In a world where customer trust means everything, a data breach can lead to a drastic downfall for a business.
One midsize payroll company found itself at the center of a data breach that shook its clients’ confidence to the core.
They relied on a SOC 1 report to demonstrate their commitment to financial accuracy, however, they overlooked the importance of data security.
As hackers become increasingly sophisticated, companies must prove they are doing everything possible to protect customer information.
Not knowing whether to conduct a SOC 1 or SOC 2 audit can lead to vulnerabilities that may result in data breaches.
This simple mistake could lead to a cyberattack that exposes sensitive customer information, including Social Security Numbers, bank account details, and personal addresses.
In this guide, we'll explore the key differences and similarities between SOC 1 and SOC 2 audits, helping you identify the appropriate compliance audit for your specific business needs.
By the end, you’ll have a clear understanding of when to choose SOC 1, when SOC 2 is more appropriate, and how these reports can protect both your business and your customers.
What Are SOC Reports?
Before we discuss the differences between SOC 1 vs. SOC 2 reports, you need to understand their purpose.
Companies conduct these reports to demonstrate effective internal controls to clients and stakeholders.
The reports provide transparency about how a service organization manages and secures data.
SOC reports are essential for organizations that provide outsourced services, such as:
● Payroll Processing
● Cloud Computing
● Data Hosting
● Healthcare
● Insurance
● Retail and E-commerce
Healthcare, retail, and tech industries are at the highest risk of experiencing data breaches.
A recent study found that North America accounted for over 42% of fraudulent transactions globally in 2023, making it the region with the highest rate of such incidents. The biggest risk factor for data breaches is stolen credit cards.
This statistic shows the importance of companies conducting SOC reports to secure sensitive data.
Organizations that undergo a SOC audit assure their clients that they implement the necessary controls to protect sensitive information.
P.S. For a detailed guide on achieving and maintaining compliance, refer to our Checklist for achieving SOC 2 Compliance.
What Is SOC 1?
SOC 1 reports evaluate and document the internal controls a service organization has in place that are relevant to the financial reporting of its clients.
Service organizations that process transactions or maintain records that could impact the financial statements of their client companies conduct this type of report.
The main goal of a SOC 1 report is to assure the service organization's clients and auditors that the controls implemented are effective in maintaining the accuracy of financial data.
When Is SOC 1 Required?
SOC 1 reports are required in industries where the organization’s services provided directly impacts the financial statements of their clients. Examples include:
● Payroll Processing Companies: These organizations handle payroll calculations, tax withholdings, and disbursements, which directly affect the financial records of their clients.
● Financial Services Providers: Organizations that manage transactions, investment portfolios, or financial data processing for their clients.
● Insurance Claims Processors: Companies that manage and process claims on behalf of insurance companies, which can influence financial reserves and other critical financial metrics.
In these industries, clients and their auditors rely on SOC 1 reports to ensure that the service organization’s controls are adequate to protect the integrity of the financial data they handle.
What Is SOC 2?
Recently, a report indicated that 9 out of 10 consumers are concerned about their personal information being stolen.
The report also mentioned that 92% of people believe that businesses prioritize profits over protecting their data.
This is why SOC 2 reports are essential. They prove to your stakeholders and clients that your internal controls safeguard their personal information.
Building trust among your customers and stakeholders helps you stay in business.
If you don't understand the purpose of these reports, it can be difficult to know when to use them. Learn more about SOC 2 reports to help you gain compliance and increase deal closure rates.
When Is SOC 2 Required?
SOC 2 reports are essential for service organizations that handle or process sensitive customer data. Some examples include:
● Cloud Service Providers: Companies that offer cloud storage, computing, or software services.
● SaaS Providers: Organizations that deliver software as a service, especially those that manage customer data.
● Data Centers and Hosting Providers: Companies that host customer data and applications.
● Healthcare Providers: Organizations that handle protected health information (PHI) and must comply with regulations like HIPAA.
● Financial Services: Companies that process sensitive financial data.
In these industries, clients often require SOC 2 reports to ensure that their data will be managed securely and in compliance with the industry’s regulations.
Conducting a SOC 2 report is never easy when you have to do it manually. Book a call with EasyAudit for AI-driven SOC 2 Compliance.
Key Differences Between SOC 1 and SOC 2 reports
Understanding the differences between SOC 1 and SOC 2 reports allows you to determine which type of audit is best for your business.
While both reports provide assurance about a service organization’s controls, they do so in different contexts and for different audiences.
Below, we explore the key differences between SOC 1 and SOC 2 in terms of their focus areas, control objectives, target audience, and report structure.
Focus Area
SOC 1: Financial Reporting
SOC 1 reports are primarily concerned with the controls that’ll impact a client’s financial data.
The main focus is on ensuring that the service organization's controls are designed and operating effectively to prevent errors in the client’s financial reporting.
SOC 2: Data Security and Privacy
SOC 2 reports focus on controls related to data management and protection. The focus is on ensuring that the service organization's systems are both secure and reliable.
Control Objectives
The control objectives in SOC 1 and SOC 2 reports differ significantly due to their distinct focus areas.
SOC 1 Control Objectives
In a SOC 1 report, the control objectives ensure that the service organization’s controls support the accuracy and integrity of financial data.
Common control objectives in a SOC 1 report include:
● Transaction Processing: Ensuring that transactions are recorded accurately and completely.
● Reconciliation Controls: Verifying that account balances are regularly reconciled and any discrepancies are addressed.
● Access Controls: Limiting access to financial systems and data to authorized personnel only.
SOC 2 Control Objectives
SOC 2 control objectives are broader and focus on the five Trust Service Criteria.
These objectives ensure that the service organization's systems are secure in protecting sensitive data.
Common control objectives in a SOC 2 report include:
● Security Controls: Protecting systems against unauthorized access and ensuring that data is secure.
● Availability Controls: Ensuring that systems are available and operational as needed.
● Processing Integrity Controls: Ensuring that data is processed accurately, completely, and timely.
● Confidentiality Controls: Protecting sensitive data from unauthorized access or disclosure.
● Privacy Controls: Ensuring that personal information is collected, used, and stored in compliance with privacy laws and policies.
Target Audience
The target audience for SOC 1 and SOC 2 reports varies depending on the nature of the controls and the interests of the stakeholders involved.
SOC 1 Audience
SOC 1 reports are primarily intended for the auditors and financial teams of the service organization's clients. The key stakeholders involved in SOC 1 reports typically include:
● Client Auditors: Who rely on SOC 1 reports to assess the impact of the service organization's controls on their client’s financial statements.
● Client Financial Teams: Who use SOC 1 reports to ensure that their financial data is accurate and reliable.
SOC 2 Audience
SOC 2 reports are designed for organizations whose clients and stakeholders prioritize data security. The key stakeholders involved in SOC 2 reports typically include:
● IT and Security Teams: Who rely on SOC 2 reports to assess the security and reliability of the service organization's systems.
● Compliance Officers: Who use SOC 2 reports to ensure that the service organization complies with relevant regulations and industry standards.
● Client Decision-Makers: Who review SOC 2 reports to determine whether the service organization's controls meet their data security and privacy requirements.
Report Structure and Content
The structure and content of SOC 1 and SOC 2 reports differ based on their respective focus areas and control objectives.
SOC 1 Report Structure
A SOC 1 report typically includes the following sections:
● Management’s Description of the System: A detailed description of the service organization's system, including the controls in place that are relevant to financial reporting.
● Management’s Assertion: A statement by management asserting that the controls are suitably designed and operating effectively to meet the control objectives.
● Auditor’s Opinion: An independent auditor’s opinion on whether the controls are suitably designed and whether they operated effectively over the reporting period.
● Test of Controls and Results: A detailed description of the controls tested by the auditors and the results of those tests.
SOC 2 Report Structure
A SOC 2 report generally includes some of the same sections as a SOC 1 report.
This includes management description of the system, management’s assertion, auditor's opinion, and test of controls and results.
It will also include additional information such as the organization’s security and privacy practices.
Do you need to become SOC 2 Compliant? Click here to see how EasyAudit can help you get it done quicker and for half the cost.
If you're already familiar with SOC 1 and SOC 2 by now and want a comparisons with other standards, check our SOC 2 vs. SOC 3 guide or an article on SOC 27001 vs SOC 2.
SOC 1 vs. SOC 2: Which Report Should You Choose?
When making a decision between SOC 1 vs. SOC 2 reports, it's important to consider the following factors.
Assessing Business Needs
The first step in choosing between SOC 1 and SOC 2 is to assess the specific needs of your business.
This involves understanding the nature of the services you provide and how these services impact your clients’ operations.
Nature of Services Provided
Organizations that provide services directly impacting clients financial reporting may find a SOC 1 report the appropriate choice.
SOC 1 reports reassure clients that your services will not produce errors in their financial statements.
If your organization handles sensitive data, then a SOC 2 report may be more relevant.
Scope and Objectives
Determine the scope of your control environment and the specific objectives you aim to achieve through the audit.
For example, if your primary goal is to provide assurance about the accuracy and integrity of financial data, SOC 1 is the clear choice.
If your objective is to demonstrate that your systems are secure and capable of protecting client data, then SOC 2 should be your focus.
Long-Term Business Strategy
Consider your long-term business strategy and how the choice between SOC 1 and SOC 2 aligns with your goals.
For example, if your organization plans to expand into new markets or offer services involving sensitive customer data, a SOC 2 report may be necessary.
Opting for a SOC 2 report will help you meet the expectations of future clients and partners.
Compliance Requirements
Industry-specific regulations and standards often play a significant role in determining whether SOC 1 or SOC 2 is the right choice for your organization.
● Financial Services: In industries like banking and insurance, SOC 1 reports are often required to ensure that financial reporting controls are effective and reliable.
● Healthcare: In the healthcare industry, SOC 2 reports are often necessary due to organizations having to comply with regulations like HIPAA.
● Technology and SaaS: SOC 2 reports help technology companies meet requirements that impose strict standards for data protection and privacy.
It also shows that their systems are secure and reliable.
● Data Centers and Hosting Providers: These companies may need both SOC 1 and SOC 2 reports. It will depend on the nature of the services they offer.
For example, if a data center handles financial transactions on behalf of clients, a SOC 1 report may be necessary.
They may also need a SOC 2 report to show that their systems are secure and capable of protecting sensitive client data.
Customer and Partner Expectations
The expectations of your customers and partners can influence whether you choose SOC 1, SOC 2, or both.
● Client Contracts: In part of a contractual agreement, clients may require specific SOC reports.
For example, a financial services client may mandate a SOC 1 report to ensure that their financial data is handled with the necessary controls.
In contrast, a technology client concerned about data security may require a SOC 2 report to verify that their data is protected, as this report focuses specifically on information security controls.
● Partner Relationships: Partners or stakeholders may also have specific expectations regarding SOC compliance.
If you partner with another service provider, they may require you to conduct a SOC 2 audit.
This is to ensure that both of you are adhering to the same high standards for data security and privacy.
● Competitive Advantage: Obtaining the appropriate SOC report can also serve as a competitive advantage in your industry.
If your competitors are providing SOC 2 reports to their clients, doing the same can help you stay competitive.
Choosing between SOC 1 and SOC 2 becomes straightforward once you understand their distinct purposes and the specific needs of your business. SOC 1 reports focus more on financial security and SOC 2 reports focus heavily on data security.
Also, remember in some cases, you may need to choose both.
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With the right approach you can ensure that your organization meets the highest standards of security, reliability, and financial integrity.
Securing the right SOC report protects your clients and builds your credibility in the marketplace.
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