Tag: SOC 1

Third-Party Risk and ISAE 3402

From comprehensive outsourcing of intricate functions like Infrastructure as a Service (IaaS), Platform as a Service (PaaS) services, or component manufacturing to modest contracts with local service providers and suppliers, organizations spanning various sectors and scales place significant reliance on third-party service organizations.

Engaging in outsourcing activities yields benefits such as cost reductions, operational efficiencies, and the infusion of specialized expertise into the organization. However, outsourcing also broadens the spectrum of potential risks an organization must contend with. In light of this, comprehending, evaluating, and adeptly addressing these risks as part of an enterprise risk management (ERM) framework is imperative to mitigate the exposure to financial losses, regulatory non-compliance, and reputational harm.

Gaining Insight into Third-Party Risk: It’s important to note that third-party risk isn’t exclusive to multinational corporations that outsource major business functions to offshore vendors. In the contemporary business landscape, most organizations regularly interact with service organizations as an integral aspect of their day-to-day operations, as previously discussed. Even smaller enterprises rely on service organizations for diverse activities, ranging from server hosting and IT support to salary processing. The growth of third-party outsourcing inherently heightens the potential risks to which organizations are subject.

The continuous analysis of third-party risk at any given juncture holds significance for ensuring business continuity and optimizing the effectiveness of risk management endeavors. Given the considerable reliance on data across most businesses, any third party granted access to sensitive or confidential information may potentially pose a risk to business continuity. Just as in other risk categories, outsourcing risks can be evaluated based on degrees and hierarchies. These hierarchies and degrees constitute the foundation for risk prioritization by management and shape the risk framework presented in an ISAE 3402 | SOC1 report.

Prioritizing Risks and ISAE 3402: It’s crucial to recognize that prioritizing risks is an ongoing process. All parameters should be adaptable over time, influenced by factors ranging from economic shifts to changes in the regulatory landscape and evolving strategic initiatives. While this is not an exhaustive list, service organizations that generally entail a higher degree of risk for your organization include:

  • Cloud computing/on-demand computing
  • Software-as-a-Service (SaaS)
  • Internet service providers (ISPs)
  • Credit card processing platforms
  • Online order fulfillment
  • Data center and co-location providers
  • HR and payroll services
  • Third-party administrators (TPAs)
  • Print and mail services
  • Third-party logistics (3PL) services
  • Accounts receivable processing and debt collection services
  • Third-party due diligence

Conducting thorough due diligence before entering into a new third-party contract serves as a foundational step. Similar to enterprise risks, third-party risks should be consistently and proactively managed throughout the duration of a vendor relationship, given that parameters evolve with time. This approach entails harnessing the capabilities of internal audit, finance, legal, and, in many instances, independent auditors capable of providing an ISAE 3402 assurance opinion.

Securance is well-equipped to assist you in achieving compliance with ISAE 3402, SOC 1, ISAE 3000, SOC 2, ISO 27001, and ISO 9001. Feel free to reach out to us for assistance or advice.

SOC 1 & SOC 2

The primary and widely used term for service organizations reporting on third-party risks to user organizations is the Systems and Organization Control Report, often referred to as the SOC report. This term was introduced by the American Institute of Certified Public Accountants (AICPA) as a replacement for the SAS70 framework.

Previously, these were known as Service Organization Control reports. SOC encompasses a suite of reports that originated in the United States. ISAE 3402 is aligned with the US Statement on Standards for Attestation Engagements (SSAE) 18 US standard. An ISAE 3402 report delivers assurance on a service organization’s system description and the appropriateness of its control design and operational effectiveness as presented in a Service Auditor’s Report.

ISAE 3402 | SOC 1: In an ISAE 3402 | SOC 1 report, organizations establish their own control objectives and controls and align them with customer requirements. The scope of an ISAE 3402 report typically includes all operational and financial controls that impact financial statements, as well as IT General Controls (e.g., security management, physical and logical security, change management, incident management, and systems monitoring). In essence, if an organization hosts financial information that could affect its client’s financial reporting, pursuing an ISAE 3402 | SOC 1 audit report is the most logical choice and is often requested. ITGCs, operational controls, and financial controls fall within the purview of an ISAE 3402 | SOC 1 audit.

SOC 1: In a SOC 1 audit, control objectives essential for accurately representing internal control over financial reporting (ICOFR) are required. Organizations subject to SEC filings in the United States typically include these objectives.

Given the importance of IT service providers, cloud service providers, and datacenter/housing providers as key suppliers to financial institutions, standards like SAS70, SSAE 18 SOC 1, and ISAE 3402 have gained significant prominence in the IT industry. They have become the most comprehensive and transparent standards for effective IT outsourcing and risk management. Organizations seeking an ISAE 3402 | SOC 1 report often contemplate ISAE 3000 | SOC 2 reports.

ISAE 3000 | SOC 2: In ISAE 3000 | SOC 2 reports, the Trust Services Principles and Criteria (TSPs) are applied. These TSPs consist of specific requirements developed by the AICPA and Canadian Institute of Chartered Accountants (CICA) to provide assurance concerning security, availability, confidentiality, processing integrity, and privacy. An organization can select the specific aspects that align with their customers’ needs. An ISAE 3000 | SOC 2 report may encompass one or more principles. When an organization handles various types of information for clients that do not impact financial reporting, an ISAE 3000 | SOC 2 report is more relevant. In such cases, clients are primarily concerned about the secure handling and availability of their data as stipulated in their agreements. A SOC 2 report, like a SOC 1 report, evaluates internal controls, policies, and procedures.

SOC 1 or SOC 2: Organizations that manage, process, or host systems or information affecting financial reporting should invariably provide an ISAE 3402 | SOC 1 report. ISAE 3000 | SOC 2 is suitable when all systems and processes are unrelated to financial reporting. Datacenter providers, Infrastructure as a Service (IaaS) providers, and Platform as a Service (PaaS) providers often issue hybrid reports, incorporating both an ISAE 3402 | SOC 1 for finance-related processes and systems and an ISAE 3000 | SOC 2 for unrelated processes and systems. The content of both reports is typically identical.

How does a service organization prepare for SOC 1?

The SOC 1 standard necessitates that service organizations take a proactive approach to fulfill the requirements outlined by service auditors, typically accountants. To navigate this process effectively, service organizations can derive significant advantages from conducting an ISAE Readiness Assessment, which aids in comprehending the reporting prerequisites.

These reporting prerequisites encompass:

  1. Developing a comprehensive description of the service organization’s system.
  2. Drafting a written management statement (referred to as a statement of assertion) that will be incorporated in the final SOC 1 report.

Furthermore, the service organization’s internal audit department may participate in the entire assurance engagement process if the service organization’s accountant (auditor) deems their objectivity and professionalism to be acceptable. For instance, conducting a SOC 1 Readiness Assessment becomes instrumental for service organizations in clarifying the assignment’s scope and grasping the reporting obligations associated with the SOC 1 standard.

About Securance
Securance provides services in the realms of information security, risk management, and governance. Beyond offering advisory services and risk sourcing, Securance provides software solutions empowering organizations to autonomously implement complex standards. This positions Securance as a forward-thinking and market-leading entity in the Netherlands. Securance specializes in delivering solutions for risk management and the implementation of various standards, including ISAE 3402 (SOC 1), ISAE 3000 (SOC 2), GDPR/AVG, ISO 27001, ISO 9001, and COSO.

SOC 2 vs. SOC 1

ISAE 3000 | SOC 2 reports and ISAE 3402 | SOC 1 Type 2 reports share a similar design, but their distinctive scopes set them apart.

ISAE 3402 | SOC 1 Type 2 Report
An ISAE 3402 | SOC 1 Type 2 report serves as an assurance statement issued to an organization. This report delves into how a service provider manages risks associated with outsourced processes. The assessment framework encompasses both the outsourcing itself and the financial processes, particularly examining any ties to annual accounts. In the financial sector, demonstrating an ISAE 3402 | SOC 1 assurance statement is customary, especially for organizations that purchase services. For instance, a financial institution typically demands an ISAE 3402 | SOC 1 report from suppliers before engaging their services.

The key principle behind ISAE 3402 | SOC 1 is that objectives must align with the needs of the organization acquiring the service. In essence, the control framework, comprising control objectives and measures, can be tailored to the specific needs of the organization. The underlying concept is that the risks associated with outsourcing activities are contingent on the circumstances, making the management objectives and measures a customized effort.

ISAE 3000 | SOC 2 Report
In an ISAE 3000 | SOC 2 report, the assessment framework pivots on information security rather than the act of outsourcing. ISAE 3000 | SOC 2 reports don’t center on financial processes but, instead, focus on Trust Services Criteria, encompassing security, availability, confidentiality, processing integrity, and privacy within a service organization. The scope of an ISAE 3000 | SOC 2 report is determined by predefined management objectives, known as the Trust Service Criteria.

ISAE 3000 | SOC 2 primarily revolves around ensuring that the data processed or hosted does not impact the financial statements of clients. Clients are particularly concerned with the correct handling of information security and privacy. For example, an ISAE 3000 | SOC 2 report is instrumental in providing assurance regarding external Cloud services.

About Securance
Securance offers a spectrum of services in the domains of information security, risk management, and governance. Alongside advisory services and risk sourcing, Securance provides software solutions that empower organizations to independently implement complex standards. This approach has positioned Securance as a trailblazer and market leader in the Netherlands, driving solutions for risk management and the implementation of standards like ISAE 3402 (SOC 1), ISAE 3000 (SOC 2), GDPR/AVG, ISO 27001, ISO 9001, and COSO.