Service Organization Control (SOC) reports have become essential in ensuring the protection of sensitive information and compliance with regulatory requirements. These reports provide valuable insights into an organization’s security controls and processes, fostering trust and confidence among clients and stakeholders. But how often should a company obtain a SOC report to maintain optimal security and compliance? In this Peak Post, we will explore the recommended frequency for obtaining SOC reports, the different types of reports available, and the factors that influence the decision-making process.
Types of SOC Reports
There are three primary types of SOC reports, each serving a specific purpose:
- SOC 1: This report focuses on the controls at a service organization relevant to user entities’ internal control over financial reporting (ICFR). It’s typically requested by auditors of user entities when conducting financial audits.
- SOC 2: This report evaluates a service organization’s controls related to one or more of the Trust Services Categories: security, availability, processing integrity, confidentiality, and privacy. It is widely used by organizations that provide services in fields like technology, healthcare, and finance.
- SOC 3: This is a simplified version of the SOC 2 report, primarily intended for public consumption. It provides a high-level overview of the service organization’s controls without revealing specific details.
SOC 1 Report
The Securities and Exchange Commission (SEC) requires that all entities that are publicly held must file annual reports that are audited and SOC 1 reporting helps organization to comply with Sarbanes–Oxley Act’s section 404, issued by the SEC, to demonstrate successful internal controls regarding financial auditing and reporting. A service organization (this includes privately held companies) may be required by their user entities and other stake holders to obtain a SOC 1 if the service organization provides a service that may impact their clients’ internal controls over financial reporting (ICFR). The service organization obtaining a Type 2 report would not be able to align the period covered by their report with the fiscal or reporting period of every user entity. However, since the period covered by the type 2 report would need to overlap a substantial portion of the period covered by a user entity’s financial statements being audited and because of the aforementioned annual reporting requirements, a service organization would typically get a SOC 1 Type 2 report every 12 months since this is most likely to maximize the usefulness of the report to stake holders, the user entities and their auditors and provide continuous coverage year over year.
“Regardless of the specific needs or reporting cadence the aim is to provide SOC reports with sufficient frequency and covering sufficient periods to provide continuous coverage and assurance to meet the needs of internal and external stakeholders.”
SOC 2 Report
A SOC 2 isn’t required by law and as such there are no mandated requirements to obtain a SOC 2 within a predefined period. Also, SOC 2 reports do not expire, however reports that are older than a year are often considered “stale”, providing little to no value to user entities and their auditors. Generally, service organizations will obtain a SOC 2 Type 2 report annually since similarly to a SOC 1 Type 2 report, this reporting cadence provides assurance over the operating effectiveness of controls over a longer period of time and maximizes the usefulness of the report to not only the service organization but also the user entities and their auditors.
Continuous SOC Report Coverage
While service organizations typically obtain a SOC 1 or SOC 2 report on an annual cadence, a service organization may elect to obtain a SOC 1 Type 2 or SOC 2 Type 2 report more frequently (e.g., every six (6) months) depending on their own needs, their client’s preferences, any ongoing concerns or when significant changes are made that impacts their control environment. A service organization may even elect to obtain a report covering a shorter period (three (3) months) based on specific needs however periods that are too short provides less assurance over the operating effectiveness of controls at the service organization. Regardless of the specific needs or reporting cadence the aim is to provide SOC reports with sufficient frequency and covering sufficient periods to provide continuous coverage and assurance to meet the needs of internal and external stakeholders.
Circumstances Requiring More Frequent SOC Reporting
There are situations where a more frequent SOC reporting schedule may be necessary. These could include:
- Regulatory Requirements: Certain industries have specific regulatory requirements that mandate more frequent SOC reporting, such as the Health Insurance Portability and Accountability Act (HIPAA) for healthcare organizations.
- Contractual Obligations: Some client contracts may require service organizations to provide updated SOC reports at a predetermined interval, which could be more frequent than the standard annual recommendation.
- Significant Changes: If a service organization undergoes significant changes, such as a merger or acquisition, implementing new technology, or modifying its control environment, it may be necessary to obtain a SOC report more frequently to reflect these changes and ensure continued compliance.
Factors to Consider When Determining SOC Report Frequency
When determining the frequency of obtaining a SOC report, organizations should consider the following factors:
- Industry Standards: Understand the industry-specific regulations and standards that apply to your organization, as they may influence the frequency of SOC reporting.
- Client Expectations: Consider the expectations of your clients and stakeholders, as they may require a specific level of assurance that can only be provided through regular SOC reporting.
- Risk Management: Evaluate your organization’s risk tolerance and the potential impact of security breaches or non-compliance. This assessment can help guide the decision-making process when determining how often to obtain a SOC report.
- Internal Control Environment: Regularly review and assess the effectiveness of your organization’s internal controls. This can help identify any areas that need improvement and determine if more frequent SOC reporting is necessary.
The frequency of obtaining a SOC report is ultimately dependent on the specific needs and circumstances of your organization. Generally, an annual SOC report is sufficient to demonstrate your commitment to maintaining robust security and compliance measures. However, industry-specific regulations, client expectations, and significant changes within the organization can necessitate more frequent SOC reporting. By carefully considering these factors, organizations can ensure they are providing the necessary assurance to clients and stakeholders while effectively managing risk and maintaining compliance.