The prevalence of cyber security attacks and data breach in the recent years have brought to light how vulnerable organizations are to a cyber-attack. The financial losses and the tarnish of reputation caused by such attacks cannot be underestimated by any organization handling confidential data. Data breach still continues to be a pressing concern for companies across the globe. Indeed, information security has now become a major concern for organizations handling sensitive data and including those who outsource their business requirements to third-party organizations such as SaaS providers, data analytic companies and Cloud computing providers.
Needless to say, all IT managers and security stakeholders have been scrambling to find ways to tackle the situation and gain control over their network and data security. One way to ensure the security and privacy of data is by obtaining a SOC 2 Type1 & Type 2 report from a CPA. So, let us today understand in detail about the SOC 2 audit and its application to your organization.
Table of Contents
What is SOC 2 audit
A SOC 2 report essentially verifies whether an organization is in compliance with the requirements relevant to Security, Processing integrity, Availability, Confidentiality, and Privacy. It is an audit meant for service organizations that holds, stores, or processes private data of their clients. A SOC 2 audit report provides the organization and its clients an assurance that the reporting controls are suitably designed, well in place, and client’s sensitive data is appropriately secured.
Types of SOC 2 report
SOC 2 audits constitute two types of audit reporting, namely SOC 2 Type 1 & SOC 2 Type 2. Both the types of reports are meant to tackle the reporting controls and processes of a service organization related to the five trust principles of data. For more info on which Trust Principles are relevant to your organisation, check out my earlier article ( SOC 2 Trust Service Criteria)
SOC 2 Type 1 Definition:
SOC 2 Type 1 is a report on a service organization’s system and the suitability of the design of controls. The report describes the current systems and controls in place and review documents around these controls. Design sufficiency of all Administrative, Technical and Logical controls are validated.
SOC 2 Type 2 Definition:
SOC 2 Type 2 Report is very similar to the Type 1 report, except that the evidence of control effectiveness are described and evaluated for a minimum of six months to see if the systems and control in place are functioning as described by the management of the service organization.
(Note- SOC 2 Type 1 & SOC 2 Type 2 are two different stages of achieving SOC 2 Compliance.)
Difference between SOC 2 type 1 & type 2
The differences between SOC 2 Types 1 & 2 is arguably the most apparent or glaring difference with the SOC 2 Type 1 audit report covering the suitability of design controls and its effectiveness, the SOC 2 Type 2 audit report covers a detailed description with evaluation and evidence on its operating effectiveness. Although the Type II report takes more time (spanning over 6-12 months) and effort for service providers to prepare for it.However, the additional time and resources invested for compliance to SOC 2 Type 2 yields more value to companies. The Type 2 report clearly describes the steps and efforts taken by the service provider to protect sensitive data of its customers. Typically, the SOC 2 Type 2 report appeals to prospective customers and other stakeholders about the safety of their data with service organization.
Application of SOC 2 type 1 & type 2 for service organizations
SOC 2 Compliance is mandatory for all technology-based service organizations who store, process and use client information in the cloud. Such businesses include those that provide SaaS services, data processing/analytic companies and Cloud service providers while also using the cloud to store engaged client’s information. That apart, as evident in the description of SOC 2 Type 1 & Type 2 illustrated above, both the reports have a lot in common in terms of tackling the reporting controls and processes of a service organization related to the five trust principles of data. So, let us take a closer look at each of their implications.
SOC 2 Type 1 Audit:
The report clearly shows that the service organization has best practices in place. The auditor will base the report on the description of controls and review of documentation around these controls. Design effectiveness of controls for all Administrative, Technical and Logical whether Preventive, Detective or Corrective are validated. This kind of report is particularly helpful to all service companies as it gives their potential customers the assurance that the data with service organization is safe as per the SOC 2-Type 1 audit. Generally, companies prefer working with vendors who can prove that they can handle sensitive data.
This kind of report is today a necessity for companies handling customer data like healthcare firms, financial institutions and Cloud computing service providers. Clients most often look for this report in a third-party vendor who are hardpressed for time and are doing SOC 2 for the first time and need atleast a basic level of SOC 2 compliance… this is true, especially since Type 2 SOC 2 report takes almost a year when its done for the first time. Moreover, the audit report of Type 1 is generally less expensive as the data required to determine the compliance of a service organization is bare minimum. Hence, Service organizations should initially strive to achieve SOC 2 Type 1 compliance, especially when trying to collaborate or partner with bigger firms but need to get compliant say within 3 months or so.
SOC 2 Type 2 Audit:
Although, SOC 2 Type 1 compliance offers many benefits, it pales in comparison with the SOC 2 Type 2 audit report. SOC 2 Type 2 compliance has a better leverage over the SOC 2 Type 1 report, for the service organization has to pass through a thorough examination of its internal control and prove its operational effectiveness. The Type 2 audit report provides a clear description with evidence to the evaluation of the company’s effectiveness with regards to its internal control policies and practices over the time. The Type 2 audit report in comparison gives a higher level of assurance on data security and control systems of the service organization. With SOC 2 Type 2 report, it gives a clear message that the service organization applies the documented best practices in data security and control systems effectively and efficiently. Further, these companies have a better chance to bag contracts from bigger firms. Although, complying with SOC 2 Type 2 audit can be quite timing consuming and would also call for significant investment in terms of money.
Companies today prefer achieving compliance to SOC 2 Type 2 for their desire to assure customers that they have the best processes and controls to protect data. Moreover, customers too prefer a SOC 2 Type 2 compliant service organization to work with as it gives better assurance of data safety over service organizations compliant with SOC 2 Type 1 report.
Having understood the differences and implications of both Type 1 & Type 2 reporting, it brings us back to the question as to which type of report is ideal for an organization. Well, to put it in simple words, for an organization that is new to the SOC 2 Compliance and has time/budget constraints, can initially kick-start with SOC 2 Type 1 compliance in the first year. So, during the course of the first year, a readiness assessment can help identify failed controls in the service organization which will enable them to prepare a detailed action plan to remediate gaps, gain efficiencies and achieve SOC 2 Type 1 Compliance over the first year. Eventually in the later years, they can try achieving SOC 2 Type 2 Compliance. While, for those companies that can spare good amount of time and money towards being SOC 2 Type 2 Complaint, can opt for achieving the same in the very first year itself. However, the company has to pass through the initial stage of SOC 2 Type 1 Compliance in order to proceed further, to achieve SOC 2 Type 2 Compliance.But, for the max bang for the buck, SOC 2 Type 2 is always the best bet.
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