Demystifying SOC Audits: Understanding the Why and What

In our digital-first world where data breaches and cybersecurity threats are on the rise, organizations are under increasing pressure to demonstrate their commitment to protecting sensitive information.

One powerful tool is the System and Organization Controls (SOC) audit, an independent assessment designed to provide assurance to stakeholders that a company has adequate controls in place to protect its data, systems, and operations.

“The rapid growth in the number of businesses outsourcing various functions has made it absolutely necessary for service organizations to have internal controls in place designed to protect those they work with,” says Holbrook & Manter SOC Report Services. “Your customers may call on you for assurance about your systems’ controls in regards to financial reporting, the controls meant to guard the privacy of user’s data and security or the integrity of your systems as a whole.”

SOC audits are conducted by independent auditors who use a variety of techniques to assess the effectiveness of the company's controls. These techniques can include interviews with company personnel, review of documentation, and testing of controls.

“The biggest value of an SOC audit is getting an independent, third-party review of your processes and controls,” says Holbrook & Manter. “By having an SOC audit performed, you can set yourself apart from the competition. With today’s aggressive business environment, any competitive edge you can obtain can be the make-it-or-break-it deciding factor when it comes to picking a service provider.”

The Different Types of SOC Audits

There is more than one type of SOC audit.

Here are the three main levels of SOCs for service organizations:

• SOC 1: Relates to the organization's internal control over financial reporting. These audits are sometimes known as SSAE (Statement on Standards for Attestation Engagements) audits. These audits focus on financial reporting controls relevant to the customers of the audited organization. These audits are often used for organizations that process financial transactions, such as payroll providers or data centers.
• SOC 2: Concentrates on security, availability, processing integrity, confidentiality, and privacy controls. These audits are often used by organizations that provide cloud services, data housing, or other services that involve handling sensitive information. There are two subtypes for SOC 2 audits:

o   Type 1: Reporting on the design of controls at a specific point in time or carried out on a specific date.

o   Type 2: Reporting on operational effectiveness of controls over a period, usually a minimum of six months and typically for a full year.

• SOC 3: These audits are like SOC 2 audits, but their reports are much more concise and designed for a general audience. These reports are typically used for marketing purposes to demonstrate an organization’s commitment to security and data protection.

Most companies will initially start with a Type 1 audit and then follow up with a Type 2 audit annually.

What type of SOC audit should your company have conducted? The American Institute of Certified Public Accountants (AICP) says you should answer these three key questions:

• Will the report be used by your customers and their auditors to plan and perform an audit or integrated audit of your customer’s financial statements? Then SOC 1 audit.
  
  
• Will the report be used by your customers or stakeholders to gain confidence and place trust in a service organization’s systems? Then SOC 2 or SOC 3 audit.
  
  
• Do your customers have the need for and ability to understand the details of the processing and controls at a service organization, the tests performed by the service auditor, and the results of those tests? Then SOC 2 audit.

Who Performs an SOC and What Results Are Shared?

SOC audits are conducted by independent third-party auditors or audit firms with expertise in information security and control assessments.

“In the U.S., an SOC audit can only be performed by an independent CPA (certified public accountant) or accountancy organization,” says IT Governance. “SOC auditors are regulated by and must adhere to specific professional standards established by, the AICPA. They are also required to follow specific guidance related to planning, executing, and supervising audit procedures. AICPA members are also required to undergo a peer review to ensure their audits are conducted in accordance with accepted auditing standards.”

The results of an SOC audit are typically shared in the form of an SOC report. Depending on the type of SOC audit, this report may include:

• Management's Assertion: The organization's management provides a written assertion regarding the effectiveness of its controls.
  
  
• Auditor's Opinion: The auditor provides an opinion on the accuracy and completeness of the management's assertion.
  
  
• Description of System: Details about the organization's system, including its scope, objectives, and operations.
  
  
• Control Objectives and Activities: A description of control objectives and activities implemented by the organization.
  
  
• Test Results: The results of testing controls, including any identified deficiencies or weaknesses.
  
  
• Compliance with Criteria: A statement on whether the controls meet the relevant criteria (e.g., SOC2 principles).
  
  
• Other Information: Additional details or information related to the audit.
  
  

Why a Company Calls for an SOC Audit

Organizations choose to have SOC audits performed for various reasons:

• Customer Trust: Demonstrates a commitment to data security and compliance, which can instill trust in customers and partners.
  
  
• Regulatory Compliance: Some industries and regulatory bodies require SOC audits to ensure data protection and privacy standards are met.
  
  
• Risk Mitigation: Identifies vulnerabilities and weaknesses in controls, allowing for remediation to reduce the risk of data breaches and fraud.
  
  
• Competitive Advantage: Having an SOC report can give organizations a competitive advantage by showcasing their commitment to data security.
  
  
• Improved Internal Processes: SOC audits often result in recommendations for process improvements, enhancing overall operational efficiency.
  
  

“There are two main reasons to have an SOC audit performed: your customers are asking, and you feel it’s needed,” says Holbrook & Manter. “The first is easier to explain; because an SOC audit is telling your customers that you have controls in place to make sure their information is properly processed, is kept secure, is done accurately, etc., this provides value to them.

“The second reason is because it makes sense to have one. While most people hear the word audit or auditor and cringe, some people actually place value on a third party coming in, independently, reviewing their operations and systems and providing feedback, and pointing out weaknesses.

Benefits of Having an SOC Audit Conducted

A SOC audit can be a valuable tool for companies that want to demonstrate to their stakeholders that they have effective controls in place to protect their data, systems, and operations.

SOC audits can also help companies to identify areas where they can improve their controls.

Here are some of the benefits of conducting a SOC audit:

• Increased confidence for stakeholders.
  
  
• Reduced risk of data breaches and other security incidents.
  
  
• Improved compliance with regulations.
  
  
• Identification of opportunities for improvement and streamlining processes.
  
  

“Having an SOC report sends a strong signal to customers that your organization upholds its policies and procedures,” says Sprinto. “SOC reports help customers to understand a vendor’s security and legitimacy of data and systems. It also enables vendors to fix flaws and identify vulnerabilities before customers do.”

The folks at Wipfli also say the benefits of an SOC audit extend to:

• Cuts down on questionnaires: Organizations sometimes must fill out multiple vendor management or security questionnaires for customers, which can be time-consuming and a burden to staff. An SOC audit can often be provided in place of these questionnaires.
  
  
• Reduces financial statement auditor questions: An SOC report can also help reduce the time you spend answering your customer’s auditor’s questions about your controls, processes, and operations.
  
  
• Makes your policies and procedures more robust: Your auditor may find you’re missing policies or procedures, or that certain ones need to be adjusted, and following their recommendations will allow you to make improvements and further mitigate risk.
  
  
• Gain a competitive advantage and expand your customer base: Customers are increasingly requesting SOC audits in contracts as a condition of doing business with them so not being SOC compliant could lose your organization's customers.
  
  

SOC audits play a vital role in today's data-driven world by providing assurance to stakeholders, customers, and partners about an organization's commitment to data security and operational integrity.