What is SOC

“SOC” stands for System and Organization Controls, defined by the American Institute of Certified Public Accountants (AICPA). Although informally, SOC reports are referred to as “Service Organization Controls” reports.

SOC reports are independent assurance reports issued by a CPA firm to provide confidence to customers, i.e., user entities and their auditors, that a service organization has designed and operated appropriate internal controls over its systems and services.

There are three types of SOC reports:

SOC 1: Provides assurance over controls at a service organization that are relevant to customers’ internal control over financial reporting (ICFR).

SOC 2: Provides assurance that a service organization has controls in place to protect data and systems based on the 5 Trust Services Criteria (Security, Availability, Processing Integrity, Confidentiality, Privacy).

SOC 3: A high‑level, publicly shareable summary of a SOC 2 report intended for general users without detailed control descriptions.

1. Intent of SOC 1

   SOC 1 is appropriate when a service you provide has a direct impact on your customers’ financial reporting, such as payroll processing, billing, financial accounting, expense management, or other activities that affect the general ledger and financial statements. A SOC 1 report then evaluates the controls in place at your organisation that are relevant to your customers’ Internal Control over Financial Reporting (ICFR). The purpose of this report is to help your customers and their auditors understand how you manage these controls and how effective they are in the outsourced processes that could impact your customers’ financial statement assertions.

2. Relevant Standards

SOC 1 examinations are performed under:

• • US: SSAE 18: Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ ICFR.
  • Often mapped to ISAE 3402 for international equivalence.

These standards define how system descriptions, control design, and control operating effectiveness must be evaluated.

3. Type 1 vs Type 2 – What’s the Difference?

Type 1 Report: Evaluates whether controls are suitably designed as of a point in time.

Type 2 Report: Includes everything in Type 1 plus operating effectiveness testing over a defined period (typically 6–12 months).

Type 2 provides much stronger audit reliance and is expected by most mature enterprise customers.

4. Who Should Get SOC 1 Attestation and When?

A service organization should pursue SOC 1 when:

• • Its services impact customers’ financial reporting or are part of the customer’s ICFR;
  • Customers’ external auditors request assurance to reduce duplicate testing.

5. What a SOC 1 Report Contains

A SOC 1 report has the following sections:

• • Management’s Assertion – Management declares that the system description is accurate and controls are suitably designed (and operating effectively for Type 2).
  • Service Auditor’s Opinion – The independent auditor provides their conclusion on the fairness of the description and the design/operating effectiveness of controls.
  • System Description – Outlines the services provided, system boundaries, and the controls in place to support relevant financial reporting objectives.  It also includes:
    • Subservice Organizations– Explains which third-party providers are involved in the process and whether their controls are included in or excluded from the report (Inclusive or Carve‑Out).
    • Complementary User Entity Controls (CUECs) – Identifies the controls that customer organizations must perform to achieve the overall control objectives.
  • Control Objectives and Controls – Lists the specific objectives the system aims to achieve, and the controls implemented to meet them.
  • Tests of Controls & Results (Type 2) – Presents the auditor’s testing procedures and the results assessing whether controls operated effectively over the review period.

In Closing

A SOC 1 report is a strategic assurance tool that strengthens trust with customers and demonstrates responsible management of financial‑impacting processes.  It positions the outsourced service provider as a trusted, well-governed service provider in financial reporting environments.