SOC 1 and SOC 2 are often discussed in the same breath, but they serve very distinct purposes. As organizations navigate the compliance landscape, understanding these differences—and their occasional overlap—can save time, resources, and headaches.
This blog aims to demystify SOC 1 and SOC 2 by exploring their differences, similarities, and use cases.
A Quick Overview of SOC 1 vs. SOC 2
What is SOC 1?
SOC 1 (System and Organization Controls 1) focuses on financial reporting controls. It’s designed for service organizations whose services impact the financial statements of their clients. For example, payroll providers often undergo SOC 1 audits to ensure their controls meet the requirements of their client’s auditors.
- Audience: Financial auditors and stakeholders focused on internal control over financial reporting (ICFR).
- Scope: Financial systems and processes.
- Examples: Controls for payroll processing, financial transaction accuracy, and reporting integrity.
Designed by Freepik.
What is SOC 2?
SOC 2 addresses operational and compliance controls related to data security and privacy. It’s based on the Trust Services Criteria (TSC), which include security, availability, processing integrity, confidentiality, and privacy.
- Audience: Business clients and stakeholders concerned about data handling and security practices.
- Scope: IT systems, data security, and operational processes.
- Examples: Controls for data encryption, physical security, and system availability.
The Key Difference Between SOC1 and SOC2
To fully understand how SOC 1 and SOC 2 differ, let’s break them down:
1. Purpose
SOC 1
Focuses on financial reporting. Its goal is to ensure that a service organization’s controls are reliable for financial statement accuracy.
SOC 2
Evaluates how a service organization protects sensitive information, addressing modern privacy and security demands.
2. Criteria
SOC 1
Organizations define their control objectives based on financial relevance.
SOC 2
Uses predefined Trust Services Criteria, focusing on broader operational concerns like security and availability.
3. Audience
SOC 1
Tailored for financial auditors.
SOC 2
Designed for clients seeking assurance about a vendor’s operational controls.
4. Flexibility
SOC 1
Allows organizations to create their own control objectives, which are tested during the audit.
SOC 2
More rigid, with controls designed to meet established TSC criteria.
Pro Tips for SOC 1 and SOC 2 Compliance
1. SOC 2 Is an Attestation, Not a Certification
First, let’s set the record straight: SOC 2 is an attestation, not a certification. This difference is crucial to grasp. Unlike ISO 27001, which offers a binary “pass or fail” certification, SOC 2 is more like an audited financial statement—it attests that your controls are in place but doesn’t guarantee perfection. What truly matters is the quality and relevance of the controls in your SOC 1 and SOC 2 reports.
2. Scope Is Everything
Regarding SOC 2, scope is your best friend—or your worst enemy if mishandled. Narrowing the scope of systems and processes included in the SOC 1 and SOC 2 audits can significantly reduce complexity and effort. For instance, segregating sensitive data into a few well-secured systems allows you to focus on the essentials rather than attempting to cover your entire infrastructure. Remember, less is more when it comes to scope.
3. Focus on What Truly Matters
SOC 2’s flexibility is both its strength and its challenge. The Trust Services Criteria (TSC) set the foundation, but you can decide how to meet them. Avoid wasting resources on generic, templated controls that don’t align with your organization’s operations. Instead, prioritize:
- Controls that bolster your actual security posture.
- Controls that satisfy client security reviews.
4. Define Clear Control Objectives
Unlike SOC 2’s rigid criteria, SOC 1 allows you to define control objectives tailored to your financial reporting needs. Collaborate with finance and IT teams to align these objectives with client expectations and your processes.
5. Map Financial Data and IT Systems
SOC 1 requires you to demonstrate how IT systems support accurate financial reporting. Create a detailed map showing the relationships between your financial data, processes, and IT systems. This exercise helps identify control gaps and ensures nothing is missed.
6. Manage Vendor Compliance
Vendors often play critical roles in financial processes. Your SOC 1 scope should include monitoring their compliance through contracts and audits. Ensure third-party systems meet your reporting requirements.
7. Conduct an Internal Pre-Audit
Before the official SOC 1 audit, review your financial controls internally. This proactive step helps identify and address weaknesses, reducing surprises during the audit.
Key SOC 1 and SOC 2 Differences in Controls
SOC 1 and SOC 2 audits focus on distinct areas, but both require robust controls:
| SOC 1: Financial Focus | SOC 2: Security and Operational Excellence |
| Transaction Accuracy: Prevent duplicates and ensure reconciliations. | Data Security: Use encryption, MFA, and penetration testing. |
| Segregation of Duties: Prevent single-user control of financial processes. | Availability: Maintain disaster recovery plans and SLAs. |
| Access Controls: Role-based permissions for financial systems. | Incident Response: Monitor systems, document responses, and conduct post-incident reviews. |
SOC 1 Controls: Financial Focus
SOC 1 controls are designed to ensure accurate financial reporting. SOC 1 does not have a set list of universal controls. The customization required for SOC 1 audits is driven by each organization’s unique financial processes and risks, making a one-size-fits-all approach impractical. Instead, organizations rely on flexible frameworks like COSO and COBIT to guide their internal controls, tailoring them to their specific needs.
Organizations undergoing a SOC 1 audit will need to focus on areas such as:
1. Transaction Processing Accuracy
Controls must verify that all transactions are recorded accurately and completely. Examples include:
- Automated checks to prevent duplicate entries.
- Reconciliation processes to ensure ledger accuracy.
2. Segregation of Duties
To minimize fraud risk, controls must ensure that no single individual has end-to-end responsibility for critical financial processes, such as:
- Initiating, approving, and recording financial transactions.
- Processing payroll and approving salary adjustments.
3. Access Controls Over Financial Systems
Ensure that only authorized personnel have access to systems affecting financial reporting:
- Role-based access to accounting software.
- Audit trails that track changes to financial data.
4. Compliance With Regulatory Standards
Industry-specific regulations may require additional controls to address compliance, such as ensuring adherence to tax laws or financial disclosure requirements.
SOC 2 Controls: Security and Operational Excellence
SOC 2 controls, based on the Trust Services Criteria (TSC), go beyond financial reporting to protect sensitive data, ensure operational reliability, and meet customer trust requirements.
Examples of SOC 2-specific control areas include:
1. Data Security Measures
Protecting data from unauthorized access or breaches is a primary concern for SOC 2. Common controls include:
- Encryption protocols for data at rest and in transit.
- Multi-factor authentication (MFA) for accessing critical systems.
- Regular penetration testing and vulnerability assessments.
2. Availability and Disaster Recovery
SOC 2 emphasizes ensuring systems are available and resilient:
- Disaster recovery plans with regular testing.
- Backup systems for mission-critical data.
- Service-level agreements (SLAs) outlining uptime commitments.
3. Incident Response and Monitoring
SOC 2 requires organizations to demonstrate robust incident detection and response processes:
- 24/7 system monitoring and alerting.
- Documented incident response procedures.
- Post-incident reviews to improve future responses.
4. Privacy and Confidentiality
Controls must ensure that sensitive customer data is handled appropriately:
- Role-based access to confidential data.
- Policies for data retention, deletion, and masking.
- Employee training on privacy standards and protocols.
Comparing Control Implementation in Practice
To illustrate the divergence in controls, let’s consider a payroll provider preparing for SOC 1 and SOC 2 audits:
- SOC 1:
The payroll provider needs controls to ensure that all payroll calculations are accurate and compliant with tax regulations. This might include automating tax deduction calculations, reconciling payroll accounts monthly, and maintaining an audit trail for any changes made to employee salary data.
- SOC 2:
The same provider would implement controls to secure sensitive employee data (e.g., social security numbers, direct deposit details). This includes encrypting personal information in their databases, monitoring system access logs, and conducting regular audits to verify compliance with data privacy standards.
How to Prepare for SOC 1 and SOC 2 Audits
Preparation is crucial for a smooth audit process. While there are overlaps, the steps differ based on the audit type:
1. Conduct an Internal Gap Analysis
SOC 1: Evaluate controls over financial reporting, such as transaction processing and payroll.
SOC 2: Assess controls related to Trust Service Criteria, such as data encryption and access management.
2. Ensure Documentation Readiness
SOC 1: Prepare financial transaction logs, reconciliation records, and control narratives.
SOC 2: Gather policies, system activity logs, and evidence of security training.
3. Train Employees
SOC 1: Train staff involved in financial reporting.
SOC 2: Focus on data security practices and incident response protocols.
4. Perform a Readiness Assessment
Readiness assessments identify gaps and reduce risks before the formal audit. This step is invaluable for both SOC 1 and SOC 2.
The Lifecycle of SOC 1 and SOC 2 Audits
While SOC 1 and SOC 2 audits follow a similar lifecycle, their focus varies:
1. Scoping
SOC 1: Define financial processes and systems for audit.
SOC 2: Identify Trust Service Criteria to include.
2. Readiness Assessment
3. Fieldwork
SOC 1: Auditors review financial transactions and controls.
SOC 2: Evaluates data security measures and operational practices.
4. Reporting
SOC 1 Report: Details the design and effectiveness of financial controls.
SOC 2 Report: Focuses on controls related to selected Trust Service Criteria.
Choosing Between SOC 1 and SOC 2
Understand Your Audience
Financial auditors? Go for SOC 1.
Clients concerned about security? SOC 2 is your answer.
Consider Overlap
If controls overlap, align audits to reduce duplication—but remember, the reports serve different purposes.
Budget Wisely
If you’re doing both SOC 1 and SOC 2, ask for a discount—they share a lot of work!
Final Word
SOC 1 and SOC 2 are powerful tools in the compliance arsenal, but they’re not one-size-fits-all. By understanding their differences, organizations can meet the right requirements for the right audiences. Whether encrypting data or reconciling financial statements, aligning your controls with the appropriate framework is critical for trust and transparency.
