Jul 03 2024

SOC 1 vs. SOC 2 Reports: What Is the Difference?

System and Organization Controls 1 and 2 reports help companies monitor financial and operational controls and build trust with customers.

For businesses, there has long been a cost associated with regulatory compliance, but compliance can also give organizations opportunities to develop trust with customers. 

A 2023 study from Drata, a security and compliance automation platform that continuously monitors security controls, found that 87 percent of respondents faced “consequences as a result of not having continuous compliance, including slowed sales cycles, security breaches, business interruption, loss of a business relationship, a damaged reputation, or fines.” Further, 68 percent of respondents reported that compliance strengthens relationships with existing customers or acts as a differentiator. The report found 74 percent view compliance as burdensome, but that the sentiment was “directly connected to the current state of compliance maturity an organization has achieved.”
Two of the most significant compliance mechanisms for businesses are the System and Organization Controls 1 and 2 reports, better known as SOC 1 and SOC 2. They were established  by the American Institute of Certified Public Accountants (AICPA) and deal with different aspects of regulatory compliance.

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High-profile accounting scandals and data breaches over the past several decades spurred the need for more regulatory compliance, according to Heather Herbst, research director for the worldwide office of the CFO at IDC.

“SOC 1 and SOC 2 reports help mitigate these risks by providing independent assurance on the effectiveness of controls over financial reporting and data protection, respectively,” Herbst says. “By ensuring that service organizations have robust controls in place, companies can better manage risk, ensure compliance and protect their own and their customers' interests.”

SOC 1: Definition and Scope

SOC 1 reports are designed to provide assurance on the internal controls over financial reporting (ICFR) at service organizations, specifically under the Sarbanes-Oxley Act (SOX), according to Herbst. “They help user entities — clients of the service organization — and their auditors understand how the service organization's controls can impact the clients’ financial statements,” she says.

The Enron and Arthur Andersen accounting scandals and the account scandal at WorldCom in the early 2000s pushed the AICPA to develop the framework for SOC 1, Herbst notes.  

“So essentially, if you outsource your payroll to a third party, that third party needs to give its customers some comfort that the controls they’re operating on their behalf are operating correctly to provide a complete and accurate accounting of those numbers back to their customers,” says Todd Bialick, U.S. digital assurance and transparency leader at PwC. 

Heather Herbst
SOC 1 and SOC 2 reports help mitigate these risks by providing independent assurance on the effectiveness of controls over financial reporting and data protection, respectively.”

Heather Herbst Research Director for the Worldwide Office of the CFO, IDC

It would be very intrusive to have auditors from every company for which the payroll company provides services to come and audit it, Bialick notes. “So, they generally will hire an auditor to do a report, test the controls — both the design and operating effectiveness of those controls — and then they can give the reports to those, say, 10,000 or 100,000 customers,” he adds. 

The users of those reports are generally the management and auditors of the service provider’s customers. It’s also worth noting that there are two types of SOC 1 reports. 

A Type I report is an audit of a service organization's internal controls at a specific time, Herbst says, and “includes the organization’s description of its system and the auditor’s opinion on whether the controls are suitably designed to achieve the control objectives.”

A Type II report evaluates not only the suitability of the design of controls “but also their operating effectiveness over a specified period, typically six months to a year,” she adds.

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SOC 2: Definition and Scope

A SOC 2 report is more expansive in scope and is designed to provide assurance about Trust Services Criteria (TSC), Herbst says, which include five categories:

  • Security: The system is protected against unauthorized access (physical and logical).
  • Availability: The system is available for operation and use as committed or agreed to.
  • Processing Integrity: System processing is complete, valid, accurate, timely and authorized.
  • Confidentiality: Information designated as confidential is protected.
  • Privacy: Personal information is collected, used, retained, disclosed and disposed of in conformity with the commitments in the service organization's privacy notice.

SOC 2 reports are generally used by information security and third-party risk management teams, Bialick says, as they focus more on operational controls. 


The percentage of respondents that faced consequences as a result of having reactive compliance maturity

Source: drata.com, “New Resource: 2023 Compliance Trends Report,” Feb. 14, 2023

As with SOC 1, there are two types of SOC 2 reports, Herbst says.

A Type I report “includes the service organization’s description of its system and the auditor’s opinion on whether the controls are suitably designed to meet the applicable Trust Services Criteria,” she says. 

The Type II report looks at the design and operating effectiveness of the controls, usually within six months to a year. It also includes the components of a Type I report and provides the auditor’s opinion on the effectiveness of the controls in operation over the specified period. 

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SOC 1 vs. SOC 2 Reports: What’s the Difference?

There are several differences between SOC 1 and SOC 2 reports. SOC 1 is squarely focused on financial controls and is designed for review by auditors. SOC 2 is focused on operational controls, including data security, and is aimed at operational personnel, such as the IT team. 

“SOC 2 is more important to IT leaders,” Herbst says. “It is crucial for IT service providers, and it can be used to show compliance with data security and protection regulations.

If a SOC 1 report uncovers issues, those complications could affect the financial statements of the users, Bialick says, either internally or with a company’s auditors.

By contrast, issues in a SOC 2 report could, for example, result in a company deciding not to use a cybersecurity vendor.  The stakes are different, but one report is not necessarily more important or impactful than the other, according to Bialick.

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Why Do You Need These Reports for Compliance and Customer Trust?

Enron and Arthur Andersen were “involved in a massive accounting fraud, partly facilitated by inadequate controls over financial reporting, which led to the creation of SOX,” Herbst says.

“Similarly, WorldCom's improper accounting practices prompted governing boards and regulators to rethink the need for audit assessment and oversight of financial controls. SOC 1 reports can be used to demonstrate SOX compliance.”

SOC 2 reports can be used to demonstrate compliance with regulations such as the Health Insurance Portability and Accountability Act (HIPPA), the Gramm-Leach-Bliley Act (GLBA), the General Data Protection Regulation (GDPR) and the Federal Risk and Authorization Management Program (FedRAMP).

“A consistent framework helps companies understand how they can comply with these and other regulations, enhancing their overall security posture,” Herbst says. SOC 1 and SOC 2 reports also help businesses manage adherence to multiple regulations. 

SOC 2 reports are crucial for companies in highly regulated industries, such as banks, Bialick says. “They need to get those so that their third-party risk management program has some teeth and they make sure they’re doing what they need to do to monitor what that third party’s doing on their behalf,” he says.

Maintaining compliance through SOC 1 and SOC 2 is critical to brands’ reputations and their relationships with customers. Many customers reportedly avoid certain brands “due to high-profile data breaches and financial reporting scandals,” Herbst says.

There are too many cautionary tales to count where customer trust was “weakened by the lack of foresight and effort put into protecting them by many corporations, which can lead to customers’ financial health declining and significantly impact their future,” Herbst says.

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