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Most service organizations struggle to establish whether a SOC 1 or SOC 2 audit is the best match, since System and Organization Control audits (SOC) are increasingly becoming a prerequisite to maintain and engage new clients. These audit activities are basically similar in terms of procedure, yet they serve very distinct purposes for your users.  

A SOC audit addresses third-party risk by independently verifying and reporting to your customers that your company has adequate and effective internal controls in place. Your clients may be compelled to get a SOC report from you in order to meet their own compliance requirements in various circumstances. 

Here, we look into the fundamental differences between a SOC 1 and a SOC 2 report, as well as which industries rely on SOC 1, and the aspects of compliance and reporting. 

Differences Between SOC 1 and SOC 2 

Is SOC 2 better than SOC 1? Is a SOC 1 report required before you can receive a SOC 2? Is SOC 1 more valuable than SOC 2? We get these types of questions often. 

It’s vital to remember that the numbers (1, 2 or 3 as the case may be) do not represent a certain order or set of standards. A SOC 1 audit is not required before beginning a SOC 2 audit.

SOC 1 and SOC 2 are essentially two distinct methods of reporting. In a nutshell, a SOC 1 audit focuses on internal controls over financial reporting (ICFR). A SOC 2 audit examines non-financial reports (such as information and IT security) as defined by any of the five Trust Services Categories: security, confidentiality, information privacy, processing integrity, and availability.

SOC 1 vs. SOC 2 

SOC 1 SOC 2 
Focuses on an organization’s financial reporting Focuses on how customer data is secured and protected 
Targeted towards organizations whose internal security procedures may have an influence on a customer’s financial statements, such as   Payroll, claims, and payment processing organizations.   SOC 2 is primarily targeted towards service providers who store client data in the cloud. As a result, SOC 2 applies to almost every SaaS company. 
With SOC 1 reports customers may rest easy knowing that their financial information is safe SOC 2 compliance means that processes and practices with required levels of oversight across an organization has been established (based on the Trust Services Criteria) 
The SOC 2 report is the most sought-after in this subject area, and it’s a requisite if you’re working with an IT provider. People mistakenly assume that SOC 2 is an improvement to SOC 1, which is wrong. SOC 2 examines a service organization’s controls in relation to the Trust Service Criteria.
This table compares the reasons for engaging either a SOC 1 or SOC 2 audit.

Which Industries Rely More on SOC 1? 

If your services have an influence on your client’s financial reporting, you should target SOC 1.  For example, if your company develops software that handles your clients’ billing and collections data, you’re influencing their financial reporting, thus a SOC 1 is suitable.  

Clients requesting a “right to audit,” is another motivation for enterprises to prefer SOC 1 over SOC 2. Without SOC 1, this might be an expensive and time-consuming procedure for both parties, especially if several clients want the same thing. As part of a compliance obligation, you may be required to comply with SOC 1. If your organization is publicly listed, SOC 1 credentials are also required as part of the Sarbanes-Oxley (SOX) Act. 

SOC 2 makes sense, on the other hand, if your company doesn’t process financial data but does process or host other forms of data. Your clients may seek verification that you are making reasonable efforts to secure their data and halt any leaks, especially in today’s business climate when everyone is hyper-aware of data breaches. 

“A lot of our clients find value in performing a separate engagement when there is some needed reliance on internal controls related to the nature of reporting. For clients that perform some sort of business process or financial process that’s relied on by their customers or vendors, a SOC 1 is oftentimes the best solution. A SOC 1 audit provides a solid level of assurance for the controls relied upon by their user entities.” 

– Joe Ciancimino, CISA, CRISC, and director at I.S. Partners.    

We also find ourselves talking some software clients out of doing a SOC 2. This is when their customers rely on their platform for some sort of accounting process or financial application. The testing that I.S. Partners performs as part of SOC 1 certification gives their end customers assurance related to the automated controls within the software. A SOC 1 is uniquely suited to provide our clients’ customers with the assurance that the accounting processes in the software work the way they are intended. 

Related article: 5 Reasons that Data Centers Need a SOC 1 Report.

Industries Where SOC Applies

SOC 1 SOC 2 
1. Data center companies,  
2. Loan servicing companies,  
3. Medical claims processors 
4. Payroll processors. 
5. Trust companies 
1. Software as a service (SaaS) companies that provide programs, apps, and websites 
2. Companies that provide business intelligence, analytics, and management services 
3. HR management services 
4. Organizations that provide customer management and other client-facing services 
5. Managed IT and security service providers, including those that help with SOC 2 
This table compares the industries in which SOC1 and SOC 2 are applied voluntarily or by compliance regulations.

Differences Between the SOC 1 Types 

Type I and Type II reports are supplemental to SOC 1 and SOC 2 compliance. Type I or Type II reports are most commonly found in SOC 1 or SOC 2 reports. A corporation could have a SOC 1 Type I, SOC 2 Type I, and so on. The scope and duration of the evaluation are what distinguishes the various types of SOC audits: 

Type I

Type I audits are used to get a picture of a company’s compliance status. One control is tested by the auditor to ensure that the company’s description and design are correct. The firm is given a Type I compliance certification if this is the case. 

Type II

Assesses a company’s capacity to maintain compliance. Over a period of time, the auditor evaluates the company’s compliance procedures. A Type II compliance report is issued if the firm stays compliant during the evaluation period. 

How Can You Choose Between SOC 1 Type I and SOC 1 Type II? 

Often, the sort of report you want for your SOC audit will be determined by your customer. What does your customer require? When users request a SOC report for their internal auditing process, they usually want the Type II report, which is the most complete form. 

But let’s say you’re just learning about SOC reports. In that situation, whether it’s SOC 1 or SOC 2, we recommend starting with a Type I report to gain a better knowledge of your organization’s controls and gain firsthand experience with the auditing process. 

Related article: SOC 1 Type I vs. SOC 1 Type II Report – What’s the Difference? 

When Is SOC 1 the Better Option?

If your services have an influence on your clients’ financial reporting, you should target SOC 1.  For example, if your company develops software that handles your clients’ billing and collections data, you’re influencing their financial reporting, thus a SOC 1 is suitable.  

Clients requesting a “right to audit,” is another motivation for enterprises to prefer SOC 1 over SOC 2. Without SOC 1, this might be an expensive and time-consuming procedure for both parties, especially if several clients want the same thing. As part of a compliance obligation, you may be required to comply with SOC 1. If your organization is publicly listed, SOC 1 credentials are also required as part of the Sarbanes-Oxley (SOX) Act. 

SOC 2 makes sense, on the other hand, if your company doesn’t process financial data but does process or host other forms of data. Your clients may seek verification that you are making reasonable efforts to secure their data and halt any leaks, especially in today’s business climate when everyone is hyper-aware of data breaches. 

Are Service Organizations Required to have both a SOC 1 and SOC 2? 

A service organization may be required to get both a SOC 1 and SOC 2 audits in some cases. When a company provides services across multiple industries, some clients may request a SOC 1 while others request a SOC 2. There may be overlap in the testing covered in the reports, resulting in testing efficiencies. 

How Long Does it Take to Get SOC 1 vs SOC 2 Reports? 

The time requirements for SOC 1 and SOC 2 are different SOC 1 reports may take a bit less time to complete depending on the availability of the relevant controls, SOC 2 is more stringent in that it examines policies and processes over a time period, with systems being assessed for at least six months. 

A SOC 1 examination normally takes one to three months for Type I reports and six to twelve months for Type II reports if a company has controls in place. The audit may take longer if there are no controls in place. 

For most businesses, a SOC 2 Report will take anything from six months to a year to complete. SOC 2 Type 1 Reports, in example, can take up to six months, but SOC 2 Type 2 Reports usually take at least six months and often last a year or longer. 

“The process for achieving SOC 1 compliance is longer from a readiness standpoint. I’d say that it takes considerably longer to start from scratch and get certified for SOC 1–as opposed to approaching a SOC 2 audit for the first time–but the audit is done the first time, the organization should be all set. There isn’t much difference in time and effort; recertification will likely require virtually the same amount of effort as a SOC 2.”  

Robert Godard, partner at I.S. Partners is specialized in audits of IT controls and infrastructure, financial statements, SOC 1 and SOC 2 audits, HITRUST assessments and more.

Many factors influence these times, resulting in considerable variations from one company to the next. Companies with more complex and diversified IT and cybersecurity infrastructures, for example, would likely need more time to complete the audit procedure required for a SOC 2 Report. The number, kind, and location of users associated with the organization (i.e., on-premise or remote workers) will also influence the auditor’s evaluation scope. 

Related article: Prepare a Great Written Assertion for Your SOC 1 Examination.

Why Your Organization Should Consider SOC 1 

Here’s a quick rundown of the advantages of SOC 1 over SOC 2 auditing as explained by David Dunkelberger, who is a Partner at I.S. Partners and specializes in forensic investigation and fraud detection, SOC 1, 2, and 3 audits, information security assessments, financial controls and process enhancements, internal reporting, strategic planning and development. 

  1. SOC 1 is a more flexible and customizable audit framework than SOC 2. SOC 2 has more prescribed criteria that must be met, while the SOC 1 the control objectives that need to be met are determined by the client’s management team. Our SOC auditors work with the client to develop the language for those objectives. Overall, the level of customization is much greater in SOC 1 than a SOC 2. 
  1. Performing a SOC 1 audit could save your organization time. In terms of time, one of the major impacts of having a SOC 1 report is that it reduces the amount of outside auditing from the client’s customers. A good example is a company that provides some software that has a financial reporting impact for its customers, such as a payroll tool. The company’s customers, at least those in the U.S., have a respective right to know how it is performing for their benefit. So, instead of having a separate audit team from each of those customers go to the software company and do their own auditing, the SOC 1 report takes care of that need. The SOC 1 report basically eliminates any time involved in running third-party audits that the customer may have to provide for their own benefit. In that way, SOC 1 is really a powerful tool especially for financial reporting and internal controls, as David when on to explain.  

Why Work with I.S. Partners for SOC 1 Auditing, Reporting, and Certification? 

We work with the client to develop the control objectives and compliance workflow that are right for your organization. Contact I.S. Partners to find out if it’s the better choice for your organization. 

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