In today’s interconnected business environment, service organizations must prioritize accountability, transparency and robust internal controls. System and Organization Controls (SOC) examinations have emerged as a critical tool in achieving these goals, fostering trust between service organizations and their clients. In a recent webinar, Baker Tilly SOC specialists explored key SOC topics, including common challenges and strategies for optimizing your organization’s SOC compliance requirements, readiness and compliance efforts.
The importance of SOC reporting
As businesses increasingly rely on outsourcing to support critical functions, demonstrating the ability to manage risks effectively is essential. SOC reports provide independent assurance that a service organization’s controls are designed (Type 1) and operate effectively (Type 2) to meet commitments such as financial reporting (SOC 1) or security and privacy standards (SOC 2). However, SOC reports are not one-size-fits-all — they must be tailored to specific service offerings and client needs.
Does your organization need a SOC exam?
Determining whether your organization needs a SOC examination often hinges on your clients’ demands and the nature of your services. Clients increasingly require assurances about how their data is managed and how financial processes are controlled, making SOC reports a competitive advantage — or even a contractual necessity.
Key indicators that your organization may need a SOC examination include:
Handling financial transactions or reporting: If your services impact financial reporting, such as payroll processing, claims management or inventory control, a SOC 1 report is typically necessary
Storing or processing sensitive data: Industries like healthcare, technology and finance often require SOC 2 reports to verify robust security and/or privacy measures
Client demand: Prospective and existing clients may mandate SOC examinations to ensure transparency, trust and compliance with their own risk management standards
Choosing the right SOC report depends on your services and client needs. Some organizations may even require both SOC 1 and SOC 2, particularly if they handle financial and sensitive data.
Overcoming common SOC challenges
Audit trail gaps
Effective audits depend on clear and accessible evidence. Organizations often face challenges like insufficient documentation, lack of proper data retention and over-reliance on specific individuals. To address these issues, educate control owners about audit requirements, ensure adequate system retention settings and implement planning for cross-training and succession.
Completeness and accuracy of evidence
Auditors require reliable, system-generated data, yet many organizations rely on manually prepared reports. Ensure completeness by leveraging automated tools, centralizing policy documentation and implementing rigorous change management for modifiable reports.
Managing non-occurrence controls
Some controls may not operate during the examination period which, if pervasive, can prevent the service organization from achieving the criteria. To help alleviate issues that arise from non-occurrences, it is important for the service organization to proactively identify controls and/or process areas that may not occur during the examination period. The sooner these scenarios are identified, the sooner the service organization and service auditor can have conversations about adding other controls that have samples to test and would fulfill achieving the criteria. These additional controls will be tested by the service auditor and assuming they are operating effectively, they can help the service organization achieve the criteria.
Vendors vs. subservice organizations
Differentiating between vendors and subservice organizations is crucial for defining scope. Establish clear criteria for classification, align oversight with risk impact and obtain complementary SOC reports from subservice providers to enhance transparency.
Emerging tools: A balanced approach
Emerging tools offer the potential for increased efficiency but should not completely replace established processes. The AICPA cautions against relying solely on these tools for SOC 2 compliance, highlighting the importance of continuous oversight. Organizations must actively manage SOC processes to ensure effective controls. Auditors play a crucial role in validating these efforts beyond automated methods. Therefore, these tools should enhance, rather than replace, diligent management and validation of controls.
The value of SOC readiness assessments
SOC readiness assessments are akin to practice exams, preparing organizations for successful SOC examinations. Key deliverables include:
• An inventory of in-scope systems and controls
• A control matrix aligned with objectives or criteria
• Identification of control gaps and remediation plans
Starting readiness assessments early allows ample time for remediation, minimizing last-minute challenges.
Exploring SOC 2+
SOC 2+ reports streamline compliance by integrating supplementary frameworks with the SOC 2 criteria. This approach reduces redundancy, aligns controls across frameworks and demonstrates comprehensive compliance to stakeholders.
For example, consider a SOC 2+ HIPAA report. In this scenario, the organization’s HIPAA compliance requirements are mapped directly to the SOC 2 criteria. During the SOC 2 audit, the auditor simultaneously evaluates the organization’s adherence to HIPAA regulations using the same set of controls and evidence. This integrated method demonstrates compliance while saving significant time and effort.
HIPAA is just one of many frameworks that can be combined with SOC 2. Other examples include HITRUST, ISO, NIST and even GDPR. Each of these frameworks can be seamlessly incorporated into a SOC 2+ report, enabling organizations to address diverse regulatory obligations within a single audit process.
Staying ahead in SOC compliance
SOC reporting is not static — it evolves alongside technological and regulatory landscapes. By addressing challenges proactively, leveraging readiness assessments and exploring integrated frameworks, organizations can navigate the complexities of SOC with confidence.
