SOC-reports: Building Trust Through Audited Internal Controls

In the digital economy, data and business processes are an essential basis for value creation. The increasing outsourcing of central functions – such as financial accounting, payroll accounting, payment processing, IT hosting, data center operations, and cloud services – increases the risk profile of organizations. Relevant risk categories include information security (confidentiality, integrity, availability), data protection and compliance requirements (e.g., GDPR, sector-specific outsourcing regulations), operational resilience (service availability, business continuity, incident management), risks to financial reporting, and third- and fourth-party risks, including subservice providers. Transparency regarding control objectives, control design, and control effectiveness thus becomes a material governance requirement.

Stakeholder requirements for reliability and compliance

Stakeholders – e.g., management and supervisory bodies, customers and business partners, as well as supervisory authorities and external auditors – require reliable, comparable, and periodically updated evidence that sensitive information is protected, systems are available, processing is correct and compliant, and outsourced services are adequately monitored. Exposed areas such as finance and payroll accounting or critical IT services, mismanagement can have immediate financial, legal, and reputational consequences. Independent audit evidence of the adequacy and effectiveness of the internal control system (ICS) at service providers is therefore essential.

SOC-reports as a confidence-building governance element

SOC (Service Organization Controls) reports address these requirements. As standardized assurance reports, they provide a structured assessment of the design effectiveness and – depending on the report type – the operating effectiveness of controls at service providers over defined reporting periods. SOC-reports create decision-relevant transparency for the stakeholders, support third-party risk management and compliance, and reduce the information and control asymmetries that arise from outsourcing.

Overview of SOC-report types

SOC-reports vary depending on their purpose and target audience. To help companies and their customers choose the right type of report, it is worth looking at the key differences:

Tab. 1: Types of SOC-audits

Source: Bungartz, Oliver: Handbuch Interne Kontrollsysteme (IKS), 6th ed. Berlin 2020, pp. 87-88.

Type I vs. Type II: Differences with a significant impact

In addition to choosing the appropriate type of SOC-report, it is crucial to decide whether the audit will be conducted as a Type I or Type II audit:

Tab. 2: Types of SOC-Reporting

Source: Bungartz, Oliver: Handbuch Interne Kontrollsysteme (IKS), 6th ed. Berlin 2020, p. 88.

While a Type I report primarily provides a snapshot of the structure and adequacy of the ICS, a Type II report confirms the actual functionality of the controls over a longer period and is therefore significantly more meaningful.

Relevant standards and audit frameworks

SOC-reports are widely accepted internationally because they are based on clearly defined, globally recognized auditing standards. These standards ensure comparability, traceability, and thus trust. Without such integration into existing auditing frameworks, a SOC-report would not be reliable:

• ISAE 3402 is the relevant international standard for SOC 1 audits if the service provider's controls have an impact on the financial reporting of client organizations.
• ISAE 3000 serves as a general framework standard for audits of non-financial information and forms the basis for SOC 2 and SOC 3 reports. The focus here is on controls relating to security, availability, processing integrity, confidentiality, and data protection.
• SSAE 18 is the auditing standard applicable in the United States that regulates the performance of SOC audits under US law. It specifies the reporting requirements for the US market and is particularly relevant for internationally active companies that have business relationships with US customers.
• IDW PS 951 n.F. represents the national implementation of ISAE 3402 in the German audit environment. It thus provides a legally established framework for audits of outsourced services in the German legal system without deviating from the content of ISAE 3402. No distinction is made between the three types of SOC audits.

Compliance with these standards ensures that SOC-reports are not misunderstood as a marketing tool, but rather as serious, audit-verified evidence of the adequacy and effectiveness of controls:

Fig. 1: Standards of SOC-reporting

Approach to preparing a SOC-report

• Preparation phase (readiness assessment): At the beginning, a structured inventory of the relevant processes, systems, and locations is carried out. During this preparation phase, existing controls are identified and documented, gaps in the control environment are highlighted, and measures to close these gaps are defined. The goal is to create a consistent basis for the subsequent audit.
• Statement and system description: Management submits a declaration ("Management Statement") confirming that the system description is accurate and complete. This system description contains a clear presentation of the services offered, the systems and processes used, the responsibilities, and the interfaces to other units or service providers.
• Definition of the control framework: A control framework is developed based on the system description. This framework defines the key objectives and associated controls, documents them in a comprehensible manner, and presents them in a structured way. The controls are described in such a way that their existence and functionality can be verified.
• Conducting the audit: The audit can be performed in two types:
  • Type I: Assessment of whether the controls described are appropriately designed and implemented as of the reporting date.
  • Type II: Extended assessment, which additionally examines whether the controls have functioned effectively over a longer period. Evidence is obtained, random samples are selected and checked, and actual implementation is evaluated. Any deviations or weaknesses identified are documented in the report.
• Issuance of the SOC-report: The auditor prepares the SOC-report. The report contains the management representation letter and system description prepared by the company/service provider, the auditor's assessment and, depending on the type of report, a description of the controls tested and the results. In addition, any findings, limitations, or recommendations are listed transparently.

Conclusion

SOC-reports are much more than formal audit evidence; they have developed into a strategic tool for building trust and strengthening the competitiveness of service providers in the market. Companies that process sensitive data or provide critical services – such as financial accounting, payroll accounting, payment processing, IT hosting, data center operations, and cloud services – can use a SOC-report to document their performance, reliability, and the adequacy of their internal controls in a differentiated manner.

The relevance stems from the rising expectations of customers, business partners, and regulatory authorities. They demand reliable evidence that processes are controlled, systems are available, and data is protected. Without audited and documented controls, trust quickly declines, while an up-to-date SOC-report creates transparency and proves that an effective control environment has been established. This makes it clear that SOC-reports are not an end in themselves, but rather a tool for reducing information asymmetries in outsourcing relationships, strengthening the client's ability to exercise control, and demonstrating the quality of internal controls at service providers.

For companies, this means that a SOC-report can be used to strengthen business relationships, reliably meet compliance requirements, and successfully support tenders. Stakeholders can rest assured that the services provided are carried out in a structured, controlled, and verified environment. This makes the SOC-report an essential component of sustainable and trust-based cooperation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.