Types of SOC Reports and Their Business Impact

SOC (Service Organization Control) reports are categorized into three types, primarily distinguished by their intended audience: SOC 1 and SOC 2 reports are meant for current user entities, while SOC 3 reports can be provided to potential clients. Here is a brief overview of the different types of soc reports:

As with any business investment strategy, prudency is a critical component to ensure value is being added to the organization. When analyzing the decision to invest in a long-term strategy, a cost-benefit analysis provides insight into the value provided by the investment. When considering adding a SOC report to your strategy, there are some direct costs to consider:

The initial step in securing a SOC report is completing a readiness assessment to identify gaps or deficiencies in internal controls, which can include the need to invest in additional technological strategies to ensure closure of gaps or remediation of deficiencies. These strategies can vary from software investment to outsourcing processes. Appropriately designed strategies ensure organizational readiness for ongoing SOC audits year after year.

While the completion of a readiness assessment will help identify and potentially streamline the resources needed to complete a SOC audit, there will be a need for an auditor to engage with organizational staff annually to complete the SOC audit. Fieldwork typically spans 2-4 weeks, depending on staff availability and preparedness. Additionally, it is beneficial to train staff on the significance of maintaining internal controls throughout the designated period, which may incur further costs.

A quality SOC examination begins with a readiness assessment in the first year of the engagement, which rolls into a SOC report. The readiness assessment then leads to an annual SOC examination to ensure ongoing compliance. The cost of readiness assessments and SOC examinations vary depending on the type of report and the number of internal controls assessed within the organization's business processes. In the first year, an organization will bear the cost of both, but in the years following, the audit fees associated with the SOC report will not include a readiness assessment.

While the direct costs may seem daunting, there are several benefits received by the organization:

Inherently, nothing can eliminate all organizational exposure risk. However, having a dedicated team to maintain internal controls for financial reporting and information systems security significantly reduces the risk of security incidents and data breaches.

Providing a SOC report to clients, demonstrates a commitment to strong internal controls and security, which fosters greater trust among clients.

When service organizations are contracting with clients, having a completed SOC report (even if not shareable, depending on the report type) helps reduce the effort required to provide the client with necessary information, facilitating the client’s decision-making process.

In a market filled with an array of options, possessing a SOC report can provide a competitive edge, while the absence of one could create a disadvantage, as more organizations strive to meet client demands.

The final and most time-intensive aspect of obtaining a SOC report is developing an implementation strategy for preparing and completing a SOC audit. This implementation strategy can be summarized in three parts:

As previously discussed, the first step in obtaining a SOC report is the readiness assessment. During this phase, the service organization will determine the scope of the report, and the type of SOC report needed. They will evaluate the current control environment and, with the help of an auditor, identify gaps in internal controls as well as necessary remediation strategies to address those deficiencies. This phase typically takes about three months, and involves discussions around business processes with internal staff, evaluating existing internal controls, and creating a list of identified gaps. Additionally, during this phase, the auditor will work closely with the service organization to develop the system description, which is a requirement for a SOC report. At the completion of the Assessment Phase, the auditor will provide a list of all internal controls identified during the assessment, any gaps or deficiencies found, along with a detailed system description.

The Preparation Phase is the next phase of obtaining a SOC report, which occurs internally within the organization. During this phase, the service organization will take steps to close the identified gaps and implement required internal controls, document processes and procedures, and train staff on compliance requirements. The duration of this phase depends on the staffing capabilities of the organization, the volume of identified gaps, and the organization’s desire to move into the Audit Phase. Some organizations may be able to transition directly into an Audit Phase, while others may require additional time for preparation.

The final phase of obtaining a SOC report is the Audit Phase. In this phase, the service organization will engage with a qualified auditor to complete the examination process, ensuring that internal controls are effective and addressing any auditor findings encountered during the audit. Most auditors will conduct fieldwork, walkthroughs, and testing to evaluate control evidence and provide recommendations to improve the service organization's overall internal control environment. The final deliverable of the Audit Phase is the service auditor’s SOC report.

So, what lies ahead, and why all the fuss about SOC reporting? As an industry, we are witnessing emerging services, breakdowns in internal controls leading to security incidents and data breaches, and heightened regulatory scrutiny. We see this most commonly in:

The business case for SOC reports is becoming stronger as service organizations face mounting pressure to demonstrate robust control environments. Although the investment required is significant, they are more than just a compliance exercise. The benefits of enhanced trust, reduced risk, and operational efficiency make SOC reports an essential component of modern business operations.

SOC reports are more than a compliance exercise. They are a critical tool for managing risk, building trust, and gaining a competitive edge in today’s digital landscape. The experts at Clark Schaefer Consulting help organizations navigate the complexities of SOC reporting with tailored solutions that address your unique needs.

Ready to explore how SOC reporting can benefit your organization? Contact us today to schedule a consultation and take the first step toward securing your organization’s future.