SOC 1 vs SOC 2: What’s The Difference?

SOC 1 vs SOC 2: What Is the Difference?

SOC 1 is a compliance framework that evaluates a service organization’s internal controls, specifically related to financial reporting. The attestation you get at the end proves that your client’s financial data is handled correctly and securely. This makes it relevant for organizations that manage or process financial transactions for their clients.

On the other hand, SOC 2 is a compliance framework that digs deeper into your organization’s overall security posture. The impending audit examines the controls you have in place to protect and secure the systems or services your prospective customers and partners rely on.

The audit is guided by the SOC 2 Trust Services Criteria (TSC), which sets the standards for security, availability, processing integrity, confidentiality, and privacy.

While SOC 1 is centered on evaluating the design of controls related to financial data, SOC 2 focuses on data security. It assesses how well your organization protects and secures sensitive information so that it is safe and handled responsibly.

Understanding the Distinctions Between SOC 1 and SOC 2

Getting to know the difference between SOC 1 and SOC 2 will be the driver behind choosing the audit required to tackle your needs and compliance requirements. 

SOC 1 focuses on internal controls related to financial reporting, making it key for organizations managing financial data. 

SOC 2, however, takes a broader approach as it examines how well your organization secures and protects sensitive information based on selected criteria.

So, what sets them apart? Let’s break down the main differences to give you a clearer picture.

SOC 1: An Overview

Meaning & Purpose

SOC 1, or System and Organization Controls 1, is an audit designed to assess a service organization’s internal controls, specifically protecting client data that could impact financial reporting. 

This audit is particularly useful for SaaS companies that handle financial information or data that could influence their customers’ financial statements. This includes publicly traded companies, financial institutions, or government entities.

Types of Reports

SOC 1 reports are categorized based on the scope of the report and the audit period covered. The two main categories are Type 1 and Type 2:

• SOC 1 Type 1. Type 1 SOC report gives the third-party auditor’s opinion on whether the system is designed to meet specific objectives as of a particular date. Since it’s based on a single day or a specific date, it often requires less effort from the organization and the auditors.
• SOC 1 Type 2. This report includes everything in a Type 1 report but goes further by testing the operating effectiveness of controls over time.

Process of Compliance

Here is how the process of regulatory compliance works for SOC 1:

1. Familiarize Yourself With SOC 1. SOC 1 reports are tailored for service organizations that manage financial data on behalf of their clients. These reports evaluate how effective your information system’s controls are for financial reporting.
2. Get to Know the Scope. The SOC examination covers business processes and information technology, focusing on control objectives and testing so everything functions as it should.
3. Conduct Risk Assessment. Risk assessment is another important requirement for complying with SOC1. You need to identify and evaluate risks that could impact your financial reporting, examining external and internal factors that could compromise the integrity of your financial data.
4. Establish Control Activities. As a service organization, your next step should be to set up and maintain control activities that directly address the risks you’ve identified. These controls are, in a way, the backbone that ensures the accuracy and completeness of your financial reporting.
5. Implement Information and Communication Processes. Next, you must establish processes for communicating financial information within and outside your organization. This step covers capturing and recording data and reporting it. The reason behind this is so that the information flows without a hitch.
6. Monitor and Evaluate Controls. Finally, continuous monitoring of your control activities is essential. Regularly assess the design and effectiveness of these controls to ensure they are operating as intended and make necessary adjustments.

Readers and Users

SOC 1 reports are primarily read and used by a customer’s management team and external auditors. These reports are tailored for the user entity and the CPAs responsible for auditing its financial statements. 

Their main purpose is to help these users understand how the service organization’s controls might impact the accuracy and integrity of the user entity’s financial reporting.

Report Structure

SOC 1 reports are structured according to a standard format set by the AICPA (American Institute of Certified Public Accountants). They typically include:

• Independent service auditor’s report
• Management’s assertion
• System description
• Control objectives and related controls
• Tests of controls and results
• Other information provided by the service organization

When going through the SOC 1 audit process for the first time, it’s common to start with a readiness assessment, followed by a SOC 1 Type 1 report. This usually takes around 2 to 3 months. However, if the organization lacks the necessary resources or hasn’t prioritized the process, it could extend to 6 to 12 months.

SOC 2: An Overview

Meaning & Purpose

SOC 2 was developed by the AICPA to help organizations verify their security measures and minimize the risk of a data breach. The main goal of SOC 2 is to ensure that third-party SaaS providers handle and protect client data securely throughout its storage and processing.

SOC 2 reports are primarily used by organizations and stakeholders that need assurance about the security and reliability of a cloud service provider’s systems, particularly when dealing with sensitive customer data. 

Types of Report

SOC 2 reports are categorized based on the duration and scope of evaluating the organization’s control environment. The two main categories are SOC Type 1 and Type II reports, distinguished by their focus on timing and operational effectiveness.

• SOC 2 Type 1 Report. It provides a snapshot of the organization’s systems, assessing whether their design aligns with the relevant trust services principles.
• SOC 2 Type 2 Report. Type 2 audit report goes a step further by evaluating how effectively these systems operate over time.

Process of Compliance

The process of SOC compliance starts with choosing the relevant TSCs that apply to your organization and committing to maintaining high standards of information security. However, here is a quick glance at the steps involved: 

1. Choose the Relevant TSCs. Start by identifying which of the five TSCs apply to your organization. While security is mandatory, the other criteria—availability, processing integrity, confidentiality, and privacy—may or may not be relevant depending on your operations.
2. Perform a Gap Assessment. Once you’ve defined the scope and selected the applicable TSCs, it’s time for a gap assessment. This step is important as it highlights any weaknesses or vulnerabilities in your current systems, whether related to infrastructure, applications, or processes. 
3. Choose a SOC 2 Auditor and Approach. Selecting the right auditor can feel overwhelming, especially with so many unknowns. However, making this decision will drive you to gain clarity and move forward with the compliance process. This is where The Pun Group comes in as we have the experience to you through the steps so that your approach aligns with SOC 2 requirements.
4. Undergo the Audit. Unlike a tax or financial audit, a SOC report isn’t about catching you off guard. The auditor reviews your documentation and evidence to confirm that your practices align with your claim. For a SOC 2 Type 2 audit, the auditor will also verify that these practices are consistently applied over a period of time, ensuring operational effectiveness.
5. Receive Your SOC 2 Attestation Report. After the audit, the auditor will prepare your SOC 2 compliance report. If everything is in order, you’ll receive a clean report. However, if there are areas of non-compliance, these will be clearly marked, providing you with specific areas to address for full security compliance.

Readers and Users

SOC 2 reports are valuable documents for a range of stakeholders. Typically, these reports are reviewed by your customer’s management team, business partners, prospective clients, compliance regulators, and external auditors. 

For example, they monitor the service organization, manage vendor relationships, ensure solid internal corporate governance, and assist in risk management processes. 

Also, SOC 2 reports are often reviewed during regulatory oversight to confirm that the organization meets the required standards.

Report Structure

Just like SOC 1, SOC 2 reports also follow the guidelines set by the AICPA but offer a bit more flexibility in how they’re structured. Generally, these reports cover several key areas:

• Management assertion 
• Independent service auditor’s opinion 
• Systems description 
• Description of security controls and test results 
• Management’s response to exceptions

Should You Do a SOC 1 and SOC 2 Simultaneously?

Doing SOC 1 and SOC 2 Type II audits simultaneously can be a smart move. This strategy can be easily achieved with the guidance and holding of a professional auditor and CPA firm like The Pun Group. 

Here’s why:

• Show Your Clients They’re in Safe Hands. If you want to impress new and existing clients, having both SOC 1 and SOC 2 can really set you apart. SOC 2, in particular, dives deeper into data security, which can give your clients extra peace of mind.
• Keep Your Clients Happy. If your clients are already asking for SOC 2, this is your chance to tick that box. Plus, having SOC 2 on top of SOC 1 shows you’re serious about protecting their personal information.
• Make Your Life Easier. Handling both audits at once can streamline your internal processes. Instead of juggling separate audits, you can work with your assessors to cover all your bases in one go, saving time and reducing hassle.

Asked about the impact of the SOC audits in service organization’s market positioning and client trust, Bernard Gallagher, The Pun Group’s Director of Advisory Services, had this to say,

“Although the importance of each varies by industry, achieving SOC 1 or SOC 2 attestation can have a substantial impact on a service organization’s market standing and customer trust. Organizations handling financial data or participating in financial reporting, such as payroll processors or financial services, must adhere to SOC 1 certification, which focuses on financial controls over reporting.

SOC 2 certification, on the other hand, covers more comprehensive requirements for processing integrity, availability, confidentiality, and privacy in addition to data security. Businesses handling sensitive consumer data, SaaS providers, and technology and cloud service providers will find it very useful. In sectors like healthcare and e-commerce where data security and privacy are crucial, achieving SOC 2 can greatly increase customer trust.”

Rise to the Top 1% of SOC Attestation Holders with The Pun Group

SOC 2 vs. SOC 1 compliance can be a real challenge, especially if you’re tackling it alone. These standards are crucial for any organization handling sensitive data but come with their fair share of complexity.

Here’s where The Pun Group steps in. We’re here to simplify SOC 1 and SOC 2 compliance for you. Our team brings deep expertise and experience and makes the process of achieving both SOC 1 and SOC 2 reports smoother and more efficient.

Rather than juggling multiple audits on your own, why not let us guide you through a combined SOC 1 and SOC 2 audit? We’ve streamlined the process to help you meet these standards without the hassle.

Curious about how we can make this work for you? Let’s chat and explore how we can help you hit those top-tier compliance goals.