United States: Converting Risk Into Opportunity: Leveraging SOC Reporting To Build Customer Confidence

Last Updated: September 22 2015
Article by Armanino LLP

The significant growth in the business process outsourcing market in the U.S. presents increasing risk for customers. Companies are concerned about their lack of control over all aspects of their business, as outsourcing is now a business imperative for them to compete effectively. To address this risk, there is an ever increasing need for auditor reporting on internal controls at service organizations.

SOC compliance requires time and effort, but it also provides an opportunity for service organizations to differentiate themselves in their marketplace. By staying current with new developments in SOC reporting and implementing SOC best practices, companies can manage their SOC compliance efforts effectively. They can then leverage their compliance efforts to demonstrate the trustworthiness of their internal controls to prospective and existing customers―thereby converting risk into opportunity.

SOC Reporting Options

To meet the growing need for auditor reporting on service organization internal controls, the American Institute of CPAs (AICPA) has created three Service Organization Controls (SOC) reporting options:

  • SOC 1
    This is a report on controls at a service organization relevant to a user entity's internal control over financial reporting. This report is typically used by the service organization's customers to satisfy Sarbanes-Oxley compliance requirements. It is performed under the international ISAE 3402 and U.S. SSAE16 attestation standards.
  • SOC 2
    This is a report on controls at a service organization relevant to security, availability, processing integrity, confidentiality and/or privacy. It is typically used by the service organization's customers to gain comfort over selected operational controls tested at the service organization. This engagement is performed under the AT 101 attestation standard.
  • SOC 3
    This is a Trust Services report, which essentially covers the same subject matter as SOC 2 but does not include the same level of detail. This report enables the service organization to publish a seal on their website indicating their compliance. This engagement is performed under the AT 101 attestation standard.

Comparison of the SOC Reports

REPORT SOC 1 SOC 2 SOC 3
What is it? Report on Controls at a Service Organization Relevant to User Entities' Internal Control Over Financial Reporting Report on Controls at a Service Organization Relevant to Security, Availability, processing Integrity, confidentiality and privacy Trust Services Report for Service Organizations
Applicable Standard SSAE16 AT101 AT101
Scope Controls relevant to user entities' financial statements – general IT controls and applicable financial controls Controls related to security, availability, processing integrity, confidentiality or privacy Controls related to security, availability, processing integrity, confidentiality or privacy
Report Distribution Restricted use report Generally a restricted use report General use report (with a public seal)
Report Content Description of service organization's system

CPA's opinion on fairness of presentation of the description, suitability of design, and in a type 2 report, the operating effectiveness of controls
Description of service organization's system

CPA's opinion on fairness of presentation of the description, suitability of design, and in a type 2 report, the operating effectiveness of controls
An unaudited system description used to delineate the boundaries of the system

CPA's opinion on whether the entity maintained effective controls over its system
Benefits Provides customers with the necessary detail to support their regulatory requirements

Eliminates the expense of responding to multiple user entity and auditor requests

Provides a competitive advantage when seeking to attract new customers

Use of the report is restricted to the user entity and their auditor
Provides customers with the necessary detail to support their regulatory requirements

Eliminates the expense of responding to multiple user entity and auditor requests

Provides a competitive advantage when seeking to attract new customers

Use of the report is restricted to the user entity, their auditor and other entities with knowledge of the system
Provides customers with an abbreviated report to support their regulatory requirements

Eliminates the expense of responding to multiple user entity and auditor requests

Provides a competitive advantage when seeking to attract new customers

Report is unrestricted and can enhance marketing efforts

Service Organization Best Practices

A SOC audit requires careful planning, execution and communication between the service organization and the independent service auditor. Because another company's auditors will be relying on the SOC report generated, getting it right the first time is very important. Below are the top five things service organizations can do to make the project efficient, effective and successful for all parties involved.

Set a proper scope.

This is crucial to producing an effective SOC report. Service organization management should leverage a risk-based approach for the creation of the SOC report, and this evaluation process should ensure sufficient understanding of how each risk can impact their customers' operations and financial reporting. In turn, this will help management identify the proper scope and eliminate control objectives and business processes that are not critical to customers.

Identify the correct project/reporting period.

Many service organizations will align their SOC report with their own year-end or the calendar year-end, without determining the impact of this decision. For example, if an organization has a December 31 year-end, they will be starting their year-end close and financial reporting responsibilities shortly after the end of the calendar year. Combine this with holiday vacations, and key staff members may be stretched too thin during this important period. By evaluating peak times during the year along with customers' fiscal year-ends, service organizations can determine the most appropriate timing for the SOC reporting period. This evaluation will typically identify alternate, non-peak dates for SOC reporting periods that meet the needs of the service organization and their customers.

Request appropriate lead time from your auditor.

Many SOC providers will not request documents until they arrive on site for fieldwork. This means that the service organization's team will have less time to generate the requested samples and ensure they meet the auditor's needs. By establishing proper lead times with the auditor, the necessary evidence can be gathered in advance of the auditor's arrival. This increases auditor efficiency, minimizes the impact to the service organization, and reduces risk and overall cost.

Properly define the control language.

Many service organizations make errors when defining the key control activities that are included in their SOC report. The language will either be too general or too restrictive, both of which make reliance on the SOC report difficult. If the control language is too general, customers' auditors will find it difficult to understand exactly what is being tested and what the results mean. If the language is too restrictive, it will drastically increase the likelihood that the SOC report will include exceptions or even result in a qualified opinion. These exceptions will reduce customers' ability to rely on the report as they had intended. By defining key control activities properly, service organizations can ensure that the report will have the necessary level of detail for their customers without increasing the likelihood of testing failures and exceptions.

Establish clear ownership for the project.

A SOC report, like any other project, will require some level of effort from the service organization's various relevant departments. So it is imperative that the business assigns a clear owner for the project, to ensure that the team works effectively and efficiently with the SOC auditor. That way, the project will remain on schedule and on budget, and achieve the desired outcomes for all parties. Lack of ownership and oversight by the business sponsors is often the number one factor in increasing the overall cost of a SOC audit.

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