Many organizations rely on third-party service providers to handle critical operations and sensitive data. These organizations need a widely accepted way to assess the internal controls of third-party service providers and communicate the effectiveness of those controls to various stakeholders.
That’s where SOC reports come in.
What Are SOC Reports?
SOC reports are independent assessments of a service organization’s internal controls. The reports are independent because they are produced after a thorough audit by a CPA firm.
SOC reports protect the interests of an organization’s clients and stakeholders by providing them with insights about a third-party service provider’s control environment.
What Does SOC Stand For?
SOC stands for System and Organization Controls.
Types of SOC Reports
There are several types of SOC reports that address different needs and concerns.
- SOC 1 reports focus on internal controls related to financial reporting.
A SOC 1 report is like an official seal of approval for a third-party service provider that manages financial information for other organizations. An independent auditor examines how the service provider handles financial information to ensure strong systems are in place to prevent errors and fraud.
- SOC 2 reports focus on operational risks beyond financial reporting. An independent auditor certifies that a service provider adheres to proper security standards regarding data confidentiality, availability, processing integrity, and privacy.
- Other types of SOC reports include those addressing risk management related to cybersecurity and supply chains.
Why Are SOC Reports Important?
SOC reports help provide assurance for customers and other stakeholders that your organization has effective internal controls in place. These reports are important for several reasons:
- SOC reports build trust. Because an independent CPA validates the control environment, SOC reports build trust with clients, partners, and stakeholders.
- SOC reports demonstrate a commitment to risk management. By identifying potential vulnerabilities and assessing control effectiveness, the examinations that result in SOC reports enable organizations to manage and mitigate risks when outsourcing critical services.
- SOC reports help ensure compliance. Many industries and regulatory frameworks require organizations to obtain SOC reports from service providers.
- SOC reports can help secure a competitive advantage. Organizations that obtain SOC reports demonstrate a proactive commitment to optimizing security and internal controls.
- The SOC audit process often uncovers opportunities for operational improvements. By identifying potential weaknesses or gaps in controls before those issues cause a significant problem, the SOC audit process can improve data protection, operational efficiency, and risk mitigation.
Who Needs SOC Reports?
SOC reports can provide value for the following types of organizations:
- Certain regulated industries. Organizations in sectors like finance and healthcare may require SOC reports to meet compliance requirements.
- B2B companies. Organizations that handle sensitive client data or provide services to other businesses can build trust and win new business by having SOC reports.
- Any organization that outsources critical services (e.g., cloud hosting, payment processing, data management, etc.) can use SOC reports to demonstrate control effectiveness.
How to Obtain a SOC Report
The SOC report process involves several key steps:
Step 1: Determine the scope. Learn which SOC report type is most appropriate for your organization and define the scope of the audit.
Step 2 *: Prepare for the SOC audit. To the extent possible, assess and document your control environment, ensuring all necessary policies and procedures are readily available.
* For many organizations issuing a SOC report for the first time, this step can be the most challenging. Whether you’re still developing internal controls or have identified weaknesses in existing controls, starting with a SOC readiness assessment can help identify and address potential issues in your systems/controls before the SOC examination begins.
Step 3: Identify an independent CPA firm to conduct the SOC audit, test controls, and gather evidence.
Step 4: The auditor will prepare the SOC report, including their opinion on the effectiveness of your organization’s controls.
Learn More
SOC reports are extremely valuable for organizations looking to build trust, manage risk, and demonstrate their commitment to security and compliance.
Whether you’re a service provider seeking to differentiate yourself in the market or a business that needs to vet current or potential service providers, the PBMares Risk Advisory team can help. Contact us today.
