SOC 1 vs. SOC 2 vs. SOC 3: Why your company needs compliance to grow
Compliance stands between your company and growth. If you want to sign enterprise deals, learn the differences between SOC 1, SOC 2, and SOC 3––and how best you can comply.
Compliance stands between you and growth.
SOC compliance likely wasn’t on your list of job responsibilities or in your vision for your career—but you work at a startup. Among the many hats you have to wear, compliance is one of the most important—even if it’s ill-fitting.
SOC stands for Service Organization Control, and the nut of what it’s all about is summarized right there: You’re a service organization (in accountant-speak), and you need to prove that you have certain controls in place for said accountants to deem you SOC-compliant.
SOC compliance is important because most enterprises can't or won't adopt your product without it. Without SOC compliance, you can’t land the enterprise deals that make your startup sustainable.
In this article, we’re going to break down the meaning of SOC 1, SOC 2, and SOC 3, as well as the differences between all three. By the end, you’ll know which is most relevant and which is necessary, and you’ll understand how to embark on the path to compliance.
SOC 1 vs. SOC 2. vs. SOC 3: An Overview
TL;DR: SOC compliance demonstrates that your customers can rely on the services you provide. An accountant audits your company and certifies you with a SOC report that you supply to your customers. This report proves your trustworthiness.
Understanding SOC compliance in greater detail is important, however, for knowing when to get SOC compliance and which type of SOC report to get. So let’s break it down further.
The Major differences between Soc 1 vs. SOC 2. vs. SOC 3
There are three primary types of SOC reports—the first two are the most used, and the second is of most concern to technology companies.
SOC 1 and SOC 2 are the most common SOC reports, so understanding the difference between them is essential. The difference between SOC 1 and SOC 2 is that SOC 1 focuses on financial reporting, whereas SOC 2 focuses on compliance and operations.
SOC 3 reports are less common. SOC 3 is a variation on SOC 2 and contains the same information as SOC 2, but it’s presented for a general audience rather than an informed one. If a SOC 2 report is for auditors and stakeholders inside the company you’re selling to, SOC 3 is for that company’s customers.
There are a couple of other SOC reports that are rarer and outside the scope of this article:
- SOC for Cybersecurity reports on the effectiveness of a service organization’s cybersecurity risk management.
- SOC for Supply Chain reports on the effectiveness of a service organization’s supply chain risk management.
We’ve already thrown a lot at you. Let’s pause, zoom out, and look at SOC 1, SOC 2, and SOC 3 from a higher level. Save this handy-dandy infographic to refer to when your memory of this article gets a little hazy.
How and why to become SOC-compliant
To become compliant and get a SOC report, you have to work with an independent CPA. An independent CPA assesses the scope, design, and/or operating effectiveness of your internal control processes. You and your CPA will work together to determine the scope of the SOC report.
There’s software (of course there’s software) that can assist you in managing compliance, but there’s no magic key. The AICPA has final say. This isn’t one of those times when you can move fast and break things.
The CPA or CPA firm will audit your company. They’ll identify any holes in your controls and, once those holes are filled, certify you as SOC (1 or 2)-compliant. You can then give this SOC report to your customers, and because it’s standardized and can only be done by certified professionals, they’ll trust it.
There are numerous reasons why you’d want to become SOC-compliant. Chief among them is the fact that many of your customers will do annual audits of all the services they use. As your company grows, the quantity of these audits will become burdensome. If you become SOC-compliant, you can provide a SOC report instead of dealing with individual audits.
Rest assured, your customers don’t want to be doling out individual audits either. Many companies, especially the bigger ones, will actually refuse to. For them, it’s SOC or nothing. And trust us: You want those deals.
Bear with us, but the terminology is important. As you continue to read, feel free to scroll back up and refer to this key:
- SOC: An acronym that stands for Service Organization Control.
- SOC report: A document that informs your customers of the internal controls you’ve taken. Its purpose is to help customers assess the risks of using an outsourced service.
- AICPA: The American Institute of Certified Public Accountants, the organization that standardizes SOC compliance.
- CPA: Certified Public Accountants are licensed and registered accountants who can issue SOC 1, 2, and 3 reports.
- Control: A control is a policy that either attains a desired event or avoids an unwanted one.
- User entity: A company that uses a service organization.
- Service organization: A company that offers information system services to other companies. We’re talking data centers, IT managed services, SaaS vendors, and more (i.e., you).
- Auditor: A representative from the user entity who reviews the SOC report(s).
- SAS-70: This stands for Statement on Auditing Standards, and there have been dozens of them. Until SAS-70, there were few problems, but confusion resulted from the 70th release. AICPA released SSAE No. 16, to clarify.
- SSAE No. 16 and SSAE No. 18: The acronym stands for Statement on Standards for Attestation Engagements, and we will not be using either term in this article (breathe a sigh of relief). Suffice it to say, SSAE No. 18 is what houses SOC 1, SOC 2, and SOC 3 (and it replaced the earlier house, SSAE no. 16).
With that out of the way, let’s dig into the details.
What is a SOC 1 report?
SOC 1 is focused on financial reporting. The goal is to have and demonstrate internal controls for how you handle your customers’ financial information. Your customers have to report this info to their auditors, so, naturally, it’s very important to them.
What does SOC 1 compliance do?
Your company provides services to other companies. As such, your services may affect how your customers report their finances (something your customer’s auditors care about very much). SOC 1 compliance is all about proving you have the controls in place to ensure that the design of your service, as well as their actual operations, are effective and predictable.
Types of SOC 1 Compliance
SOC 1 compliance comes in two types of reports: Type 1 and Type 2. Both types inspect how you described or designed your controls as of a particular date.
The difference is that in a Type 1 report, auditors test one control to confirm your description and design. In a Type 2 report, auditors test the effectiveness of your controls over a set period—for example, six months.
When to get SOC 1 Compliance
When you’re first starting out, SOC 1 compliance likely isn’t on your radar. The timing of your compliance is important, however, because you don’t want to be scrambling to get certified when a deal hangs in the balance. The market will tell you when you really need compliance, but, ideally, you want to preempt the market and offer compliance just before you need it.
Beyond timing, there are two main things that will make SOC 1 compliance necessary:
- Your client asks for a “right to audit.”
- You need to comply with another regulation, such as the Sarbanes-Oxley (SOX) Act if your company is going to be publicly traded.
Either of these things will pretty much make SOC 1 compliance your number one priority.
Who cares about SOC 1 compliance?
Your customers care, broadly speaking, about how you handle their financial data. For tech startups, SOC 1 is rarely asked for and rarely necessary. When companies do use SOC 1, it’s internal auditors who prepare SOC 1 reports, and it’s external auditors who review and verify the reports. For the most part, SOC 1 compliance remains between auditors.
What is a SOC 2 report?
SOC 2 is focused on operations and compliance, especially in regard to cloud computing and data security. The goal is to have and demonstrate internal controls that align with AICPA’s five criteria.
Let’s pause here for just a moment. If you’re a B2B tech company, SOC 2 is the big one. Open this article in a new tab—The Developer's Guide to SOC 2 Compliance—and read it once you're done with this one. What you're reading now provides a big-picture overview; that article gets into the technical details, including basic access controls and encrypting data at rest.
What does SOC 2 compliance do?
Cloud computing and its ascendant growth enabled companies all over the world to outsource functions to service organizations. This meant—for these companies’ customers—assuring compliance was harder. Compliance with one company really means compliance with all the companies it worked with. SOC 2 arose to address this demand.
SOC 2 and similar regulations are likely only going to become more important. Outsourcing may have begun with outsourced IT services, but cloud computing now means that any manner of function or feature can be done by another company. With API-first companies, you can even outsource with as little effort as a few lines of code.
Packy McCormick, describing the specific case of API-first companies, writes, “They allow customers to focus on the one or two things that differentiate their businesses, while plugging in best-in-class solutions everywhere else.” This principle extends to all outsourced functions. Outsourcing enables focus, and in increasingly competitive markets, startups need focus to win.
Types of SOC 2 Compliance
Just like with SOC 1, there are two different types of SOC 2 reports. They differ only in scope and timeline.
Both types of reports inspect how you described or designed your controls as of a particular date. The difference is that in a Type 1 report, auditors test one control to confirm your description and design. In a Type 2 report, auditors test the effectiveness of a service organization’s controls over a set period—for example, 12 months.
SOC 2 compliance further differs depending on the scope you and your CPA decide on. AICPA provides five Trust Services Criteria that auditors use to evaluate the design and effectiveness of your controls. The five criteria are:
- Security: Are your systems safe from unauthorized access, and can you alert customers to suspicious activity?
- Confidentiality: Does your customer restrict how sensitive data is shared? If so, how so?
- Processing Integrity: Do your systems ensure processes work as intended?
- Privacy: Does your customer restrict how personal data is shared? If so, how so?
- Availability: Can your customers access your systems as much as your contract specifies they can?
Security is the only criterion that’s required; the rest will depend on applicability to your business. If you’re in ecommerce, for instance, your customers will likely care a lot about the integrity of your transaction processes. If you’re providing an essential, infrastructure-level service, your customers will care a lot about availability.
When to get SOC 2 Compliance
The marketplace will indicate how severe your need is for SOC 2 compliance. The bigger the customer you’re pursuing, the more likely they’ll want to see a SOC 2 report.
That said, if you process or host nonfinancial data, you should pursue SOC 2 (at some point). Note, too, that SOC 2 isn’t actually required by big-time compliance frameworks like HIPAA or PCI-DSS. The number of data breaches that occur, however, means that many companies, especially enterprises, will want to see SOC 2 compliance before inking a deal.
Type 1 and Type 2 SOC 2 reports also make a difference here. Many startups, in a rush to appear compliant, will get Type 1 SOC compliance. A Type 1 report is a point-in-time certification that shows you have controls in place. As such, many startups will prove momentary compliance, claim general SOC 2 compliance, and then pursue a Type 2 report later.
Unfortunately, your prospects’ IT admins know better and will likely put little weight behind a Type 1 report. If you really want SOC 2 compliance, and you do, it’s often smarter to do an accelerated process and pursue a Type 2 report from the start.
Who cares about SOC 2 compliance?
Unlike SOC 1 compliance, where the authors and readers of the report are most likely both auditors, SOC 2 reports tend to have a wider readership. Companies will share SOC 2 reports with customers, managers, and regulators, often with an NDA attached.
What is a SOC 3 report?
SOC 3 is the oddball of the bunch. SOC 3 contains the same information found in SOC 2 but is intended to be presented to a general audience. As such, we won’t break down the details so much.
Companies typically use SOC 3 compliance to post on their website, along with a seal that indicates compliance. Google Cloud, AWS, and Microsoft, for example, all exhibit SOC 3 reports. Google Cloud’s SOC 3 report (screenshot below) even contains a helpful introduction to what SOC 2 is and means.
Below that, Google Cloud breaks down SOC 3 compliance among its (many, many) products. Seriously, this screenshot captures only a portion.
AWS, in its SOC 3 report, provides a helpful overview that gives readers a bird’s-eye view of what these reports cover and links to its SOC 3 report as a publicly available whitepaper.
Microsoft provides an FAQs section that lets readers dig in even deeper.
SOC 3 reports are largely marketing tools that companies use to demonstrate how effective their internal controls are. Both Google Cloud and AWS, as you can see above, proudly display the AICPA seal to show off their compliance.
SOC 3 reports, because they contain most of the information in a SOC 2 report, are nearly done when companies make their SOC 2 reports. As such, many companies will often ask the auditors who prepared their SOC 2 report to prepare a summary that functions as their SOC 3.
If you’re ready to dig deeper, click through to any of the SOC 3 reports we cited above. These examples offer models for your SOC 3 reports and glimpses into these companies’ SOC 2 reports.
Close your biggest deals with SOC compliance
SOC compliance is instrumental to closing big deals. Though it appears cumbersome or annoying from the outside, in the hands of a smart company, compliance can be a growth strategy.
The survival of an enterprise deal depends largely on how fast it closes. The longer it goes on, the more likely some important stakeholder gets cold feet or a competitor steps in. Rather than scramble when your customer asks, prepare for SOC compliance ahead of time.