Understanding SOC Reporting: A Beginner’s Guide

Written by Corbin Parker, CISA of Abacus Technologies (part of the BMSS Family of Companies)

Organizations are increasingly relying on third parties to handle financial transactions, customer data, and IT services. This reliance introduces the need for trust and assurance – how can organizations be sure their service providers are handling sensitive information securely and reliably?

This is where SOC reporting comes into play. SOC (System and Organization Controls) reports provide independent assurance that a company has a control environment in place that effectively safeguards its customers’ data and financial processes.

For companies without a mature compliance program, SOC compliance may seem complex, but they are essential for building trust with clients and staying competitive. This article provides a high-level overview of SOC, the different types of SOC reports, and why they matter.

What is SOC Reporting?

SOC reports are independent audit reports issued by Certified Public Accountants (CPAs) that assess an organization’s internal control environment. These reports help businesses demonstrate their commitment to protect data and provide services in a manner that doesn’t increase the risk surface of their customers.

The American Institute of Public Accountants (AICPA) developed SOC standards to evaluate how companies manage risks related to financial reporting, data security, and IT systems. SOC reports are particularly important for companies that store, process, or transmit sensitive customer information.

At a high level, a SOC report helps answer these questions:

• Does the organization have controls in place to protect data and financial processes?
• Are these controls designed effectively and operating as intended?
• Can customers trust this company with their sensitive information?

Types of SOC Reports

There are three main types of SOC reports, each serving a different purpose.

1. SOC 1 – Internal Controls Over Financial Reporting (ICFR)

What It Covers: SOC 1 reports focus on the controls an organization has in place to protect financial data that customers rely on for their own financial reporting. How can your customers be sure that the financial data output from your system is complete and accurate?

Who Needs It: Organizations that process financial transactions or provide services that affect their clients’ accounting records and financial statements.

Example: A payroll processing company would undergo a SOC 1 audit to demonstrate its controls for accurate payroll calculations and data security.

• SOC 2 – Security & Trust Services Criteria

What It Covers: SOC 2 reports evaluate an organization’s control environment related to Security (mandatory), and additionally, the other Trust Services Criteria:

• Security (protection from unauthorized access)
• Availability (system uptime and reliability)
• Confidentiality (protection of sensitive business information)
• Processing Integrity (accurate and timely data processing)
• Privacy (proper handling of personal data)

Unlike SOC 1, which focuses on financial reporting, SOC 2 is centered around IT security and operational controls.

Who Needs It: Any company that stores or processes sensitive customer data, such as SaaS providers, cloud computing firms, and data centers.

Example: With Security and Availability in-scope, a B2B SaaS application would undergo a SOC 2 audit to prove it has strong security controls in place to protect the data it has access to, as well as the controls in place to ensure the application is available as stated contractually.

• SOC 3 – Public-Facing Summary of SOC 2

What It Covers: SOC 3 is essentially a simplified version of SOC 2. While SOC 2 reports are detailed and meant for a company’s business partners, SOC 3 reports are designed for public distribution, allowing organizations to showcase their compliance without revealing sensitive details.

Who Needs It: Companies that want to provide external stakeholders with an easy-to-understand SOC report for marketing and trust-building purposes.

Example: A software company publishing a SOC 3 report on its website to market their SOC compliance to potential customers.

Why SOC Reports Matter

SOC reports are more than just compliance checkboxes – they provide real business benefits:

• Builds Trust: Customers and partners want assurance that they are working with a secure and reliable company.
• Competitive Advantage: Many organizations require SOC reports before signing contracts, making them a must-have in industries like SaaS, finance, and healthcare.
• Continuous Improvement: Organizations settle into an annual SOC reporting cycle. Every audit is a chance to make improvements that allow them to stay in front of the ever-evolving threats to organizational goals.

Ultimately, SOC compliance demonstrates that a company takes risk management and data security seriously, making it more attractive to clients and business partners.

Common Misconceptions About SOC Reports

Despite their importance, SOC reports are often misunderstood. Here are some common misconceptions:

• “SOC 2 is just an IT security audit.” – Not quite. While items like penetration testing and vulnerability management are indeed audited, the SOC 2 framework considers subjects like HR, policy management, and software change management. A singular facet of an organization’s IT security controls, while important, does not provide the “big picture” that allows the reader to understand whether an organization can be trusted with your data.
• “Any CPA firm can give us a SOC report.” – Not all SOC reports are created equal. Given the inherent technical nature of SOC reporting, organizations must partner with a firm that has the expertise to design a SOC examination that provides the assurance your customers are looking for in the first place. If the controls in your report aren’t designed and audited in a manner that addresses the specific risks of your organization, you’ll never see the true benefits of the process.
• “We shouldn’t get a SOC report until we have to.” – While customer expectations do generally drive necessity, waiting until you are asked for it can put your organization in a tough position. The audit process becomes much more daunting when you apply stringent deadlines for completion. Or, you might miss out on that potential customer – especially if your competitors already have a report in hand.

Final Thoughts: Is SOC Reporting Right for Your Organization?

SOC reporting is becoming increasingly important as businesses prioritize security and compliance — the AICPA reported a 49% increase in demand for SOC engagements over a recent two-year period. If a company provides financial services, handles sensitive customer data, or offers cloud-based solutions, a SOC report might be essential for securing partnerships and maintaining trust.

To get started, organizations should:

• Assess whether clients are requesting, or industry competitors are obtaining, SOC reports.
• Strengthen internal security and operational controls before an audit.
• Work with a CPA firm that specializes in SOC audits.

By proactively investing in SOC compliance, organizations can enhance their security posture, build customer confidence, and stay ahead in today’s digital economy. If you would like additional information or if you would like to speak to one of our SOC experts, please call (844) 443.5900 or visit our website at Abacus Technologies.