliance. SOC reports streamline this process, reducing redundancy and enhancing efficiency.
Example: Data Center Vendor
A data center vendor providing hosting solutions for e-commerce platforms uses its SOC 2 report as a one-stop solution for client inquiries about its security measures. Instead of answering separate questionnaires from every client, the vendor shares its SOC 2 report, which outlines its compliance with trust service criteria.
Result: The vendor saves time and resources while satisfying client requirements, freeing its team to focus on operational improvements.
The first step is to identify the nature of your business and the expectations of your customers or stakeholders. Consider the following:
2. Assess the Scope of Your Services
Clearly define the systems, services, and processes to be evaluated. This helps align the SOC report’s focus with your organization’s operational goals. For example:
3. Determine the Audience for the Report
The audience for your SOC report will influence the level of detail required:
4. Consider the Role of a SOC Report Bridge Letter
A SOC report bridge letter is an interim solution for demonstrating compliance when the period covered by the existing SOC report does not fully align with a customer’s reporting requirements. It promotes continued assurance during the gap period and is often critical for retaining customer confidence.
5. Engage with Experienced Auditors
Working with auditors who specialize in SOC reports ensures that the process is tailored to your needs. They can help you:
Choosing the right SOC report is critical for meeting customer expectations, mitigating risks, and demonstrating your organization’s commitment to excellence. Whether you need a SOC 1 report for financial reporting, a SOC 2 report for IT security, or a SOC 3 report for public assurance, understanding your business needs and customer requirements will guide you to the right choice.
SOC reports are more than compliance tools—they are strategic assets that reinforce trust and provide actionable insights for continuous improvement. By investing in the appropriate SOC report, your organization can enhance its risk management capabilities and strengthen relationships with stakeholders.
Mike Hostinsky – Partner, Risk Advisory
Mike Hostinsky is a Partner and service line leader in Bennett Thrasher’s Risk Advisory practice. He leads and delivers System and Organization Controls (SOC) attestation examinations and readiness assessments, internal audit outsourcing and co-sourcing engagements, Sarbanes-Oxley 404 internal control reviews and business process improvement projects.
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