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Monday, August 3, 2015

Converting Risk Into Opportunity: Leveraging SOC Reporting to Build Customer Confidence


Leveraging SOC Reporting to Build Customer Confidence

The significant growth in the business process outsourcing market in the U.S. presents increasing risk for customers. Companies are concerned about their lack of control over all aspects of their business, as outsourcing is now a business imperative for them to compete effectively. To address this risk, there is an ever increasing need for auditor reporting on internal controls at service organizations.

SOC compliance requires time and effort, but it also provides an opportunity for service organizations to differentiate themselves in their marketplace. By staying current with new developments in SOC reporting and implementing SOC best practices, companies can manage their SOC compliance efforts effectively. They can then leverage their compliance efforts to demonstrate the trustworthiness of their internal controls to prospective and existing customers―thereby converting risk into opportunity.

SOC compliance requires time and effort, but it also provides an opportunity for service organizations to differentiate themselves in their marketplace.

SOC Reporting Options

To meet the growing need for auditor reporting on service organization internal controls, the American Institute of CPAs (AICPA) has created three Service Organization Controls (SOC) reporting options:

  1. This is a report on controls at a service organization relevant to a user entity’s internal control over financial reporting. This report is typically used by the service organization’s customers to satisfy Sarbanes-Oxley compliance requirements. It is performed under the international ISAE 3402 and U.S. SSAE16 attestation standards.
  2. This is a report on controls at a service organization relevant to security, availability, processing integrity, confidentiality and/or privacy. It is typically used by the service organization’s customers to gain comfort over selected operational controls tested at the service organization. This engagement is performed under the AT 101 attestation standard.
  3. This is a Trust Services report, which essentially covers the same subject matter as SOC 2 but does not include the same level of detail. This report enables the service organization to publish a seal on their website indicating their compliance. This engagement is performed under the AT 101 attestation standard.

Comparison of the SOC Reports

REPORT SOC 1 SOC 2 SOC 3
What is it? Report on Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting Report on Controls at a Service Organization Relevant to Security, Availability, processing Integrity, confidentiality and privacy Trust Services Report for Service Organizations
Applicable Standard SSAE16 AT101 AT101
Scope Controls relevant to user entities’ financial statements – general IT controls and applicable financial controls Controls related to security, availability, processing integrity, confidentiality or privacy Controls related to security, availability, processing integrity, confidentiality or privacy
Report Distribution Restricted use report Generally a restricted use report General use report (with a public seal)
Report Content Description of service organization’s system
CPA’s opinion on fairness of presentation of the description, suitability of design, and in a type 2 report, the operating effectiveness of controls
Description of service organization’s system
CPA’s opinion on fairness of presentation of the description, suitability of design, and in a type 2 report, the operating effectiveness of controls
An unaudited system description used to delineate the boundaries of the system
CPA’s opinion on whether the entity maintained effective controls over its system
Benefits Provides customers with the necessary detail to support their regulatory requirements
Eliminates the expense of responding to multiple user entity and auditor requests
Provides a competitive advantage when seeking to attract new customers
Use of the report is restricted to the user entity and their auditor
Provides customers with the necessary detail to support their regulatory requirements
Eliminates the expense of responding to multiple user entity and auditor requests
Provides a competitive advantage when seeking to attract new customers
Use of the report is restricted to the user entity, their auditor and other entities with knowledge of the system
Provides customers with an abbreviated report to support their regulatory requirements
Eliminates the expense of responding to multiple userentity and auditor requests
Provides a competitive advantage when seeking to attract new customers
Report is unrestricted and can enhance marketing efforts

Service Organization Best Practices

A SOC audit requires careful planning, execution and communication between the service organization and the independent service auditor. Because another company’s auditors will be relying on the SOC report generated, getting it right the first time is very important. Below are the top five things service organizations can do to make the project efficient, effective and successful for all parties involved.

Set a proper scope. This is crucial to producing an effective SOC report. Service organization management should leverage a risk-based approach for the creation of the SOC report, and this evaluation process should ensure sufficient understanding of how each risk can impact their customers’ operations and financial reporting. In turn, this will help management identify the proper scope and eliminate control objectives and business processes that are not critical to customers.

Identify the correct project/reporting period Many service organizations will align their SOC report with their own year-end or the calendar year-end, without determining the impact of this decision. For example, if an organization has a December 31 year-end, they will be starting their year-end close and financial reporting responsibilities shortly after the end of the calendar year. Combine this with holiday vacations, and key staff members may be stretched too thin during this important period. By evaluating peak times during the year along with customers’ fiscal year-ends, service organizations can determine the most appropriate timing for the SOC reporting period. This evaluation will typically identify alternate, non-peak dates for SOC reporting periods that meet the needs of the service organization and their customers

Request appropriate lead time from your auditor. Many SOC providers will not request documents until they arrive on site for fieldwork. This means that the service organization’s team will have less time to generate the requested samples and ensure they meet the auditor’s needs. By establishing

proper lead times with the auditor, the necessary evidence can be gathered in advance of the auditor’s arrival. This increases auditor efficiency, minimizes the impact to the service organization, and reduces risk and overall cost.

Properly define the control language. Many service organizations make errors when defining the key control activities that are included in their SOC report. The language will either be too general or too restrictive, both of which make reliance on the SOC report difficult. If the control language is too general, customers’ auditors will find it difficult to understand exactly what is being tested and what the results mean. If the language is too restrictive, it will drastically increase the likelihood that the SOC report will include exceptions or even result in a qualified opinion. These exceptions will reduce customers’ ability to rely on the report as they had intended. By defining key control activities properly, service organizations can ensure that the report will have the necessary level of detail for their customers without increasing the likelihood of testing failures and exceptions.

Establish clear ownership for the project. A SOC report, like any other project, will require some level of effort from the service organization’s various relevant departments. So it is imperative that the business assigns a clear owner for the project, to ensure that the team works effectively and efficiently with the SOC auditor. That way, the project will remain on schedule and on budget, and achieve the desired outcomes for all parties. Lack of ownership and oversight by the business sponsors is often the number one factor in increasing the overall cost of a SOC audit.

Recent Developments in SOC Reporting

Updates to SOC2

The AICPA has updated or proposed updates to SOC2 reporting criteria:

Updated Trust Services Criteria

The AICPA updated the Trust Services Criteria for SOC2 audits (except privacy) effective for periods on or after December 15, 2014. These updates include a simplification of the control structure and an increased focus on the service organization’s internal risk assessment processes. Initially, service organizations noted significant overlap across the various principles, and the AICPA developed the common criteria to eliminate these redundancies. Some companies have already begun to report using the new common criteria, and their feedback has generally been very positive with respect to the new format’s ease of use. Companies who have not yet been subject to the new format should work with their independent auditor to ensure that their current control set maps to the new criteria.

Increasing focus on privacy for SOC2

Service organization customers are increasingly concerned about the privacy of their data. In an effort to address this concern, the AICPA has proposed updates to the common control criteria that will include a new set of privacy controls. To support the implementation of these new control criteria, the AICPA is also adding new illustrative risks and controls to their updated guidance.

Increased demand for enhanced SOC2 reporting

Service organizations are getting an increasing number of security questionnaires from their customers. In an effort to leverage their SOC2 compliance efforts, they are working with their auditors to issue enhanced SOC2 reports, which map controls to an ever-expanding list of industry standards and frameworks. Service organizations can add additional controls for testing that enable them to meet their customers’ compliance requirements and avoid having to address multiple customer security questionnaires on an ad-hoc basis. For example, mapping controls within a SOC2 report to the Payment Card Industry (PCI) standard may be relevant to customers who operate systems that process or store credit card account information.

COSO 2013

In 2013 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued Internal Control—Integrated Framework (COSO 2013), which updated the original framework issued in 1992. Companies use this framework when evaluating their internal controls as part of their financial audit for purposes of complying with the Sarbanes-Oxley Act of 2002 (SOX). The updated framework includes a greater focus on the increased use of and dependence on outsourced service providers. While adoption of COSO 2013 is not mandated for service organizations, many are complying in order to proactively support their customers’ SOX efforts.

When applying the new COSO framework, service organizations describe aspects of their control environment, risk assessment process, information and communication systems, and monitoring of controls that are relevant to the services provided to user organizations. This updated framework is applicable to SOC1 reports, which focus on internal controls over financial reporting. The table below outlines the elements of the new framework, along with the applicable considerations for service organizations:


CONTROL ENVIRONMENT
PRINCIPLE CONSIDERATION
  1. Demonstrates commitment to integrity and ethical values
  2. Exercises oversight responsibility
  3. Establishes structure, authority and responsibility
  4. Demonstrates commitment to competence
  5. Enforces accountability
  • Understand the organization’s reporting structure
  • Understand how accountability is established and enforced
  • Evaluate how the organization sets codes of conduct
  • Assess the organization’s processes for training and retaining staff
RISK ASSESSMENT
PRINCIPLE CONSIDERATION
  1. Specifies suitable objectives
  • Understand management’s risk assessment process
  1. Identifies and analyzes risk
  • Evaluate how the organization defines and measures risk
  • Understand how the organization identifies and mitigates risk
  1. Assesses fraud risk
  • Assess areas susceptible to fraud within the organization’s business
  • Understand the organization’s fraud risk assessment
  • Understand key fraud prevention controls in operation at the organization
  1. Identifies and analyzes significant change
  • Assess and document how significant change in the organization is evaluated to determine the impact on internal controls
CONTROL ACTIVITIES
PRINCIPLE CONSIDERATION
  1. Selects and develops control activities
  • Understand how the risk assessment process integrates with the control development process
  • Assess, review and describe the key control selection process
  1. Selects and develops general controls over technology
  • Document how information is captured and validated in key system generated reports
  • Document linkage between automated controls and supporting general controls over technology
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  1. Deploys through policies and procedures
  • Document how information is captured and validated in key system generated reports
  • Document linkage between automated controls and supporting general controls over technology
INFORMATION & COMMUNICATION
PRINCIPLE CONSIDERATION
  1. Uses relevant information
  2. Communicates internally
  • Document how the organization obtains data and ensures data quality
  1. Communicates externally
  • Evaluate the organization’s communication protocols and their linkage with internal controls
MONITORING ACTIVITIES
PRINCIPLE CONSIDERATION
  1. Conducts ongoing and/or separate evaluations
  • Understand how the organization evaluations internal controls on an ongoing basis
  • Determine how the organization defines and communicates deficiencies
  1. Selects and develops general controls over technology
  • Document the role of Internal Audit and the linkage between their audit plan and the organization’s risk assessment
  • Evaluate the organization’s process for taking corrective actions when deficiencies are identified

SOC Compliance as a Business Differentiator

The need for SOC reporting is increasing, as service organizations and their customers face ever-expanding regulatory demands and growing risk to their business from internal and external threats. Although SOC compliance requires time and resources, it also offers significant business opportunities for service providers. Companies who effectively manage their compliance―by following best practices and current regulatory guidance―can demonstrate the trustworthiness of their internal controls to the marketplace, and drive revenue growth by leveraging their SOC reporting efforts.



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