What is SOC 2 Compliance and Why You May Need One

by Adarsh Raj Bhatt in
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Image credit: Pexels

Key Takeaways

  • SOC 2 is not a rigid set of regulations, procedures, or processes that must be followed by all. Instead, it states the criteria that must be met in order to maintain strong data security, enabling each startup to adopt the practices and processes that are most relevant to its goals and operations.
  • SOC 2 compliance informs your clientele that you have ensured that the structure, tools, and policies necessary to secure clients’ data from unwanted access - both inside and outside the company - are in place.
  • There are 2 types of SOC reports: type 1 defines a vendor's infrastructure and determines if they are capable of satisfying significant trust principles as of a specific date, and type 2 analyzes the operational efficacy of those systems over a given period of time. 
  • When customers engage with a company that has SOC 2 certification, especially if they have any compilatory or IT governance needs, then this audit report can give them near-instant confidence in the company's strict data protection and storage procedures. SOC 2 is essentially an indication of high-quality cloud infrastructure and a strong set of internal policies that are meant to reduce threats and safeguard all parties.
  • SOC 2 audits are entirely voluntary, and no regulatory body or statutory authority requires them. Of course, that doesn’t detract from its importance. From scrappy startups to large enterprises, any service organization that manages customer information ought to be compatible with this increasingly crucial framework.
  • There are some prevalent types of service organizations to which SOC-compliance appears to apply. These include businesses that deliver technology, applications, and software as a service (SaaS); that provide services in the areas of business analytics, statistics, and administration; that manage, assist, or counsel in financial or accounting procedures; that offer customer support or other client-facing operations; and providers of managed IT and security services, particularly those that assist with SOC 2 compliance.
  • While the major focus of SOC is on service organizations, the AICPA also provides various regulatory standards within the SOC structure that extend its safeguards to the distribution network and beyond.

What is SOC 2 compliance?

The American Institute of CPA's Service Organization Control reporting platform includes SOC 2 compliance. Its goal is to keep the company’s clients' information safe and confidential. As a foundation for data protection, it defines 5 trust service philosophies: security, availability, processing integrity, confidentiality, and privacy of client information.

SOC 2 is not a rigid set of regulations, procedures, or processes that must be followed by all. Instead, it states the criteria that must be met in order to maintain strong data security, enabling each startup to adopt the practices and processes that are most relevant to its goals and operations. SOC 2 compliance informs your clientele that you have ensured that the structure, tools, and policies necessary to secure clients’ data from unwanted access - both inside and outside the company - are in place.

In effect, SOC 2 compliance entails the following:

  • Your startup is familiar with usual operations and routinely monitors for hostile or/and unidentified behavior, documents system configuration modifications, and keeps track of user access permissions.
  • The startup has mechanisms in place to detect risks and notify the parties involved, allowing them to assess the danger and take the required steps to safeguard information and applications from unauthorized access or usage.
  • You'll have all the knowledge you need to determine the extent of any security attacks, rectify systems or procedures as needed, and reinstate data processing integrity.

Who needs SOC 2 Compliance?

Any technological service provider or SaaS firm that receives or keeps client data must comply with SOC 2. To protect the integrity of their information system and safeguards, such businesses' third-party vendors, additional partners, or/and support organizations should likewise be SOC 2 compliant.

Most service organizations fall under the scope of SOC. The following are some of the most prevalent types of service companies to which SOC-compliance appears to apply:

  • Businesses that deliver technology, applications, and software as a service (SaaS).
  • Startups that provide services in the areas of business analytics, statistics, and administration.
  • Companies that manage, assist, or counsel on financial or accounting procedures.
  • Companies that offer customer support or other client-facing operations.
  • Providers of managed IT and security services, particularly those that assist with SOC 2 compliance.

If your startup falls under any of these categories, or if it is similar to these service organizations in general, then the business may be required to comply with SOC. While the major focus of SOC is on service organizations, the AICPA also provides various regulatory standards within the SOC structure that extend its safeguards to the distribution network and beyond.

Is SOC Mandatory?

Although private firms are less controlled than public firms, most will adhere to the same standards as the latter. Firstly, this is a sensible risk management model. Secondly, it guarantees that the business's records are in good shape if it ever wants to raise money or go public. Service providers need SOC reports only when they or their network of service providers engage with public firms. If the private company's services have an influence on a public company's fiscal data, then SOC 1 reports will certainly be required. SOC 2 reports may be audited by private firms - but not SOC 1 assessments. There is no need to go through the procedure because these firms are not obligated to produce SOC 1 audits for their fiscal auditors. Service providers in heavily regulated sectors such as economic services, medicine, and insurance, on the other hand, are generally required to produce both SOC assessments. Furthermore, private user groups that handle sensitive consumer data may ask service providers for both SOC reports.

Any firm can utilize SOC 3 reports, but FASB is phasing them out in favor of SOC 2, which covers the same topics in more depth. You don't need to get a SOC audit done if you're running an on-premise software platform and aren't delivering services to anybody else through it. SOC assessments on internal controls are intended for use by third parties.

Why is SOC compliance important?

A client may want to engage with a SOC 2-accredited company in several fields or situations. In fact, SOC compliance is sometimes seen as a requirement for service-oriented firms in order to provide services to high-profile or tier-one enterprises. SOC 2 compliance demonstrates that your company's processes have evolved and that you are devoted to winning customer confidence. With the increasing number of data breaches and cyberattacks today, it's no surprise that information security is becoming more and more important. SOC 2 audits are general-purpose reports that reassure user organizations and stakeholders that a service is being delivered safely. Availability, confidentiality, processing integrity, and privacy are among the requirements that could be included in SOC 2.

In the United States, the move toward cloud technology, and outsourcing in general, has dramatically increased the need for SOC 2 audits. SOC 2 audits enable a service organization to reassure its clients that the service they are receiving is safe and dependable. Consider a data center provider that serves hundreds of customers from a range of industries. A SOC 2 audit might be issued to the data center to assure its stakeholders that specific controls are implemented - and working properly - in order to fulfill applicable SOC 2 requirements. Without the SOC 2 audit, the same data center may be subjected to dozens of individual client audits. The data center's employees and infrastructure may not be able to accommodate multiple customer audits every year. Instead of being exposed to myriad potential audits, the data center "picks their poison" and hires their preferred auditor. Obtaining a SOC 2 audit serves this goal.

When is a SOC 2 report required?

Most SOC 2 audits span a 12-month period; however, based on the client's preferences and any ongoing problems in the operating control framework, many service organizations may undertake this audit every 6 months. But the SOC 2 compliance procedure begins well before the official audit date. Security and compliance ought to be continual endeavors. They begin by assessing the risk environment and finding gaps, then move on to rectification and readiness assessment before the audit, accrediting and repeating the process the following year. A SOC 2 report that is more than one year old is sometimes referred to as a "stale" audit. As a result, the evaluation of a company's inner controls is out of date, and the document's usefulness to the viewer is extremely limited. 

SOC 2 audits are entirely voluntary, and no regulatory body or statutory authority requires them. Of course, that doesn’t detract from its importance. From scrappy startups to large enterprises, any service organization that manages customer information ought to be compatible with this increasingly crucial framework.

Types of SOC 2

There are 2 types of SOC reports: type 1 defines a vendor's infrastructure and determines if they are capable of satisfying significant trust principles as of a specific date, and type 2 analyzes the operational efficacy of those systems over a given period of time. 

Type 1

A SOC 2 Type 1 report, for example, examines the design controls' appropriateness for the service organization's structure. It describes the system at a certain moment in time, including its scope, the organization's management characterizing the system, and the regulations in place. The “as of” date on this assessment is crucial, as it addresses the details of a system at a given moment in time. The auditor's report is based on a summary of the controls and an examination of the documentation related to these measures.

The SOC 2 Type 1 report demonstrates that a SaaS company has best practices in place as proof of conformity with the AICPA auditing method(s). The SOC 2 Type 1 report is very beneficial to service businesses since it may help them become much more competitive than they were before. It also assures potential consumers that a service organization has cleared the aforementioned auditing process and that their data will be protected as they would be dealing with a SOC 2-compliant firm.

As the number of cybercrime incidents rises, so does client demand for SOC 2 Type 1 reports. Companies are increasingly looking for providers that can demonstrate that they can effectively manage or handle confidential client material. This report is increasingly considered a need for businesses that handle consumer data, including and especially healthcare organizations and financial companies.

Type 2

While SOC 2 Type 1 compliance has several advantages, it pales in contrast to SOC 2 Type 2 compliance. In comparison to SOC 2 Type 1, SOC 2 Type 2 compliance provides a much better level of confidence. To meet the relevant criteria, a firm must pass an auditor's comprehensive review of its internal control policies and processes over a specific period of time.

A service business may send a strong message to potential clients with a SOC 2 Type 2 report, demonstrating that it follows best practices in data security management systems. Service providers who comply with this standard are more likely to win contracts from larger companies. SOC 2 Type 2 examines the 5 trust standards of computing and storage, similar to SOC 2 Type 1: availability, confidentiality, security, privacy, and processing integrity. Although compliance with SOC 2 Type 2 can be costly in terms of both capital and labor hours, it can set a service provider apart from competitors that have not undergone this sort of audit.

Summary

SOC 2 certification requires effort, commitment, and, in most cases, the engagement of third-party organizations to guarantee that you receive the accreditation. When it comes to data security, privacy, integrity, and maintaining control over the information in company possession, it's critical to show people who will work with the company that the latter seriously cares about security. When customers engage with a company that has SOC 2 certification, especially if they have any compilatory or IT governance needs, then this audit report can give them near-instant confidence in the company's strict data protection and storage procedures. SOC 2 is essentially an indication of high-quality cloud infrastructure and a strong set of internal policies that are meant to reduce threats and safeguard all parties.

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