As a business owner, you might be asked for a SOC report from stakeholders. But how do you know which SOC report you need? Do you need both types of SOC reports?
This article provides the difference between SOC 1 and SOC 2 so you can make informed decisions about your business needs.
Table of Contents
What Is SOC?
Before comparing SOC 1 and SOC 2, it’s important to understand what SOC is. The Association of Certified Public Accountants (CPA) defines it as System and Organization Control (formerly Service Organization Control). It is a “suite of service offerings CPAs provide in connection with system-level controls of a service organization or entity-level controls of other organizations.”
In other words, it is a set of services offered by CPAs that focus on overseeing and assuring the effectiveness of the following:
Service-level controls for a service organization
These controls refer to the measures and processes in place within a service organization that ensure the accuracy, completeness, and reliability of its systems. For example, if a company provides payroll services, its system-level controls must include checks and balances to guarantee accurate salary calculations and financial reporting.
Entity-level controls for other organizations
Entity-level controls are broader controls that encompass an entire organization. In the context of providing services to other organizations, these controls refer to the measures implemented by one organization to ensure the reliability of its operations. For instance, entity-level controls would involve cloud infrastructure if a service provider offers cloud storage services to other businesses.
Presently, the AICPA offers SOC 1, SOC 2, SOC 3, and SOC for Cybersecurity. Moreover, you can also get a SOC + report that considers other security standards such as HIPAA or HITRUST.
What Is SOC 1 and SOC 2?
Here’s a simple and detailed SOC 1 and SOC 2 comparison:
SOC 1
A SOC 1 report shows the assessment results of a service organization’s controls relevant to financial reporting. It provides assurances regarding the accuracy, completeness, and reliability of financial data processed by an organization. Controls can include transaction processing, data validation, and financial statement preparation.
SOC 2
A SOC 2 report focuses on information security and data confidentiality, integrity, and availability. Its evaluations depend on five Trust Service Criteria (TSC). Except for Security, you may decide which criteria are relevant to your business. Apart from the TSC, the Auditboard emphasizes that SOC 2 reports also address COSO principles, which target a company’s governance, ethics, and culture.
Note that SOC 1 and SOC 2 reports come in two types:
- Type I: This report evaluates the effectiveness of a system’s controls for a specific date. This is best if you need a quick SOC report.
- Type II: More comprehensive than Type 1 reports, this report evaluates the effectiveness of a system’s controls for a longer duration, typically 12 months. There is no minimum required period, but the shortest audit CPA firms will usually accept is three months.
What is the Difference Between SOC 1 and SOC 2?
AICPA Standards
According to Linford & Co. CPA firm, the AICPA puts SOC 1 and SOC 2 under different standards. The Statement on Standards for Attestation Engagements (SSAE) 18 AT-C 320 is the AICPA regulatory framework that governs SOC 1 reports. Meanwhile, the SSAE 18 standard AT-C 105 and the SSAE 21 standard AT-C 205 are the regulatory frameworks governing SOC 2 reports.
Criteria of evaluation
SOC 1 addresses controls related to financial transactions. You don’t have to meet predefined criteria. Instead, the focus is on defining your control objectives that specifically address the provided services. For instance, a payroll processing company may have the control objective “to ensure the accuracy of transactions.” Its controls may include data validation, authorization protocols, and audit trails. On the other hand, SOC 2 evaluates system controls based on five TSC and COSO principles.
Applicability
SOC 1 is relevant for businesses handling financial transactions. SOC 2 is critical for managing sensitive information. If your company or organization provides services impacting clients’ financial statements, such as accounting or payroll processing, a SOC 1 report is relevant for you. If your business stores, processes, or transmits sensitive information such as individuals’ healthcare records or intellectual property, then a SOC 2 report is what you need.
SOC 2 vs SOC 1: Which One Do You Need?
You might need only one type of SOC report, or you might need both. To know which type of report you need, consider the following:
Objectives
If your business wants to evaluate system controls related to financial transactions, then SOC 1 is for you. However, if you want to focus on information security and COSO principles, then SOC 2 is for you.
Businesses that provide services involving financial transactions and sensitive information handling will need both. An example of this is a cloud-based practice management platform for healthcare that handles protected health information and, at the same time, does invoicing, billing, and payment processing.
Stakeholder expectations
Investors and customers may also request specific types of SOC reports. If they demand assurance of the accuracy of financial reporting, SOC 1 compliance is important. If the client’s trust hinges on the secure handling of data, SOC 2 is relevant.
Industry standards
Different industries may have unique regulatory requirements. For example, the healthcare industry follows the Health Insurance Portability and Accountability Act (HIPAA), which aligns well with SOC 2. Meanwhile, the financial sector may need to comply with the Gramm-Leach-Bliley Act (GLBA), which aligns with SOC 1 principles. These regulations often dictate specific controls and practices that organizations must implement to ensure data privacy and financial accuracy.
