INSIGHT

What is a SOC report, and why is it important? 

Marguerite Williams • July 15, 2025

Services: System and Organization Controls Reporting

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In today’s interconnected business environment, organizations often rely on third-party service providers to handle critical operations ranging from payroll processing to cloud-based data storage. This growing dependence on external vendors creates new challenges for companies trying to maintain oversight of their internal controls and ensure compliance with regulatory requirements.  

What is a SOC report? 

System and Organization Controls (SOC) reports are a vital tool for addressing these challenges, providing standardized assessments of service organizations’ internal controls and security measures. 

SOC examinations serve multiple stakeholders by offering independent verification that service providers maintain adequate controls over the processes and the data they handle. Financial statement auditors use these reports to streamline their audit procedures, while sophisticated users of service organizations demand them as proof that their sensitive information remains secure and protected.  

This article will explore the three types of SOC reports, explain when each type is needed and discuss how organizations can determine which SOC report best serves their specific requirements. 

Understanding the three main types of SOC reports 

The SOC framework, created by the AICPA, encompasses three distinct report types, each designed to meet different stakeholder needs and use cases. SOC 1®, SOC 2® and SOC 3® reports all provide valuable insights into service organization controls, but they differ significantly in their scope, intended audience, and level of detail. The SOC 1 and SOC 2 reports usually have up to 5 sections: 

1. The assertion 

2. The opinion 

3. The description 

4. The controls 

5. Other information, which is outside the service auditors opinion. 

SOC 1 reports focus on financial reporting controls 

SOC 1 reports examine controls that directly impact a user entity’s internal control over financial reporting. These reports specifically target the needs of user entities and the certified public accountants who audit their financial statements. When a company outsources processes that affect financial reporting—such as payroll processing, loan servicing or transaction processing—a SOC 1 report helps to provide assurance that the service organization maintains effective controls over these critical functions. 

Organizations typically need SOC 1 reports when they rely on external service providers for processes that directly impact their financial statements. For example, a company using a third-party payroll provider would benefit from reviewing that provider’s SOC 1 report to understand how payroll controls support the company’s overall financial reporting objectives. 

A SOC 1 report should have controls and control objectives around processing the transactions completely and accurately. The description should include details and possibly a flow diagram showing how those transactions function.  

SOC 2 reports address the Trust Services Criteria (TSC) 

SOC 2 reports evaluate service organization controls based on the five trust services criteria: security, availability, processing integrity, confidentiality and privacy.  

Service organization management selects which criteria to include in the examination based on their understanding of the user entities’ needs and what they want to communicate to stakeholders. 

These reports play important roles in:  

• Vendor management programs 
• Internal corporate governance processes 
• Risk management activities 
• Regulatory oversight initiatives 

SOC 2 reports prove particularly valuable when organizations use outsourced or digital services, such as cloud-based software, data centers, or software-as-a-service platforms. 

The demand for SOC 2 reports has grown significantly as organizations face increasing cybersecurity threats and regulatory requirements. Technology companies, healthcare organizations and financial services firms frequently require SOC 2 reports from their service providers to demonstrate compliance with industry standards and regulatory frameworks. 

SOC 3 reports offer general-use accessibility 

SOC 3 reports cover the same trust services criteria as SOC 2 reports but provide less detailed information about the auditor’s testing procedures and system descriptions. The key advantage of a SOC 3 report lies in their unrestricted distribution—organizations can share these reports publicly and often post them on their websites. 

Service organizations often pursue SOC 3 reports as marketing tools to demonstrate their commitment to security and control effectiveness to potential customers. While SOC 3 reports provide less detail than their SOC 2 counterparts, they offer sufficient information for general users to assess a service organization’s control environment.  

To obtain a SOC 3 report a service organization would need to complete a SOC 2 type 2 examination with an unmodified opinion. 

There are two other SOC report types in the AICPA suite of SOC services. 

• SOC for Supply Chain, a reporting framework that can be used by CPAs, management accountants, and organization management to communicate about the organization’s supply chain risk management efforts and assess the effectiveness of system controls that mitigate those risks 

• SOC for Cybersecurity,  a report on a description of an entity’s cybersecurity risk management program and effectiveness of controls within the program at the entity level 

Type 1 vs Type 2 examinations 

Both SOC 1 and SOC 2 reports come in two varieties: Type 1 and Type 2 examinations. Understanding the distinction between these examination types helps organizations choose the most appropriate option for their needs. 

Type 1 

Type 1 reports focus on the design of controls at a specific point in time. They describe the service organization’s system and evaluate whether the controls are suitably designed and implemented to achieve their stated objectives. However, Type 1 reports do not test whether these controls operate effectively over time. 

Type 2 

Type 2 reports include everything found in Type 1 reports plus additional testing of control operating effectiveness over a specified period, typically ranging from six months to one year. These reports provide detailed descriptions of the auditor’s testing procedures and results, offering users greater confidence in the service organization’s control environment. 

Most user organizations prefer Type 2 reports because they provide evidence of sustained control effectiveness rather than just a snapshot of control design. Type 2 reports require more time and resources to complete but offer significantly more value to stakeholders making risk assessments about service providers. 
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Partner with BPM for your SOC reporting needs 

Navigating the complexities of SOC reporting requires working with professionals who understand both the technical requirements and business implications of these examinations. BPM brings deep knowledge of SOC examinations and extensive experience helping organizations across diverse industries achieve their assurance objectives. 

Our team works closely with service organizations to determine the most appropriate SOC report type, develop comprehensive testing strategies and deliver reports that provide meaningful value to stakeholders. We understand that SOC reports serve strategic business purposes beyond mere compliance, helping organizations build trust with customers, streamline vendor management processes and demonstrate their commitment to security and control effectiveness.  

To discuss how we can support your SOC reporting requirements and help you achieve your business objectives through effective internal control assurance, contact us.