Navigating the SOC Report Journey: Benefits, Process & Key Steps

Whether your organization is a start-up or a well-established firm, obtaining a System and Organization Controls (SOC) report offers many benefits. Although not mandated by current regulations, a SOC report can give your company a competitive edge by demonstrating that you have effective internal controls and safeguards in place.

A SOC report provides a detailed, standardized assessment of your internal controls that is widely recognized across industries. This not only sets your organization apart from competitors but also shows your customers and prospects your dedication to strong internal control practices. In fact, larger clients in sectors like financial services and healthcare may require a SOC report before considering your product or service.

If your organization is considering a SOC report, you might be wondering where to start and how long it will take to get a report ready for your customers. In this article, we will outline the typical timeline that organizations follow to achieve a Type 1 and Type 2 report, and provide you with a clear understanding of the process.

Starting Your SOC Report Journey: Selecting the Right CPA Audit Firm

The first step in your SOC report journey is to identify an audit firm that can help you reach the desired deliverable. To assist your organization with this process, you can begin by issuing a request for proposal (RFP) to find suitable audit firms tailored to your organization’s needs. As you review the proposals, keep in mind that there are several questions to consider beyond just the fee:

• Is the audit firm a certified public accounting (CPA) firm?

It is important to remember that SOC reports can only be issued by CPA firms and non-CPA firms are not able to provide this service.

• What tools will the audit firm use to conduct the audits?

Consider if the audit firm has systems to organize requested items as well as a centralized system to upload the requests.

• Does the audit firm have their own SOC report?

You will be sharing potentially confidential and sensitive information with your auditor. Organizations should ask for the audit firm’s SOC report to ensure they have proper internal controls to secure any data that is shared.

• Does the audit firm have appropriate expertise to guide your organization through the process for the desired deliverable?

It’s important to inquire about several key aspects when evaluating audit firms: the number of SOC reports they handle annually, the experience level of the team assigned to your audit, and their familiarity with the technologies you use. Additionally, ask about their experience assisting organizations like yours and the potential value they can provide, such as helping you enhance your environment beyond merely “checking the box.”

• Can the audit firm guide you to ensure the proper type of SOC report and scope is selected to meet the needs of my customers?

Clarify how potential firms can assist with these aspects to avoid overspending on unnecessary testing procedures that may not be relevant to the report’s readers.

• Does the audit firm have the availability and resources to meet your desired timeline?

Discuss with the audit firm the availability of their resources to ensure it aligns with your goals. Consider any feedback provided by the audit firms as they can offer guidance on if the proposed timeline is too ambitious.

In addition to these questions, you should also consider the culture fit of potential firms as you will have many interactions during audit planning and execution. Once you have selected the audit firm, the next step in the traditional roadmap is to undergo a readiness assessment.

SOC Readiness Assessment: Preparing for Success

The readiness assessment is an exercise where the auditor will work with stakeholders of your business to refine the scope of the report and understand the internal control environment. The auditor will also look for gaps of where a necessary control is missing and evidence if a control does not exist. The readiness assessment generally takes about a month to execute and produce the deliverable detailing gaps that require remediation.

Understanding Remediation Timelines & Requirements

The timeline for remediation varies by organization, depending on the number and severity of gaps, and the availability of resources. Most organizations will need at least three months, and often longer, to address these gaps. The SOC audit itself cannot begin until all gaps have been resolved. Keep in mind that while your auditor can offer guidance on remediation actions, they cannot directly perform the corrective actions, as this would violate independence requirements and prevent them from conducting the SOC audit. Typically, the auditor can provide materials or refer you to other firms that can assist with remediation if necessary.

Drafting a System Description for Your SOC Report

The final requirement during the readiness assessment is to start drafting a system description. This narrative should outline the scope of the system, including relevant controls and business processes, which will be detailed in the SOC report. The system description must be prepared by management or a hired consultant, as the auditor cannot draft it due to the independence rules set by the American Institute of Certified Public Accountants (AICPA). However, the auditor can review the description as it is being prepared and provide feedback. The system description should be largely completed before the SOC audit begins.

Type 1 SOC Report: A Preliminary Step With Key Benefits

A Type 1 report is an optional step in the SOC process, but many organizations choose to undergo this audit because of its benefits. A Type 1 audit is the quickest way to provide a signed SOC report to your prospects and customers, satisfying their immediate needs while you prepare for a Type 2 audit. As a point-in-time report, a Type 1 audit establishes when all necessary controls are in place, helping to define the period for a Type 2 report.

Additionally, a SOC Type 1 audit involves less rigorous testing compared to a SOC Type 2 audit, serving as a preliminary “open book” test. This can help your organization ensure that proper evidence is maintained, potentially reducing findings in the subsequent Type 2 audit. The actual Type 1 audit will generally last one to two weeks based on the scope of the audit and the number of controls that require testing. The auditor will generally issue a draft report within 30 days of the end of testing, with a final report following within 60 days of the end of testing.

Type 2 SOC Report: Comprehensive Assurance & Testing

For most organizations, the Type 2 report is the desired level of reporting, as it provides an auditor’s assurance on the design, implementation, and operating effectiveness of internal controls. This report covers a specified period, usually extending from the date of the Type 1 report (if your organization chose not to undergo a Type 1 audit, you and the auditor will agree in writing on the defined period). While Type 2 reports typically cover 12 months, your organization can request a shorter period, such as six months, provided that most controls had the opportunity to operate during that time.

The testing requirements for a Type 2 audit are significantly more rigorous than those for a Type 1 audit. Since the auditor must verify the operating effectiveness of controls, you will need to provide various records, such as lists of new hires, terminations, change control tickets, and other relevant documents. The auditor will use these records to randomly select samples and validate that controls were effectively operating. This requirement for sampling will extend the time needed for testing and increase the demand on your organization to supply all necessary materials.

A Type 2 audit typically takes two to three weeks, depending on the scope and the number of controls being tested. Testing is usually scheduled toward the end of the audit period to ensure most of the period has elapsed before data is collected. As with the Type 1 audit, a draft report is generally available within 30 days of completing the testing, with the final report issued within 60 days.

Moving Forward With Your SOC Report Journey

A SOC report is a powerful tool for showcasing the effectiveness of your organization’s internal controls to customers and prospects. These reports can distinguish your organization and help you push potential deals over the finish line. However, achieving this requires patience and choosing the right audit firm to guide you through the process.

If your organization is considering pursuing a SOC report, reach out to our team – we are here to support you every step of the way.