Understanding Compliance SOC 1 vs SOC 2 vs SOC 3

Compliance is a crucial aspect of your organization’s growth. 

Suppose you want to run a SaaS business and target mid-market customers. In that case, you need to be compliant with applicable rules and regulations and maintain a stronger security posture for your company. 

Many organizations try to bypass these requirements by applying security questionnaires. 

So, when a customer or a client demands a SOC certificate, you can realize how important it is to be compliant with regulations. 

Service Organization Control (SOC) compliance refers to a type of certification in which an organization completes a third-party audit that shows certain controls your organization has. SOC compliance is also applicable to supply chain and SOC cybersecurity. 

In April 2010, the American Institute of Certified Public Accountants (AICPA) announced the change of SAS 70. The refined and new auditing standard is named the Statement on Standards for Attestation Engagements (SSAE 16). 

Along with SSAE 16 audit, three other reports also have been established to examine the controls of a service organization. These are called SOC reports which contain three reports – SOC 1, SOC 2, and SOC 3 reports carrying different objectives. 

In this article, I’ll mention each SOC report and where to apply them, and how they fit into IT security. 

Here we go!

What Exactly Is a SOC Report?

SOC reports can be considered a competitive advantage benefiting an organization in terms of money and time. It utilizes third-party and independent auditors to examine different aspects of an organization, including:

• Availability
• Confidentiality
• Privacy
• Processing integrity
• Security
• Controls related to cybersecurity
• Controls related to financial reporting

SOC reports enable a company to feel confident that potential service providers are operating compliantly and ethically. Although audits can be tricky, they can offer immense security and trust. SOC reports help establish the trustworthiness and credibility of a service provider.

Furthermore, SOC reports are useful for:

• Vendor management programs
• Oversight of the organization
• Regulatory oversight
• Risk management process and internal corporate governance

Why Is a SOC Report Essential?

Several service organizations, such as data center companies, SaaS providers, loan servicers, and claim processors, are needed to undergo a SOC examination. These organizations need to store their clients’ or user entities’ financial data or sensitive data. 

So, any company providing services to other companies or users can be befitted from the SOC examination. A SOC report not only lets your potential clients know that the company is legitimate but also reveals before you the flaws and weaknesses of your controls or clients through assessment processes.

What Can You Expect from a SOC Assessment?

Before going through a SOC assessment process, you must determine which type of SOC report you need that can suit your organization the most. Next, an official process will begin with the readiness assessment. 

Service organizations prepare themselves for the examination by identifying potential red flags, gaps, deficiencies, and more. This way, the company can understand the available options to repair these flaws and weaknesses. 

Who Can Perform a SOC Audit?

SOC audits are performed by independent Certified Public Accountants (CPAs) or accounting firms. 

AICPA establishes professional standards that are meant to regulate SOC auditors’ work. In addition to this, certain guidelines regarding execution, planning, and oversight must be followed by organizations. 

Every AICPA audit then undergoes peer review. CPA organizations or firms also hire non-CPA professionals with information technology and security skills to prepare for a SOC audit. But, the final report must be checked and disclosed by the CPA. 

Let’s go through each report separately to understand how they work.

What Is SOC 1?

SOC 1 main goal is to control objectives within the SOC 1 documents and process areas of internal controls that are relevant to the audit of the user entity’s financial statements. 

Simply put, it tells you when the organization’s services impact a user entity’s financial reporting. 

What Is a SOC 1 Report?

A SOC 1 report determines service organization control applicable to the user entity’s control over the financial reporting. It is designed to meet the demands of the user entities. In this, the accountants evaluate the effectiveness of the service organization’s internal controls. 

There are two types of SOC 1 reports:

• SOC 1 Type 1: This report generally concentrates on a service organization’s system and checks the suitability of system controls to achieve the control objectives along with the description on the specified date. 

SOC 1 Type 1 reports are only restricted to auditors, managers, and user entities, typically, service providers belong to any service organization. A service auditor determines the report that covers all the requirements of the SSAE 16. 

• SOC 1 Type 2: This report has similar opinions and analysis as in SOC 1 Type 1 report. But, it includes views on the effectiveness of the pre-established controls designed to get all control objectives over a specific period. 

In a SOC 1 Type 2 report, control objectives lead to potential risks that the internal control wants to mitigate. The scope includes relevant control domains and offers reasonable assurances. It also says that there is a limit on performing only authorized and appropriate actions. 

What Is the Purpose of SOC 1?

As we already discussed, SOC 1 is the first part of the Service Organization Control series that addresses internal controls across financial reporting. It is applicable to businesses that directly interact with financial data for partners and customers.

Thus, it secures an organization’s interaction, storing users’ financial statements and transmitting them. However, SOC 1 report helps investors, customers, auditors, and management evaluate the internal controls around financial reporting within the AICPA guidelines.

How to Maintain SOC 1 Compliance?

SOC 1 compliance defines the process of managing all SOC 1 controls added within the SOC 1 report over a defined period. It ensures the effectiveness of the operation of SOC 1 rules. 

The controls are generally IT controls, business process controls, etc., used to offer a reasonable assurance based on the control objectives. 

What Is SOC 2?

SOC 2, developed by AICPA, describes the criteria for controlling or managing customer information based on 5 principles to provide trusted services: These principles are:

• Availability includes disaster recovery, security incident handling, and performance monitoring. 
• Privacy: It includes encryption, two-factor authentication (2FA), and access control.
• Security: It includes intrusion detection, two-factor authentication, and network or application firewalls.
• Confidentiality: It includes access controls, encryption, and application firewalls.
• Processing integrity: It includes processing monitoring and quality assurance. 

SOC 2 is unique for every organization because of its rigid requirements, unlike PCI DSS. With specific business practices, every design has its control to comply with multiple trust principles. 

What Is a SOC 2 Report?

A SOC 2 report allows service organizations to receive and share a report with stakeholders to describe general; IT controls that are secure in the place. 

There are two types of SOC 2 reports:

• SOC 2 Type 1: It describes the vendor’s systems and tells whether the vendor’s design is suitable to meet trust principles. 
• SOC 2 Type 2: It shares the details of the operational effectiveness of the vendor’s systems. 

SOC 2 differs from organization to organization regarding information security frameworks and standards as there are no defined requirements. AICPA provides criteria that a service organization selects to demonstrate the controls they have in place to safeguard the services offered. 

What Is the Purpose of SOC 2?

Compliance with SOC 2 indicates that the organization controls and maintains a high information security level. Strict compliance enables organizations to ensure that their critical information is safe. 

By complying with SOC 2, you will get:

• Enhanced data security practices where the organization defends itself from cyber attacks and security breaches. 
• Competitive advantage as customers wants to work with service providers with solid data security practices, especially for cloud and IT services. 

It restricts the unauthorized use of the data and assets that an organization handles. The security principles require organizations to add access controls to secure data from malicious attacks, misuse, unauthorized disclosure or alteration of company information, and unauthorized data deletion. 

How to Maintain SOC 2 Compliance?

SOC 2 compliance is a voluntary standard developed by AICPA that specifies how an organization manages its customer information. The standard is described with five Trust Services Criteria, i.e., security, processing integrity, confidentiality, privacy, and availability. 

SOC compliance is tailored to the needs of every organization. Depending on the business practices, an organization can choose design controls that should follow one or more Trust Service Principles. It extends to all the services, including DDoS protection, load balancing, attack analytics, web application security, content delivery via CDN, and more. 

In simple terms, SOC 2 compliance is not a descriptive list of tools, processes, or controls; instead, it cites the need for criteria crucial to maintaining information security. This allows each organization to adopt the best processes and practices relevant to its operations and objectives. 

Below is the checklist of basic SOC 2 compliance:

• Access controls
• System operations
• Mitigating risk
• Change management

What Is SOC 3?

A SOC 3 is an auditing procedure that AICPA develops to define the strength of a service organization’s internal control over data centers and cloud security. A SOC 3 framework is also based on Trust Services Criteria that include:

• Security: Systems and information are secure against unauthorized disclosure, unauthorized access, and damage to the systems.
• Process Integrity: System processing is valid, accurate, authorized, timely, and complete to meet the entity’s demands. 
• Availability: Systems and information are available for use and operation to meet the entity’s demands. 
• Privacy: Personal information is used, disclosed, disposed of, retained, and collected to meet the entity’s demands. 
• Confidentiality: Information designated as critical is protected to meet the entity’s requirements. 

With the help of SOC 3, service organizations determine which of these Trust Services criteria apply to the service they offer customers. You will also find additional reporting, performance requirements, and application guidance in the Statements on Standards. 

What Is a SOC 3 Report?

SOC 3 reports have the same information as SOC 2 but differ in terms of the audience. A SOC 3 report is intended only for general audiences. These reports are short and do not precisely include the same data as a SOC 2 report. They are built suitable for stakeholders and informed audiences. 

Since a SOC 3 report is more general, it can be shared quickly and openly on a company’s website, along with a seal describing its compliance. It helps in keeping pace with international accounting standards. 

For example, AWS allows public downloads of the SOC 3 report.

What Is the Purpose of SOC 3?

Companies, especially small or startups, usually don’t have enough resources to control or maintain certain essential services in-house. Therefore, these companies often outsource the services to third-party providers instead of investing extra effort or money in building a new department for those services. 

Thus, outsourcing is a better option but can be risky. The reason is that an organization shares customer data or sensitive information with third-party providers depending on the services the organization chooses to outsource. 

However, organizations must partner only with vendors that demonstrate SOC 3 compliance.

SOC 3 compliance is based on AT-C Section 205 and AT-C Section 105 of SSAE 18. It includes the basic information of the independent management’s description and auditor’s report. It applies to all the service providers storing customer information in the cloud, including PaaS, IaaS, and SaaS providers. 

How to Maintain SOC 3 Compliance?

SOC 3 is the subsequent version of SOC 2, so the auditing procedure is the same. Service auditors are seeking the following policies and controls:

• Disaster recovery
• Intrusion detection
• Performance monitoring
• Quality assurance
• Two-factor authentication
• Security incident handling
• Processing monitoring
• Encryption
• Access controls
• Network and application firewalls

Once the audit is complete, the auditor generates a report based on the findings. But a SOC 3 report is far less detailed as it only shares the information necessary for the public. The service organization freely shares the results after completing the final audit for marketing purposes. It tells you what to focus on to pass the audit. So, the service organization is advised to:

• Carefully select the controls.
• Conduct an assessment to identify gaps within the controls
• Figure out the regular activity
• Describe the next steps for incident alerting
• Search for a qualified service auditor to perform the final examination

Now that you have some idea of each compliance type, let’s understand the differences between the three to know how they help every firm to stand in the market.

SOC 1 vs SOC 2 vs SOC 3: Differences

The following table describes the purposes and benefits of each SOC report.

Conclusion

Deciding which SOC compliance will be the most suitable for your organization requires you to visualize the type of information you are dealing with, whether it’s your customers’ data or yours. 

If you are offering payroll processing services, you might want to use SOC 1. If you are processing or hosting customer data, you might need a SOC 2 report. Similarly, if you need less formal compliance, which is best for marketing purposes, you might want to go with a SOC 3 report.