A SOC 1 Report (System and Organization Controls Report) is a report on Controls at a Service Organization which are relevant to user entities’ internal control over financial reporting. The SOC1 Report is what you would have previously considered to be the standard SAS70, complete with a Type I and Type II reports, but falls under the SSAE 16 guidance (and soon to be SSAE 18).
Please see the following articles discussing the SSAE 16 guidance and additional information related to the SOC 1 (Type I and Type II) Reports:
In addition to the SOC 1 report which is restricted to controls relevant to an audit of a user entity’s financial statements, the SOC 2 and SOC 3 reports have been created to address controls relevant to operations and compliance and will be discussed in further detail in the future.
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.
This information is also consistent with SSAE-18 which is effective as of May 1, 2017.
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.
The soon to be effective, SSAE-18, is expected to follow a similar reporting structure to the SSAE-16 within a SOC 1 report.
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:
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
You may have heard SSAE-18 is on the horizon for reports issued as of May 1, 2017. There are some important updates discussed in here: SSAE-18 – An Update to SSAE-16.
As the standard is formalized and the date approaches we will continue to provide more information to help you prepare for these changes.