What Is SOC Reporting, and Why Does Every Organization Need It?

In today’s increasingly specialized business landscape, joining forces with third-party partners is essential. Rather than developing in-house capabilities for everything they do, organizations can outsource peripheral tasks while focusing on their core business functions. However, organizations must carefully evaluate potential business partners to ensure they can meet their own quality standards. That’s precisely the purpose of tools such as SOC reporting. So what is SOC reporting, and why does every organization need it?

What Is a SOC Report?

SOC reporting is a way for companies to receive independent third-party certification that their internal controls and processes meet specific requirements. With SOC reporting, businesses can confirm that a potential third-party partner complies with best practices in a particular field or industry. The acronym “SOC” stands for System and Organizational Controls, but the previous version of the abbreviation (Service Organization Controls) is also sometimes in use. By issuing a SOC report, companies can assure their customers, business partners, and stakeholders that they meet all applicable laws and regulations. SOC reports are generally prepared and released by authorized independent third-party auditors such as certified public accountants. The idea of SOC reporting was first developed in the 1970s by the American Institute of Certified Public Accountants (AICPA), which released a set of guidelines for how independent auditors should assess firms’ financial documents (AICPA, 2022). Today, SOC reporting includes three types of general-service reports and specialized reports for cybersecurity and the supply chain.

What About the Security Operations Center?

The term “SOC” (System and Organizational Controls) is not to be confused with another common SOC acronym: the Security Operations Center. In cybersecurity, a Security Operations Center is a dedicated facility within an organization that is responsible for monitoring the organization’s internal security posture.

The most crucial role of a Security Operations Center is to detect and respond to potential security threats and cyberattacks promptly. To accomplish this goal, SOC network analysts perform duties such as monitoring system logs, reacting to automated pings and alerts, and conducting forensic investigations after an attack.

Although a Security Operations Center is distinct from SOC reporting, the two are linked via the concept of SOC reporting for cybersecurity. In other words, having a Security Operations Center helps businesses meet the requirements of SOC reporting for cybersecurity. The next section will discuss the different types of SOC reports, including SOC reporting for cybersecurity.

The Types of SOC Reports

Businesses can provide three types of general SOC reports and two types for specialized use cases. The general-purpose types of SOC reports are:

1. SOC 1 reports

focus on an organization’s internal controls related to financial reporting. In other words, SOC 1 reporting assures customers and stakeholders that the company’s financial statements are reliable.

2. SOC 2 reports

focus on an organization’s internal controls pertaining to security, availability, processing integrity, confidentiality, and privacy. These five categories are collectively known as the Trust Services Criteria (AICPA, 2020).

1. Security: The organization can protect data and IT systems from unauthorized access.

2. Availability: The organization’s data and IT systems enjoy a high level of availability without suffering from extensive downtime or crashes.

3. Processing integrity: The organization’s data is accurate, complete, and valid.

4. Confidentiality: Sensitive information is adequately protected throughout the data lifecycle, from collection to disposal.

5. Privacy: Personally identifiable information (PII) is appropriately collected, used, stored, and disposed of.

3. SOC 3 reports

are similar to SOC 2 reports but intended for a general audience. SOC 2 reports include in-depth descriptions of the auditor’s tests and results and are only designed to be read by specific entities, such as a company’s business partners. SOC 3 reports omit this potentially sensitive information, making them suitable for widespread distribution.

In addition to these general-purpose SOC reports, there are two types of SOC reports for specific use cases: cybersecurity and supply chain.

• SOC reporting for cybersecurity is an evaluative framework for organizations to assess the strength of their cybersecurity risk management efforts. This involves both the five Trust Services Criteria discussed above and cybersecurity-specific issues. Auditors examine how the organization identifies its IT assets, manages IT security risks, and enacts security policies and processes.
• SOC reporting for supply chain is an evaluative framework for organizations to assess their supply chain controls and processes (i.e., producing, manufacturing, shipping, and distributing goods and products).

Finally, SOC reports may be of two types: type 1 and type 2.

◉ Type 1 SOC reports include the organization’s description of its systems, procedures, and controls and the auditor’s assessment of their suitability.

◉ Type 2 SOC reports include everything in a Type 1 report and an assessment of the effectiveness of these processes and controls over time. Type 2 SOC reports are generally preferred over Type 1 reports because they provide a more in-depth evaluation.

To sum up, SOC 1 reports evaluate an organization’s financial reporting, while SOC 2 and SOC 3 reports evaluate an organization’s IT systems and data management. Type 2 SOC reports involve a long-term evaluation and are more in-depth than Type 1.

The Benefits of SOC Reporting

SOC reporting has several benefits, including:

• Greater transparency: SOC reports provide detailed information about an organization’s internal controls and processes, building trust with its partners and stakeholders.
• More robust risk management: SOC reports can highlight potential flaws, vulnerabilities, or risks in the organization’s controls and processes, making them easier to discover and correct.
• Improved efficiency: SOC audits can identify possible inefficiencies in an organization’s processes that can be streamlined, leading to higher productivity and lower costs.
• Regulatory compliance: A successful SOC report can help the organization comply with other applicable regulations and standards, such as Sarbanes-Oxley (Digital Guardian, 2022) and PCI DSS (Microsoft, 2022).

Source: eccouncil.org