What is SOC 1? — A Complete Guide to SOC 1 Reports

For organizations that provide services that could impact their customers’ financial reporting, demonstrating strong internal controls is critical.

In today’s business world, it’s no longer enough to simply claim your internal processes are secure or reliable. Customers, partners, and stakeholders—such as SOX auditors—expect verified assurance, especially when financial reporting is involved. That’s where SOC 1 comes in.

Here’s everything you need to know about SOC 1, what it covers, and why it might be the right choice for your organization:

What is a SOC 1 Report?

A System and Organization Controls (SOC) 1 report is a formal, independent assessment of a service organization’s internal controls that are relevant to its customers’ financial reporting. Issued under standards defined by the American Institute of Certified Public Accountants (AICPA), SOC 1 reports evaluate whether a service provider’s systems are designed and/or operating effectively.

There are two types of SOC 1 reports:

• SOC 1 Type 1 examines the design of controls at a specific point in time. It answers the question: Have the right controls been put in place?
• SOC 1 Type 2 examines both the design and operating effectiveness of controls over a specified period of time, typically between six and 12 months. It answers the question: Have those controls been functioning as intended?

Both are conducted by accredited CPA firms and follow the AICPA’s SSAE 18 standards, which replaced SSAE 16 in 2017, introducing more rigorous requirements around management assertions and system descriptions.

Unlike frameworks such as ISO 27001 and HITRUST, a SOC 1 audit does not result in any certification. Instead, it offers a CPA’s opinion on whether your controls are suitably designed and operating effectively to meet control objectives tied to financial reporting.

Who Needs a SOC 1 Report?

SOC 1 reports serve as an essential tool for businesses that handle financial transactions or support transaction processing systems, especially when those systems have a direct impact on a customer’s financial statements.

Organizations should consider undergoing a SOC 1 examination if their services could impact a customer’s internal controls over financial reporting. This includes services like:

• Payroll and benefits platforms
• Billing and invoicing systems
• Data hosting or cloud services involved in financial reporting and recordkeeping

While not legally required, a SOC 1 report is often requested by current and prospective customers as part of their regular vendor risk assessments. For this reason, undergoing a SOC 1 examination can remove friction from your sales process while helping you build trust and credibility with prospects.

What’s the Difference Between SOC 1, SOC 2, and SOC 3?

In simple terms, a SOC 1 report gives current and potential stakeholders a closer look at the policies, procedures, and controls in place to ensure the integrity of data within a system that may impact a user’s financial reporting. However, if your organization’s biggest risk drivers include security, availability, or privacy, which is often the case for cloud services or SaaS platforms, then a SOC 2 or SOC 3 report might be more appropriate. 

SOC 2 reports address broader trust services criteria (TSC), such as:

• Security: The system is protected against unauthorized access (both physical and logical). This TSC is required for all SOC 2 reports.
• Availability: The system is available for operation and use as committed or agreed.
• Processing Integrity: System processing is complete, valid, accurate, timely, and authorized to meet the entity’s objectives.
• Confidentiality: Information designated as confidential is protected as committed or agreed.
• Privacy: Personal information is collected, used, retained, disclosed, and disposed of to meet the entity’s objectives.

A SOC 3 report is similar in scope to a SOC 2 report, but the information is packaged more concisely, making SOC 3 reports easier to read and a better fit for widespread distribution. Both reports result from the same audit, and both can help communicate that an organization’s controls are properly designed, implemented, and operating effectively.

The Bottom Line

Whether you’re aiming to meet customer demands or boost your credibility in a competitive market, undergoing a SOC 1 audit can be a smart investment for service organizations that play a role in their clients’ financial reporting.

By understanding the scope and purpose of a SOC 1 report, and how it differs from SOC 2 and SOC 3, you’ll be better positioned to choose the right option for your business.

Not sure which SOC report makes the most sense for your organization? Contact us today for a free consultation.