Why Quality Matters for SOC Reports

As organizations continue to outsource more processes to third parties, companies have sought new ways to understand the controls in place at potential service providers. One of the most common ways for a company to understand the control environment of a potential service provider is to obtain a Service Organization Control (SOC)report.

SOC reports are essential for understanding the processes and controls in place at a service provider. Businesses rely on these reports to evaluate the effectiveness of processes and controls. The quality of a SOC report can significantly impact an organization's reputation, compliance posture, and customer trust.

The popularity of SOC reports for evaluating a given service provider has led to pressure within the market to make SOC reports easier and less expensive to obtain. There are many software providers that have developed SaaS solutions intended to assist companies in preparing for a SOC examination.  However, in many cases, these tools have resulted in "templatized" system descriptions and controls that include vague language and limited details about pertinent processes and controls. This, in turn, has led to quality concerns associated with SOC reports, and complaints that they have become "check the box" exercises that provide little value in providing meaningful information about a service provider's processes and controls.

Below are some primary reasons why quality matters in SOC reports:

1. Stakeholder confidence – Clients, investors, and business partners rely on SOC reports to assess risk before engaging with a service provider. A well-prepared report instills confidence, demonstrating a commitment to security and operational excellence.
2. Risk mitigation – A thorough, high-quality SOC report helps organizations identify and address potential control weaknesses before they become security incidents. A poorly executed report with incomplete or vague findings can leave critical risks unaddressed, exposing the business to cyber threats and operational failures.
3. Competitive advantage – In today's digital landscape, businesses seek partners with strong security and compliance frameworks. A high-quality SOC report can differentiate a company from competitors, making it a preferred choice for customers. 

The purpose of a SOC report is to provide user organizations with adequate information about the processes and controls in place at a service provider, helping readers understand the risks associated with the services provided. A simple example would be a SOC report provided by a data center provider. Before deciding to use a particular data center to house your critical system infrastructure, reading their SOC report (most likely a SOC 2®) should provide you with adequate information about the processes and controls they have in place to provide assurance that your systems and infrastructure will be adequately secured and monitored. If the report provided by the data center is not thorough enough or detailed enough to provide the needed assurance, then you will likely find a different data center for your systems.

Quality is important for both SOC 2® and SOC 1® reports, however, due to the nature of SOC 1® reports, quality is critical. SOC 1® reports are intended to provide information on the processes and controls at service providers who initiate, process, record, and report transactions that have an impact on a user organization's financial information. Financial statement auditors rely on SOC 1® reports to help them understand the processes and controls in place at third party providers, such as payroll providers. 

The financial statement auditors need assurance that controls over the calculation, processing, and reporting of payroll are designed effectively and operating consistently to ensure the accuracy and completeness of payroll recorded in the financial records. A high-quality SOC 1® report will clearly describe the payroll processes and controls and will provide adequate details of how the controls were tested.

If the report is missing certain controls, or the testing is not adequately rigorous to provide assurance, then the audit team must determine if additional procedures must be performed to gain the necessary assurance. That can be time-consuming and expensive.

Prior to reading a report, you should determine what aspects of the services provided are most impactful to the user organization. For example, if the user organization is relying on the service organization to ensure that the reporting being provided by the system is accurate and complete, then the report should clearly identify control objectives and subsequent controls over the accuracy and completeness of reporting.

Here are some other key questions to ask as you read a SOC report:

• What is the scope of the SOC report? Does it align with the particular services I am concerned with?
• Does the report address the critical controls and control objectives which user organizations rely on?
• Does the report provide sufficient detail regarding the processes associated with the services provided?
• Does the report provide adequate information about how the controls were tested?

Let's look at a real-world example of a report that didn't provide adequate detail around a key control.

Example: Inadequate detail around key controls

A review of a SOC 1® Type 2 report for a nationally recognized payroll processor, prepared and delivered by a Big 4 CPA firm included the following Control Objective:

"Controls provide reasonable assurance that client payroll and output reports are produced completely and accurately and are distributed in accordance with client specifications."

Note that there are two primary objectives; completeness and accuracy.

The primary control listed to achieve the objective is shown below:

"The Core Payroll application is configured to produce the following standard output reports using the client payroll input.

• Department Summary
• Payroll Journal"

The "Testing Performed" by the Big 4 audit firm was documented as follows:

"Inspection – For the following key reports, inspected the system details and compared to the report to determine whether the Core Payroll application generated the reports completely and accurately.

• Department Summary
• Payroll Journal"

As an auditor concerned with the completeness and accuracy of the payroll data being processed and the reporting of the payroll processing, the "Testing Performed" does not provide me with adequate information about HOW the conclusion was reached. "Inspected the system details?" What does that mean? Was the source code of the payroll software inspected? Did the auditor examine the data input to ensure that all records were processed?

There is inadequate information about how this control was tested to conclude that "payroll and output reports are produced completely and accurately."

Invest in long-term success 

Quality is crucial when preparing SOC reports, as they serve as a foundation for trust, compliance, and risk management. Organizations should work with experienced auditors, ensure thorough testing of controls, and provide transparent documentation to maintain high standards. In an era where security breaches and compliance failures can be costly, a well-executed SOC report is an investment in long-term success.