SOC 1 in the Era of Cloud and Outsourcing: What CFOs and Controllers Need to Know

Key Takeaways

• SOC 1 Reports Support ICFR Assurance: SOC 1 reports are critical for validating internal controls over financial reporting when key financial processes are outsourced to third parties, including cloud-based service providers.
• Understand SOC 1 vs. SOC 2: SOC 1 focuses on controls impacting financial reporting, while SOC 2 addresses broader system security and operational controls – both serve distinct but complementary purposes.
• Cloud Adoption Introduces New Risks: Shared responsibility models, reliance on third parties, and data integrity challenges increase the importance of reviewing SOC 1 controls in cloud-based financial environments.
• Active Vendor Oversight Is Essential: CFOs and Controllers should regularly request, review, and understand SOC 1 reports, including complementary user entity controls that must be implemented internally.
• Ongoing Compliance Requires Monitoring: Gap analyses and bridge letters help ensure SOC 1 controls remain effective and aligned with the organization’s reporting period and risk environment.

In businesses today, financial activities continue to be outsourced to outside parties and can often be hosted on cloud solutions. This creates new challenges when it comes to internal controls over financial reporting (ICFR). SOC 1 reports continue to be a key element in the reliance on financial data that is processed by outside parties. This article will delve into the importance of the SOC 1 report and what steps organizations should take to ensure that internal controls over financial reporting are in place.

The Role of SOC 1

A SOC 1 report is primarily focused on the internal controls over financial reporting. Designed by the AICPA using guidelines defined by the Sarbanes Oxley Act (SOX), a SOC 1 report is composed of control objectives defined by management and controls within each control objective to support the system processing user entity transactions. A CPA firm performs testing of the controls to confirm whether the controls are designed and implemented (Type 1 report) and operating (Type II). Often, companies that receive SOC 1 reports process key financial data, such as payroll, loan servicing, and other software as a service (SaaS) companies processing transactions.

Cloud-Based Financial Transactions

With a shift to cloud-based solutions for processing financial transactions, new risks can arise. Risks, such as shared responsibility and accountability of certain controls, dependence on third parties for certain financial data, and integrity of the financial data, can add certain complexities for modern businesses. Utilizing SOC 1 reports can help identify controls used in processing user transactions. As mentioned above, this is primarily over financial reporting, though can be expanded to information technology general controls based on the users of the report. SOC 2, also designed by the AICPA, is similar in name, but serves a different purpose. A SOC 2 report is over the controls that address security, availability, confidentiality, processing integrity, and privacy for services organizations. The Trust Services Criteria, which includes the COSO framework, defines the criteria for all SOC 2 reports and does not allow for designing control objectives as in a SOC 1. This kind of a report is often used to provide more assurance over cybersecurity and operations of a system.

Managing SOC 1 Compliance

So, now that the baseline knowledge of SOC 1 reports has been outlined, what are best practices for CFOs and Controllers to help manage SOC 1 compliance in today’s environment?

• Requesting and Reviewing SOC 1 Reports for Vendors – For any financial data that is being relied upon for financial reporting, it is important to identify any controls the outside party has in place to ensure accuracy.
• Review Complementary User Entity Controls – Within the SOC 1 report, controls and processes are defined that are the responsibility of the user of the financial data or system. These are often controls that should be implemented at the organization.
• Gap Analysis – Performing a gap analysis using the controls within the SOC 1 report along with controls at the organization can identify areas of improvement.
• Obtain Bridge Letter – Not all SOC reports align with the organization’s calendar or fiscal year end. Bridge letters can be obtained to ensure the controls are still in place, and there are no significant changes outside of the reporting period.

As more process and systems become digital by default, it is important to identify risks and implement compensating controls. SOC 1 reports have offered a straightforward way to identify internal controls over financial report, which can help provide assurance to users of the financial data.

If your entity is interested in obtaining any additional information on SOC reports, or if there are any other questions related to SOC, please contact us. For more information on these services and more, be sure to visit our firm’s SOC & Cybersecurity industry page, and don’t hesitate to contact Dave Hammarberg, CPA, CFE, CISSP, GSEC, MCSE, CISA, CCSFP, CHQP, CCA regarding our services.

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