Differences Between SOC 1 vs SOC 2 Reports

Building trust with clients and stakeholders is crucial for any organization, and understanding the right compliance framework is an essential part of that process. SOC reports, categorized primarily into SOC 1 and SOC 2, share the goal of evaluating a service organization’s controls but also serve distinct purposes. While SOC 1 focuses on controls relevant to financial reporting, SOC 2 emphasizes safeguarding sensitive data and ensuring operational reliability. 

Different organizations opt for these reports based on various factors, such as their industry, client expectations, and regulatory requirements, which is why having a clear understanding of these factors and their purpose is important. So, explore the differences between SOC 1 vs. SOC 2 in detail to stay compliant while meeting organizational and client requirements.

Key Differences Between SOC 1 Vs. SOC 2 Reports

Here are the key differences between SOC 1 and SOC 2 Reports:

Purpose

SOC 1: This report focuses on financial reporting controls. It evaluates how a service organization's controls and systems impact the financial statements of its clients. It assures clients that the right controls are in place and working to keep the data accurate and secure.

SOC 2: The SOC 2 report, on the other hand, is concerned with the operations and security controls of the service organization. Its main purpose is to ensure that the organization follows best practices related to security, availability, processing integrity, confidentiality, and privacy—collectively known as the Trust Services Criteria (TSC).

Audience

SOC 1: These reports are mainly for financial auditors, accountants, and clients who need to check how well controls work when it comes to financial reporting. External auditors use these reports to evaluate if an organization’s controls are effective, especially when they impact their clients’ financial statements. Clients, such as those using payroll, accounting, or transaction processing services, review SOC 1 reports to ensure the service provider’s controls won’t cause problems during their financial audits. Regulatory bodies may also require these reports to confirm compliance with financial reporting rules, especially for services critical to financial operations.

SOC 2: The SOC 2 report is essential for IT and security professionals who examine an organization's technical controls, system performance, and security measures.  Business stakeholders, like Chief Information Officers (CIOs) and Chief Technology Officers (CTOs), use these reports to ensure their organizations manage sensitive information and maintain system availability. Additionally, clients who depend on service providers for data management also find these reports helpful for understanding how their data is protected, stored, and processed.  

Focus Area

SOC 1: SOC 1 report is finance-focused and tied to an organization's internal controls over financial reporting (ICFR).

SOC 2: It emphasizes the non-financial controls that are crucial for safeguarding sensitive data and ensuring operational reliability. This means that its Trust Service Criteria framework focuses on the broader operational aspect of the organization, where it helps analyze how a service provider addresses risks and ensures safe delivery.

Use Cases 

SOC 1: These reports are valuable in industries where outsourced services influence financial processes, offering assurance to the user entities’ auditors during financial audits. For example, a payroll company can use a SOC 1 report to show that its systems correctly calculate and process employee wages, ensuring compliance with financial reporting standards such as GAAP or IFRS. Additionally, organizations outsourcing financial operations like billing, accounting, or transaction processing also need this report to verify that the functions are handled accurately. An example of this is a company utilizing third-party accounts receivable services, which may review a SOC 1 report to ensure accurate revenue recognition.

SOC 2: These reports play a crucial role in vendor risk management as they allow businesses to evaluate the security and trustworthiness of their service providers. For example, a software company might share a SOC 2 report to show customers that its platform keeps user data safe from breaches. Having this report also gives a competitive edge, especially for companies wanting to partner with big businesses or industries with strict rules. For example, a new IT support company can stand out by showing its SOC 2 Type II report to potential clients in fields like healthcare or finance.

Regulatory Needs

SOC 1: Regulatory rules that often require or benefit from SOC 1 reports include the Sarbanes-Oxley Act (SOX), which requires publicly traded companies to control their financial reporting properly. A SOC 1 report shows how well a service provider’s controls work, helping clients comply with SOX. Also, financial institutions, like banks and insurance companies, use these reports to make sure third-party vendors handling financial transactions or records meet necessary standards for accurate reporting and data security.

SOC 2:  SOC 2 reports are designed to address broader regulatory concerns around data privacy, security, and operational efficiency, particularly for technology and service organizations that handle sensitive information. Some laws connected to SOC 2 include the General Data Protection Regulation (GDPR), which requires businesses to protect personal data in the EU, and the Health Insurance Portability and Accountability Act (HIPAA), which makes healthcare organizations protect health information. Another one is the California Consumer Privacy Act (CCPA), which focuses on protecting personal data for people in California.

Report Structure

SOC 1: This report focuses on the controls a service organization uses to handle financial reporting and is issued in two types: Type I and Type II in a SOC Report. The SOC 1 Type I report gives a snapshot of the organization’s controls at a specific point in time, explaining how they are designed, but it doesn’t test them. The SOC 1 Type II report, on the other hand, not only describes the controls but also tests how well they worked over a period of time, usually 6 to 12 months, providing a more complete picture. This report usually includes the management’s statement about the control's effectiveness, the system's description and processes, control objectives (the financial goals the controls aim to achieve), and, in the Type II report, details about the testing done and the results observed.

SOC 2: A SOC 2 report usually includes a Management Assertion, a System Description, and details on how data is managed according to Trust Service Criteria. There are two types of SOC 2 reports: SOC 2 Type I, which explains the organization’s controls at a specific point in time and looks at how they are designed but doesn’t check if they are working effectively, and SOC 2 Type 2, which provides a detailed system description, reviews how the controls are designed, and checks if they are working properly over a period of time (typically 6 to 12 months).

Type of Assurance

SOC 1: The type of assurance provided by SOC 1 reports involves an opinion on the design and working, helping users to see if these controls ensure accurate financial reporting. These result in more limited assurance for operational and non-financial risks.

SOC 2: SOC 2 reports provide assurance on whether a service organization’s controls meet the specific Trust Service Criteria that are relevant to the organization's operations. These reports assess both the design and operational effectiveness of these controls, ensuring their alignment with the TSC. Unlike SOC 1, SOC 2 reports are intended for a wider range of users, including customers, regulators, and business partners, who are concerned with data security and privacy rather than solely financial reporting.

Duration

SOC 1: The duration is one of the main differences between SOC 1 vs. SOC 2 Reports, where the timeline of the SOC 1 report often depends on the needs of the organization’s financial reporting stakeholders. Usually, SOC 1 reports cover a set period, like 6 or 12 months, so the auditor can check how the controls worked during that time. This is called a Type II report, but a Type I SOC 1 report looks at the controls at just one specific point in time. When it comes to the audit timeline, it may take a shorter time, i.e., a few weeks to months, due to narrow focus. 

SOC 2: Since SOC 2 reports focus on security, availability, processing integrity, confidentiality, and privacy, the assessment period can depend on contracts, regulations, or client needs. Most SOC 2 reports cover a 12-month period, especially for businesses that need ongoing monitoring of these important criteria. Here, the audit time can be longer as the organization may need to conduct a pre-assessment to ensure readiness.  

What Type of SOC Audit Does Your Organization Need?

Identify the Nature of Your Services

If your organization directly affects clients' financial statements, a SOC 1 audit is essential. However, if your company manages sensitive data, hosts applications, or provides IT infrastructure, a SOC 2 audit is the better choice.

Consider Your Clients and Stakeholders

Clients and industry standards often help decide which type of SOC audit your organization needs. Some clients may request a specific SOC report in contracts or RFPs (Request for Proposals), so it’s important to meet their expectations. Also, industries like healthcare, finance, and technology have compliance rules that usually match either SOC 1 or SOC 2 audits. 

Audit Type (Type I Vs. Type II)

If your organization is newly implementing controls or needs a quick, one-time assessment of the design of its controls, a Type I audit is appropriate. On the other hand, organizations that require ongoing assurance of control effectiveness over a specified period (e.g., 6–12 months) require a Type II audit.