The Definitive Guide to SOC 1 and SOC 2 Certifications: A blog about compliance for companies

by Adarsh Raj Bhatt in
pile of books

Image credit: Unsplash

Key Takeaways

  • SOC is an acronym for “System and Organization Controls”. It is a mechanism of controls for service companies. These controls are essentially part of a system that is used to quantitatively evaluate how well a service company manages its data. This system is able to make its measurements by employing a sequence of standards that are built to evaluate a service company’s information regulation practices.
  • There are several benefits of SOC compliance. It offers the potential for improved profits, reduced organizational risk, improved employee performance, expert evaluation and constructive criticism, and efficient engagement with clients (and with their auditors).
  • What a SOC 1 report does is grant some peace of mind - to the entities that make use of your company's services - that their financial data and records are safe and being dealt with in a confidential manner. On the other hand, SOC 2 is a mechanism to measure the effectiveness of a service company’s cloud controls as well as its data center controls. 
  • If you can impact your client’s financial reporting through the services you offer (for eg., if you host or process your client’s invoices, transactions, billing, etc.), then a SOC 1 could be more appropriate. If, however, you have nothing to do with your client’s financial data and store or process other kinds of (your client’s) data, then a SOC 2 audit might be more appropriate. 
  • To pass a SOC audit, the service organization must first determine the audit’s scope, then select a reliable and trustworthy auditing firm, then develop a Risk and Mitigation Matrix with the help of the firm, and, finally, request the firm for a list of action items to prepare in advance to potentially expedite the process of the entire audit.

What is SOC? 

SOC is an acronym for “System and Organization Controls”. It is a mechanism of controls for service companies. These controls are essentially part of a system that is used to quantitatively evaluate how well a service company manages its data. This system is able to make its measurements by employing a sequence of standards that are built to evaluate a service company’s information regulation practices. There are numerous opinions among experts on the importance of SOC - and the unanimous perspective is that, by and large, SOC helps corporations have faith in a service-providing company (or a vendor) when they rope in such a vendor. 

A SOC certification signifies that a CPA (Certified Public Accountant) has audited a service company and ascertained that the company has established suitable SOC measures and processes. The CPA who did the auditing must be independent and unaffiliated with the service organization. 

Importance and benefits of SOC compliance

SOC audits are often misconstrued as costs that need to be borne for only compliance purposes. This is why founders have little to no expectations of returns from a SOC audit and don’t view it as having a value proposition that exceeds compliance. But the truth is different. Sure, compliance is a major - if not the most significant - function of a SOC certification. But that does not mean that there are no business benefits and ROI that come with SOC.

What are these benefits? Let’s find out. 

Potential for Improved Profits

In this day and age, companies are increasingly turning to outsourcing operations that are not core to the business and are allocating most of their time to product development, market research, and customer acquisition (as they should!). At AbstractOps, we have seen firsthand the cognitive relief that founders get after roping in our tech and our experts to take care of their ops. What this rising trend of outsourcing spells for the relationships between companies and vendors is an increasing mutual reliance and interconnectedness. For example, payroll-providing businesses and other businesses are becoming more and more interdependent every day. Considering all of this, it shouldn’t be a surprise to know that clients, executives, and stock owners all depend on SOC audits to get some peace of mind with respect to the service organization’s functioning, especially regarding how safe, secure, accessible, scrupulous, and secretive the organization is when it comes to handling their customer’s information. Indeed, there are many businesses that have norms, policies, and requirements which necessitate that any service organization with whom they do business must have a SOC certification. An unqualified SOC audit report should be a major milestone for a service organization as it signals a kind of legitimacy, integrity, and credibility that can distinguish the organization from its competitors.

A SOC certification offers significant ROI for service organizations as it helps them attract, convert, and retain clients, thereby adding to the company’s bottom line. Thus, getting a SOC audit done shouldn’t be viewed as an undesirable expense but as an investment in something that will offer an improved potential for profits in the future.

Reduces organizational risk

Successfully getting a SOC audit done brings with it some tremendous business benefits. An organization that has robust operations with strong controls can effectively assuage the risk that the business will otherwise be vulnerable to. This mitigates the possibility of damages to the organization’s image and the possibility of incurring hefty fines as well. Without a SOC certification, your organization could be at operational and business risk even due to the actions of your vendors and your staff. 

Examples of organizations that became embroiled in data breaches (and the subsequent fines, court settlements, and erosion of customers’ trust) include giant brands like Equifax (data breach in 2017) and Target (data breach in 2013). 

The bottom line is that your operational environment, no matter how strong it might seem by and large, is still only as effective as its weakest component. Considering how interwoven the business world is becoming (especially when you’re also depending on third-parties for certain services), business entities that engage with each other only do so after there is a guarantee (in the form of a SOC certification) that their information - and the information of entities that trust them - will be safe, accessible, privileged, and protected. A strong operational system places emphasis on third-party risk management

Improved employee performance

You don’t need to be reminded how important the performance of your workforce is to your profits (and overall success). That’s another area where SOC offers a benefit: research conducted by Macrothink Institute demonstrated that a strong internal control environment helps improve the staff’s performance and engagement while also helping in the formation and cementing of goals common to the staff and the organization. 

Expert evaluation and constructive criticism

When an independent CPA conducts a SOC audit, the organization benefits by getting an expert review and analysis of its operations, procedures, and controls. This kind of constructive criticism helps identify flaws and weaknesses in the organization’s operational environment so that these shortcomings can be dealt with in time before they lead to poor experiences with clients. 

Efficient engagement with clients

A SOC audit enables organizations to be extremely efficient in terms of their engagement with their clients’ auditors. Without an audit, far more time has to be spent with every client’s auditor. In fact, an SOC 1 audit report is so helpful that these auditors can completely depend on it to procure what they want. On the other hand, without a SOC audit, you will most likely have to field various queries; auditors might even wish to physically come to your business to examine your operational environment and the kind of measures and controls you have in place. If this happens, it could be an inconvenience for not just you and your staff but also your existing clients by adding roadblocks, cognitive load, and hold-ups. 

SOC 1 certification cost

A SOC 1 report is a report on controls at a service organization relevant to user entities’ Internal Control over Financial Reporting (ICFR). The cost of a SOC 1 Type 1 report ranges from $10K to $20K. This price range does not include the readiness assessment costs, which is a project that most orgs find to be quite advantageous. Once factored in, the overall cost goes up. Readiness assessment could cost anywhere between $5K to $10K and varies based on the extent of support needed and the scope of the readiness assessment. 

SOC 2 certification cost

SOC 2 certification cost includes not just monetary costs (for eg., the auditor’s average retainer of $12,000 to $17,000) but also costs like: 

  • The cost of productivity that almost all team members will lose during the audit (which could take a total of 6 months to one year to complete)
  • Depending on your current technology as well as your approach to security, you’ll need to either purchase new tools (if you have more money and less time) or build new infrastructure on your own (if you have more time and less money)
  • The cost of training your entire staff yearly in security awareness (and the productivity lost here too)

Therefore, when considering SOC 2 certification cost, the monetary cost of the auditor’s fees shouldn’t be the only consideration. The other kinds of costs outlined above should also be taken into account.       

While a SOC 2 Type 1 audit can cost up to $60K, a SOC 2 Type 2 audit can be even more expensive, potentially going up to $80K. 

SAS 70 certification vs SOC 1 and SOC 2

SOC 1 and SOC 2 can sometimes be mixed up with each other by founders who’re researching SOC auditing for the first time. Both are systems for compliance that act as evidence of the controls that your operational environment includes. However, each emphasizes different things.

The SOC 1 report was originally referred to as the SAS 70, or the Statement on Auditing Standards 70. It was later changed to SSAE 16, or the Statement on Standards for Attestation Engagements no. 16. What a SOC 1 report does is grant some peace of mind - to the entities that make use of your company's services - that their financial data and records are safe and being dealt with in a confidential manner.

On the other hand, SOC 2 is a mechanism to measure the effectiveness of a service company’s cloud controls as well as its data center controls. 

If you’re wondering which type of audit would make sense for your organization, the general determining factor for most organizations is this: if you can impact your client’s financial reporting through the services you offer (for eg., if you host or process your client’s invoices, transactions, billing, etc.), then a SOC 1 could be more appropriate. If, however, you have nothing to do with your client’s financial data and store or process other kinds of (your client’s) data, then a SOC 2 audit might be more appropriate. 

An audit firm is usually the trusted authority that a service organization might go to to ascertain whether it would be more appropriate to get a SOC 1 audit, an SOC 2 audit, or perhaps even both kinds of audits.

How to pass a SOC audit?

Determining the audit’s scope

Your foremost priority should be to select the appropriate scope for the audit. You can do this by taking the help of an auditing firm. The firm will be able to - if you’re looking to get a SOC 1 audit done - choose the suitable control goals for you. If you’re looking to get a SOC 2 audit, it can choose the suitable Trust Service Principles and Criteria. In either case, the objective would be to choose the components that will help resolve the right queries for your user entities. Whatever the firm ends up selecting will delineate the scope of your SOC report. In order to correctly select the right scope for the report, the firm might raise some queries for you to address. These questions could revolve around: 

  • The services you offer
  • The risks that those services might be vulnerable to (for eg., breach of any sensitive data that you possess or/and process) 
  • Whether your organization processes privileged information (for eg., data related to health or financial records)

After recognizing the threats to your services, your organization will have to procure an audit report detailing how you have made these risks less severe. This report will act as an assurance for you entities that have an interest in your operations (i.e., your stakeholders).

Selecting a reliable firm 

Next, choose a reliable and trustworthy firm, one that has competent auditors. This firm should have the capabilities and experience for auditing your organization. It should be a CPA (Certified Public Accounting) firm with auditors who have the skills and credentials to audit IT systems. When evaluating a firm, it’s recommended to assess its track record by requesting the number of SOC audits that it has successfully finished previously. 

Risks and Mitigation

Thirdly, get a Risk and Control Matrix (RACM) made. The audit firm that you selected will help you develop it. What the RACM does is detect the risks and threats to your company; it also ascertains if controls to tackle these risks are established properly or not. When this is done, you will be able to impartially gauge your ability to mitigate your company’s risk (and bring it down to an allowable extent) as well as to understand the kind of controls that you have in place for the same. 

Request action items in advance

Lastly, the best way to make sure that an audit goes smoothly and with as few hitches as possible is to ask the audit firm for a preliminary assortment of things that you can prepare in advance. Deliberate over these requirements with the auditor so that you know precisely what they will need beforehand. After this, prepare these things before the whole process starts. Then submit them to the auditor when they ask for those items during the audit. 

Doing all this will enable you to utilize the time that the auditor will spend on the field with you to promptly resolve the various queries that they would have regarding the items that you prepared in advance. It’s important to both prepare the list of items in advance and resolve the auditor’s queries in a timely manner. Why? Because making things simpler for the auditor ensures that the audit is conducted with optimum efficiency and you can emerge from the ordeal - successfully - as soon as possible.

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