SOC 2 vs SOC 1: Key Differences for Buyers

One of the most common questions we get at Agency is whether a company needs SOC 1 or SOC 2 — and the confusion is understandable. Both are attestation reports issued by licensed CPA firms under AICPA standards, but they evaluate completely different aspects of a service organization. SOC 1 (formally known as SSAE 18 / ISAE 3402) evaluates controls relevant to user entities' financial reporting — it exists for organizations whose services affect their customers' financial statements. SOC 2 evaluates controls related to security, availability, processing integrity, confidentiality, and privacy under the Trust Service Criteria. The most common mix-up happens when a customer requests a "SOC report" without specifying which type, or when a service organization pursuing compliance selects the wrong report for their business model.

This guide explains the key differences between SOC 1 and SOC 2, helps you determine which report your customers are actually requesting, identifies scenarios where you might need both, and provides guidance on choosing the right report type for your organization.

The Fundamental Difference

Purpose and Scope

Dimension	SOC 1	SOC 2
Full name	System and Organization Controls 1	System and Organization Controls 2
AICPA standard	SSAE 18 (US) / ISAE 3402 (international)	AT-C Section 205 / AT-C Section 105
What it evaluates	Controls relevant to user entities' internal control over financial reporting (ICFR)	Controls related to security, availability, processing integrity, confidentiality, and/or privacy
Control framework	Organization-defined control objectives related to financial reporting	Trust Service Criteria (TSC) defined by the AICPA
Why it exists	To help customers' auditors assess the impact of outsourced services on financial statement audits	To help customers evaluate a service organization's security and operational controls
Who requests it	Customer finance teams and their external auditors	Customer security teams, procurement, and compliance

The simplest way we explain it to clients: SOC 1 is about money (controls affecting financial reporting), and SOC 2 is about security (controls protecting data and systems).

Report Types

Both SOC 1 and SOC 2 offer Type I and Type II variations:

Report Type	SOC 1	SOC 2
Type I	Design of controls at a point in time	Design of controls at a point in time
Type II	Design and operating effectiveness of controls over a period (typically six to twelve months)	Design and operating effectiveness of controls over a period (typically six to twelve months)
Type II preference	Required by most customer auditors	Required by most enterprise buyers

Additionally, both frameworks offer a Type III variant for distribution purposes:

Distribution Type	SOC 1	SOC 2
Restricted use	SOC 1 reports are restricted to management, user entities, and their auditors	SOC 2 Type II reports are restricted to management and specified parties
General use (SOC 3)	No general use equivalent	SOC 3 — a general use report with the auditor's opinion but without detailed control descriptions or test results

Which Report Do Your Customers Need?

SOC 1 Is Appropriate When

Your service directly affects your customers' financial statements. Common SOC 1 scenarios include:

Service Type	Why SOC 1	Example
Payroll processing	Your calculations directly affect customers' payroll expense and liability accounts	ADP, Paychex, Gusto processing payroll for client companies
Payment processing	Transaction processing affects customers' revenue and accounts receivable	Payment gateway processing credit card transactions
Loan servicing	Your records and calculations affect customers' loan portfolio financial reporting	Loan servicer managing payment collection and principal/interest allocation
Claims administration	Claims processing affects customers' insurance liability and expense accounts	Third-party administrator processing health insurance claims
Investment management / fund administration	Net asset value calculations and trade processing affect customers' investment account reporting	Fund administrator calculating NAV for investment funds
Accounting / bookkeeping services	Direct preparation or processing of customers' financial records	Outsourced accounting firm maintaining clients' general ledger

SOC 2 Is Appropriate When

Your service handles customer data and your customers care about security, availability, and data protection. Common SOC 2 scenarios include:

Service Type	Why SOC 2	Example
SaaS platforms	Customers entrust data to your platform and need assurance about security controls	CRM, project management, communication tools
Cloud infrastructure	Customers host applications and data on your infrastructure	Cloud hosting, managed services, IaaS
Data processing	You process customer data where security and confidentiality matter	Data analytics, data warehousing, ETL services
Healthcare technology	Customers need assurance about PHI protection	EHR systems, telehealth platforms, health data analytics
Financial technology	Customers need security assurance beyond SOC 1 financial reporting controls	Banking-as-a-service, financial data aggregation
Developer tools	Customers integrate your tools into their development and deployment workflows	CI/CD platforms, code repositories, monitoring tools

When You Need Both

Some organizations need both SOC 1 and SOC 2 because their services both affect customer financial reporting and handle sensitive data:

Scenario	SOC 1 Covers	SOC 2 Covers
Payment processing platform	Transaction processing controls affecting customer revenue recognition	Security, availability, and data protection for cardholder data
Payroll SaaS	Payroll calculation and remittance controls affecting customer financial statements	Security and confidentiality of employee PII stored in the platform
Fintech lending platform	Loan origination and servicing controls affecting customer financial reporting	Security and availability of the technology platform
Insurance claims platform	Claims processing and reserve calculation controls	Security and privacy of claimant personal information

When both reports are needed, we typically advise running both audits with the same CPA firm. Some controls (access management, change management, monitoring) overlap between the two engagements, reducing the incremental effort for the second report. Running both typically costs thirty to fifty percent more than a single report — not double — because of shared testing.

Detailed Comparison

Audit Process

Aspect	SOC 1	SOC 2
Who performs the audit	Licensed CPA firm	Licensed CPA firm
Control objectives	Organization defines control objectives specific to financial reporting impact	AICPA-defined Trust Service Criteria (standardized)
Control descriptions	Organization describes controls in a management assertion	Organization describes controls mapped to Trust Service Criteria
Testing approach	Auditor tests controls against organization-defined objectives	Auditor tests controls against Trust Service Criteria
Sampling	Statistical sampling of transactions and control executions	Statistical sampling of control executions and configurations
Observation period (Type II)	Typically twelve months (aligned with customer fiscal year)	Typically three, six, or twelve months
Report recipient	Customer finance teams and their external auditors	Customer security teams, procurement, and specified parties

Cost Comparison

Factor	SOC 1	SOC 2
First-year audit cost	$30,000-$100,000+	$20,000-$100,000+
Typical range for mid-market	$40,000-$70,000	$30,000-$60,000
GRC platform	Not typically used (controls are organization-specific)	$6,000-$50,000/year (Vanta, Drata, Secureframe, Sprinto)
Annual renewal	70-80% of first-year cost	70-80% of first-year cost
Both reports (same firm)	Combined cost typically 130-150% of the more expensive report	Same — combined pricing leverages shared controls

SOC 1 audits are sometimes more expensive than SOC 2 because SOC 1 control objectives are custom-defined, requiring more auditor effort to design test procedures. SOC 2 uses standardized Trust Service Criteria, which allows auditors to apply consistent testing frameworks.

Report Contents

Section	SOC 1	SOC 2
Management assertion	Asserts controls are fairly presented and suitably designed (and operating effectively for Type II)	Same structure
System description	Describes services, control environment, and controls relevant to financial reporting	Describes services, infrastructure, software, data, people, and procedures
Control objectives / criteria	Organization-defined control objectives	AICPA Trust Service Criteria
Auditor's opinion	Opinion on whether controls are suitably designed and operating effectively	Opinion on whether controls meet the Trust Service Criteria
Test results	Detailed testing of each control objective	Detailed testing of each Trust Service Criterion
Complementary user entity controls (CUECs)	Controls the customer must implement for the overall control environment to be effective	Same concept — controls customers must implement

Market Context

Factor	SOC 1	SOC 2
Market growth	Stable — demand driven by financial reporting requirements	Growing rapidly — driven by enterprise security requirements
Buyer awareness	Well-understood by finance and audit professionals	Increasingly understood across security, compliance, and procurement
Competitive requirement	Table stakes for financial services outsourcing	Increasingly table stakes for enterprise SaaS sales
Geographic relevance	Primarily US (SSAE 18); ISAE 3402 for international	Primarily US; growing international recognition

How to Determine Which Report Your Customer Is Requesting

When a customer asks for a "SOC report" without specifying the type, we recommend using this diagnostic:

Question	If Yes →	If No →
Does the customer's finance team or external auditor want the report?	Likely SOC 1	Likely SOC 2
Does the request reference "financial reporting controls" or "ICFR"?	SOC 1	SOC 2
Does the request reference "security controls" or "Trust Service Criteria"?	SOC 2	Ask for clarification
Does the request come from a security questionnaire or vendor assessment?	SOC 2	Ask for clarification
Does your service process transactions that affect the customer's financial statements?	SOC 1 (possibly both)	SOC 2
Does the request specify "SSAE 18" or "ISAE 3402"?	SOC 1	Ask for clarification

When in doubt, we advise asking the customer directly: "Are you looking for a report on controls relevant to your financial reporting (SOC 1), or a report on our security and operational controls (SOC 2)?" Most technology companies discover their customers want SOC 2.

Common Mistakes

Mistake	Consequence	How to Avoid
Pursuing SOC 1 when customers want SOC 2	Spend months and significant budget on the wrong report; still need SOC 2	Clarify the specific report type before beginning the engagement
Assuming SOC 2 covers financial reporting controls	Customer auditors cannot rely on a SOC 2 report for ICFR assessment	If your service affects customer financial statements, evaluate whether SOC 1 is also needed
Using the terms interchangeably	Confusion during sales process; loss of credibility with knowledgeable buyers	Train sales and customer-facing teams on the distinction
Pursuing SOC 3 thinking it replaces SOC 2	SOC 3 is a summary report without detail; enterprise buyers require the full SOC 2 Type II report	Pursue SOC 2 Type II as your primary report; use SOC 3 only for public-facing trust validation

Choosing Your First SOC Report

For most technology companies, the decision framework is straightforward:

Your Situation	Recommended Report
SaaS company selling to enterprise customers	SOC 2 Type II
Financial services outsourcing company	SOC 1 Type II
Payment processing company	Both SOC 1 and SOC 2
Cloud infrastructure provider	SOC 2 Type II
Payroll or HR processing SaaS	Both SOC 1 and SOC 2 (or SOC 2 first, add SOC 1 when customers require it)
Healthcare technology company	SOC 2 Type II
Data analytics or processing company	SOC 2 Type II
Not sure yet	Start with SOC 2 — it is requested more frequently and has broader market applicability

Key Takeaways

• SOC 1 evaluates controls relevant to customer financial reporting (ICFR); SOC 2 evaluates security, availability, processing integrity, confidentiality, and privacy controls
• SOC 1 uses organization-defined control objectives; SOC 2 uses AICPA-standardized Trust Service Criteria
• In our experience, most technology companies need SOC 2 — it is the more commonly requested report for SaaS, cloud, and data processing companies
• SOC 1 is required when your service directly affects customers' financial statements (payroll processing, payment processing, fund administration)
• When both reports are needed, we recommend running them with the same CPA firm — the combined cost is typically thirty to fifty percent more than a single report due to shared control testing
• Both report types offer Type I (point-in-time) and Type II (period of time) — enterprise customers and auditors prefer Type II
• When a customer requests a "SOC report" without specifying, ask whether they need financial reporting assurance (SOC 1) or security assurance (SOC 2)
• SOC 2 market demand is growing rapidly as enterprise security requirements increase; SOC 1 demand is stable within financial services

Frequently Asked Questions

Can a SOC 2 report replace a SOC 1?

What we tell clients clearly is: no. SOC 1 and SOC 2 serve fundamentally different purposes. A SOC 2 report evaluates security controls but does not address controls relevant to customer financial reporting. If your customer's external auditor needs to rely on your controls for their financial statement audit, they need a SOC 1 report. A SOC 2 report, regardless of how comprehensive, cannot be used as a substitute for SOC 1 in that context.

Is SOC 1 or SOC 2 more expensive?

Based on what we see across our client base, costs are comparable, though SOC 1 audits are sometimes more expensive because control objectives are custom-defined rather than standardized. SOC 1 audit fees typically range from thirty thousand to one hundred thousand dollars; SOC 2 fees range from twenty thousand to one hundred thousand dollars. The total cost difference is more significant when you factor in GRC platforms — SOC 2 benefits from automated platforms (Vanta, Drata, Secureframe, Sprinto) that reduce preparation effort, while SOC 1 preparation is typically more manual because controls are organization-specific.

Our customer asked for SSAE 18 — is that SOC 1 or SOC 2?

The advice we give here is straightforward: SSAE 18 is the attestation standard under which SOC 1 reports are issued. If a customer specifically references SSAE 18, they are requesting a SOC 1 report. SOC 2 reports are issued under AT-C Section 205 and AT-C Section 105. However, some customers use "SSAE 18" loosely to mean any SOC report — we always recommend clarifying whether they need financial reporting assurance or security assurance.

Do we need to use the same auditor for both SOC 1 and SOC 2?

In our experience, using the same CPA firm for both reports is not required but is strongly recommended. A single firm can leverage shared understanding of your control environment, reuse common control testing (access management, change management, monitoring), and coordinate both engagements more efficiently. This typically reduces the combined cost by fifteen to twenty-five percent compared to engaging separate firms.