System and Organization Controls (SOC)
Summary Definition: A compliance audit report that evaluates the effectiveness of internal controls at service organizations handling sensitive client data.
What is a SOC Report?
A System and Organization Controls (SOC) report is an independent audit report that evaluates how a service organization manages and safeguards sensitive customer data.
Developed by the American Institute of Certified Public Accountants (AICPA) and issued by certified public accountants (CPAs), SOC reports assess the design and effectiveness of controls related to various criteria, such as security, availability, processing integrity, confidentiality, and privacy.
The audit process typically includes testing system operations, reviewing control documentation, interviewing personnel, and evaluating the control environment.
Key Takeaways
- Service and Organization Controls (SOC) reports independently confirm that a service organization’s virtual controls protect client data and mitigate risks.
- Each SOC report category (SOC 1, SOC 2, SOC 3) serves a distinct purpose, from evaluating financial reporting controls to demonstrating data security practices for public audiences.
- SOC compliance enhances trust and strengthens internal operations, giving service organizations a competitive edge in highly regulated industries.
Why Do SOC Reports Matter?
SOC reports provide independent verification that a service organization has adequate controls to protect sensitive data, ensure regulatory compliance, and manage risks.
For businesses interested in partnering with a service provider for sensitive functions (e.g., payroll, benefits administration, financial processing, etc.), SOC reports build trust by demonstrating operational transparency and control reliability.
Moreover, they can help organizations identify potential vulnerabilities and maintain compliance with industry standards, reducing the risk of data breaches or regulatory issues.
SOC Report Types: SOC 1 vs. SOC 2 vs. SOC 3
SOC reports come in several varieties, each serving a different purpose and audience. Furthermore, there are two types of SOC reports based on whether it audits an organization’s controls once (Type 1) or repeatedly over a prolonged period, typically six to 12 months (Type 2).
What is SOC 1?
A SOC 1 report evaluates a service organization’s internal controls over financial reporting (ICFR). Therefore, SOC 1 reports are primarily intended for organizations providing services that impact a client’s financial statements, such as payroll processing, spend management, or accounting functions.
What is SOC 2?
SOC 2 reports are for organizations handling sensitive customer data (e.g., HR or benefits information). They demonstrate an organization’s commitment to data protection and operational reliability.
As such, each SOC 2 audit evaluates how a service organization manages data based on five Trust Services Criteria:
- Security: Safeguard systems against unauthorized access and data breaches with controls such as access management, multi-factor authentication (MFA), and security monitoring.
- Availability: Optimize system uptime, responsiveness, and availability via performance monitoring, redundancy planning, and disaster recovery strategies.
- Processing Integrity: Ensure data and transaction processes are complete, accurate, and timely by incorporating validation checks, reconciliation procedures, and error detection controls.
- Confidentiality: Protect sensitive or proprietary data through access restrictions, encryption, retention policies, and secure data disposal methods.
- Privacy: Outline how personally identifiable information (PII) is collected, used, stored, and deleted, focusing on consent, data accuracy, disclosure protocols, and legal compliance.
Achieving SOC 2 compliance verifies an organization’s adherence to industry best practices and reinforces client trust in securing, processing, and protecting sensitive data.
What is SOC 3?
A SOC 3 report is a publicly shareable summary of how a service organization meets the five Trust Services Criteria. Due to their shareable nature, SOC-3 results are sometimes used for marketing or brand purposes. However, there is no Type 1 version of this report.
| SOC Reports | Report Focus | Intended Use |
| SOC 1 Type 1 SOC 1 Type 2 |
Financial reporting controls | Audit services impacting financial data and statements |
| SOC 2 Type 1 SOC 2 Type 2 |
Trust services criteria | Test services impacting sensitive customer data |
| SOC Type 3 | Summary of SOC 2 results |
Public sharing for marketing or brand purposes |
SOC Compliance Benefits
Regardless of whether a report is SOC 1 vs. SOC 2, achieving SOC certification signals the company’s commitment to strong internal controls, data integrity, and operational transparency. This, in turn, delivers strategic benefits, including:
- Building Trust and Credibility: Gives clients, business partners, and regulators confidence that the organization’s systems and processes are independently verified to meet strict security and reliability standards.
- Improving Operations and Security: Each report’s results identify weaknesses in access controls, monitoring, and data protection to drive corrective actions that strengthen overall system integrity and reduce potential vulnerabilities.
- Differentiating from Industry Competitors: SOC results are a recognized credential that can help distinguish an organization from its competitors and improve overall market positioning to win new, discerning clients.
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