SOC 1 vs SOC 2 – Which Report Does Your Business Need?

In today’s digital world, safeguarding your customers’ sensitive data is more critical than ever. Whether your company handles financial records, personal information, or other sensitive data, having a system in place to ensure its security is essential. One way to demonstrate your commitment to data protection is by obtaining a SOC (System and Organization Controls) assessment.

However, with multiple types of SOC reports available, it’s important to understand the differences between them and determine which is the right fit for your business. Specifically, and most commonly, you’ll need to decide between SOC 1 and SOC 2. In this article, we’ll dive deeper into what each report entails and help you decide which is best suited for your company’s needs.

What is a SOC Assessment?

A SOC assessment is an audit conducted by a third-party service auditor, like Audit Advantage Group, to evaluate how well your company is managing its systems and processes that impact customer data. Think of it as a "report card" for your company's operations related to data security, privacy, and internal controls. The objective is to demonstrate to your clients that you’re adhering to industry standards and best practices for managing sensitive data.

SOC assessments can range from ensuring the integrity of financial data (SOC 1) to confirming your business's efforts to secure and protect sensitive information like customer privacy (SOC 2). There are three different types of SOC reports (SOC 1, SOC 2, and SOC 3), but SOC 1 and SOC 2 are the most commonly used, each focusing on distinct areas of your operations.

SOC 1: Focusing on Financial Data and Internal Controls

A SOC 1 audit focuses on your organization’s internal controls over financial reporting. This audit assesses how your company handles financial data and whether your processes could impact the accuracy of financial statements.

Who Needs a SOC 1? SOC 1 reports are crucial for any business that provides services which impact its customers’ financial reporting. Common examples include:

Payroll service providers: Ensuring the accuracy and integrity of employee payroll.
Accounting firms: Verifying the management of client financial records.
Transaction processors: Checking if financial data is handled accurately and securely.
Banking/Payment systems: Confirming secure and compliant processing of financial transactions.

What Does a SOC 1 Audit Cover? The SOC 1 audit specifically addresses the control environment around financial reporting. The auditor assesses whether your company’s controls could potentially lead to errors, fraud, or inaccurate financial data.

A SOC 1 audit looks at control objectives such as:

Transaction processing controls: How transactions are authorized, recorded, and processed.
Access controls: Who can access financial records, and whether access is properly restricted.
Data transmission security: Ensuring financial data is securely transferred between systems and clients.
Operational effectiveness: Whether your financial processes are being followed properly and effectively.

SOC 1 reports are typically used by financial auditors and regulators to assess risks related to financial reporting.

Key Features of SOC 1:

Primary Focus: Internal controls over financial reporting.
Audience: Primarily external auditors, regulators, and financial teams.
Impact: Directly affects the accuracy and security of financial data.

SOC 2: Focusing on Data Security, Privacy, and System Reliability

A SOC 2 audit, on the other hand, focuses on a wider range of concerns related to the security, availability, processing integrity, confidentiality, and privacy of data handled by a company. Unlike SOC 1, which is limited to financial data, SOC 2 applies to companies that deal with sensitive customer information, such as personal details, health data, or intellectual property.

Who Needs a SOC 2? SOC 2 audits are most common for technology-driven businesses that process sensitive data or operate services that require a high level of trust. This includes:

Software-as-a-Service (SaaS) providers: Ensuring the security of user data hosted in cloud applications.
Cloud service providers: Verifying the availability and integrity of cloud-based services and data.
Tech companies handling sensitive data: Companies managing personal, medical, or financial information.
Data centers: Companies that store or process large amounts of sensitive data for clients.

What Does a SOC 2 Audit Cover? SOC 2 reports are based on the Trust Services Criteria (TSC), a set of five key principles used to evaluate the security and reliability of your systems. These principles are:

Security: Ensures the system is protected against unauthorized access and data breaches.
Availability: Verifies that the system is available for operation and use as agreed upon.
Processing Integrity: Checks whether the system processes data accurately, timely, and in a complete manner.
Confidentiality: Ensures that sensitive data is protected and only accessible to authorized parties.
Privacy: Verifies that personal information is collected, stored, and used in accordance with privacy laws and regulations.

SOC 2 Audit Topics

The SOC 2 audit is grounded in the COSO (Committee of Sponsoring Organizations) framework, which provides a structured approach to assessing and managing internal controls. This framework emphasizes a comprehensive evaluation of an organization's ability to safeguard data and ensure the integrity of its systems. A SOC 2 audit typically covers the following critical areas:

Risk Assessment: Reviewing how your organization identifies and evaluates risks to its systems, data, and operations. This includes ensuring that risks are regularly assessed and that appropriate controls are implemented to mitigate these risks.
Communication and Information: Evaluating the effectiveness of internal and external communication channels. This includes how critical information is shared within the organization and with external stakeholders to support the functioning of internal controls and ensure the right people have the necessary information to maintain security and compliance.
Human Resources Processes: Assessing HR practices related to hiring, training, and managing personnel involved in sensitive data handling or IT operations. This includes evaluating background checks, onboarding procedures, and ongoing employee training programs to ensure personnel are aware of security policies and procedures.
Access control mechanisms: Ensuring only authorized personnel have access to sensitive data.
Data encryption: Verifying that data is encrypted during transmission and storage to prevent unauthorized access.
Incident response: Evaluating how well your company can respond to and manage a potential security breach.
Service uptime: Measuring the availability of your services and systems as per agreed-upon SLAs.
Privacy policies: Reviewing how customer data is collected, used, and protected in compliance with privacy laws.

SOC 2 audits are usually important for customers and clients who are concerned about the safety and confidentiality of their data, making it a crucial report for service providers who handle sensitive information.

Key Features of SOC 2:

Primary Focus: Data security, availability, confidentiality, processing integrity and privacy.
Audience: Primarily customers, clients, and business partners who rely on your company to protect their sensitive data.
Impact: Builds trust with customers by showing your commitment to safeguarding their data.

SOC 1 vs SOC 2: A Quick Comparison

Feature	SOC 1	SOC 2
Focus	Financial data and internal controls for financial reporting	Security, privacy, and data protection across various domains
Audience	Auditors, financial teams, regulators	Clients, customers, partners, and compliance officers
When to Choose	If your business impacts financial reporting (e.g., payroll, accounting, financial transactions)	If your business processes sensitive customer data (e.g., SaaS, cloud services, tech companies)
Main Criteria	Financial reporting accuracy and integrity	Security, privacy, availability, and confidentiality of data
Typical Use Case	Financial institutions, accounting firms, and service providers	SaaS providers, cloud service companies, data processors

Which One Does Your Business Need?

Determining whether you need SOC 1 or SOC 2 depends entirely on the nature of your business and the type of data you handle:

Choose SOC 1 if your company offers services that influence or directly affect financial reporting—such as payroll processing, accounting services, or transaction processing.
Choose SOC 2 if your company processes customer data, particularly sensitive or personal information. SOC 2 is essential for demonstrating to customers that your organization follows best practices in security and privacy management.

Some businesses may need both SOC 1 and SOC 2 reports if they provide a mix of services that affect both financial data and customer data.

Why SOC Reports Matter

Opting for the right SOC assessment can provide a variety of benefits to your business, including:

Building Customer Trust: A successful SOC audit demonstrates your commitment to protecting customer data and assures clients that you adhere to best practices.
Regulatory Compliance: Certain industries (like healthcare, finance, and government) require strict data protection measures. A SOC report helps you comply with these regulations.
Identifying Security Gaps: The audit process helps identify potential weaknesses in your data security systems, giving you the chance to improve them proactively.

Final Thoughts

Whether you choose SOC 1 or SOC 2 depends on your business’s operations and the type of data you handle. Both audits are essential tools for building trust with your clients and ensuring your systems and processes align with best practices. However, understanding which SOC report best fits your company’s needs is crucial.

At Audit Advantage Group, we can help you navigate this decision and guide you through the process to ensure your company receives the right SOC report. If you’re unsure which audit to choose or need more details, feel free to contact us today. We’re here to help!