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Difference between SOC 1 and SOC 2? When would your customers want a SOC 1 versus a SOC 2?

System and Organization Controls (SOC) reports, governed by the American Institute of Certified Public Accountants (AICPA), play a critical role in establishing trust and accountability. These reports can only be conducted by approved, independent specialists following the strict AICPA framework. When exploring the world of SOC reports, understanding the differences between SOC 1 and SOC 2 is crucial. Designed to evaluate a service organization’s controls and processes, these reports ensure both operational and financial reliability. In this blog, we’ll break down the key distinctions, explain when each report is most appropriate, and help you determine whether your organization might need both.

SOC 1 vs. SOC 2: What’s the Difference?

  • SOC 1:
    • Purpose: Focuses on  financial integrity.
    • Key Users: Primarily for clients’ financial auditors and compliance officers.
    • Scope of Auditor’s Opinion :The auditor’s opinion focuses on evaluating whether the company meets its own defined control objectives.
  • SOC 2:
    • Purpose: Evaluates information security and operational controls based on Trust Services Criteria (TSC), which are defined by the American Institute of Certified Public Accountants (AICPA). These criteria establish a clear framework to assess the security, availability, processing integrity, confidentiality, and privacy of a system, helping organizations safeguard data effectively.
    • Key Users: Compliance officers, IT executives, and regulatory bodies.
    • Scope of Auditor’s Opinion : The auditor’s opinion focuses on whether the company meets the Trust Services Criteria (TSCs) established by the AICPA.

Difference Between SOC Type I and SOC Type II Reports

Both SOC 1 and SOC 2 offer Type I and Type II reports:

  • Type I: Focuses on evaluating the description and suitability of the design of controls at a specific point in time. It examines whether the controls are well-designed to meet the organization’s objectives but does not assess how these controls operate over time.
    • Evaluates the design and implementation of controls at a specific point in time.
    • Suitable for organizations seeking a quick audit to demonstrate initial compliance.
  • Type II: Focuses not only on the description and suitability of the controls’ design but also their operating effectiveness over a defined period. This provides assurance that the controls consistently function as intended.
    • Examines the operating effectiveness of controls over a defined period of time.
    • Provides greater assurance to customers about the reliability of the controls.

When Would Customers Want SOC 1 or SOC 2?

  • SOC 1:
    • Relevant for organizations that impact their clients’ financial statements.
    • Example: Payroll processors, Claims handlers, Payment processors, Data centres, Medical billing companies.
  • SOC 2:
    • Essential for businesses managing sensitive customer data or providing IT services.
    • Example: Cloud service providers, SaaS companies, or cybersecurity firms.

Will You Need Both SOC 1 and SOC 2 Reports?

It depends on your service offerings and customer demands:

  • When Both Are Required:
    • If you offer financial transaction services (SOC 1) and also handle sensitive data (SOC 2), clients may request both reports.
    • Example: A fintech company processing payments and storing customer data.

There is some overlap in testing, so conducting both audits simultaneously can reduce costs and effort. Type I reports will help demonstrate readiness to meet these common frameworks. If you’re looking for true transparency, a Type II report will usually provide a more satisfactory and comprehensive audit that your customers will appreciate.

FAQs About SOC Reports

Yes. Businesses often need both reports to meet diverse client requirements or to cover both financial and operational assurances.

Because they involve an independent auditor evaluating and attesting to the effectiveness of an organization’s controls.

No, both reports are restricted to stakeholders such as clients and their auditors.

The duration of a SOC Type II audit depends on the specific circumstances of the organization. While the audit itself may take several weeks, the Type II report requires a minimum of three months to assess the effectiveness of controls over time.

At Decrypt Compliance, we specialize in guiding businesses through SOC readiness and audits, ensuring they meet industry standards while building trust with their clients. We provide comprehensive auditing services for all types of SOC reports, including SOC 1, SOC 2, and SOC 3. Our team is here to guide you in selecting the report type that best suits your organization’s needs. If you’re unsure which combination of trust services criteria to include for your SOC 2 report, we’ll work with you to identify the most relevant criteria to align with your service commitments.

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