Successful business is all about trust. Clients need to trust their service providers, and vendors need to show they can be trusted.
However, when it comes to data security, the vendor’s clients suffer more from data loss. For example, if your vendors get hacked or mishandle your financial data, the effects will trickle down to how you do business. You can lose customers due to fraud or even data loss if it breaches data protection and privacy laws.
Similarly, when you’re the service provider, aka vendor, you need to earn the client’s trust by implementing the proper controls to protect their data integrity and security.
There are three types of SOC reports. Understanding the report you should focus on as a vendor or client of a service provider is essential.
The SOC 1 Report – Financial Reporting
The report looks to scrutinize a service organization’s financial reporting systems. If a service organization has any control over your financial information, they must present you with a SOC 1 report. Some of the service companies that are affected by this include:
- Payroll processors
- Datacenter companies
- Medical claim processors
- Lending services
- Human resource support services
- Cloud service providers
- SaaS companies
SOC 1 reports can be presented in one of two ways: type 1 or type 2. The former report tests the adequacy of a service organization’s internal financial controls design and details how well these controls have been implemented on a given date.
SOC 1 Type 2, conversely, helps prove that an organization has implemented the necessary financial controls within a designated time.
Ideally, producing this report calls for at least six months of control operations. SOC 1 reports can generally be quite helpful in complying with Sarbanes-Oxley’s section 404 requirements since they help demonstrate that the company in question has adequate internal controls that cover financial reporting.
The SOC 2 Report – Data Security
While SOC 1 reports analyze an organization’s financial reporting controls, SOC 2 deals with data security. Ideally, your service organization has to ensure that you meet all five trust service criteria while handling data. These trust criteria require you to uphold data processing integrity, security, privacy, availability, and confidentiality.
Data security is continuously emphasized in a world where the cloud is increasingly becoming mainstream and organizational budgets are tightening. When deciding between cloud providers and other SaaS companies, you need to pick providers who will help protect your data from current and upcoming security threats. Like SOC 1, SOC 2 is also divided into two types of reports: SOC 2 Type 1 and SOC 2 Type 2.
Type 1 reports offer descriptions by a service provider’s management that they have implemented sustainable control designs. The words showcase that the auditors have observed the effectiveness of the control design at a particular time.
Type 2 reports, on the other hand, showcase a service organization’s management’s description of the system and sustainability of control designs, as well as their effectiveness. They also attest that these controls are adequate over time.
The SOC 3 Report – A Summary
The SOC 3 report is quite similar to the SOC 2 report, proving that a service organization can meet the five trust service principles. However, there is a significant difference in how both are disclosed.
For SOC 1 and SOC 2, your service organization will only be required to share the information with you if you work with them. On the other hand, SOC 3 should be shared publicly.
As a result, the SOC 3 report only summarizes what would be found in the SOC 2 report. It’s a summary that barely touches on the intricate details of how the organization is run. Your vendors may post this report on their website, and you don’t necessarily need to sign an NDA to gain access.
Which Report?
Whether you are a service organization or a client of a service organization, concentrating on the right report will ensure that your business can run smoothly.
If you are working with a company that will affect your financial reporting, ask the vendor for a SOC 1 report.
If your primary concern is data security when working with a service organization, ask vendors for a SOC 2 or SOC 3 report. The choice between the reports will depend on the depth of information you need.
While SOC 2 will provide a detailed analysis of the controls vendors have implemented to meet the five trust service principles, SOC 3 will only provide an overview.
SOC reports standardize how businesses can tell which vendors to trust and which not to.
In a world rife with financial fraud and cyber-security threats, these reports are necessary to reduce the risk of doing business. Ask your vendors for the report that applies to you for a smooth time doing business.
Setting up a SOC and SOC Reports
SOC (System and Organization Controls) reports are closely related to setting up a Security Operations Center (SOC) regarding security governance, auditing, and ensuring compliance with industry standards.
If you’re setting up a SOC, you’ll be keen to know that doing so ensures that your business is prepared for SOC audits and can demonstrate compliance through the SOC reports.
Additionally, setting up a SOC might involve ensuring that systems handling financial data are secure and controls are in place to prevent unauthorized access or or loss of data.