SSAE 16 is an enhancement to the current standard for Reporting on Controls at a Service Organization, the SAS70. The changes made to the standard will bring your company, and the rest of the companies in the US, up to date with new international service organization reporting standards, the ISAE 3402. The adjustments made from SAS 70 to SSAE 16 will help you and your counterparts in the US compete on an international level; allowing companies around the world to give you their business with complete confidence.
SSAE16 is now effective as of June 15, 2011, and if you have not made the necessary adjustments required, now is the time to find a quality provider to discuss the proper steps. All organizations are now required to issue their Service Auditor Reports under the SSAE 16 standards in an SOC 1 Report.
Who Needs an SSAE 16 (SOC 1) Audit?
If your Company (the ‘Service Organization’) performs outsourced services that affect the financial statements of another Company (the ‘User Organization’), you will more than likely be asked to provide an SSAE16 Type II Report, especially if the User Organization is publicly traded.
Some example industries include:
- Payroll Processing
- Loan Servicing
- Data Center/Co-Location/Network Monitoring Services
- Software as a Service (SaaS)
- Medical Claims Processors
What you Need to Know:
Before starting the SSAE 16 process, there are a number of considerations one must take into account that can save considerable time, effort, and money in the long run. Use the following items as a mini checklist for yourself:
- Does my Company need an SSAE16, or, are we doing it just because someone asked?
- Reports on the low end can run at least $15,000 a year, will the business lost be less of a burden than the cost of the report itself?
- Does your company have defined Business Process and IT controls in place, or, will you need assistance developing and implementing them (readiness assessment)?
- Have you determined the controls in place which affect the outsourced services being provided?
- Have key stakeholders been defined and included in discussions?
There are many other issues to consider before engaging a CPA firm to help with your SSAE 16, for a more detailed ‘checklist’ – please see The SSAE 16 Checklist
The first difference between the SSAE 16 and ISAE 3402 Standards is that SSAE 16 requires the service auditor to assess the risk associated with potential “Intentional Acts by Service Organization Personnel”.
Under SSAE 16, If the service auditor, while performing their review, notices deviations that could have been a result of an intentional act by an employee of the service organization, the auditor is required to dig into it. The reasoning for this is to determine whether or not the description of the service organization’s system is not fairly presented and that the controls are not suitably designed or operating effectively.
So, it seems that in this case, the SSAE 16 standard is a bit stricter. If the auditor is not required to dig into an intentional act committed by an employee of the service organization, how would the Auditing Firm and User Organizations feel comfortable with the report? In my opinion, they shouldn’t. Without any consequences for the service organization (failed report), there is an incentive for the service organization to try and operate outside the control structure as defined as it is unlikely that they would be held responsible for their actions. This might be a question you would want to dig into if you are going to use a company that has only been issued an ISAE 3402 report.
Be on the lookout for the next post related to the difference between SSAE 16 and ISAE 3402, Anomalies.
SSAE 16 was built upon the ISAE 3402 framework, which essentially is the same thing, but accepted at an international level with a number of deviations to be discussed here over time. The AICPA and other standard settings organizations are now encouraged to design their frameworks for reporting on controls at a service organization around the ISAE 3402 framework, this will allow for increased fluidity and lower expenses to complete globally. ISAE 3402 was intentionally designed to allow for minor modifications to adjust for local protocols and existing frameworks.
SSAE 16 contains 9 deviations from the ISAE 3402 framework, at a high level include:
- 1. Intentional Acts by Service Organization Personnel
- 2. Anomalies
- 3. Direct Assistance
- 4. Subsequent Events
- 5. Statement Restricting Use of the Service Auditor’s Report
- 6. Documentation Completion
- 7. Engagement Acceptance and Continuance
- 8. Disclaimer of Opinion
- 9. Elements of the SSAE Report That are Not Required in the ISAE 3402 Report
These topics will be delved into in greater depth at a later time, however, are not of concern if you do not plan on performing outsourcing services for an organization located outside of the United States.
Controls at a Service Organization refer to the controls that are in place at your company.
Many of these controls should be covered within your policies and procedures, as they should reflect an accurate depiction of the various processes that occur within your organization. Accurate policies and procedures (P&P) should be designed, implemented, and documented by the service organization. When the service auditor is testing the effectiveness of your control objectives and activities, your P&P support the achievement of the control objectives. While P&P are not enough to determine that a process is operating effectively, they can support the design effectiveness of a control.
Typically a service auditor will perform testing, beyond P&P, around the control objectives and activities to support the fact that employees are performing their duties in accordance with the P&P, because without the additional testing, it would be impossible have comfort that they are actually being followed.
Simply put, good policies and procedures will only get you so far during an audit because you still need to prove to the auditors that the functions management say are being performed are being carried out correctly.
There are significant differences between a Type I and Type II report, however, we aren’t going to discuss that here, thats for another day. We will discuss the basics of a SSAE 16 Type I Report and some areas that should be focused on if this is the direction your company wants to take.
While the Type I Report doesn’t carry much weight, there are benefits, and that’s why it exists as an option. A Type I Report is specifically defined by the SSAE 16 guidance as a “report on a description of a service organization’s system and the suitability of the design of controls”, essentially, a determination of if your company’s controls designed appropriately. When performing a Type I report, the auditors will test the design effectiveness of your company’s defined controls by examining a sample of 1 item per control. This provides a user organization with some comfort that your company (the service organization) has at least some controls in place. This can be useful when trying to obtain a contract and to show good faith to the potential user organization that your company is moving in the right direction. Most user organizations will require a Type II Report before contracting your company as a service organization of theirs.
The Type I Report is made up of 3 major areas, per the SSAE No. 16 Guidance:
a description of the service organization’s system prepared by management of the service organization.
– Management will need to prepare a description of the control objectives that are in place and being tested at their organization, as it relates to the process that is being reviewed for use by a User Organization. This will read sort of like a narrative of the process and how your control objectives tie in to each other and the process as a whole, giving a User Organization an overview of what and how, at a high level, their data will be handled.
a written assertion by the Service Organization’s management about whether, in all material respects, and based on suitable criteria:
1. the description of the service organization’s system fairly presents the service organization’s system that was designed and implemented as of a specified date.
2. the controls related to the control objectives stated in the description were suitably designed to achieve those control objectives as of the specified date.
– Management will need to prepare a written assertion attesting to the fair presentation and design of controls. Previously under SAS 70, it was the auditors who reported directly on the controls and management was not required to attest to anything. (There will be a separate post describing this in detail as this is a major difference)
The final component:
a service auditor’s report that expresses an opinion on the matters in b1-2.
– The auditors that are hired to perform the testing will need to review the Management’s assessment of the design of controls and attest to the validity of Management’s opinion. The auditors will walk through the control objectives and control activities in place at your company and verify they are, in fact, designed as Management noted. This is where the auditors will obtain a sample of 1 to support each control activity and express the results of their testing.
Specifics of reporting details for a SSAE Type I will be discussed later on!
Another series we will have periodic posts about will be related to potential controls that would be expected to be in place, almost regardless of the entity in question.
This will be a real basic one to help get everyone up to speed, we will delve into other areas that may be a little more advanced in the future.
Example: Firewalls are in place at all externally facing access points.
The point of this control is to ensure that firewalls are being used at the organization to help prevent hacking attempts, thus, the theft of data. Companies outsourcing their workloads want to have comfort that the company performing the work has adequate security measures in place to lower the chance of their data being stolen.
Firewalls are some of the most basic devices that need to be in place at a business to protect data and if your business does not currently employ firewalls on their network, it is a must do and should be looked into immediately.