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It’s an objective, third-party system that tells customers that they can trust your startup to handle their information with the utmost care.  This is the compliance audit most commonly sought by startups, particularly SaaS, as it’s relevant for any business that uses the cloud to store data. To become SOC 2 compliant, a startup must choose at least one or more trust services criteria and a type to test against. 

What’s the difference between SOC 1, SOC 2, and SOC 3?

There are three types of SOC reports:

  • SOC 1: Service Organization Control 1 evaluates the effect of service organization controls on financial statements. For example, say your SaaS startup provides billing services to large companies. Chances are your customers will require the startup to become SOC 1 compliant because the startup’s billing process impacts their financial reporting.
  • SOC 2: Service Organization Control 2 is a procedure that examines service providers. The audit determines if they are securely managing 3rd party data, like personal information, to protect information and ensure privacy. Compliance with SOC 2 is usually a requirement when considering SaaS providers. 
  • SOC 3: Service Organization Control 3 is a public report of internal controls over security, availability, processing integrity, and confidentiality. Like all other SOC certifications, it was established by the Auditing Standards Board of the American Institute of Certified Public Accountants’ (AICPA) Trust Service Criteria (TSC).

 

What are SSAE 16 and SSAE 18?

You might hear the term ‘SSAE’ when referring to SOC audits. This refers to the AICPA’s Statement of Standards of Attestation Engagements: the regulations auditors use to evaluate companies and more specifically evaluate compliance controls. 

SSAE 16: In 2011 the AICPA revealed SSAE 16, formerly known as SAS 70, which required auditors to evaluate a startup’s internal controls and the impact the organization can have on the control environment. This was particularly important for auditors to accurately assess a company’s financial statements (SOC 1). 

SSAE 18: In 2017 the AICPA replaced SSAE 16 with SSAE 18, an assessment standard covering both SOC 1 and SOC 2. The main purpose of the update was to demand companies to take more control and accountability over third-party vendors. The new standard, which is still used to this day, requires businesses to apply the same risk assessment standards to vendors they work with directly and indirectly. 

What are the Trust Services Criteria?

Issued by the AICPA, the Trust Services Criteria evaluates how companies process information and manage customer data. This covers five components, which include security, privacy, availability, processing integrity, and confidentiality. In order to define the scope of the audit and the necessary controls, SOC 2 reports must address one or more of the criteria.

What is the COSO framework?

In 2013, the AICPA combined the TSC framework with the COSO framework, which is used to access the design, implementation, and maintenance of a startup’s controls. Complementary to the TSC, COSO’s five components include:

  • Risk assessments
  • Information and communication
  • Existing control activities
  • Monitoring activities
  • Control environments

Put together, the TSC and COSO frameworks allow businesses to work towards a clear set of guidelines while protecting their security and data integrity posture. 

What are the types of SOC 2 reports?

There are two types of SOC 2 reports companies can obtain: Type 1 and Type 2. The difference between Type 1 and Type 2 is design versus operating effectiveness.

A Type I tests design by looking at your description of controls at a particular point in time. A Type II tests operating effectiveness by collecting evidence of your controls in operation over a 6 to 12-month period

 

What kinds of companies need SOC 2?

If your business does anything with data and software, or uses cloud computing, chances are you will need a SOC 2 audit at some point soon or in the future. Specifically designed for businesses that store data in the cloud, SOC 2 applies to almost every SaaS business (and any company that uses the cloud!)

A SOC 2 report is particularly important for growth-focused B2B startups that are looking to move upmarket and attract bigger customers. Today, enterprise buyers now require businesses to become SOC 2 compliant.

While most startups seek out a SOC 2 audit once reaching their Series A or B, it may be beneficial to do so beforehand if you’ve already begun selling to enterprise customers.

Why is SOC 2 compliance important for startups?

SOC 2 compliance is important because it:

  1. Helps businesses move through enterprise procurement
  2. Establishes credibility between you and your competitors 
  3. Protects sensitive data from hacks or threats 

Enterprise companies expect startups to meet the same procurement cycles and compliance requirements as other vendors. In many cases, bigger customers will ask you to become SOC 2 compliant before working with them.

SOC 2 as a competitive edge 

Savvy startups also use SOC 2 compliance as a competitive differentiator. Compliance doesn’t just tell enterprise buyers that you are open for business. It’s a powerful brand and marketing message that signals to the world that your startup is more established, credible, and attuned to your customer’s needs. 

Compliance protects your startup against devastating financial and reputation losses. It ensures your company is built on solid processes that remain strong and secure as your team grows, your product becomes more complex, and you take on bigger clients. Without it, you put yourself, your startup, and your customers at risk of losing it all.