What to Know About SOC 2 and SOC 3 for CPAs

Outsourcing has become an integral part of modern business. In the interest of time, cost, and efficiency, businesses have, for long, been outsourcing common operation tasks to other more capable organizations. For instance, in the case of accounting operations, it is typical for a business to look for assistance with filing taxes, invoicing clients, and even storing financial data. 

However, outsourcing comes with an inherent threat to the data security of your business. The fact that other businesses will be handling your data increases the vectors through which a cyber-attack can reach your business. Luckily, choosing to only work with businesses that take SOC 2 and 3 reporting seriously mitigates this risk. 

Here Is A Guide On Soc 2 And Soc 3 And The Pivotal Role It Plays In Enhancing The Work Of CPAs:

Background of SOC 2 and SOC 3

When referring to SOC 2 and 3 reports, an organization can either be a user entity or a service organization. While service organizations offer specific services to their clients, user entities are the recipients of these services. The reports utilize the AIPCA audit guide and are conducted in accordance with AT Section 101.

CPAs who outsource their tasks to other businesses can use the reports to ensure that these service organizations comply with their internal controls over financial reporting. Also, service organizations are supposed to meet the Trust Service Principles outlined by the AICPA. This requires them to ensure the security, confidentiality, processing integrity, privacy, and availability of the user entity’s data. In a nutshell, SOC 2 and SOC 3 reports are meant to show that service organizations have met these requirements.

SOC 2 Explained

SOC 2 reports are a necessity when vetting vendors. It showcases that they have designed and set up the necessary control measures to meet any or all of the five trust principles. The principles you would love to be met will depend on what your business needs. SOC 2 reports are usually quite detailed.

They explain in great detail how each and every control measure is to be implemented. The examination is confidential, as it may contain sensitive information. Your service provider will have to share the report directly with you for you to access this information.

SOC 2 reports are categorized into two; Type 1 and type 2. While Type 1 confirms that the controls are already in place, Type 2 reports affirm that they are working as they should be. The latter is the best representation of how secure your accounting and financial data will be in the hands of a vendor. In most cases, getting a type 2 report that has been audited by an independent CPA is wise.

SOC 3 Explained

Contrary to common misconception, SOC 3 isn’t an upgrade of SOC 2 reports. Instead, it is a summary of the SOC 2 Type 2 reports. It is meant to be less technical and avoids mentioning sensitive data. It also has a seal of approval. Service providers can use this report on their website to showcase their internal controls. 

Why Getting the Reports Matters 

Despite having outsourced financial and accounting tasks, you are still liable for the data security of your business. If anything were to go wrong, stakeholders would still blame you, regardless of whether the fault was a third-party’s or yours. In case of a data breach, you will incur heavy losses when trying to recover from it. You might have to offset hefty fines to your industry’s regulators. 

It is also quite possible to lose the trust of your customers and business partners, especially in situations where the integrity of financial data has been compromised. Consequently, working with vendors who can uphold high data security standards is a sure way to protect the interests of your business. If a vendor can produce these reports, you can rest assured that they are committed to the security of your data.

Focus On Vendor Management

Your data security posture as a business is only as good as your weakest link. If a service provider doesn’t execute security best practices, they can present cyber criminals with a channel for attacking your business. Ensuring optimal security isn’t a one-time task; it needs to be done continually.

As such, you should review the security posture of your service providers even beyond the vetting process. It is better to be safe than sorry in the face of data security risks. By having them conduct audits and forward their SOC 2 reports, you can rest assured that your business is in safe hands. 

Outsourcing business tasks is an easy solution in a business world where resources are scarce, but it shouldn’t result in you placing your data in harm’s way. SOC 2 and 3 reports can ensure that your business’ data is protected throughout the lifetime of working with a vendor. Make them part of your vendor management strategy to build strong and sustainable relationships with your service providers.