SOC (Service Organization Control) reports are essential for demonstrating a company’s commitment to security, financial accuracy, and operational integrity. Among the different types of SOC reports, SOC 1 and SOC 2 are the most commonly requested.
Understanding the difference between SOC 1 and SOC 2 is crucial for businesses to determine which report is relevant to their operations.
Who is this for?
If you’re a compliance officer, security lead, or CFO at a tech company, SaaS provider, or financial services firm struggling with understanding which SOC report your business needs, this guide will help you choose the right framework to meet customer expectations, regulatory demands, and audit requirements.
What is a SOC 1 Report?
A SOC 1 report focuses on a company’s internal controls relevant to financial reporting. If your company provides services that impact a client’s financial statements, you may need a SOC 1 audit to prove the reliability of your financial processes.
Key Features of SOC 1 Reports
- Emphasis on financial transaction controls: SOC 1 ensures that a company has proper controls in place for handling financial data accurately and securely.
- Used for compliance with standards such as SOX (Sarbanes-Oxley Act): Many public companies require SOC 1 compliance to meet SOX regulations.
- Primarily relevant to auditors and financial stakeholders: The main audience for SOC 1 reports includes accountants, auditors, and clients who rely on your financial data.
Industries and Use Cases
SOC 1 is commonly used in industries where financial transactions and reporting accuracy are critical, such as:
- Payroll services – Ensuring salary and tax calculations are accurate.
- Accounting and financial data processing – Verifying controls over financial transactions.
- Investment firms – Confirming controls over fund management and reporting.
What is a SOC 2 Report?
A SOC 2 report, on the other hand, focuses on information security and data management. If your business handles customer data, a SOC 2 report helps demonstrate that you follow best practices for data security, availability, and privacy.
Key Features of SOC 2 Reports
- Emphasis on data security and operational controls: SOC 2 ensures a company protects sensitive customer data.
- Relevant for demonstrating compliance with industry standards like GDPR, CCPA, or HIPAA: Many regulations require businesses to have strong security measures in place, and SOC 2 helps validate these efforts.
- Used by IT teams, security professionals, and customers evaluating security posture: Companies handling sensitive data often require SOC 2 reports to gain customer trust.
Trust Service Criteria
SOC 2 reports evaluate a company based on five Trust Service Criteria:
- Security – Protection against unauthorized access and threats.
- Availability – Ensuring systems are operational when needed.
- Processing Integrity – Accuracy and completeness of data processing.
- Confidentiality – Proper management of confidential information.
- Privacy – Ensuring personal data is handled appropriately.
Industries and Use Cases
SOC 2 compliance is essential for:
- Technology companies – Cloud service providers, SaaS businesses, and IT companies handling customer data.
- Healthcare providers – Ensuring patient data security in compliance with HIPAA.
- Financial services – Beyond financial reporting, financial institutions that store customer data benefit from SOC 2 compliance.
Key Differences Between SOC 1 and SOC 2
| Aspect | SOC 1 | SOC 2 |
|---|---|---|
| Purpose | Internal controls for financial reporting | Security, privacy, and data management |
| Focus | Financial transactions | Information security |
| Audience | Financial auditors, accountants | IT teams, customers, security professionals |
| Compliance Standards | SOX | GDPR, HIPAA, CCPA |
| Trust Service Criteria | Not applicable | Security, Availability, Processing Integrity, Confidentiality, Privacy |
Which One Does Your Business Need?
If You Provide Services Impacting Financial Reporting
If your company offers services that influence financial statements, you’ll likely need SOC 1 compliance. Examples include:
- Payroll providers
- Accounting software companies
- Financial service providers
If Your Services Involve Data Security and Privacy
For companies handling sensitive customer data, SOC 2 compliance is essential. This applies to:
- SaaS providers
- Cloud storage companies
- IT service providers
When You Might Need Both
Some businesses may require both SOC 1 and SOC 2 reports, especially those operating in financial technology (FinTech) or cloud-based financial services. If your company processes financial transactions and handles sensitive customer data, both reports can help ensure full compliance.
How to Prepare for SOC Audits
- Identify Your Requirements – Determine whether your business needs SOC 1, SOC 2, or both.
- Conduct a Gap Analysis – Assess your current controls and identify areas that need improvement.
- Implement Policies and Procedures – Develop security and financial control policies to meet compliance requirements.
- Engage an Auditor – Work with a certified public accountant (CPA) or a third-party service provider.
- Use Compliance Automation Tools – Consider software solutions to streamline the audit preparation process.
Common Misconceptions About SOC Reports
SOC 2 Is Only for Large Companies
Many small and mid-sized businesses benefit from SOC 2 compliance, particularly those handling customer data.
SOC 1 and SOC 2 Reports Are Interchangeable
They serve different purposes: SOC 1 is for financial controls, while SOC 2 focuses on data security.
Achieving SOC 2 Means You’re Compliant With All Regulations
SOC 2 is a strong security standard, but companies may still need additional compliance measures for industry-specific regulations like HIPAA.
Key Takeaways & Wrap Up
Understanding the differences between SOC 1 and SOC 2 helps businesses choose the right compliance framework. Here’s a quick summary:
- SOC 1 focuses on financial controls relevant to financial reporting.
- SOC 2 ensures data security, privacy, and operational controls.
- Businesses in financial services should prioritize SOC 1, while tech companies and SaaS providers should focus on SOC 2.
- Some businesses may need both reports to cover financial and data security compliance.
- Preparing for SOC audits involves assessing current controls, implementing policies, and working with an auditor.
SOC 1 vs SOC 2 - FAQs
What is the main difference between SOC 1 and SOC 2?
SOC 1 focuses on financial controls, while SOC 2 deals with security, privacy, and data management.
Who needs a SOC 1 report?
Businesses that impact financial reporting, such as payroll providers and accounting software companies.
Is SOC 2 mandatory for SaaS companies?
It’s not legally required, but it’s an industry standard for SaaS companies handling customer data.
How long does it take to achieve SOC compliance?
It can take several months, depending on your existing controls and readiness for the audit.
Can a company have both SOC 1 and SOC 2 reports?
Yes, companies dealing with both financial reporting and data security may need both reports.
