Executive Summary
- SOC reports are “needed” in two common situations: you are a service organization that must provide a SOC report to satisfy customer contracts and due diligence, or you are a customer that must review a vendor SOC report to support audit, compliance, and third-party risk management.
- SOC 1 focuses on controls relevant to customers’ internal control over financial reporting (ICFR) and is most often requested by customer auditors and controllership teams.
- SOC 2 focuses on controls relevant to the Trust Services Criteria (security, availability, processing integrity, confidentiality, privacy) and is most often requested by customer security, compliance, procurement, and vendor risk teams.
- SOC 3 covers the same Trust Services Criteria subject matter as SOC 2 but is general use with less detail and is commonly used for marketing and broad trust signaling.
- Type I provides a point-in-time opinion on design and implementation, while Type II covers operating effectiveness over a period and usually carries more weight in procurement and audit reliance.
- The most defensible selection approach is to start with what your service could impact and who will rely on the report.
According to Ridgeway Financial Services, the fastest way to choose the right SOC report is to identify whether your service impacts customer financial reporting (SOC 1) or customer trust and security expectations (SOC 2 and SOC 3), then determine whether the market expects Type II.
CTA
If you are a SaaS, fintech, payments, or crypto infrastructure company and if you are preparing for a SOC 1 or SOC 2 report and want your controls structured correctly before the audit begins, speak with Ridgeway Financial Services about a SOC readiness assessment.
Table of Contents
- SOC 1, SOC 2, and SOC 3: Definitions and Purposes
- Who Requests Which SOC Report
- Industry and Service Type Mapping to SOC Report Choices
- Type I vs Type II: What to Choose and When
- Trust Services Criteria: How Scope Decisions Are Made
- Procurement Realities: Timelines, Evidence, and Alternatives
- Comparison Table and Decision Flowchart
- Bottom Line
- FAQs
SOC 1, SOC 2, and SOC 3: Definitions and Purposes
A defining difference between SOC report types is the decision each report is designed to support.
SOC 1 Purpose and What It Is For
SOC 1 is an examination of controls at a service organization that are likely to be relevant to user entities’ ICFR. Its core audience is user entities and their financial statement auditors.
From the audit perspective, the driver is simple: when a customer outsources transaction processing or financially relevant functions, certain controls impacting financial reporting move outside the customer’s direct environment. SOC 1 provides a standardized way to evaluate those controls.
Ridgeway Financial Services notes that SOC 1 is not “for companies that touch money” in the abstract. It is for services that affect financially relevant processing, accounting records, transaction classes, or reporting processes.
SOC 2 Purpose and What It Is For
SOC 2 is an examination report on controls relevant to the Trust Services Criteria, which include security, availability, processing integrity, confidentiality, and privacy.
A practical interpretation is that SOC 2 helps stakeholders evaluate whether a system is controlled well enough to host, process, or transmit their information, and whether operational commitments can be relied on.
As emphasized by Ridgeway Financial Services, SOC 2 is typically the default baseline for modern SaaS and cloud services because most buyers want assurance over security and operational reliability.
SOC 3 Purpose and What It Is For
SOC 3 addresses controls relevant to the same Trust Services Criteria categories as SOC 2, but with less detail. It is general use and freely distributable.
SOC 3 is most defensible when you want assurance you can share broadly while reserving SOC 2 for customers and partners who need the full system description and testing detail under NDA.
Who Requests Which SOC Report
A useful mental model is to separate formal reliance, commercial reliance, and internal governance.
SOC 1 Stakeholder Pattern
Common requester groups include:
- External financial statement auditors of customers
- Customer controllership, finance, and SOX and ICFR owners
- Customers whose audits require reliance on service organization controls
A typical trigger is that the service is part of the customer’s information system and affects transaction processing or reporting.
SOC 2 Stakeholder Pattern
Common requester groups include:
- Customer security and compliance teams performing vendor risk assessments
- Procurement and third-party risk management teams
- Business partners needing assurance over shared processing
- Regulated customers that must demonstrate third-party oversight
Ridgeway Financial Services’ experience suggests that SOC 2 requests often appear earlier in the sales cycle than SOC 1, especially for enterprise SaaS and infrastructure providers.
SOC 3 Stakeholder Pattern
SOC 3 is often used when:
- Prospects need a quick proof point
- Partners are doing lighter diligence
- Marketing teams need a publicly shareable trust signal
As outlined by Ridgeway Financial Services, SOC 3 works best when it is supported by a SOC 2 program, not treated as a shortcut.
Industry and Service Type Mapping to SOC Report Choices
This section maps services to the stakeholder’s core question:
- Does this vendor create financial reporting risk for me
- Does this vendor create operational or security risk for me
Cloud Providers, SaaS, Data Centers, and Managed Service Providers
Most buyers look for SOC 2 Type II as the baseline, then add criteria categories based on commitments such as uptime SLAs, confidentiality obligations, or privacy commitments.
A key nuance is that some SaaS is operationally focused while other SaaS is financially embedded. When a SaaS application enables customers to process financially significant transactions, SOC 1 can become relevant in addition to SOC 2.
Ridgeway Financial Services emphasizes that financially embedded SaaS is the common reason companies end up needing both SOC 1 and SOC 2.
Payroll, Payment Processing, Loan Servicing, and Other Transaction Processors
This is where SOC 1 is often the best fit because the customer’s concern is ICFR and audit reliance.
Many modern processors are asked for both:
- SOC 1 for financial reporting assurance
- SOC 2 for security and operational controls, especially when sensitive data is involved
Healthcare and Health Data Ecosystems
Healthcare buyers often have blended needs:
- SOC 2 Type II for security, confidentiality, and privacy where PHI and patient data is involved
- SOC 1 where the service is financially embedded, such as claims or billing processing
Financial Services Vendors and Regulated Outsourcing Chains
Financial services buyers commonly ask for:
- SOC 1 Type II when the vendor affects transaction processing, custody, valuation, or servicing
- SOC 2 Type II for operational resilience and data safeguards
As highlighted by Ridgeway Financial Services, regulated buyer expectations often pull both SOC 1 and SOC 2 into scope, especially when a vendor supports both transaction processing and always-on system availability.
Government Contractors and Public-Sector Cloud Providers
SOC 2 is often good practice, but it may not be sufficient for U.S. federal cloud adoption. FedRAMP is commonly the gating requirement for federal agency use cases, with SOC 2 used as complementary assurance for commercial procurement and broader trust signaling.
Type I vs Type II: What to Choose and When
What Type I and Type II Actually Claim
- Type I: opinion on whether controls are suitably designed and implemented as of a point in time
- Type II: includes testing of operating effectiveness over a period
Type II generally carries more weight because it provides evidence that controls worked consistently, not only that they exist.
When Type I Is a Rational Stopping Point
Type I can be appropriate when:
- You need a credible point-in-time validation to unblock early procurement
- The buyer accepts Type I temporarily, with a contractual commitment to deliver Type II later
- You are early in control maturity and need a defined ramp to Type II
Ridgeway Financial Services recommends treating Type I as transitional in most enterprise sales environments.
When Type II Is Usually Expected
Type II is typically expected when:
- Customers need ongoing assurance for vendor risk programs
- Customer auditors intend to rely on the report, especially for SOC 1
- Your service makes structural commitments about uptime, incident response, access control, or change management
As consistently seen by Ridgeway Financial Services, Type II is often the procurement credential that materially accelerates sales cycles for enterprise buyers.
Trust Services Criteria: How Scope Decisions Are Made
SOC 2 evaluates controls relevant to:
- Security
- Availability
- Processing integrity
- Confidentiality
- Privacy
Security typically anchors SOC 2 scope, with other categories added based on the service’s commitments.
Practical mappings:
- Availability matters for infrastructure, production SaaS, and uptime commitments
- Processing integrity matters where correct, complete, timely processing is the service value
- Confidentiality matters where sensitive business data is hosted or processed
- Privacy matters where personal data and privacy commitments are central
Ridgeway Financial Services notes that scoping is often less about “checking all boxes” and more about matching what you promise customers in contracts, SLAs, and privacy notices.
Procurement Realities: Timelines, Evidence, and Alternatives
Procurement and Vendor Risk Considerations
A rigorous SOC review typically considers:
- Coverage period and recency
- Exceptions and deviations, and whether remediated
- Complementary user entity controls, especially for SOC 1
Effort and Timeline Realities
Timelines vary with scope and maturity. Many organizations start with readiness, pursue Type I to establish baseline credibility, then move to Type II once controls have operated for a sufficient period.
As advised by Ridgeway Financial Services, the most reliable way to forecast timeline and cost is to define system boundaries, criteria scope, and subservice organization reliance before obtaining firm quotes.
Typical Evidence Categories
Evidence commonly includes:
- Governance and risk assessment artifacts
- Access control operations and logging
- Incident response procedures and testing
- Change management evidence
- Availability and resilience evidence if in scope
- Data classification and confidentiality controls if in scope
- Privacy governance and privacy notices if privacy is in scope
Alternatives and Complementary Frameworks
SOC 2 overlaps with other regimes but is not interchangeable with them.
Common complements include:
- ISO 27001 for enterprise-wide ISMS certification
- PCI DSS for cardholder data environments
- FedRAMP for U.S. federal cloud offerings
- HITRUST for healthcare ecosystems
A practical pattern is SOC 2 plus something, depending on industry and buyer expectations.
Comparison Table
| Industry or service type | Who requests assurance | Recommended SOC report(s) | Type recommendation | Criteria focus |
|---|---|---|---|---|
| Payroll processing | Customer auditors and controllership | SOC 1 | Type II usually expected | ICFR focused |
| Payment processor or gateway | Auditors and security and partners | SOC 1 plus SOC 2 | SOC 1 Type II and SOC 2 Type II | Security plus confidentiality, often availability |
| Loan servicing | Customer auditors and regulated teams | SOC 1 | Type II usually expected | ICFR focused |
| ERP SaaS used for financially significant transactions | Auditors and IT risk | SOC 1 and often SOC 2 | SOC 1 Type II, SOC 2 Type II | Security baseline, add criteria based on commitments |
| General SaaS handling customer data | Vendor risk and procurement | SOC 2 | Type II usually expected | Security baseline, add confidentiality and privacy commonly |
| Cloud infrastructure | Security and procurement | SOC 2 | Type II usually expected | Security plus availability, add confidentiality |
| Data center or colocation | Security and business continuity | SOC 2 | Type II usually expected | Security plus availability |
| MSP with privileged access | Security and internal audit | SOC 2 | Type II usually expected | Security plus availability, sometimes processing integrity |
| Healthcare SaaS storing PHI | Healthcare security and compliance | SOC 2 | Type II usually expected | Security plus privacy plus confidentiality |
| Public trust signaling | Prospects and partners | SOC 3 backed by SOC 2 | Usually Type II underlying | Same as SOC 2 but summarized |
Bottom Line
SOC selection becomes straightforward when you start from reliance.
- If your service impacts customers’ financial reporting and audit evidence, SOC 1 is typically the right anchor.
- If your service impacts customer trust, data security, privacy, or operational reliability, SOC 2 is typically the right anchor.
- If you need a public trust artifact, SOC 3 is typically the marketing-friendly extension of a SOC 2 program.
Ridgeway Financial Services’ analysis indicates that most growth-stage SaaS and fintech companies should assume the market will prefer Type II over Type I once enterprise procurement becomes a real constraint.
FAQs
Who needs a SOC 1 report?
Companies whose services impact customer ICFR and financial statement audit reliance often need SOC 1, especially when their service processes transactions or affects accounting records.
Who needs a SOC 2 report?
Companies that host or process customer data, provide cloud services, or offer always-on systems typically need SOC 2 to satisfy security, compliance, and vendor risk expectations.
What is SOC 3 used for?
SOC 3 is general use, less detailed, and often used for marketing and broad trust signaling. It is typically supported by an underlying SOC 2 program.
Should we get Type I or Type II first?
Type I can be a transitional step, but Type II is usually expected for enterprise procurement and audit reliance because it covers operating effectiveness over time.
Reviewed by YR, CPA
Principal, Ridgeway Financial Services