Organizations rely on third-party vendors for critical services, making robust security and compliance frameworks essential. One widely recognized framework is the System and Organization Controls (SOC) reports, developed by the American Institute of Certified Public Accountants (AICPA). These reports provide an independent assessment of a service provider’s internal controls and security posture, helping organizations make informed decisions about vendor risk management.
What Are SOC Reports?
SOC reports evaluate IT control standards, ensuring that an organization’s systems, data, and operations align with best practices for security, confidentiality, processing integrity, availability, and privacy. These assessments are conducted by certified auditors and are crucial in understanding how vendors manage risk.
The Trust Services Criteria
SOC audits assess controls based on five key Trust Services Criteria:
- Security: Ensures protection against unauthorized access, system breaches, and data leaks.
- Confidentiality: Evaluates how confidential information is stored, processed, and disposed of securely.
- Processing Integrity: Assesses whether system processing is accurate, complete, and performed in a timely manner.
- Availability: Examines whether information systems are operational and accessible as required.
- Privacy: Focuses on how personal data is collected, retained, and used according to privacy policies.
Types of SOC Reports
There are two main types of SOC reports, each serving a distinct purpose:
SOC 2 Type 1 Report
This report assesses the design and implementation of an organization’s security controls at a specific point in time. It provides an initial look into whether controls are adequately designed but does not verify their operational effectiveness over time.
SOC 2 Type 2 Report
A more comprehensive evaluation, the SOC 2 Type 2 report examines the operational effectiveness of security controls over an extended period, typically between three to six months. This report provides deeper insights into an organization’s ability to maintain security and compliance consistently.
This post focuses on the SOC 2 Type 2 report, as it is the most relevant for ongoing third-party risk management.
What Do SOC 2 Reports Contain?
While specific report formats vary by auditor, most SOC 2 reports include:
- Executive Summary: Provides an overview of the audit results, the methodologies used, and a high-level assessment of compliance.
- Organizational Overview: Describes the company’s operations, systems, and security posture.
- Scope of the Report: Defines which of the five Trust Services Criteria are included in the assessment.
- Control Activities and Testing: Lists security controls, testing methodologies, and audit findings.
- Management Response: Highlights any identified exceptions and how the organization intends to address them.
Why Are SOC 2 Reports Important for Third-Party Risk Management?
Organizations use SOC 2 reports to assess third-party vendors when:
- They need a standardized approach to evaluating vendor security practices.
- They lack internal resources to conduct extensive security assessments.
- They require flexibility to focus on specific control areas relevant to their business.
Interpreting Risks in a SOC 2 Report
A typical SOC 2 report outlines risks as “test results” within a control exceptions table. This table includes:
- Control Number: A tracking code for individual controls.
- Criteria: A description of the control being tested.
- Control Activity: Details how the organization implements the control.
- Test of Operating Effectiveness: Summarizes audit procedures and test outcomes.
- Test Results: Notes whether the control met compliance expectations or if exceptions were found.
Unlike traditional risk assessments, SOC 2 reports do not include a color-coded risk matrix. Instead, organizations must interpret these exceptions within their broader risk management strategy.
Mapping SOC 2 Exceptions to Manage Risks
To effectively manage SOC 2 control exceptions, organizations should apply a Likelihood and Impact methodology:
- Likelihood: The probability that a control failure will impact business operations.
- Impact: The severity of potential disruptions caused by a control failure.
By using a 0-5 scale (0 = no impact, 5 = high impact), organizations can build a risk heat map to prioritize remediation efforts.
Simplifying the SOC 2 Risk Remediation Process
Organizations should develop a structured playbook for addressing SOC 2 exceptions, incorporating:
- Minimum Compliance Requirements: Defining mandatory security and compliance standards for vendors.
- Industry Best Practices: Establishing recommended remediation strategies.
- Timeframes: Assigning deadlines based on risk severity.
- Remediation Actions: Determining whether to accept, mitigate, or escalate risk findings.
By integrating SOC 2 exceptions into a central risk register, organizations can cross-map findings against multiple compliance frameworks, streamlining vendor risk assessments and ongoing monitoring efforts.
Automating SOC 2 Third-Party Risk Management
Managing third-party risks is challenging without a centralized platform that automates:
- Risk identification
- Assessment and scoring
- Exception triage
- Continuous monitoring
- Remediation workflows
A dedicated third-party risk management platform, like Connected Risk Third-Party Risk Management, simplifies this process by providing real-time insights, automated risk assessments, and streamlined remediation workflows.
Get Started with Third-Party Risk Management
SOC 2 reports are invaluable for assessing vendor security and compliance, but without a structured approach to analyzing and addressing control exceptions, organizations remain vulnerable to security gaps.
Connected Risk Third-Party Risk Management can help streamline your SOC 2 risk assessment and remediation efforts. Contact us today to learn how our platform can enhance your third-party risk management strategy.
