Understanding Differences Between SOC 1, SOC 2 and SOC 3 Reports

How can organizations effectively demonstrate their commitment to security and compliance in an era where data breaches and financial inaccuracies are shared? One powerful way is through System and Organization Controls (SOC) reports.

SOC 1, SOC 2, and SOC 3 reports serve distinct yet complementary roles in governance, risk, and compliance (GRC). These reports are vital in industries such as healthcare, financial services, technology, and others, where security and compliance are not just priorities—they are necessities.

In this blog, we’ll explore the core differences between SOC 1, SOC 2, and SOC 3 and the significance of these reports for business operations. Understanding the differences between the three will help you improve risk management and regulatory compliance.

What is a SOC Report?

The System and Organization Controls (SOC) framework, developed by the American Institute of Certified Public Accountants (AICPA), is designed to help organizations ensure the reliability and security of their systems. Organizations use these reports to demonstrate their adherence to key regulatory and operational standards, particularly in managing customer data and financial information.

Types of SOC Reports: SOC 1, SOC 2, and SOC 3

SOC reports come in three types, each addressing different aspects of organizational control:

1. SOC 1: Primarily concerned with internal controls over financial reporting. Organizations that impact financial statements, such as payroll processors or cloud-based accounting software providers, use it.
2. SOC 2: Focuses on security and confidentiality, especially for organizations handling sensitive data. This report assesses a company’s compliance with the Trust Services Criteria, ensuring that its information systems are protected against data breaches.
3. SOC 3: A simplified version of SOC 2, this report summarizes an organization’s controls without going into the detailed findings of a SOC 2 audit. It is often used for marketing purposes to demonstrate a company’s commitment to data security.

Importance of SOC Reports

SOC reports demonstrate a company’s commitment to security, transparency, and trustworthiness. They provide independent verification that a company’s systems operate effectively and in compliance with established standards. Here are some key reasons why SOC reports are essential:

1. Building Trust: SOC reports assure clients and customers that an organization is committed to safeguarding their data and maintaining accurate financial reporting.
2. Meeting Compliance Requirements: Many industries, such as healthcare, financial services, and technology, require businesses to meet strict regulatory standards. SOC reports are a key component of meeting these requirements.
3. Risk Mitigation: By regularly conducting SOC audits, companies can identify potential operational risks and address vulnerabilities before they become security threats or cause financial discrepancies.
4. Competitive Advantage: Organizations that can demonstrate SOC compliance stand out in the marketplace as trustworthy, secure, and reliable. It is a strong differentiator in industries where data protection is a top priority.

Read: How to Understand SOC 2 Compliance and Data Security Standards for EdTech

While SOC reports are crucial for ensuring compliance, each type has its unique focus. Let’s begin by looking at the details of SOC 1, which focuses on financial reporting.

What is a SOC 1 Report?

A SOC 1 report focuses on internal controls over financial reporting (ICFR). It is primarily used to assess and verify that an organization’s controls effectively support the accuracy and integrity of financial statements. The report is critical for businesses whose operations affect their clients’ financial reports, such as payroll services, accounting software providers, or financial institutions.

1. Focus on Internal Controls Over Financial Reporting

SOC 1 reports ensure that the controls related to a company’s financial operations function as intended. These controls could range from handling financial transactions to managing accounting records and more.

2. Purpose of Organizations Affecting Financial Statement Accuracy

SOC 1 is an essential tool for companies involved in financial reporting to demonstrate their commitment to transparency and regulatory compliance. For example, if a payroll company processes employee wages, a SOC 1 report would confirm that its processes do not introduce errors in its client’s financial statements.

3. Conducted Following SSAE No. 18 Guidelines

SOC 1 reports are conducted in compliance with the Statement on Standards for Attestation Engagements (SSAE) No. 18, which defines the guidelines for auditing and assessing internal controls over financial reporting. These guidelines ensure that the controls assessed in the SOC 1 audit meet the standards required for evaluating the accuracy of financial reporting.

Read: The Brussels Effect: How Europe’s Regulations Shape Global Business

While SOC 1 is essential for financial reporting, SOC 2 addresses the growing concerns around cybersecurity and data protection. Let’s take a closer look at SOC 2 and its significance.

What is a SOC 2 Report?

A SOC 2 report evaluates a company’s information systems and data handling practices to ensure they are secure and that sensitive customer data is adequately protected. Unlike SOC 1, which centers on financial reporting, SOC 2 primarily concerns safeguarding systems and data from breaches or misuse. This makes it particularly relevant for companies that handle sensitive client data.

1. Centers on Cybersecurity and Information Security Practices

SOC 2 reports evaluate an organization’s security posture based on five Trust Services Criteria: Security, Availability, Processing Integrity, Confidentiality, and Privacy. These criteria ensure that an organization’s systems are secure and function as promised, ensuring their availability, integrity, and confidentiality. 

2. Based on the Trust Services Criteria

SOC 2 is driven by these five criteria, which cover the most critical aspects of data protection and system integrity:

• Security: Ensures that the system is protected against unauthorized access.
• Availability: Determine whether the system is operational and usable as agreed.
• Processing Integrity: Ensures system processing is complete, accurate, and authorized.
• Confidentiality: Focuses on protecting confidential information from unauthorized access.
• Privacy: Deals with the collection, use, retention, and disposal of personal information in a way that ensures compliance with privacy laws and regulations.

3. Evaluate Measures to Safeguard Against Data Breaches

The primary goal of a SOC 2 report is to evaluate the effectiveness of an organization’s measures in protecting client data. It includes assessing technical safeguards, administrative procedures, and physical security protocols that prevent data breaches, system failures, or unauthorized access.

Read: What Is SOC 2 Compliance?

In the next section, let’s explore what a SOC 3 report entails and how it differs from the other two.

What is a SOC 3 Report?

A SOC 3 report is a simplified version of the SOC 2 report, offering a high-level overview of an organization’s adherence to security and data protection standards. The SOC 3 report presents a condensed summary of the information in a SOC 2 report, making it accessible to a broader audience. It helps organizations demonstrate their commitment to security without revealing the specifics of their internal controls.

1. High-Level Overview of Data Protection Measures

SOC 3 reports focus on an organization’s overall security posture, summarizing its compliance with the Trust Services Criteria. While SOC 3 does not provide detailed findings and audit results, it offers an accessible snapshot of the company’s commitment to maintaining robust cybersecurity practices.

2. Public Demonstration of Security Practices

Unlike SOC 2 reports, which are typically shared with clients under confidentiality agreements, SOC 3 reports can be freely shared. This makes it especially valuable for marketing purposes, as it highlights an organization’s dedication to maintaining secure systems without exposing proprietary audit details.

3. Conducted Following SOC 2 Guidelines

SOC 3 reports are conducted in accordance with the same Trust Services Criteria used in SOC 2 and provide a public-facing summary of the findings. It helps organizations convey their security and data protection efforts in a way that is easy to digest for a wide audience.

Read: Differences and Similarities between ISO 27001 and SOC 2

With an understanding of SOC 1, SOC 2, and SOC 3, we can now compare their key differences and see how each report serves the distinct needs of organizations.

Key Differences Between SOC 1, SOC 2, and SOC 3

SOC 1, SOC 2, and SOC 3 reports serve different purposes, and understanding their differences is essential for organizations when determining which report best suits their needs. While both reports offer insights into a company’s internal controls, they address different areas of concern and have distinct business implications.

Aspect	SOC 1	SOC 2	SOC 3
Focus	Internal controls over financial reporting.	Evaluates an organization’s controls related to security, availability, processing integrity, confidentiality, and privacy.	Summary of SOC 2 findings, designed for public use.
Primary Purpose	Assures clients that the controls in place do not negatively affect the accuracy of their financial statements.	Ensures that a company’s systems meet rigorous data protection standards.	Provides a high-level overview of SOC 2 compliance for marketing.
Scope of Evaluation	Focuses on the accuracy and reliability of financial transactions, including record keeping, data accuracy, and monetary system processes.	Evaluates security measures such as firewalls, data encryption, intrusion detection, and access controls, as well as ensuring the availability of systems and the confidentiality of sensitive data.	A simplified summary of SOC 2 controls and compliance.
Control Type	Entity-level controls related to financial processes like payroll processing, transaction accuracy, and revenue recognition.	Technical controls for data protection include encryption, firewalls, access controls, change management, and incident response procedures.	Public-facing overview of security measures.
Applicable Frameworks and Standards	Conducted under SSAE No. 18 guidelines for assessing financial reporting controls.	Based on AICPA Trust Services Criteria.	A simplified version of SOC 2.
Relevance to Auditors	Provides insights specifically for auditors to assess the impact of an entity’s internal controls on financial statements.	Primarily relevant for security professionals, auditors focusing on data security, and IT teams managing cloud-based or data-driven operations.	Provides a summary of security measures for public audiences.
Applicable Industries	Financial services, payroll providers, cloud-based accounting, and any company impacting financial reporting.	SaaS, cloud computing, healthcare, fintech, and organizations processing sensitive customer or client data.	Industries where public trust and transparency in security are essential.
Impact on Clients	Demonstrates that an organization’s financial processes and systems are designed to report financial data accurately.	Assures customers that sensitive data is being processed securely and in compliance with industry standards for data protection.	Offers a simplified compliance overview for prospective customers.

Read: SOC2 Audit Assessment Readiness And GRC Platform’s Contribution

As we’ve highlighted the differences between SOC 1, SOC 2, and SOC 3, it’s also important to understand the types of audits associated with each report. Let’s explore the distinctions between SOC Type 1 and Type 2.

Read: SOC 2 Compliance for EdTech: Ensuring Data Security in Digital Education Solutions

Who Needs SOC 1, SOC 2, and SOC 3 Reports?

Determining whether your organization needs a SOC 1, SOC 2, or SOC 3 report depends on the nature of your business and the type of services you provide. The focus of each report aligns with different business operations, making it essential to choose the right one based on your specific needs.

1. SOC 1 is Suited for Entities Impacting Financial Reporting

If your organization provides services that affect your clients’ financial statements, a SOC 1 report is necessary. A SOC 1 report assures your clients that your financial controls are designed and working to maintain the accuracy and reliability of financial statements.

For example:

• Payroll Processing Companies: These organizations process salaries and wages for other businesses, and a SOC 1 report ensures that their controls align with financial reporting standards.
• Cloud-based Accounting Providers: These services handle clients’ financial data, making SOC 1 vital for demonstrating control over financial transactions and record-keeping.

2. SOC 2 is Applicable to Organizations Handling Sensitive or Client Data

If your company handles sensitive client data, such as personal, financial, or proprietary business information, a SOC 2 report is essential. This report assures that your company has robust cybersecurity measures to protect this data, ensuring compliance with data protection laws and regulations.

For example:

• SaaS Providers: As they manage vast amounts of client data, SOC 2 reports assess the security of their systems to ensure customer data is protected.
• Cloud Service Providers: Organizations that store sensitive data or host client applications need to demonstrate their security measures through SOC 2.

3. SOC 3 is Ideal for Public Demonstration of Security and Compliance

If your organization needs to publicly demonstrate its commitment to security and data protection without disclosing detailed audit findings, a SOC 3 report is the ideal choice. It provides a high-level summary of SOC 2 compliance and is used to assure potential customers and stakeholders that you are committed to data security.

Examples of businesses that may use SOC 3:

• SaaS and Tech Companies: These businesses may use SOC 3 reports to publicly showcase their adherence to industry standards for security and data privacy.
• Consulting and Data Hosting Providers: Organizations that need to promote their security measures and build public trust can use SOC 3 reports as a transparent demonstration of their controls.

Create comprehensive policies and procedures with ease. Explore VComply’s Policy and Procedure Templates to ensure consistent governance and compliance across your organization.

Choosing the right SOC report is critical for ensuring the proper level of compliance and security. Let’s break down how to decide which report best fits your organization.

Deciding Which SOC Report to Use

Choosing between SOC 1, SOC 2, and SOC 3 reports depends on your organization’s focus and the type of service you provide. Understanding your client’s distinct requirements and needs will help you determine which report best fits your business.

1. Scenarios Illustrating Different Needs for SOC 1, SOC 2, and SOC 3 Reports

SOC 1: A payroll service provider processes payroll data for multiple clients. A SOC 1 report is required to demonstrate that the company’s internal controls over financial reporting are designed and functioning properly.

SOC 2: A SaaS company stores sensitive customer information, such as personal details or payment information. A SOC 2 report is necessary to assure customers that the company has implemented proper security and privacy controls to safeguard this data.

SOC 3: A cloud service provider offers data hosting services and wants to publicly demonstrate its commitment to security without sharing detailed audit findings. A SOC 3 report is perfect for marketing purposes, providing stakeholders with a simplified, high-level summary of SOC 2 compliance.

2. Tailoring the Choice to Business and Client Needs

To determine which report your organization needs, consider both your internal operational requirements and your clients’ needs. 

• Are your services related to financial reporting? Then SOC 1 is the right choice. 
• Are you handling sensitive data or providing cloud-based services? A SOC 2 report will ensure your systems meet industry security, availability, and privacy standards.
• Do you need to publicly demonstrate your security and compliance efforts? If you want to showcase your adherence to security practices without delving into detailed audit results, a SOC 3 report is a good option.

Now that you understand the differences and uses of SOC 1, SOC 2, and SOC 3 reports, it’s time to implement a streamlined compliance and security strategy.

Transform Your SOC Compliance and Security Strategy with VComply

VComply’s cloud-based ComplianceOps platform empowers organizations to strengthen their SOC compliance and security oversight. Our solution provides:

• Centralized data management to gain full visibility into your SOC compliance efforts and associated risks.
• Automated workflows and real-time reporting to streamline SOC audits and ensure timely, accurate compliance reporting.
• Seamless alignment of SOC compliance initiatives with both business objectives and regulatory requirements.

Schedule a free demo to discover how VComply can simplify your SOC compliance efforts and boost your overall compliance strategy.

Final Thoughts

SOC 1, SOC 2, and SOC 3 reports are no longer just compliance requirements; they’ve become critical tools for building trust and ensuring operational transparency. In today’s data-driven business environment, protecting sensitive information and providing financial accuracy is a strategic advantage, not just a necessity.

As organizations face increasing regulatory pressures, tightening security requirements, and higher stakeholder expectations, reliable, actionable, and real-time compliance reporting is more crucial than ever. By adopting a dynamic compliance framework, companies can stay ahead of industry standards, mitigating risks and aligning security measures with business goals.

The challenge for compliance professionals is clear: move beyond basic compliance checks and embrace continuous, high-impact security and financial oversight. Companies that streamline compliance processes, improve security measures, and utilize automation maintain competitiveness and thrive to safeguard their future.

Start your 21-day free trial with VComply and experience the future of automated, compliance-driven decision-making.