The SOC 2 and SOC 3 audit guides have recently been released by the AICPA, and the SAS 70 phase-out becomes effective tomorrow. The more I learn about these new reports the more I like them. First of all, as a service provider to financial institutions we will have to prepare for this engagement (just as we did for the SAS 70), so it’s certainly important to know what changes to expect from that perspective. But as a trusted adviser to financial institutions struggling to manage the risks of outsourced services (and the associated vendors), the information provided in the new SOC 2 and SOC 3 reports are a welcome change. In fact, if your vendor provides services such as cloud computing, managed security services, or IT outsourcing, the new SOC reports provide exactly the assurances you need to address your concerns. Here is what I see as the 5 most significant differences between the SAS 70 and the SOC 2 reports, and why you should embrace the change:
Management Assertion – Management must now provide a written description of their organizations’ system (software, people, procedures and data) and controls. The auditor then expresses an opinion on whether or not managements’ assertion is accurate. Why should this matter to you? For the same reason the regulators want your Board and senior management to approve everything from lending policy to DR test results…accountability.
Relevance – The SAS 70 report was always intended to be a your-auditor-to-their-auditor communication, it was never intended to be used by you (the end-user) to address your institutions’ concerns about vendor privacy and security. The SOC reports are intended as a service provider to end-user communication, with the auditor providing verification (or attestation) as to accuracy.
Scope – Although the SAS 70 report addressed some of these, the SOC 2 report directly addresses all of the following 5 concerns:
- Security. The service provider’s systems is protected against unauthorized access.
- Availability. The service provider’s system is available for operation as contractually committed or agreed.
- Processing Integrity. The provider’s system is accurate, complete, and trustworthy.
- Confidentiality. Information designated as confidential is protected as contractually committed or agreed.
If these sound familiar, they should. The FFIEC Information Security Booklet lists the following security objectives that all financial institutions should strive to accomplish:
- The Privacy and Security elements of GLBA
- Integrity of data or systems
- Confidentiality of data or systems
As you can see, there is considerable overlap between the FFIEC requirements and the scope of a typical SOC 2 engagement.
Testing – Like the SAS 70, the SOC 1 and SOC 2 are available in both a Type 1 and Type II format. A Type I speaks only to the adequacy of vendor controls, but the Type II gives management assurance that the vendor’s controls are not just adequate, but also effective. The auditor can do this in a Type II engagement because they are expected to not just inquire about control effectiveness, but actually observe the control operating effectively via testing. And because the scope of the SOC 2 is significantly greater than the SAS 70 (see above), the test results are much more meaningful to you. In fact, the SOC 2 audit guide itself suggests that because your concerns (particularly as a financial institution) are in both control design and effectiveness, a Type I report is unlikely to provide you with sufficient information to assess the vendor’s risk management controls. For this reason you should insist on a Type II report from all of your critical service providers.
Vendor Subcontractors – This refers to the subcontractor(s) of your service provider, and again this is another FFIEC requirement that is directly addressed in the new SOC reports. The FFIEC in their Outsourcing Technology Services Booklet states that an institution can select from two techniques to manage a multiple service provider relationship:
- Use the lead provider to manage all of their subordinate relationships, or
- Use separate contracts and operational agreements for each subcontractor.
The booklet suggests that employing the first technique is the least cumbersome for the institution, but that either way;
“Management should also ensure the service provider’s control environment meets or exceeds the institution’s expectations, including the control environment of organizations that the primary service provider utilizes.”
The audit guidelines of the SOC 2 engagement require the service auditor to obtain an understanding of the significant vendors whose services affect the service provider’s system, and assess whether they should be included in the final report, or “carved-out”. Given the regulatory requirement for managing service providers you should insist on an “inclusive” report.
In summary, there will be an adaptation curve as you adjust to the new reports, but in the end I think this is an overwhelming step in the right direction for the accuracy and effectiveness of your vendor management program. I’ve created a couple of flowcharts to assist you with both the SOC selection and SOC evaluation process. You can download them here.