If you’re involved in managing an organization, you’ve likely heard of SOC 1 and SOC 2 reports. However, do you understand the difference between the two? Understanding the key differences between these reports is crucial, as they serve different purposes and are used by different types of organizations.
These reports are typically required for service organizations that handle sensitive data such as healthcare providers, financial institutions, and e-commerce companies. In this article, we’ll provide a detailed overview of SOC 1 and SOC 2 reports, including their definitions, purposes, and key differences. By the end, you’ll have a clear understanding of which report is right for your organization.
SOC 1 Reports
SOC 1 (System and Organization Controls 1) reports are designed to assure the controls at a service organization that is relevant to user entities’ internal control over financial reporting. In other words, the SOC 1 report is used to evaluate the controls in place at a service organization that impacts the financial statements of the user entities that rely on that service organization.
These reports are typically required for organizations that provide services to other organizations such as cloud computing providers, payroll processors, and data centers. They are intended to assure user organizations that the service organization has controls in place to protect their financial data and ensure the accuracy of their financial statements.
SOC 1 reports are classified into two types: Type 1 and Type 2. A Type 1 report assures the design of the service organization’s controls as of a specific date. A Type 2 report, on the other hand, assures the design and operating effectiveness of the service organization’s controls over a specified period.
SOC 2 Reports
SOC 2 reports are similar to SOC 1 reports in that they assure controls at a service organization. However, unlike SOC 1 reports, which are focused on controls related to financial reporting, SOC 2 reports focus on controls related to the five trust services criteria—security, availability, processing integrity, confidentiality, and privacy.
SOC 2 reports are typically required for service organizations that handle sensitive data such as healthcare providers, financial institutions, and e-commerce companies. These reports assure user organizations that the service organization has controls in place to protect the confidentiality, integrity, and availability of sensitive data in their care.
They are classified into the same two types as SOC 1—Type 1 and Type 2.
SOC 1 and SOC 2 Reports: Key Differences
Now that we’ve covered the basics of SOC 1 and SOC 2 reports, let’s delve deeper into the key differences between the two.
Scope
The most significant difference between SOC 1 and SOC 2 reports is the scope of the controls being evaluated. As mentioned earlier, SOC 1 reports focus on controls related to financial reporting, while SOC 2 focuses on controls related to the five trust services criteria.
This means that SOC 1 reports are primarily used by service organizations that provide services to user organizations, while SOC 2 reports are used by service organizations that handle sensitive data.
Trust Services Criteria
Another key difference between the two types of reports is the use of Trust Services Criteria (TSC) in SOC 2 reports. TSC is the specific criteria that must be met for a service organization to receive a SOC 2 report. These criteria are designed to ensure that the service organization has controls in place to protect the confidentiality, integrity, and availability of sensitive data.
Length
Another key difference between SOC 1 and SOC 2 reports is their length. SOC 1 reports are typically shorter than SOC 2, as they only need to cover controls related to financial reporting. SOC 2 reports are longer, as they cover a broader scope of controls related to the five trust services criteria. This means that SOC 2 reports may be more time-consuming and costly to produce than SOC 1 reports.
Final Thoughts
Reports on service organizations’ compliance with SOC 1 and SOC 2 standards are both vitally important instruments for ensuring that sufficient controls are in place at service organizations. However, it’s necessary to have a solid understanding of the primary distinctions that exist between the two types of reports, as both cater to distinct audiences and are utilized by a wide variety of businesses.
Understanding which report is appropriate for your organization is essential, as it will assist you in ensuring that you have the necessary controls in place to protect your financial data or sensitive information.
