SOC 2

When a company stores its data with a cloud provider or runs a business process on someone else's software, it needs confidence that the provider protects that data and keeps the service running. Sending every customer to audit every vendor would be impractical. SOC 2 solves this by having an independent auditor examine the provider's controls once and issue a report that the provider can share with customers under a non-disclosure agreement. For many software and service companies, a SOC 2 report has become a basic requirement for selling to larger customers. Prospects often ask for it before they will even begin a security review.

SOC 2 is one of the System and Organization Controls reports defined by the American Institute of Certified Public Accountants. It is not a certification in the strict sense. The auditor gives an opinion on the provider's controls, and customers decide whether the results meet their needs. Any exceptions the auditor finds are listed in the report, along with management's response. SOC 2 is most common in North America, while ISO 27001 certification is more widely recognized elsewhere, and many providers hold both. For security, compliance, sales and finance teams, SOC 2 is often the most visible compliance effort, since it directly affects whether deals close.

Definition of SOC 2

SOC 2 is an examination performed by a licensed CPA firm that reports on a service organization's description of its system and on the suitability of design, and for Type 2 the operating effectiveness, of its controls relevant to one or more of the AICPA Trust Services Criteria.

It is a common part of compliance management, is often requested during third-party risk management reviews and overlaps heavily with ISO 27001.

The Trust Services Criteria

Security is required in every SOC 2 report. It covers protection of information and systems against unauthorized access, disclosure and damage, and its requirements are known as the common criteria.

Availability covers whether systems are available for operation and use as committed or agreed.

Processing integrity covers whether system processing is complete, valid, accurate, timely and authorized.

Confidentiality covers the protection of information designated as confidential.

Privacy covers how personal information is collected, used, retained, disclosed and disposed of.

Providers choose which criteria beyond security to include, based on their services and what customers ask for. Adding criteria increases audit scope and cost, so providers usually add them only when customers need them.

Type 1 and Type 2 Reports

A Type 1 report assesses whether controls are suitably designed at a specific point in time.

A Type 2 report assesses whether controls are suitably designed and operated effectively over a period, typically between three and twelve months. A first Type 2 report often covers a shorter period, with later reports covering a full year.

Customers usually prefer Type 2 reports, since they show that controls actually worked over time.

Related reports include SOC 1, which focuses on controls relevant to customers' financial reporting, and SOC 3, a shorter general-use version of SOC 2 that can be shared publicly.

Importance of SOC 2 in Risk and Compliance

SOC 2 builds customer trust. An independent report gives customers evidence that a provider takes security seriously, rather than relying on the provider's own claims. Customers can review exactly which controls were tested and what the auditor found.

It speeds up sales. A current report can answer many security questionnaire questions at once, shortening reviews by customers' security and procurement teams.

It also improves security practices. Preparing for and maintaining SOC 2 pushes providers to formalize access management, change management, monitoring and incident response. Many providers find that the discipline of an annual audit keeps security from slipping as the company grows.

SOC 2 and Financial Management

SOC 2 costs include auditor fees, staff time, compliance software and any new security tools, and the first year is usually the most expensive. Costs vary widely with company size, scope and the criteria included.

Lacking a report can block or delay deals with larger customers, so the cost is often weighed against the revenue it enables.

Mapping SOC 2 controls to other frameworks, through control mapping, lets providers reuse evidence for ISO 27001 and other requirements.

Customers can use providers' SOC 2 reports to reduce the cost of their own vendor reviews.

Common Challenges

First-time providers may rush to a report without first building the controls it tests, leading to exceptions. Exceptions do not mean a report fails, but customers notice them and may ask follow-up questions.

Collecting evidence across many tools and teams is time-consuming without automation.

Customers may read reports superficially, missing exceptions or the complementary controls that they are expected to operate themselves.