System and Organization Controls 1 (SOC 1 Report)
By Courtney LaLone, Principal, CPA
Why should you consider a SOC 1 (System and Organization Controls) report? If you can answer “yes” to the following questions, then your management team should consider hiring an independent audit firm to complete a “SOC 1” audit over your system.
- Do you process, house, keep or manage financial data or a process that impacts your client’s financial processes?
- Are you looking to move upstream and increase market share in your industry?
- Are you looking for a competitive advantage to set your company apart from competitors or compete against larger companies within your industry?
- Do you want to create a best practice for your company and provide assurance to your clients that your system is sound?
- Is saving time and money important to your company’s success?
The SOC 1 report is designed for service organizations that provide services to other entities within their financial reporting systems. Examples of some of these are payroll providers and processing entities, medical claims processors, managed service providers (MSPs), loan servicing companies, SaaS (Software-as-a-Service) providers, etc. Obtaining a SOC 1 audit over your company’s system will add independent assurance to those user entities that your system can protect their data, is in compliance with laws and regulations, has effective controls in place, etc.
A SOC 1 report will either be issued as a Type I or Type II report. The “type” will be dependent on your needs and the controls that are in place over the system. A Type I report doesn’t include tests of the operating effectiveness over the system or processes. The Type I report only provides independent assurances over the design of the controls in place but does not provide any assurance that the controls are operating effectively. In many cases, the Type I report is used as a way to ease into the process and allow your company’s team to get an idea of what controls are designed well, what controls need work and what controls may be missing.
The Type II report will be issued to address and provide the auditor’s opinion over the design and operating effectiveness of the system’s controls. It is this opinion on the operating effectiveness that is critical to your user entities and their auditors. Ensuring the operating effectiveness of your system’s controls will ensure compliance with laws and regulations, demonstrate a commitment to best practices and keeping current to best serve user entities, and help keep your company ahead of your competition. The information contained within the Type II report is critical to building trust and confidence over the system and can minimize risks to user entities’ own systems.
Whether it is the Type I or Type II, a SOC report can elevate your company amongst your competitors and demonstrate to your user entities that their data security is important.