When is SOC 1 and when is SOC 2 needed?

When is SOC 1 and when is SOC 2 needed?

The choice between SOC 1 and SOC 2 depends primarily on the type of services your organization provides and how they impact your clients' operations. SOC 1 focuses on financial controls, while SOC 2 addresses data security and system availability.

Key differences between the reports

The fundamental distinction lies in each report's core objectives. SOC 1 examines internal controls over financial reporting, validating safeguards for financial processes that could affect clients' financial statements. This framework operates under SSAE 18 standards.

In contrast, SOC 2 evaluates controls across five key trust service criteria: security, availability, processing integrity, confidentiality, and privacy. While security serves as the mandatory baseline, organizations can select additional criteria based on their specific needs. This framework follows SSAE 18 standards.

When organizations need SOC 1

Given these distinctions, organizations requiring SOC 1 are typically service providers whose operations directly impact their clients' financial reporting processes.

Payroll service companies must demonstrate that their systems accurately process wages, taxes, and benefit contributions. Any errors in these critical processes can materially affect client financial statements. Similarly, billing and payment processors handle transaction data that requires precise documentation and robust controls—client auditors need assurance that these processes meet regulatory standards.

Payment processors represent another key category, as they manage essential financial operations where accuracy and completeness directly impact client accounting records. Additionally, accounting service providers either maintain or support client bookkeeping functions, making their system integrity crucial for financial statement quality.

Industries that choose SOC 2

While financial service organizations gravitate toward SOC 1, SOC 2 appeals to entities prioritizing data security and operational reliability.

Software-as-a-Service (SaaS) companies store and process sensitive business data, requiring proof that their platforms maintain appropriate security and availability standards. Cloud service providers fall into a similar category, managing client IT infrastructure where SOC 2 validates their adherence to security and business continuity best practices.

Furthermore, technology companies handling personal data need attestation demonstrating compliance with privacy and confidentiality requirements—particularly those operating in heavily regulated industries. IT service providers supporting mission-critical business processes must also prove their systems deliver reliable, secure, round-the-clock performance.

Report types: type 1 vs type 2

Regardless of whether you choose SOC 1 or SOC 2, each comes in two distinct formats. Type 1 reports provide a point-in-time assessment of control design and implementation. Type 2 reports cover a minimum six-month period and evaluate how effectively these controls operate over time.

Type 1 reports work well when organizations need to quickly demonstrate they have appropriate controls in place. However, Type 2 reports offer more comprehensive insights by showing how controls perform in practice over an extended period, making them more valuable for establishing long-term business relationships.

When dual attestation makes sense

In practice, some organizations require both SOC 1 and SOC 2 attestation. This typically occurs when service providers impact both financial processes and manage sensitive operational data simultaneously.

Large-scale service providers often encounter this scenario while serving diverse client bases. Some clients demand financial control validation, while others prioritize data security assurance. In these situations, maintaining both attestations becomes a business necessity. Fortunately, many controls overlap between frameworks, allowing organizations to streamline their audit processes when pursuing both attestations concurrently.

Making the right choice

With these factors in mind, your decision should stem from a thorough analysis of your service offerings. Organizations processing financial data that affects client statements typically need SOC 1. When data security and system availability take priority, SOC 2 becomes the logical choice.

Equally important is understanding your target audience. Financial auditors generally require SOC 1 reports, while IT teams, compliance officers, and regulatory bodies more commonly expect SOC 2. Additionally, clients often specify exactly which report type they need—making stakeholder requirements analysis a critical first step in your decision process.

Preparing for the audit journey

Regardless of your chosen path, organizations should begin with a comprehensive readiness assessment. This evaluation identifies control gaps and enables remediation before formal auditing begins, significantly improving your chances of successful attestation.

Robust documentation forms the backbone of any SOC engagement. Controls must be implemented, systematically documented, and regularly tested. Consequently, mapping controls to relevant criteria or objectives requires meticulous attention to detail.

It's worth noting that SOC 1 allows organizations to define control objectives tailored to their specific services, while SOC 2 requires controls to meet predetermined Trust Services Criteria. Thorough preparation not only reduces audit duration but also increases the likelihood of favorable outcomes.

Long-term business advantages

Selecting the appropriate SOC framework delivers measurable business benefits. Organizations with relevant attestations gain competitive advantages and can serve clients with stringent regulatory requirements, directly expanding market opportunities.

Moreover, systematic control documentation streamlines internal audit processes, replacing periodic, resource-intensive reviews with continuous monitoring capabilities. As a result, clients and business partners view SOC attestations as credible proof of operational excellence—particularly valuable in industries where trust serves as a fundamental business differentiator.

Conclusion

The decision between SOC 1 and SOC 2 becomes straightforward when organizations thoroughly analyze their service portfolio and client expectations. SOC 1 suits financial service providers, while SOC 2 serves technology companies and IT service organizations.

Keep in mind that some organizations need both attestations due to diverse service offerings. Ultimately, success depends on careful preparation, comprehensive control documentation, and systematic risk management approaches. The right SOC investment pays dividends through enhanced client confidence, improved competitive positioning, and more efficient internal control processes.