SOC Report Review: How to Evaluate a Vendor's Report

Your data doesn't just sit in your office — it travels, it’s hosted, it lives on servers you don’t control.

Do you know who's watching over it?

SOC 2 reports hold the key to understanding your vendors' safeguards.

In this guide we'll explain exactly how to read these reports and ensure your data is in the right hands.

What is a SOC report?

A SOC (System and Organization Controls) report is a detailed audit prepared by Certified Public Accountants (CPAs).

It evaluates your organization's internal controls, following the stringent guidelines of the American Institute of Certified Public Accountants (AICPA).

There are two main types:

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These reports fit into the AICPA's System and Organization Controls framework. They confirm that your controls meet the trust service principles.

Why are SOC reports needed?

SOC reports matter because they reveal how effective your internal controls truly are. They confirm whether your controls are properly set up and actually working.

This verification is essential when you're trying to win large enterprise contracts.

Reviewing a SOC report allows you to:

• Assess Risks: Identify and monitor risks from your service providers, supporting your vendor management strategies.
• Ensure Compliance: Support your regulatory compliance and internal governance by verifying control effectiveness.
• Facilitate Decision-Making: Decide with confidence, knowing your service providers meet their commitments.
• Enhance Trust: Build confidence with stakeholders by demonstrating that effective controls are in place.

Data breaches can cripple a company overnight with hefty fines and damaged reputations.

SOC reports confirm that your vendors meet the necessary standards, guarding your organization from these risks.

What are the different types of SOC reports?

Different SOC reports serve specific purposes:

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There are also specific reports like SOC for Cybersecurity and SOC for Supply Chains, tailored to particular control requirements.‍

Why should you review your vendors' SOC reports?

Reviewing your vendors' SOC reports is crucial to protect your organization from risks like data breaches and compliance fines.

By evaluating these reports, you can:

• Support Financial Audits: Integrate SOC findings into your financial audits, streamlining your risk management strategies.
• Verify Control Effectiveness: Ensure your vendors have effective controls, so you can trust they meet their commitments.
• Ensure Regulatory Compliance: Satisfy industry regulations by verifying your vendors' adherence to standards.
• Protect Your Organization: Spot and address vulnerabilities before they impact your business operations.

Which report should you request from your vendor?

Choosing the right SOC report depends on what you need:

• Request a SOC 1 Type II report if you want assurance about your vendor's financial reporting controls, especially for compliance with regulations like SOX. This report tests how effective those controls are over time.
• Request a SOC 2 report if you're concerned about data security and compliance in areas like security, availability, processing integrity, confidentiality, and privacy.some text
  • SOC 2 Type I: Provides a snapshot of the design of controls at a specific point in time.
  • SOC 2 Type II: Evaluates how those controls operate over a period. Ideal for vendor management and assessing ongoing risk.
• Request a SOC 3 report if you need general assurance without detailed information about the controls. It offers a summary without diving into specifics.

Generally the choice will be between SOC 1 and SOC 2, so check out our detailed guide on their differences, if you're not sure.

What should you review in your vendor's SOC report?

When reviewing a SOC report, focus on key components to ensure it meets your needs:

• Report Scope: Does it cover the products or services you use?
• Report Period: Is the report current and does it include the necessary timeframe?
• Service Auditor: Is the auditor reputable and qualified?
• Auditor Opinion: Is the opinion unqualified (clean), qualified, adverse, or a disclaimer?
• Management’s Assertion: Verify the accuracy and completeness as asserted by management.
• Service Locations: Are all relevant locations included?
• Processes, People, and Systems: Evaluate the descriptions provided by your vendors for effectiveness.
• Subservice Organizations: Identify any reliance on others and understand their reporting.
• Complementary User Entity Controls (CUECs): Ensure required user controls are in place within your organization.
• Testing Procedures and Results: Review testing procedures and results to align with your needs.

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How to review a SOC report: Step-by-step guide

1. Verify the auditor's independence and credentials

Your compliance relies on the integrity of your auditor. Ensure the SOC report is issued by a licensed Certified Public Accountant (CPA) firm.

Only CPA firms can conduct SOC audits. Non-CPA organizations lack the authority to issue valid SOC reports.

Dig deeper into the firm's reputation.

Confirm their membership with the American Institute of Certified Public Accountants (AICPA) and verify they undergo regular peer reviews. This affiliation signals adherence to professional standards.

Next, assess the auditor's expertise in information security.

Look for certifications like Certified Information Systems Security Professional (CISSP), Certified Information Systems Auditor (CISA), or Certified in Risk and Information Systems Control (CRISC).

These credentials demonstrate proficiency in evaluating complex IT systems.

Selecting an unauthorized auditor risks your compliance and could derail crucial business deals, so choose wisely.

--> Here's how to find one for yourself <--

2. Check the scope and objectives of the report

Align the SOC report with your organization's needs.

Confirm that the services and systems covered match those you rely on.

Review the report's title and system description carefully.

Ensure the reporting period is current and relevant.

An outdated report doesn't reflect the vendor's present control environment. Relying on stale information exposes you to unnecessary risks.

3. Review the auditor's opinion

Find the auditor's opinion — it's usually in the first section.

Identify the type of opinion issued:

• Unqualified Opinion: Controls are fairly presented and operating effectively.
• Qualified Opinion: Some exceptions exist that may affect control areas.
• Adverse Opinion: Significant issues impact control effectiveness.
• Disclaimer of Opinion: Insufficient evidence to form an opinion.

An unqualified opinion is ideal — it indicates effective and reliable controls. If you see a qualified, adverse, or disclaimer of opinion, dig deeper. Understand the risks these issues pose to your organization.

4. Evaluate the vendor's system description

Scrutinize the vendor's system description. Review how they describe their processes, people, and systems.

This section reveals how the vendor maintains their control environment.

Focus on processes relevant to you. Ensure that services you depend on are thoroughly covered. If critical operations are missing, that's a red flag.

Also, confirm all service locations are included.

Verify that every data center, office, or site providing services to you is part of the report. Gaps here could mean unaddressed risks.

5. Analyze Control Objectives and Activities (SOC 1) or Trust Services Criteria (SOC 2)

Dive into the details that matter to your organization.

For SOC 1 Reports:

• Examine the control objectives and related controls. Understand how they affect financial reporting or transaction processing relevant to you.

For SOC 2 Reports:

• Review controls linked to the Trust Services Criteria: Security, Availability, Processing Integrity, Confidentiality, and Privacy. Assess how these controls secure systems, ensure availability, and handle data properly.

Are these controls designed and implemented to meet your needs?

They should be documented, repeatable, and scalable.

Consider the maturity of the vendor's processes. Are they capable of supporting your compliance requirements?

6. Review the auditor's testing procedures and results (Type II reports only)

Assess the extent of testing performed. Review the tests conducted and the results.

Is the testing sufficient for your assurance needs? Evaluate the depth and breadth of the tests.

Were robust methodologies used? Different methods can impact result reliability.

Note any exceptions or findings. How were they addressed? Even minor issues can have significant implications, depending on your risk tolerance.

7. Assess complementary user entity controls (CUECs)

Identify any Complementary User Entity Controls (CUECs) listed. These are controls you need to implement to fully mitigate risks.

The SOC report assumes you have these controls in place.

Verify that your organization has implemented them effectively.

Ignoring CUECs can create security gaps that the vendor's controls won't cover.

8. Check for subservice organizations

Determine if the vendor uses any subservice organizations — third parties supporting their operations. Their controls can impact overall security.

There are two methods for including subservice organizations:

• Inclusive Method: Subservice organization's controls are included in the vendor's report.
• Carve-Out Method: Subservice organization's controls are excluded.

Evaluate how this affects the vendor's control environment. If the carve-out method is used, you might need SOC reports directly from those subservice organizations.

Also, verify how the vendor monitors these subservice organizations. Strong oversight is essential. Without it, you could be vulnerable due to unmanaged external dependencies.

9. Review exceptions and management responses

Look for any exceptions or deviations in the report. These highlight where controls didn't operate as intended.

Distinguish between design exceptions (flaws in control structure) and operating effectiveness exceptions (controls that failed in practice).

Assess the impact of these exceptions on your operations. Consider your risk profile and compliance requirements.

Read management's responses carefully. Are there detailed corrective actions? A proactive response shows the vendor's commitment to robust controls.

10. Determine the impact on your organization

Assess how the SOC report's findings affect your risk management and compliance.

Identify any issues that might impact your systems or data.

Ensure all critical controls are addressed.

Find any gaps or weaknesses. Determine if you need additional controls or actions to mitigate risks.

11. Decide on any necessary actions or follow-ups

After your review:

• Engage with the vendor for clarifications. Ask about any uncertainties.
• Confirm implementation of all necessary CUECs. Ensure they're functioning effectively.
• Document your review process and findings. This supports accountability and aids future audits.
• Plan for ongoing monitoring and future reviews. SOC reports are typically annual, but your needs may require more frequent assessments.
• Stay compliant with current standards and regulations. Be aware of any changes affecting your obligations.

Okay, so you've reviewed your vendors' reports and taken the necessary action. What's next?

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FAQs

Can you share SOC reports with customers?

Yes, but the type of SOC report you share makes a difference.

SOC 3 reports are meant for broad distribution. They offer a summary of your organization's controls without revealing sensitive information. Sharing a SOC 3 report provides your customers with assurance about your security practices without exposing confidential data.

SOC 1 and SOC 2 reports contain in-depth information about your internal controls and systems. They're intended for specific audiences and should be shared cautiously:

• SOC 1 Reports: Focus on internal controls over financial reporting.some text
  • Type I: Assesses control design at a specific point in time.
  • Type II: Evaluates control design and operational effectiveness over a period, usually 3 -12 months.
• SOC 2 Reports: Address security, availability, processing integrity, confidentiality, and privacy.some text
  • Type I: Reviews control design at a specific date.
  • Type II: Examines control design and effectiveness over time.

Because these reports reveal sensitive details, share them only with trusted parties under strict confidentiality agreements.

What if a SOC report reveals significant issues?

Finding significant issues in a SOC report means it's time to act.

First, assess the impact on your organization:

• Direct Impact: Do the issues affect your operations or data security?
• Mitigating Controls: Are there existing measures that address these gaps?

A SOC 2 Type II report provides insights into how controls operate over time, showing not just that controls exist, but how effective they are.

Work closely with your service provider to:

• Identify Root Causes: Determine why the issues occurred.
• Develop Corrective Actions: Implement solutions together.
• Monitor Progress: Ensure improvements are effective over time.

What are the risks of not reviewing SOC reports?

Without reviewing SOC reports, you might miss critical vulnerabilities in your third-party relationships. This can lead to:

• Data Breaches: Undetected security gaps can expose sensitive information.
• Compliance Violations: Failure to comply with regulations can result in fines and legal action.
• No Assurance of Data Protection: You can't be certain your data is secure.
• Damaged Reputation: Customers and partners may lose trust in your ability to safeguard data.
• Lost Business: Trust issues can lead to lost contracts and partnerships.

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