SSAE 18 is a series of enhancements aimed to increase the usefulness and quality of SOC reports, now, superseding SSAE 16, and, obviously the relic of audit reports, SAS 70. The changes made to the standard this time around will require companies to take more control and ownership of their own internal controls around the identification and classification of risk and appropriate management of third party vendor relationships. These changes, while, not overly burdensome, will help close the loop on key areas that industry professionals noted gaps in many service organization’s reports.
SSAE18 is now effective as of May 1, 2017, 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 System and Organization Controls (SOC) Report under the SSAE-18 standard in an SOC 1 Report. The SOC 1 report produced will look and feel very similar to the one issued under SSAE-16, it will just contain a couple additional sections and controls to further enhance the content and quality, and thus, the ability for third parties to rely on.
What’s New in SSAE 18?
As mentioned above, there are a couple key changes that Companies currently performing a SOC 1 or 2, or, will be performing one in the near future, need to take into consideration this year and going forward.
- Service Organizations will need to implement a formal Third Party Vendor Management Program
- Service Organizations will need to implement a formal Annual Risk Assessment process
In addition to the control based changes, your SOC report should also now contain two additional sections describing the risk assessment process, as well as, the Subservice Organizations that play a role in the overall operation of the system and the corresponding controls they impact or have complete ownership of. These two components were typically present in SOC 2 reports previously, but, not formally required. Now, this concept is being formalized and extended to all SOC reports going forward.
Now, for companies that have not previously undergone a SOC 1 audit because their service / operations were not financially significant, SSAE 18 now expands the definition of what is allowed to be reported on to include an entity’s compliance with certain laws or regulations, contractual arrangements, or another set of defined agreed-upon procedures – just about any outsourced service where 3rd party validation would be beneficial and add assurance. This now allows for an official, independent review, of a wide-range of operations under a trusted and consistent set of auditing and reporting guidelines.
Who Needs an SSAE 18 (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 SOC 1 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
How Does My Company Best Prepare?:
Before starting the SSAE 18 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 SSAE18, 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 18, for a more detailed ‘checklist’ – please see The SSAE 18 Checklist.
The SOC 3 Report , just like SOC 2, is based upon the Trust Service Principles and performed under AT101, the difference being that a SOC 3 Report can be freely distributed (general use) and only reports on if the entity has achieved the Trust Services criteria or not (no description of tests and results or opinion on description of the system). The lack of a detailed report requires that a SOC 3 be performed as a Type II, unlike SOC 1 and SOC 2 where there is a Type I option. SOC 3 reports can be issued on one or multiple Trust Services principles (security, availability, processing integrity, confidentiality and privacy) and allow the organization to place a seal on their website upon successful completion.
The Trust Service Principles were designed with a focus on e-commerce systems due to the amount of private/confidential/financial information that flows across the internet daily. When a customer processes a transaction (online retailer), builds a business on your service (SaaS providers), or submits private information, they want to know best practices are being followed by the company to guard against security leaks, lost sales, and damaged data. The most common reports based upon the trust principles are referred to as WebTrust and SysTrust.
The SysTrust review encompasses a combination of the following principles:
- Security: The system is protected against unauthorized access (both physical and logical).
- Availability: The system is available for operation and use as committed or agreed.
- Processing Integrity: System processing is complete, accurate, timely, and authorized.
- Confidentiality: Information designated as confidential is protected as committed or agreed.
The WebTrust certification can fall into the following four categories:
- WebTrust. The scope of the engagement includes any combination of the trust principles and criteria .
- WebTrust Online Privacy. The scope of the engagement is based upon the online privacy principle and criteria.
- WebTrust Consumer Protection. The scope of the engagement is based upon the processing integrity and relevant online privacy principles and criteria.
- WebTrust for Certification Authorities. The scope of the engagement is based upon specific principles and related criteria unique to certification authorities.
While some companies still request a SAS 70 report (why, who knows…), many contracts now require a SSAE 16 report, and with the change to SSAE 18 many are now asking, what is the right language to use going forward? To fix this, the AICPA is now stating the standard number or reference should no longer to be used, and formally referred to as a SOC 1 report. This will hopefully help to prevent this situation in the future when new updates are inevitably implemented (SSAE 19, 20, …). A minor, but, helpful change.
So – while you do not *have* to update your contracts, it’s typically the best course of action, and now, going forward you shouldn’t have to worry about it again.
Are there any other nagging items like this you are running into? If so, contact us or leave a comment and we will do our best to clarify.
The System and Organization Control (SOC) 2 Report will be performed in accordance with AT-C 205 (formerly under AT-101) and based upon the Trust Services Principles, with the ability to test and report on the design (Type I) and operating (Type II) effectiveness of a service organization’s controls (just like SOC 1 / SSAE 18). The SOC 2 report focuses on a business’s non-financial reporting controls as they relate to security, availability, processing integrity, confidentiality, and privacy of a system, as opposed to SOC 1/SSAE 18 which is focused on the financial reporting controls.
The Trust Service Principles which SOC 2 is based upon are modeled around four broad areas: Policies, Communications, Procedures, and Monitoring. Each of the principles have defined criteria (controls) which must be met to demonstrate adherence to the principles and produce an unqualified opinion (no significant exceptions found during your audit). The great thing about the trust principles is that the criteria businesses must meet are predefined, making it easier for business owners to know what compliance needs are required and for users of the report to read and assess the adequacy.
Many entities outsource tasks or entire functions to service organizations that operate, collect, process, transmit, store, organize, maintain and dispose of information for user entities. SOC 2 was put in place to address demands in the marketplace for assurance over non-financial controls to prevent SOC 1 from being misused just like SAS 70 was.
Did you know? A business isn’t required to address all the principles, the reviews can be limited only to the principles that are relevant to the outsourced service being performed. Some example industries that might have a need for a SOC 2 include: SaaS Providers, Data Center/ Colocations, Document Production, and Data Analytics providers.
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.