Understanding SOC 2 certifications: Principles, compliance, and audit procedures

Principles of SOC 2

While there are several types of SOC reports, SOC 2 builds upon the five Trust Services Criteria (TSC) established by the American Institute of Certified Public Accountants (AICPA) to independently assess a service organization's ability to manage customer data in the cloud securely. These criteria serve as a comprehensive framework for managing and protecting customer data, and forming the foundation of SOC 2 compliance:

1. Security: The security principle refers to protecting information and systems against unauthorized access. Service providers employ firewalls, intrusion detection, and multi-factor authentication to ensure data integrity and confidentiality. Effective security controls help prevent data breaches and unauthorized data alterations.
2. Availability: The availability principle ensures that the systems used to process data are available for operation and use as committed or agreed upon. It involves maintaining performance monitoring, disaster recovery plans, and handling incidents to ensure services remain uninterrupted.
3. Processing integrity: Processing integrity means that the system processes data in a complete, valid, accurate, timely, and authorized manner. Controls under this principle ensure that the data processing adheres to business objectives and produces reliable outcomes.
4. Confidentiality: The confidentiality principle pertains to restricting access to sensitive information to a specified set of persons or organizations. Encryption, access controls, and rigorous privacy policies help maintain the confidentiality of sensitive data such as financial or personal identification information.
5. Privacy: The privacy principle addresses how personal information is collected, used, retained, disclosed, and disposed of to meet the entity's objectives. It encompasses the entire lifecycle of personal information, ensuring compliance with data privacy laws and regulations such as General Data Protection Regulation (GDPR) or California Consumer Privacy Act (CCPA).

These five principles collectively ensure service organizations manage data responsibly and securely, fostering trust among clients and stakeholders.

What is SOC 2 compliance?

SOC 2 compliance requirements involve an independent third-party auditor conducting a thorough audit to assess whether an organization's controls align with the AICPA's Trust Services Criteria. Achieving SOC 2 compliance demonstrates that a service provider has implemented necessary measures to protect and manage customer data effectively.

When service providers pursue SOC 2 compliance, they choose between two types of SOC audits and reports. A SOC 2 Type I report evaluates the design of controls at a specific point in time. Auditors will confirm that the service provider has implemented controls suitably designed to meet the relevant trust services criteria. Still, the SOC audit does not assess the operational effectiveness of the controls. In a SOC 2 Type II report, the auditors evaluate the design and operational effectiveness of the controls over a period of time, typically six months. SOC 2 Type II provides a more comprehensive SOC audit of how well the controls function in practice.

Demonstrating SOC 2 compliance requirements reassures clients that they handle data securely, fostering trust and confidence in the service provider. Since many industries require compliance with specific regulations regarding data protection, SOC 2 compliance requirements help organizations meet these regulatory requirements, reducing the risk of legal issues and penalties. Finally, SOC 2 compliance identifies potential vulnerabilities. It provides an opportunity to address these proactively, mitigating risks associated with data breaches and system failures that would impact the service provider and all their customers.

Auditing a service provider's SOC 2 certification report

Upon receiving a service provider's SOC 2 certification report, management should take several steps to ensure the report's findings are understood and appropriately integrated into their third-party risk management and vendor oversight processes. This means auditing the report. Organizations handle this responsibility differently, with some having the IT team perform the review, others conducting the review within risk management, and some using internal audit to perform the review.

When auditing a vendor's SOC 2 certification report, a company should perform several key procedures to ensure the vendor's controls meet the necessary standards for security, availability, processing integrity, confidentiality, and privacy. A typical review will follow 12 common audit procedures:

1. Obtain the SOC 2 certification report. Whoever conducts the review should request the vendor's SOC 2 certification report. The report covers a specific period and includes a detailed description of the vendor's system and controls. Confirm the report coverage period meets the organization's expected range. Vendors will sometimes adjust their audit timing, which impacts the coverage period.
2. Verify report authenticity. Ensure a reputable, independent auditor (e.g., a CPA firm) issues the report. After requesting it, a compliance team usually issues the report as a protected, read-only document to show that the organization did not alter the details. An unprotected report delivered directly from a sales team would be a red flag. 
3. Review the auditor's opinion. Examine the opinion letter to understand the scope and any qualifications or limitations the auditor mentions. Check if the auditor has provided an "unqualified" opinion or if the auditors noted any reservations or exceptions. An exception in the report does not immediately mean the vendor is a high risk, but they should also have a clearly outlined impact analysis and remediation plan. 
4. Assess control objectives and activities. Identify the control objectives covered in the report and compare them with your organization's requirements. Verify that the control activities in place adequately address each control objective.
5. Evaluate the testing performed. Review the nature, timing, and extent of testing conducted by the auditor. Assess whether the testing procedures were comprehensive and relevant to your risk management needs.
6. Identify exceptions and management responses. Look for any noted exceptions or control deficiencies within the report. Evaluate the vendor's management responses and remediation plans for any deficiencies identified.
7. Assess Complementary User Entity Controls (CUECs). Identify any controls the vendor expects user entities (i.e., your organization) to implement. Ensure your organization has the necessary controls to complement the vendor's controls. The importance of CUECs cannot be overlooked. The vendor points out controls your organization must implement to complete the control environment outside their scope of work, so this part of the audit extends into your organization.
8. Review the system description. Ensure that the description accurately reflects the services provided to your organization. Check for any significant system or control environment changes since the last report.
9. Evaluate subservice organizations. Identify any subservice organizations (third parties) used by the vendor. Determine if the report includes subservice organizations in the scope of the SOC 2 report or if a separate SOC report is required. In SOC 2 certification reports, there are generally two methods to address subservice organizations:
   • Inclusive Method: The report includes the subservice organization's controls in the service organization's SOC 2 report. The service organization describes the controls at the subservice organization and the related testing performed by the service organization's auditor.
   • Carve-Out Method: The report includes the subservice organization's controls within the service organization's SOC 2 report. Instead, the service organization specifies the controls they rely on at the subservice organization. Customers should conduct internal SOC audits of these controls separately.
10. Understand the impact on your organization. Analyze how the vendor's controls, CUECs, subservice organization controls, and any identified deficiencies impact your organization's risk profile. Determine the potential implications for compliance, security, and operational effectiveness, including any additional control procedures that should be implemented to compensate for possible gaps.
11. Follow up with the vendor. Discuss any concerns or questions arising from the SOC 2 certification report with the vendor. If necessary, request additional information or evidence to address any remediation plans, gaps, or uncertainties you may have based on your internal SOC audit.
12. Document your findings. Thoroughly document your review process, findings, and any follow-up actions. Ensure that your documentation meets your organization's audit and compliance requirements. Communicate the insights from the SOC 2 report review to relevant internal stakeholders, including the IT, legal, and compliance teams, to ensure all departments know the service provider's compliance status and any potential risks the organization may need to address.

By following these audit procedures, a company can effectively assess a vendor's SOC 2 certification report and ensure that the vendor's controls align with the company's security, compliance, and operational requirements.

Ongoing SOC 2 compliance considerations

SOC 2 compliance is not a one-time event but an ongoing process. Management should establish continuous monitoring mechanisms within the organization to ensure that the service provider maintains compliance over time. Continuous monitoring could include regular audits, periodic reviews, and real-time monitoring of the service provider's security controls.

Management should also ensure contracts with service providers include clauses requiring SOC 2 compliance and regular SOC 2 reports as a formal service level agreement (SLA). The agreements should also outline the consequences of non-compliance, providing a clear framework for addressing any issues that may arise and an option to cancel the contract if the vendor fails to produce a SOC 2 report or if the report includes a qualified opinion.

Conclusion

SOC 2 and the Trusted Services Criteria provide a critical framework for ensuring the security, availability, processing integrity, confidentiality, and privacy of customer data managed by service organizations. By incorporating SOC 2 principles into their operations and rigorously managing compliance, organizations can create a robust security posture that protects data and fosters trust and confidence among clients and stakeholders.

Receiving a SOC 2 report is just the beginning for the organization. The next steps include thoroughly reviewing and analyzing the report, integrating its findings into risk management processes, maintaining rigorous vendor oversight, and ensuring continuous compliance. These steps allow organizations to safeguard their data, meet regulatory requirements, and build lasting trust with their clients and stakeholders.