What is SOC 2? Everything You Need to Know for Compliance and Certification

The coronavirus pandemic has accelerated the shift to managed service providers (MSPs) for a myriad of services ranging from endpoint security to storage and backup. This trend is not slowing down any time soon as revealed in this study that shows more than 60 percent of organizations will rely on managed services by 2025. The managed services global market is expected to hit 393.72 billion US dollars by 2028. Reasons for this shift are manifold, but the most important factor is the increased need for organizations to focus on their core competencies and outsource non-core functions. Other factors include the scalability and flexibility that MSPs offer, as well as their ability to provide round-the-clock support. In the post-pandemic world, MSPs are only going to become more essential as organizations look to further streamline their operations.   

However, the shift of critical business operations to service providers makes information security a serious concern for most organizations. This is where SOC 2 compliance and certification come in. 

Let’s understand SOC 2 compliance. 

What is SOC 2 compliance?

SOC 2 stands for Systems and Organizations Controls 2. This  is a voluntary compliance standard for service providers that specifies how they should handle customer data. The American Institute of CPAs (AICPA) developed this standard based on Trust Services Criteria containing five principles. Organizations can develop controls that adhere to one or multiple principles depending on their business operations. SOC 2 aims to ensure that service providers securely manage data to safeguard their clients’ interests and privacy. 

The standards are designed to guide service providers to have adequate controls in place that effectively protect the security, confidentiality, and integrity of customer data. Cyber security companies are best suited to guide organizations that want to acquire SOC 2 compliance. 

Who needs SOC 2 compliance?

SOC 2 audits are often conducted on service organizations that maintain or process data on behalf of their clients, such as cloud service providers, payment processors, and healthcare information technology (HIT) companies. That said, any type of organization can undergo SOC compliance if they have relevant controls. For example, an organization that handles sensitive information but does not store or process this data on behalf of its clients would likely still need SOC 2 in order to demonstrate its commitment to maintaining the confidentiality and privacy of this information.

In order to become SOC 2 compliant, organizations must undergo a rigorous auditing process. They must also put security protocols in place to protect data, and they must show that they are able to effectively manage risks. 

SOC 2 compliance basically affirms that a service provider adheres to high-security standards. 

Benefits of SOC 2 compliance

• Improved data security: The requirement by SOC 2 for organizations to implement strong security controls helps to protect customer data from unauthorized access and theft. The service providers can get a peace of mind backed by a good name,  knowing they have done all they ought to for the best interest of their clients. 
• Enhanced trust: Clients and stakeholders are more likely to trust providers that can demonstrate their commitment to data security. Achieving SOC 2 helps providers to build this trust.
• Greater operational efficiency: Organizing data security in accordance with SOC 2 standards can help businesses run more efficiently by streamlining processes and procedures.
• Increased competitiveness: Achieving SOC 2 compliance can help providers differentiate themselves from their competitors and win new business.

Who can perform SOC 2 audit?

Only independent Certified Public Accountants (CPAs) or accounting firms can perform SOC 2 audits. The AICPA establishes professional standards that guide the work of SOC 2 auditors. These guidelines govern how planning, execution, and oversight are done during the audit. Furthermore, all audits undergo a peer review. 

CPA firms may contract non-CPA professionals with relevant security and IT skills to plan for SOC audits. However, only a CPA can provide and disclose the final report. After a CPA conducts a successful SOC audit, the service provider can display the AICPA logo on its brand assets such as websites.  

SOC 2 audits are focused on determining whether service providers are following the strict compliance requirements that ensure responsible handling of sensitive information. 

The trust service principles of SOC 2 compliance (what is evaluated)

After completing a successful SOC 2 audit, independent CPAs issue SOC certifications. This audit assesses how a service provider complies with one or several of the five trust service principles. 

These are the principles: 

1. Security

The purpose of the security principle is to evaluate how a system prevents unauthorized access to computer networks and systems. Service providers use access controls, such as passwords, intrusion detection, firewalls, and two-factor or multi-factor authentication, to safeguard an IT infrastructure. Such controls help to prevent the misuse of computing resources, unauthorized data access, theft, alteration, or disclosure.  

In order to meet this requirement, organizations must first identify and assess the risks to their systems and data. They then need to implement security controls that are appropriate for the level of risk. Finally, they need to monitor their security controls on an ongoing basis to ensure that they are consistently effective.

2. Availability

Availability refers to how the system, services, and products are accessible as indicated in the service level agreement (SLA) or service provider contract. The service provider and the client set a system’s minimum acceptable performance level. 

Though system availability doesn’t include usability or functionality, it addresses the issues that may affect the system’s availability. This principle is concerned with monitoring network availability and performance, outages, and any other incident that may deny the client access to the system.  

The availability principle requires that systems and services are designed to operate continuously during their specified operating hours. In order to meet this requirement, organizations must have adequate capacity planning, incident management, and disaster recovery processes in place. Additionally, availability must be monitored on an ongoing basis to ensure that SLAs are being met. The availability principle is important for ensuring that customers can always access the systems and services they need, when they need them. Organizations that fail to meet this principle may find themselves in breach of their SOC 2 certification.

3. Processing integrity

Processing integrity assesses whether data processing is authorized, complete, accurate, and timely. The best way to determine a system’s processing integrity is to determine whether it delivers the correct data at the right time and price. 

To achieve processing integrity, organizations must apply quality assurance procedures and data monitoring. It follows the principle of “garbage in, garbage out” and is not really concerned with detecting and solving errors in data before inputting into the system.  

4. Confidentiality

Data confidentiality is critical; thus, access and disclosure should be restricted to only authorized users. A service provider should ensure confidentiality in all the stages of data processing, from input, processing, storage, and transmission. For instance, specific information may be intended for only a company's top management, while another set may be intended for employees only. Likewise, some information may be intended for the general public. 

In order to achieve the confidentiality principle, service providers must take a number of steps to protect customer data. First, they need to ensure that only authorized personnel have access to sensitive information. Second, they need to encrypt all confidential data in transit, and at rest. Third, they need to implement strict security controls to prevent unauthorized access to systems and data.  

5. Privacy

Privacy addresses how a system collects, uses, stores, shares, and disposes information. All these processes should adhere to the generally accepted privacy principles (GAPP) laid down by the AICPA and the company’s data privacy policy.

Personal data relating to health, sexuality, religion, ethnicity, and race is considered sensitive. In addition, personally identifiable information (PII), such as name, social security number, and address, require a high level of protection. Service providers should set up appropriate controls to safeguard the privacy of such information. 

SOC 2 auditing

SOC 2 compliance auditing is the official engagement in which a CPA firm assesses whether a service organization has controls in place that are relevant to one or more of the five trust services principles (TSPs) above. In order for an auditor to issue a SOC 2 report, they must conclude that the service organization has designed and implemented controls to meet all of the requirements specified in the TSP(s) selected for the engagement.

SOC 2 audits are conducted using the same general principles as other compliance audits (e.g., ISO 27001), but there are some key differences that organizations should be aware of. First, SOC 2 audits focus specifically on controls related to the TSPs, while other compliance audits assess controls across a broad range of areas (e.g.quality management and environmental protection). Second, SOC 2 audits are conducted by CPA firms that have been specifically trained and qualified to perform these engagements, while other compliance audits can be conducted by any qualified auditor.

However, even if this isn’t the case, you may still need to undergo a SOC 2 audit if you handle sensitive information and want to demonstrate your commitment to maintaining its confidentiality and privacy.

Types of SOC 2 audit reports

There are two main types of SOC 2 audit reports that are verifiable and prepared by Certified Public Accountants (CPAs) who follow guidelines provided by the American Institute of CPAs. 

Here are the two main types of SOC 2 audit reports.

Type 1

A SOC 2 type 1 report is the first step in a two-part process. It provides an overview of the company's controls and processes, as well as a description of how those controls are designed and implemented. 

The Type 1 audit report explains the audit findings and the controls in place at a single point in time, that is, a specific date. Therefore, a type 1 report will describe a service provider’s system at a particular date and whether it meets the relevant trust service principles.    

The report includes a description of the controls and procedures, as well as a testing and validation of their effectiveness. A Type 1 audit report is issued when an organization first implements the SOC 2 controls and procedures. 

Type 2

Type 2 audit report describes how effective the controls are over a specific period in addition to the findings included in the type 1 report. This report will include a lot of sensitive information that provides a high-level overview. Therefore, a type 2 report is more suitable for describing the operational effectiveness of a service provider’s system.

The report is intended to give clients of the service organization confidence that their data is protected and that their privacy is respected. 

This report is generally more comprehensive than a SOC 2 type 1 report, and it is typically used by financial institutions and other regulated organizations.

Conclusion

Though SOC 2 compliance is not compulsory for service providers, it plays a crucial role in demonstrating that the provider has the right controls in place and that these controls are effective in keeping customer data safe. Vendors should undergo regular SOC 2 audits to demonstrate to existing and would-be clients that they adhere to relevant Trust Services principles. 

Ultimately, SOC 2 compliance can help a service provider to improve their IT practices and protect against data breaches and cyber-attacks. Furthermore, SOC 2 compliance gives vendors a competitive advantage as certified individuals and firms are normally preferred by clients.