SOC 1 vs SOC 2 Audits: What’s the Difference?

In this video, we define SOC 1 and 2, reveal situations where companies may need both reports, and offer tips for preparing your organization for an audit.

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Transcript:

First, let's explain what a SOC report is. System and organization controls, or SOC reports, verify a company's commitment to an execution of accounting and data controls via rigorous evaluations conducted by third party auditors. They assure customers and stakeholders that companies are adequately prepared to counter and address financial and data related issues. You can think of SOC reports as a kind of company background check, confirming that the company's business practices around finances and data are sound. So just like when you accept an offer and HR orders a background check, organizations request copies of a company's SOC report before doing business.

Now let's talk about SOC 1 audits. SOC 1 audits are conducted when a service organization needs to demonstrate its command over financial reporting. Examples of service organizations are companies that manage payroll or healthcare benefit processing, insurance trust departments, or custodians for investment companies. During a SOC 1 audit, CPAs will review a company's entire set of internal financial controls in relation to the type of services they provide and the regulations in that industry. While this process can be tedious, it's worth it in the long run. Being able to show clients a successful SOC 1 audit and corresponding reports means that a company has the proper controls in place to deliver accurate, high quality financial reports.

Let's move on to SOC 2 audits. SOC 2 audits are conducted when an organization needs to demonstrate its command over internal data operations and compliance. SOC 2 audits are more complex than SOC 1 audits and are necessary for any company that accesses, stores or uses another company's data, even non-financial data. As you can imagine, SOC 2 is a must-have for most cloud-based software systems. SOC 2 audits assess controls based on five trust service categories, security, availability, processing integrity, confidentiality, and privacy. Each category has globally accepted best practices that auditors look for, such as user authentication, network protection, compliance with privacy laws, full disk encryption, and adherence to a zero trust model. So before undergoing an audit, upper management must review the current status of each of these categories in their organization and determine which ones they'd like auditors to review and include in their reports. In general, SOC 2 reports reflect an organization's devotion to data integrity, confidentiality, privacy, and safety.

Now that you know the differences between SOC 1 and SOC 2, it's time to discuss type one and type two reports. There are two types of sub reports within SOC 1 and SOC 2, with some key differences between them. The type one report evaluates a company's controls at the time of an audit. Type two takes this one step further, testing out the controls with real data in real time. Type two reports measure how well these controls work in practice by monitoring a company's operations over a six-month period. So now you might be asking yourself, would there ever be a situation where you need both a SOC 1 and a SOC 2 report? The quick answer to this question is yes, some companies may only need a SOC 1, others may only need a SOC 2, and others may require both. Companies hired by other organizations to complete an aspect of their financial reporting should focus on achieving SOC 1. Software companies, specifically SaaS companies, are often good candidates for SOC 2 reports. Even though they may not be accessing, storing, or using customers' financial data, they typically interact with company and personal data. Sometimes companies are financial service providers and software companies, like accounting software, for example. For those organizations, obtaining SOC 1 and SOC 2 reports helps to satisfy all of their stakeholders.

Understanding what SOC reports are and how to achieve them can feel overwhelming, but the good news is that passing SOC audits doesn't have to be complicated if you lay the right foundation. Jumpcloud's compliance solution allows IT to enact and enforce policies across your organization, all from one central console. Admins can identify and resolve issues immediately, restoring balance to the organization and ensuring the business continues to operate consistently and reliably.