SOC 1 Type 1 vs Type 2: Key Differences and What They Mean for Your Business

In the world of compliance and auditing, businesses often have to grapple with a variety of standards and frameworks that are designed to ensure, among other things, services provided by third parties are safe, reliable, and controlled. One such framework where businesses need to have great understanding is the SOC 1 report.

This report comes in two different types, each crucial for different reasons and distinct application: SOC 1 Type 1 and SOC 1 Type 2.

Understanding the differences between SOC 1 Type 1 vs Type 2 reports is important for businesses that rely on third-party service providers. The decision between SOC Type 1 vs Type 2 can have significant implications on how your business demonstrates the effectiveness of its internal controls, especially in relation to the financial reporting of clients. 

 

What is SOC 1?

SOC 1 is a set of auditing standards developed by the American Institute of Certified Public Accountants. It is an audit meant to assess the internal controls of a service organization, which may affect the financial reporting of the client organizations. \

A SOC 1 audit covers only those controls that pertain to financial statements and is thus vital to businesses offering services that may affect the financial operations of other organizations.

SOC 1 reports come in two varieties: Type 1 and Type 2. While both reports serve similar purposes, they differ in the scope and the length of time that they cover.

SOC 1 Type 1 vs Type 2: What’s the Difference?

The key difference between SOC 1 Type 1 vs Type 2 reports is in the time frame and the depth of the audit:

SOC 1 Type 1 Report

A SOC 1 Type 1 report assesses the suitability of the design of controls of a service organization at a point in time. This type of report is useful for organizations that need to demonstrate that they have established the right controls to protect their client’s financial data. However, it doesn’t evaluate whether the controls were operating effectively over time-only that they exist.

SOC 1, Type 1 provides an auditor review of a company’s policy and processes in design; it may be operatively working toward preset objectives. At the moment of performing such an audit, a representation of how control was set and implemented on specific dates shows the existing control environment for that time.

Key aspects of SOC 1 – Type 1:

• Includes the process of control in the design
• Represents operation at one period of time, which is momentary in nature-end.
• Demonstrates controls that are properly established without evaluating the effectiveness of their operation over time.

SOC 1 Type 2 Report A SOC 1 Type 2 report examines both the design and the operating effectiveness of the controls during a period, usually 6 to 12 months. 

A Type 2 report thus exceeds the coverage of the Type 1 report and ensures that controls are working as they should throughout the period under review. A SOC 1 Type 2 report gives a broader view of the implementation and maintenance of controls over a period of time and thus provides a higher level of assurance to clients.

SOC 1 Type 2:

• Focuses on the effectiveness of the control design.
• Covers a period of time, such as 6 or 12 months.
• Provides a detailed analysis of the organization’s control environment.

Which Report is Right for Your Business: SOC 1 Type 1 vs Type 2?

The choice between SOC 1 Type 1 vs Type 2 depends on the needs of your business and what your clients require.

• SOC 1 Type 1 is appropriate if you are a new service provider or if you have recently implemented new controls. It shows your clients that you have designed the right processes but does not yet provide evidence of the operational effectiveness of these controls over time.
• SOC 1 Type 2 would be required if you’ve been in operation for some time and need to show that your controls have operated effectively over some period.

Many clients of your company’s services, when the reliance on those services for financial operations is being made, may require a SOC 1 Type 2 report due to the evidence it can give of better reliability and operational maturity.

SOC 1 Type 2 vs SOC 2: How Do They Compare?

It is equally important to understand how SOC 1 Type 2 vs SOC 2 reports compare, especially in choosing what kind of compliance audit your business needs.

While SOC 1 focuses on financial reporting and internal controls related to financial transactions, SOC 2 focuses on other areas of an organization’s operation, including security, availability, processing integrity, confidentiality, and privacy. The SOC 2 report is relevant for service providers dealing in sensitive customer data, such as technology, healthcare, and finance industries.

Here are some key differences between SOC 1 Type 2 vs SOC 2:

• SOC 1 Type 2 is focused on controls related to financial reporting, while SOC 2 looks at broader controls related to data security, privacy, and availability.
• SOC 1 Type 2 reports are companies providing financial or accounting services, whereas SOC 2 is generally required by technology or SaaS companies that handle sensitive customer information.

While SOC 1 Type 2 vs SOC 2 reports have different purposes, both are critical to prove your compliance with industry standards and that your clients can trust in your security and control processes.

 

Key Takeaways: SOC 1 Type 1 vs Type 2

Following is a summary of the key differences between SOC 1 Type 1 vs Type 2:

• SOC 1 Type 1 focuses on the design of controls at a specific point in time without evaluating their ongoing effectiveness.
• SOC 1 Type 2 evaluates both the design and effectiveness of controls over a specific period of time (usually 6 to 12 months).
• If you are starting a new service or need to demonstrate the design of your controls, a SOC 1 Type 1 report may be sufficient.
• If you are more of an established service provider who wants to demonstrate that controls are operating effectively, you need a SOC 1 Type 2 report.

 

Conclusion: Making the Right Choice for Your Business

In conclusion, making the right choice for your business, the choice between SOC 1 Type 1 and SOC 1 Type 2 should be based upon the needs of your organization and the expectations of your clients. 

It includes businesses with no prior operational control attestation experience or any such entity seeking to establish an advantage that shows the appropriate controls of their organization. 

With experience in SOC reports, longer-term clients, and more, a SOC 1 Type 2 offers proof of operational maturity and controls much greater than a SOC 1 Type 1.

Understanding the differences between SOC Type 1 vs. Type 2, and how they relate to other compliance standards like SOC 2, will better position you to make the right choice for your business and ensure you’re meeting the necessary regulatory and client requirements.