SOC 1 vs SOC 2 vs SOC 3: What’s the Real Difference and Which One Do You Need?

Introduction

When businesses outsource critical services to third-party vendors, they need assurance that their data is secure and their operations won't be compromised. SOC reports play an important role when it comes to these services. These standardized audits have become the gold standard for evaluating service organizations, yet many businesses struggle to understand which report they actually need. SOC applies to both SaaS company seeking certification and businesses evaluating potential vendors and understanding the differences between SOC 1, SOC 2, and SOC 3 reports can save you time, money, and potential compliance headaches.

What is SOC 1, 2 & 3?

SOC stands for Service Organization Control, a framework developed by the American Institute of Certified Public Accountants (AICPA). These reports provide independent verification that a service organization has appropriate controls in place to protect client data and maintain system integrity.

SOC 1: Financial Reporting Controls

SOC 1 reports focus exclusively on controls relevant to financial reporting. These audits examine whether a service organization's internal controls could affect their clients' financial statements. For example, if you're a payroll processing company, your clients rely on your accurate calculations to report their financial data correctly. Any errors on your end could cascade into their financial reports, potentially causing serious compliance issues.
There are two types of SOC 1 reports. Type I evaluates whether controls are appropriately designed at a specific point in time, essentially providing a snapshot. Type II goes further by testing whether these controls operated effectively over a period of time, typically six to twelve months. Type II reports are generally more valuable because they demonstrate sustained compliance rather than just theoretical capability.

SOC 1 reports are primarily intended for organizations that handle processes directly affecting their clients' financial statements, such as payroll processors, claims processors, or transaction processing services. If your service doesn't touch financial reporting, you likely don't need a SOC 1.

SOC 2: Security and Operational Controls

SOC 2 reports take a broader approach, focusing on five Trust Services Criteria: Security, Availability, Processing Integrity, Confidentiality, and Privacy. Unlike SOC 1, which entirely deals with financial controls, SOC 2 examines how a company safeguards customer data and ensures their systems work as promised.
Security is mandatory for all SOC 2 audits and covers protection against unauthorized access, both physical and logical. The other four criteria are optional and depend on the services provided. For instance, a cloud hosting provider would likely address Availability (ensuring systems are operational and accessible) and Security, while a healthcare platform might also include Privacy and Confidentiality criteria.
Like SOC 1, SOC 2 comes in Type I and Type II varieties. A Type I SOC 2 examines control design at a specific point in time, while Type II evaluates operational effectiveness over a period. Most clients and partners require Type II reports because they want evidence of consistent security practices, not just well-designed policies sitting on a shelf.
SOC 2 reports have become essential for technology companies, particularly SaaS providers, cloud service providers, data centers, and any organization storing, processing, or transmitting customer data. If you're in the business of handling sensitive information, expect potential clients to ask for your SOC 2 report.

SOC 3: Public-Facing Trust

SOC 3 reports are essentially the public relations version of SOC 2. They contain the same Trust Services Criteria (Security, Availability, Processing Integrity, Confidentiality, and Privacy) but present the information in a simplified, general-use format without the detailed testing procedures and results found in SOC 2 reports.
The key advantage of SOC 3 is that it can be freely distributed to anyone. Companies often display their SOC 3 seal on their websites or include the report in marketing materials to demonstrate their commitment to security. It's a way to publicly showcase compliance without revealing the sensitive operational details contained in a SOC 2 report.
However, SOC 3 reports have limitations. Because they lack granular detail, sophisticated clients, especially enterprise customers or those in regulated industries, typically won't accept a SOC 3 as sufficient due diligence. They want the full SOC 2 report with all its technical specifics.

Key Differences Between SOC 1, SOC 2, and SOC 3

Purpose and Focus

The most fundamental difference lies in what each report evaluates. SOC 1 is laser-focused on financial reporting controls, asking "Could this service organization's processes affect my financial statements?" SOC 2 and SOC 3 examine security and operational controls, asking "Can I trust this organization with my data and critical operations?" If you're not handling processes that feed into financial reporting, SOC 1 isn't relevant to you.

Intended Audience

SOC 1 reports are designed for a very specific audience: the financial and accounting teams of client organizations and their auditors. These reports are shared under non-disclosure agreements because they contain sensitive information about financial processes.
SOC 2 reports target a broader but still restricted audience, including potential clients, existing customers, regulators, and business partners who need to understand security practices. They're confidential documents typically shared under NDA during vendor due diligence processes.
SOC 3 reports stand apart as the only publicly distributable option. Any company can request one, and organizations can post them on their websites without restriction. This makes SOC 3 ideal for marketing purposes but less useful for detailed security assessments.

Level of Detail

SOC 1 and SOC 2 reports are comprehensive documents, often hundreds of pages long, containing detailed descriptions of controls, testing procedures, exceptions noted by auditors, and management responses. They provide the technical depth needed for thorough evaluation.
SOC 3 reports, by contrast, are brief documents, typically just a few pages. They confirm that an organization met the Trust Services Criteria but don't explain how testing was conducted or provide specifics about the control environment. You get a pass/fail result without the supporting evidence.

Distribution and Accessibility

This represents another critical distinction. SOC 1 and SOC 2 reports are confidential and require non-disclosure agreements before sharing. Organizations carefully control who receives these reports because they contain proprietary information about internal processes and potential vulnerabilities.
SOC 3 reports have no such restrictions. They're designed for unrestricted distribution, making them perfect for posting in a trust center or sharing with prospects early in the sales process before NDAs are in place.

Compliance Requirements

Your industry and service type largely determine which SOC report you need. Financial services companies and those providing financial processing services typically require SOC 1. Technology companies, healthcare organizations, and businesses handling personal data usually need SOC 2. SOC 3 is supplementary rather than required, serving as a marketing tool to complement a SOC 2 rather than replace it.
Many organizations actually obtain multiple SOC reports. A fintech company might need both SOC 1 (for financial reporting controls) and SOC 2 (for data security), while also publishing a SOC 3 for marketing purposes.

Cost and Time Investment

While specific costs vary based on organization size and complexity, SOC 1 and SOC 2 audits typically cost between $20,000 and $100,000 or more, with Type II reports being more expensive than Type I due to the extended testing period. The process takes several months from preparation through final report issuance.
SOC 3 reports are considerably less expensive if you already have a SOC 2, often just a few thousand dollars, because the auditor is essentially reformatting existing audit results into a public-facing document. However, if you're starting from scratch, you'll pay for the full SOC 2 audit first, then the additional SOC 3 conversion.

Conclusion

Understanding the differences between SOC 1, SOC 2, and SOC 3 reports is crucial for both service organizations seeking certification and businesses evaluating vendors. SOC 1 focuses on financial reporting controls and serves a specialized audience of accountants and auditors. SOC 2 examines security and operational controls, providing detailed assurance for technically sophisticated stakeholders. SOC 3 offers a publicly shareable seal of approval but lacks the depth required for thorough due diligence.
Most modern tech service organizations, will find SOC 2 Type II most relevant to their business needs and customer demands. Complementing it with a SOC 3 report provides marketing value without significant additional investment. SOC 1 remains essential for organizations whose services directly impact client financial reporting.
These reports are powerful tools for building trust, differentiating your business, and demonstrating your commitment to protecting client interests. In an era where data breaches make headlines weekly, having the right SOC report is a competitive necessity. Choose the report that aligns with your services, satisfies your clients' requirements, and positions your organization as a trustworthy partner in an increasingly security-conscious marketplace.