The most significant IT outage in history was caused by a botched software update from CrowdStrike, a major cybersecurity firm. On July 19, 2024, the flawed update led to widespread disruptions affecting numerous sectors, including airlines, hospitals, and media outlets. The issue was worsened by a dependency on Microsoft’s Azure cloud services, which played a significant role in the cascade of failures.
The outage highlighted critical vulnerabilities in the IT infrastructure and the interconnectedness of modern technological systems. As a result, both CrowdStrike and Microsoft faced scrutiny.
The incident highlights the importance of vendor security. If a world-renowned cybersecurity company like CrowdStrike can release a faulty update affecting millions of users, others cannot be expected to be perfect.
The smallest glitch in your vendor system can cause havoc in your organization. You need assurance that your vendors’ systems are secure and they implement robust control measures. This is where Systems and Organization Controls (SOC) reports come in.
Understanding SOC reports
SOC reports, also known as service organization control reports, are a set of auditing standards developed by the American Institute of Certified Public Accountants (AICPA). These reports evaluate the internal controls of service organizations that manage sensitive data for their clients. The main purpose of SOC reports is to provide assurance to clients and stakeholders regarding the effectiveness and adequacy of the controls that the service organization has implemented.
Does my organization need a SOC report?
Any service organization that handles sensitive data or provides services that could impact the financial reporting of its clients can be subject to SOC reporting. This includes but is not limited to:
Data centers and cloud service providers
Organizations that host and manage critical IT infrastructure and data on behalf of clients.
Payroll and HR service providers
Companies that handle payroll processing, employee data, and HR-related functions for other organizations.
Software as a Service (SaaS) providers
Companies offering software applications and services hosted on the cloud.
Financial institutions
Banks and other financial organizations process transactions and handle client financial data.
Healthcare providers
Organizations that manage electronic health records and sensitive patient data.
Business Process Outsourcing (BPO) Companies
Companies that provide various business functions, such as customer support or accounting services.
The importance of SOC reports in various industries can be seen in the following figure. It shows the third-party breaches in various industries (Data by SecurityScoreCard):
Scope and objectives of SOC reports
SOC reports have one core aim: to make service organizations seem credible to their stakeholders and clients by assuring them about their controls and processes. These reports aim to give an independent and expert evaluation of the effectiveness, suitability, and reliability of the internal controls related to various aspects, such as financial reporting or data security.
What are the main objectives of SOC reports?
SOC compliance is key to revenue growth as it provides a standardized framework for demonstrating strong security measures, which enhances trust with clients and differentiates a company in competitive markets, ultimately driving sales and profitability.
SOC reports are essential for several reasons:
Effective risk management
SOC reports help organizations assess the risks associated with engaging third-party service providers. They allow clients to understand the controls in place to mitigate potential risks and protect sensitive data.
Demonstrating compliance
SOC reports help organizations demonstrate compliance with diverse data security and privacy regulations.
Managing vendors
By understanding the controls and security measures that a service organization has implemented, SOC reports enable clients to make informed decisions when selecting and managing service providers.
Building customer trust
By undergoing independent assessments, service providers demonstrate their commitment to transparency and the protection of client data.
You will also be interested in our podcast episode: The Perks of Automating Audits
Who requests SOC reports and why?
SecurityScoreCard reported that at least 29% of the data breaches in 2023 had third-party attack vectors. Although SOC reports are not a guarantee that your third-party vendor won’t fall victim to cyber-attacks, they are assurances that your vendor is following best practices to prevent any catastrophes. Various stakeholders request SOC reports for different reasons:
Customers and clients
Typically, SOC report recipients are the service organization’s customers and clients. They ask for these reports to ensure that the existing controls sufficiently shield their data and monetary concerns.
Regulators
Regulatory bodies may require service organizations to undergo SOC audits to ensure compliance with specific industry regulations and data protection laws.
Business partners
Business partners and vendors may request SOC reports to evaluate the security and reliability of the service organization before entering into contracts or partnerships.
Internal management and CISOs
Within an organization, management and Chief Information Security Officers (CISOs) may request SOC reports when considering outsourcing certain functions to third-party service providers. These reports assist in making risk-informed decisions and aligning vendor selection with security standards.
What are the different types of SOC reports?
There are three essential types of SOC reports that are in accordance with certain purposes and objectives.
A. SOC 1
SOC 1 reports are designed to assess the internal controls at a service organization that are likely to impact the financial reporting of their clients. These reports are essential for organizations that provide services that are relevant to their clients’ financial statements, such as payroll processing, financial transaction processing, or data center outsourcing.
There are two types of SOC 1 reports:
- SOC 1 Type 1
This report evaluates the design and implementation of controls at a specific point in time. It provides a snapshot of the controls in place and their suitability to achieve the intended control objectives.
- SOC 1 Type 2
This report not only assesses the design of controls but also evaluates the effectiveness of these controls over a period (usually six to twelve months). It offers a historical perspective on the performance of the controls and their ability to operate effectively.
B. SOC 2
SOC 2 reports are centered around the Trust Services Criteria, which include security, availability, processing integrity, confidentiality, and privacy. These reports are used to evaluate the controls and processes related to the security and privacy of information in service organizations.
Just like SOC 1, SOC 2 has Type 1 and Type 2 reports
- SOC 2 Type 1
The type 1 report evaluates the effectiveness of controls on a particular date.
- SOC 2 Type 2
The SOC 2 Type 2 report evaluates the effectiveness of the controls over a period of time.
C. SOC 3
SOC 3 reports are summarized versions of SOC 2 reports, providing a high-level overview of the organization’s controls related to the Trust Services Criteria. Unlike SOC 1 and SOC 2, SOC 3 reports are intended for public distribution and can be freely shared with anyone. They are often used as marketing tools to demonstrate the organization’s commitment to security, availability, processing integrity, confidentiality, and privacy.
To sum up, SOC 1 vs 2 vs 3, SOC 1 reports are focused on financial reporting, SOC 2 on security, availability, processing integrity, confidentiality, and privacy, while SOC 3 is a publicly shareable summary of SOC 2 reports. Each type of SOC report serves specific purposes and can be used by organizations to gain trust and assurance in the controls and processes of their service providers.
What are the differences between SOC 1 vs SOC 2 vs SOC 3?
| Aspect | SOC 1 report | SOC 2 report | SOC 3 report |
| Focus and purpose | Controls impacting financial reporting (ICFR) of the service organization’s clients. Relevant for organizations outsourcing functions impacting financial statements. | Controls related to security, availability, processing integrity, confidentiality, and privacy. Assess the security and availability of service providers. | Summary of controls related to security, availability, processing integrity, confidentiality, and privacy. Used for marketing purposes, demonstrating a commitment to meeting Trust Services Criteria. |
| Ideal for | Organizations that handle or impact their clients’ financial reporting, such as payroll processors, financial transaction processors, and companies providing outsourced financial services, would benefit from SOC 1 reports. These reports focus on internal controls over financial reporting. | Technology service organizations, data centers, cloud service providers, and any companies that store, process, or transmit data would benefit from SOC 2 reports. SOC 2 focuses on security, availability, processing integrity, confidentiality, and privacy of data. | Organizations that need to provide assurance to a broad audience about their data security practices, such as SaaS providers, can benefit from SOC 3 reports. SOC 3 reports are similar to SOC 2 but are intended for a general audience and can be freely distributed without disclosing sensitive information. |
| Recipients and distribution | Clients and auditors of the service organization. Not for public distribution. | Clients, business partners, regulators, and other stakeholders. It can be shared with a wider audience. | Intended for public distribution. Freely accessible by anyone interested. |
| Level of detail | Detailed information on controls relevant to financial reporting. | Detailed information on controls related to the Trust Services Criteria. | High-level summary without detailed control descriptions or testing results. |
| Reporting criteria | Internal control over financial reporting (ICFR). | Trust Services Criteria: Security, availability, processing integrity, confidentiality, and privacy. | Trust Services Criteria: Security, availability, processing integrity, confidentiality, and privacy. |
How can you obtain SOC 2 certification?
There are multiple ways in which you can obtain SOC 2 certification. Let’s discuss all of them, and you can choose the one that suits you best.
1. On your own
Obtaining SOC certification on your own involves a significant amount of time and resources. You need to:
- Understand the SOC 2 framework and requirements.
- Conduct a thorough gap analysis and implement necessary controls.
- Prepare extensive documentation and evidence.
- Manage the audit process, including responding to auditor requests and addressing findings.
How much cost will you incur?
The cost of a SOC 2 report will depend on the size and complexity of your organization, the type of SOC 2 report (Type I or Type II), and the type of auditors you hire. However, let’s try to give you a ballpark estimate of the costs you might incur if you venture on your own:
| Description | Estimated Cost |
| Tools and training for SOC 2 framework | $10,000 – $15,000 |
| Auditor fees – if you hire a boutique firm | $7000 – $10,000 |
| Auditors fees – if you hire the big four | Up to $60,000 |
| Type I certification | $6000 – $30,000 |
| Type II certification | $20,000 – $50,000 |
| Legal fees | $5000 – $10,000 |
| Estimated total (if you hire a boutique audit firm) | $60,000 – $80,000 |
| Time taken | 6 – 9 months |
2. Hire a consultant
Often, getting a consultant can help expedite the SOC certification process because of their know-how:
- Consultants can provide guidance on best practices and help implement controls.
- They offer assistance with documentation and audit preparation.
- However, consultants can be expensive, and the process still requires substantial internal effort.
- A consultant can charge you $10,000 to $15,000 if you are a small to medium-sized business.
Read about the experience of our esteemed client Xeno in this case study.
3. Hire compliance experts like Scrut
Organizations like Scrut manage end-to-end compliance and risk management, handling all the complexities, paperwork, and procedures involved. By automating and simplifying these processes, they allow businesses to focus on their core functions without being bogged down by compliance and security tasks.
Scrut takes four to six weeks for SOC 2 compliance at highly competitive pricing for small to medium enterprises.
To explore detailed information on SOC 2 compliance and understand pricing structures tailored to your organization’s needs, click here to book a demo with Scrut. Discover how Scrut can streamline your SOC 2 audit process efficiently and effectively.
The following reasons often make it the best option to use compliance experts like Scrut:
- Automation and efficiency: Scrut automates 90% of the compliance tasks, significantly reducing the time and effort required to achieve SOC 2 certification. This includes the automation of policy creation, risk assessments, and control monitoring, which are crucial elements of the SOC 2 audit process. It reduces the likelihood of error by a great deal.
- Cost-effective: While hiring a consultant can be costly, a SaaS solution offers a more affordable and scalable approach. It allows businesses to manage compliance within their budget while still accessing expert guidance.
- End-to-end management: Scrut offers a platform that allows teams to manage every aspect of the SOC 2 audit, from initial risk assessments to the final audit report. They provide tools to collaborate seamlessly with auditors and consultants, ensuring all parties are on the same page throughout the process.
- Streamlined collaboration: Scrut enables seamless collaboration with auditors. Evidence artifacts can be shared directly through the platform, reducing the need for separate communication channels and minimizing delays.
- Continuous improvement: Scrut provides ongoing updates and support, ensuring that your compliance posture remains strong even after certification. This proactive approach helps maintain compliance and prepare for future audits.
- Competitive advantage: With a trustworthy compliance solution, SOC 2 certification helps build customer trust that can be used to promote a competitive edge. As a result, this opens up more avenues for increasing business opportunities and enhancing customers’ commitment to the brand.
Ready to streamline your SOC 2 compliance process? Schedule a demo with Scrut today and see how our platform can automate and simplify your journey to achieving and maintaining SOC 2 compliance. Book your demo now to get started!
What are the best practices for SOC reporting?
Following are the SOC reports best practices
A. Preparing for SOC reporting
An organization should follow the following steps to prepare for SOC reporting:
Internal readiness
Before starting the SOC reporting process, ensure that your organization has a clear understanding of the scope, objectives, and control environment that will be subject to assessment. Have all relevant documentation and evidence readily available for the auditor’s review.
Identify key stakeholders
Involve key stakeholders, such as the CISO, IT, finance, legal, and vendor management teams, in the SOC reporting process. Establish clear lines of communication and collaboration to ensure a smooth and comprehensive assessment.
Define control objectives
Work with your internal team and external auditor to define clear and specific control objectives based on the applicable SOC criteria. Tailor these objectives to match the organization’s unique needs and risk profile.
B. Selecting the right type of SOC report
For selecting the right type of SOC report, CISOs should consider the following points:
Understand reporting needs
Determine the specific requirements of your clients and stakeholders. Identify whether financial reporting controls (SOC 1), data security and availability (SOC 2) or a summary for public distribution (SOC 3) can best address their concerns.
Assess the impact on stakeholders
Consider the impact of the SOC report on your stakeholders, including clients, business partners, and regulators. Select the type of report that aligns with their needs and expectations.
Evaluate scope and coverage
Ensure that the selected SOC report’s scope accurately reflects the services and controls relevant to your stakeholders. The report should cover all necessary processes and data-handling activities.
C. Working with auditors
Consider the following three points while carrying out SOC audit:
Engage experienced auditors
Choose reputable and experienced auditors who are well-versed in SOC reporting and the applicable SOC criteria. Experienced auditors can provide valuable insights and effectively assess your controls.
Open communication
Maintain open and transparent communication with the auditors throughout the process. Address any questions or concerns promptly and provide necessary documentation and evidence in a timely manner.
Collaborate on testing
Collaborate with auditors during the testing phase to provide access to systems, personnel, and information required for the assessment. Work together to ensure smooth and efficient testing procedures.
D. Fixing control gaps and remediation
Review findings
Review the auditor’s findings and control gaps identified during the assessment. Understand the root causes of the deficiencies and assess their impact on your organization’s security and compliance.
Develop a remediation plan:
Create a comprehensive remediation plan that outlines the steps needed to address control deficiencies. Prioritize remediation efforts based on the risk level and potential impact on your operations.
Monitor progress
Continuously monitor the progress of remediation efforts and track the implementation of controls. Regularly report updates to management and auditors to demonstrate the commitment to improving these controls.
Continuous improvement
Use the SOC reporting process as an opportunity for continuous improvement. Learn from the assessment results and enhance your control environment to strengthen security and compliance measures.
Final thoughts on the importance of SOC reports
SOC reports play a crucial role in building trust between service organizations and their clients, ensuring robust security measures and compliance with regulatory standards. By understanding the distinctions between SOC 1 vs SOC 2 vs SOC 3, organizations can choose the appropriate report to address their specific needs, whether it’s financial reporting, data security, or public assurance.
The decision to obtain SOC certification, whether independently, with a consultant, or through compliance experts like Scrut, should be based on a comprehensive evaluation of resources, expertise, and long-term goals. SOC compliance has a direct impact on revenue because the majority of businesses demand it as a prerequisite for partnerships, ensuring trust and security, which is essential for attracting and retaining clients.
Elevate your organization’s compliance with Scrut. With our automated processes, expert guidance, and streamlined collaboration, you can achieve seamless, efficient, and cost-effective SOC certification. Enhance your credibility and build customer trust. Contact Scrut today to get started!
FAQs
SOC reports, or Service Organization Control reports, are auditing standards developed by the American Institute of Certified Public Accountants (AICPA) to evaluate the internal controls of service organizations that manage sensitive data for their clients.
SOC reports are requested by customers and clients, regulators, business partners, and internal management, including Chief Information Security Officers (CISOs), to assess the security and dependability of a service organization’s controls.
Any service organization that processes sensitive data or provides services affecting clients’ financial reporting may need SOC reports, including data centers, cloud service providers, payroll and HR service providers, SaaS providers, financial institutions, healthcare providers, and BPO companies.
SOC 1: Focuses on internal controls over financial reporting.
SOC 2: Evaluates controls related to security, availability, processing integrity, confidentiality, and privacy.
SOC 3: A public summary of SOC 2, intended for broad distribution without detailed control descriptions.
If you are a small or a medium enterprise and carry out SOC 2 compliance on your own, it will cost you anywhere from $60,000 to $80,000. However, you can save 90% of your costs if you employ experts like Scrut.
