What is SOC 1?

You’ve probably heard of SOC 2. Maybe even SOC 3. But do you know about SOC 1?

It’s not a predecessor to SOC 2 or more important than SOC 3. But it’s just as essential. SOC 1 helps organizations demonstrate their controls’ effectiveness to customers and stakeholders. 

In this blog, we’ll dive into the details of SOC 1 and why it’s important, who needs it, the differences between SOC reports, and the types of SOC 1 reports.

Why is SOC 1 important?

SOC 1 stands for System and Organization Control 1. In 2017, this term was introduced to supersede service organization control. It’s an attestation report that demonstrates how a company’s control environment ensures the reliability of its financial reporting. 

The attestation outlines the controls that the organization has in place and control effectiveness in achieving the objectives–protecting information through different means and environments. Don’t worry, we’ll explain this more in a bit.

SOC 1 reports help service organizations build customer trust and reduce the risk of fraud or financial misstatements.

Who needs a SOC 1 attestation?

Any company providing outsourced services that could affect their clients’ financial statements should consider a SOC 1 report. 

These services include payroll processing, data center operations, financial processing, and other services that could impact their clients’ financial reporting. The SOC 1 report is especially crucial for organizations subject to regulatory compliance, such as the Sarbanes-Oxley Act (SOX).

What is the difference between SOC 1 vs. SOC 2?

While SOC 1 reports focus on financial reporting, SOC 2 reports evaluate the effectiveness of a company’s security, confidentiality, and privacy controls. 

SOC 2 reports are more relevant for organizations that process sensitive or confidential data, such as healthcare providers or financial institutions. SOC 2 reports can also help organizations demonstrate compliance with HIPAA, GDPR, or PCI DSS regulations.

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Defining SOC 1 Type 1 vs. SOC 1 Type 2

There are two types of SOC 1 reports; SOC 1 Type 1 and SOC 1 Type 2. 

SOC 1 Type 1 reports evaluate the design and implementation of controls at a specific point in time. This report provides a snapshot of the control environment and the effectiveness of the controls at that time. 

On the other hand, SOC 1 Type 2 reports evaluate the effectiveness of the controls over a period, usually six months to a year. This report provides a more comprehensive view of the control environment and the effectiveness of the controls over time.

When should my business get a SOC 1 report?

Service organizations should work toward a SOC 1 report when customers or stakeholders require it. 

Obtaining a SOC 1 report helps service organizations differentiate themselves from competitors and build trust with their customers. SOC 1 reports are also useful when organizations want to demonstrate their compliance with regulatory requirements, like SOX.

SOC 1 compliance through achieving control objectives

To become SOC 1 compliant, service organizations must follow specific control objectives and control activities outlined in the AICPA’s SOC 1 framework. 

The framework outlines five categories of control objectives that service organizations must address: control environment, risk assessment, control activities, information and communication, and monitoring. 

Within those control categories are controls themselves. These include access controls, change management, backup and recovery, and disaster recovery planning.

Control environment

The control environment objective evaluates the service organization’s overall control environment, including the tone at the top, the organization’s integrity and ethical values, and the commitment to competence. The control environment provides the foundation for all other control objectives.

Risk assessment 

The risk assessment objective evaluates the service organization’s processes for identifying and assessing the risks that could affect the reliability of financial reporting. This includes evaluating the design and implementation of internal controls to mitigate identified risks.

Control activities 

The control activities objective evaluates the specific control activities in place to prevent or detect financial misstatements. Control activities can include policies and procedures related to access controls, segregation of duties, and monitoring and reporting of financial transactions.

Information and communication

The information and communication objective evaluates the accuracy, completeness, and timely reporting of financial information. This includes an evaluation of the service organization’s systems for capturing, processing, and reporting financial information.

Monitoring 

The monitoring objective evaluates the service organization’s ongoing monitoring of its controls to ensure their effectiveness over time. This includes an evaluation of the service organization’s processes for identifying control deficiencies and taking corrective action when necessary.

Who can perform my SOC 1 attestation?

SOC 1 attestation can only be performed by independent, third-party auditors who meet specific qualifications outlined by the AICPA. These auditors must have the appropriate experience and training to perform the attestation, and they must follow specific guidelines for conducting the assessment. It’s important to choose a reputable auditor who has experience working with your industry and the type of service you provide.

Ready to get SOC 1 compliant?

If you think SOC 1 audits are in your future, get in touch with our experts and learn how Laika can help you seamlessly manage the audit experience.

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