As the frequency of cybercrime continues to grow, experts estimate that cyberattacks will cost businesses $10.5 trillion per year by 2025. Given this ever-growing threat, rock-solid data security is now a more important objective than ever for businesses of all sizes.
One great way to strengthen your organization's internal controls and secure sensitive data is to implement an auditing standard such as SOC 1 or SOC 2. But what do these auditing standards mean, and what is the difference between the two?
To help you optimize your business processes for maximum security, let's look at everything you need to know about the difference between SOC 1 and SOC 2 audits and their benefits.
Why organizations need SOC reports
SOC reports help create trust between internal and external stakeholders by demonstrating that your organization has security controls in place to protect sensitive data.
While costly and time-intensive upfront, conducting a SOC audit can also increase the efficiency of your compliance process and reduce the time and money spent on future audits/vendor management.
Of course, the primary purpose of a SOC report is to strengthen an organization's data security — and given that the average cost of a single data breach in the United States is now $9.44 million, bolstering data security is a vital priority.
What is SOC 1?
Previously known as both SSAE 18 and SAS 70, SOC 1 is an auditing framework by the American Institute of Certified Public Accountants (AICPA). SOC 1 is designed to audit security controls related to a service organization's financial reporting. Agencies providing a service that can impact their clients' financial statements (such as payroll or payment processing) can usually benefit from a SOC 1 audit. Along with ensuring the accuracy of IT and business processes related to financial reporting, SOC 1 ensures the security of sensitive financial data that a service provider collects from its customers.
Components of SOC 1 reports
Control objectives covered by a SOC 1 report can be related to both business processes and information technology systems. A type I SOC 1 report will describe security controls and their suitability for achieving control objectives. Meanwhile, a type II SOC 1 report will include this information as well as an opinion on the operating effectiveness needed to achieve control objectives throughout a specified period of time (usually a minimum of six months).
What is SOC 2?
SOC 2 reports are designed for service providers that outsource technological and data-processing services. This includes data hosting providers, data processing providers, and Software-as-a-Service (SaaS) providers.
Along with focusing on controls related to data security, a SOC 2 report also emphasizes data availability and privacy. The scope and focus of a SOC 2 report make SOC 2 an especially useful framework for service providers in areas such as organizational oversight, vendor management, and regulatory oversight.
Components of SOC 2 reports
A SOC 2 report focuses on controls related to five trust services principles:
- Security: The first and most obvious focus of a SOC 2 audit is ensuring the security of the data that a service provider collects from its customers. Access controls, network firewalls, and data encryption are some of the controls related to this trust service principle.
- Availability: Availability is a trust service principle that assesses the availability and reliability of a service provider's product and is designed to limit costly downtime of the product(s) that the service provider's customers rely on.
- Processing integrity: This principle ensures that data processing systems function as designed without delays, vulnerabilities, errors, or bugs.
- Confidentiality: Confidentiality is a trust service principle that ensures that data deemed confidential (such as a customer's financial information) is thoroughly protected. This principle is typically achieved via data encryption and access controls.
- Privacy: The privacy principle of a SOC 2 report focuses on how personally identifiable information (PII) is collected, used, stored, disclosed, and disposed of. Any service provider that collects such data is required to adhere to its published data usage and privacy policy as well as the conditions defined in the Generally Accepted Privacy Principles (GAPP).
It's also important to note that a SOC 2 report doesn't have to focus on all five of these trust service criteria. Instead, you can create a SOC 2 report that focuses on any combination of the five available trust service criteria and the controls related to them.
Differences between SOC 1 and SOC 2
While there is a certain degree of overlap between SOC 1 and SOC 2, these frameworks are defined more by their differences than their similarities. Some of the most noteworthy differences between SOC1 and SOC 2 include:
Focus of report
A SOC 1 report focuses on controls related to your customers' financial statements and ensures that their financial information is processed and secured appropriately. A SOC 2 report focuses on controls related to the security, availability, processing integrity, confidentiality, and privacy of the data you collect from customers.
Target audience
The target audience of a SOC 1 report is typically the management and external auditors of a service provider's customers. SOC 1 reports help customers and the CPAs that audit their financial reports determine the impact of a service provider's internal controls on those statements. SOC 2 reports are commonly used by a customer's management and external auditors, but business partners, prospective customers, and compliance regulators may also read them.
Scope of report
A SOC 1 report specifically covers internal controls related to collecting and storing a customer's financial information. SOC 2 reports have a broader focus and can cover controls related to any of the five trust service principles regarding customer data collection, storage, and use.
Type of controls reviewed
A SOC 1 report covers internal controls related to financial statements and financial reporting. A SOC 2 report covers internal controls related to customer data security, availability, processing integrity, confidentiality, and privacy.
Types of service providers that require each report
As we touched on briefly above, SOC 1 reports are typically used by organizations providing a service that can impact their customers' financial statements. This includes organizations such as payroll providers, payment processing providers, and collection agencies.
SOC 2 reports are used by any organization that collects customer data, including SaaS providers, data centers, and data processing providers.
Understanding type 1 and type 2 SOC reports
We can break down SOC 1 and SOC 2 into two types that dictate the report's focus and scope. While there are many differences between the SOC 1 and SOC 2 frameworks, the distinction between type 1 and type 2 reports is the same for both SOC 1 and SOC2.
Type 1 SOC reports
Type 1 SOC reports examine internal controls as of a specific date, testing them once to confirm their description and design at the point the report is created.
Type 2 SOC reports
Type 2 SOC reports confirm the description and design of controls, but also include the extra step of testing the operating effectiveness of controls over a designated period.
A type 2 SOC report will usually cover at least six months. However, many organizations choose to conduct annual type 2 reports that cover 12 months to achieve continual coverage of controls.
Which report is right for your organization?
Whether SOC 1 or SOC 2 is better suited for your organization depends on the nature of your services.
If you collect financial information from your customers or provide services that impact their finances, SOC 1 is a better choice for your organization. However, if you collect, store, or use any other type of customer data, a SOC 2 report (and its broader focus) will better serve you and your customers.
Within a SOC 2 report, you can choose the specific trust service principles you would like the report to cover. This enables you to narrow the report's focus to the principles and related controls that are most important to your organization and its customers.
As for the type of SOC report you should create, type 1 SOC reports require much less time to complete and are best suited for situations where you need to get a report out to a customer or prospective customer as quickly as possible. If time isn't necessarily an issue, SOC 2 reports are generally more advisable due to their greater testing breadth.
Benefits of SOC compliance
From improved operating effectiveness to better risk management and information security, conducting a SOC 1 or SOC 2 audit can offer substantial benefits. Some of the top benefits of SOC compliance include:
- Improved security: SOC 1 and SOC 2 audits highlight gaps in an organization's data security practices and provide controls for addressing those issues, leading to much stronger data security.
- Better customer/client relationships: Customers and clients need to know that they can trust your organization with their private data. Providing them with SOC reports creates peace of mind, leading to better customer/client relationships.
- Regulatory compliance: SOC compliance is not typically mandatory. However, conducting a SOC 1 or SOC 2 audit can also help you achieve compliance with other regulatory standards that your organization may be required to follow, such as HIPAA, ISO 27001, and PCI DSS.
- Competitive advantage: Achieving SOC compliance can position your company as security-conscious, improving your brand image and providing you with a powerful competitive advantage.
Streamline your compliance process with HyperComply
Achieving SOC compliance is well worth the effort thanks to its many benefits. But without the right tools, it may be more of an effort than you bargained for.
This is where HyperComply can help.
With HyperComply, organizations can complete security questionnaires required for SOC compliance in a fraction of the time it takes to complete them manually — leveraging advanced AI and expert human analysis for unmatched accuracy and time-saving automation.
To learn more about how HyperComply can help your organization streamline its compliance process, sign up for a demo today.
