SOX vs. SOC explained: What every business needs to know about compliance

TLDR: Curious about the difference between SOX and SOC? For those short on time, here’s a quick summary: SOX (The Sarbanes-Oxley Act of 2002) is a law that applies to public companies that helps to ensure financial transparency, internal controls, and corporate accountability to promote reliable financial reporting to investors and stakeholders. SOC (System and Organization Controls) Reports document how service organizations (typically vendors that handle, process, or host customer data in their software solutions) protect and process customer data and information, helping customers and partners feel confident doing business with them.

In this article, we'll explore the key differences in purpose, scope, and compliance requirements for SOX and SOC, as well as how they work together. Understanding the relationships and differences between SOX and SOC, organizations will be empowered to effectively meet their compliance obligations and build a foundation of trust with stakeholders.

What are SOX and SOC?

Overview of SOX (Sarbanes-Oxley Act of 2002)

The Sarbanes-Oxley Act of 2002 (SOX) is a U.S. federal law enacted in response to corporate fraud scandals, including those at Enron and WorldCom. SOX compliance promotes financial transparency, reduces the risk of fraud, and builds investor confidence in published financial results. Although all publicly traded companies are subject to SOX and the requirement to maintain internal controls over financial reporting (ICFR), only those above certain size thresholds are required to undergo formal internal control audits by independent auditors (in addition to audits over the financial statements). Still, many private companies voluntarily adopt SOX practices to strengthen internal controls and prepare for a potential IPO, acquisition, or other exit event.

Helpful Tip: Check out AuditBoard’s article on SOX planning for an in-depth look at SOX compliance.

Overview of SOC (System and Organization Controls)

System and Organization Controls (SOC) Reports are attestation reports issued in relation to a set of standards developed by the American Institute of Certified Public Accountants (AICPA) that can apply to any service organization that handles sensitive data or performs key outsourced services on behalf of other businesses (i.e., service organizations). Service organizations seek SOC 1 and 2 reports (and less frequently, SOC 3 reports) to build trust with their clients and meet growing demands for transparency around internal controls in place to protect and/or process customer data they come into contact with. Service organizations have various reasons for pursuing one of the types of SOC reports:

• SOC 1: SOC 1 reports are pursued when a service organization’s work could impact a client’s financial reporting (e.g., payroll processors, billing services). These reports help clients’ auditors rely on the service organization's controls, reducing audit burden. Since one service organization will have many customers relying on its data processing and protecting practices, SOC Reports allow the service organization to be audited once and have the same results and information furnished to its customers.
  • Intended audience: customers of the service organization, management of the service organization, and the customers’ financial auditors (internal or external).
• SOC 2: SOC 2 reports are sought to demonstrate that a service provider has effective controls in place to protect data and maintain system security, availability, confidentiality, processing integrity, and privacy (criteria set out by the AICPA). They're commonly required by enterprise customers during vendor onboarding or risk assessments. Unlike SOC 1 Reports, the criteria listed above for SOC 2 Reports are standard and do not necessarily need to be relevant to a customer’s financial reporting.
  • Intended audience: customers of the service organization, management of the service organization, vendors and business partners, and internal or external auditors.
• SOC 3 (rare): SOC 3 reports (the least common form of SOC report) are high-level, marketing-friendly versions of SOC 2 reports, suitable for public distribution and usually have advertisements of attestation posted on the service organization’s website.
  • Intended audience: general public, marketing, and sales teams of service providers

Key Point: SOX ensures financial reporting integrity for public companies, while SOC reports evaluate a service provider’s internal control activities that may impact customers’ financial reporting environments (SOC 1) or data security, availability, confidentiality, processing integrity, and privacy (SOC 2).

How SOX and SOC 1 intersect

SOX requires publicly traded companies to maintain and assess internal controls over financial reporting (ICFR). However, the overall control environment of a company also includes relevant processes and controls of third-party service providers — such as payroll processors, billing platforms, or equity management systems — whose systems directly impact the accuracy of financial data presented in financial statements. This is where SOC 1 reports come into play.

SOC 1 reports provide assurance over a service organization’s controls related to ICFR. To effectively evaluate their own SOX compliance, companies must also review the SOC 1 reports of vendors whose processes and controls influence their financial statements. For example, if a key control at a service organization related to processing integrity of customer transactions failed, then that is relevant to customer organizations who rely on outputs of those processes for their own financial statements. In this way, SOC 1 reports are a critical piece of the broader SOX compliance puzzle.

What are the key differences between SOX and SOC?

Purpose and Scope

To understand the key differences between SOX and SOC, it's essential to recognize their fundamental goals and areas of enforcement.

SOX is designed to prevent corporate fraud and enhance financial reporting accuracy. It applies only to publicly traded companies in the U.S. and requires them to maintain rigorous internal controls to ensure financial transparency. The law was introduced in response to major financial scandals, such as Enron and WorldCom, which resulted in massive investor losses due to fraudulent financial reporting. SOX compliance is intended to demonstrate that a public company has the appropriate processes and controls in place to prevent and detect material misstatements in its financial reports, helping to reduce the risk of fraud and maintain investor trust.

On the other hand, SOC is a set of standards developed by the AICPA concerning the controls and processes at service organizations. The three types of SOC reports serve different purposes, focusing on internal controls at the service organization likely to have an impact on the customer’s internal control over financial reporting (SOC 1), evaluating a service organization’s controls related to the five trust services criteria: security, availability, processing integrity, confidentiality, and privacy (SOC 2) or, less frequently, providing a high-level summary of the service provider’s security and operational controls for public consumption (SOC 3, rare).

Who must comply?

Understanding who must comply with SOX and SOC is critical for organizations navigating regulatory requirements:

• Publicly traded companies: Required to comply with SOX, ensuring that their financial reporting is accurate and supported by effective internal controls to prevent fraud and material misstatements in financial reporting. Private companies planning to go public or undergo an acquisition often adopt SOX-like controls early to demonstrate strong governance and appeal to investors, auditors, or acquirers.
• Service providers handling customer data or operating cloud-based systems: Often pursue SOC 2 compliance to prove they have proper data security, processing integrity, and customer information protection safeguards. SOC 2 reports are frequently requested by customers during vendor assessments and are essential for maintaining trust and winning business.
• Service organizations impacting clients’ financial reporting: Need SOC 1 reports if their services affect a client’s internal control over financial reporting (ICFR) — for example, payroll processors, billing platforms, or equity management systems. These reports allow clients to rely on the provider’s controls when assessing their own SOX compliance.

TLDR: While SOX is legally mandated for public companies, SOC compliance is often contractually required by customers who want assurance that a service provider effectively protects customer data.

Key Point: SOX applies to financial reporting in public companies, ensuring corporate governance and investor protection, while SOC reports focus on service providers, particularly those handling customer data or impacting financial reporting, helping customers and partners feel confident doing business with them.

Understanding SOX compliance

Key requirements

SOX is more than just a box to check — it can help to safeguard an organization against financial disasters. The act mandates that publicly traded companies establish robust internal controls to help ensure that published financial information is accurate, transparent, and free from material misstatement. Here’s what compliance entails:

• Management must have a system in place to gain comfort over the existence and effectiveness of controls. Each public company is responsible for maintaining a system of internal control to support its financial statements. It is management’s responsibility to design and implement effective internal controls over financial reporting.
• Management must attest to the reliability of financial reports and its assessment of internal controls. The CEO and CFO must sign off on financial statements, meaning they are personally accountable for accuracy and truthfulness. As part of Section 302 of SOX, the CEO and CFO must attest to their understanding of responsibility for internal control and that the financial statements do not contain untrue statements or omissions of material facts, among other things.
• External audit opinion on internal controls. Depending on a company's size and timeline of being public, annual financial statements must include an opinion from the external auditor on whether the organization's system of internal control over financial reporting is operating effectively enough to prevent and detect financial misstatements.

The role of audits in SOX compliance

In SOX compliance, management is responsible for establishing and maintaining a system of internal controls to prevent material misstatements in financial reporting. To support this effort, companies often hire internal control specialists or engage public accounting firms to assist with control design, implementation, and evaluation. For publicly traded companies, the requirement for an external auditor to opine on the effectiveness of internal controls depends on company size and other factors. Specifically, accelerated filers and large accelerated filers are required under SOX Section 404(b) to undergo annual external audits of their internal control over financial reporting. This independent assessment provides additional assurance to investors, regulators, and other stakeholders.

Beyond legal requirements, SOX compliance builds trust. Companies that follow SOX guidelines demonstrate financial integrity, making them more attractive to investors, stakeholders, and regulators.

Key Point: SOX compliance is more than a regulatory burden — it’s a commitment to transparency, investor confidence, and strong corporate governance.

Helpful Tip: Check out AuditBoard’s article on performing a mid-year SOX risk assessment.

Understanding SOC reports and compliance

What are the types of SOC reports?

SOC reports are essential for service organizations that handle financial transactions or store sensitive customer data. SOC 1 and SOC 2 are the most common, while SOC 3 Reports are not as frequently issued. As explained above, each report serves a different purpose:

• SOC 1: Focuses on an organization's internal controls over financial reporting (ICFR). This is particularly relevant for payroll processors, SaaS providers managing financial transactions, and any entity that affects a client’s financial statements.
• SOC 2: Examines trust services criteria, including security, availability, processing integrity, confidentiality, and privacy. This report is crucial for cloud providers, data centers, and technology companies that must safeguard customer data and sensitive information.
• SOC 3 (rare): A public-facing version of SOC 2 that provides a high-level overview, allowing companies to demonstrate compliance to customers and stakeholders without revealing sensitive audit details. SOC 3 is the least frequently issued type of SOC report.

SOC compliance process

If an organization seeks a SOC report, it is responsible for preparing a detailed description of its system or service, including its scope, boundaries, and relevant processes. The organization must also provide a written management assertion stating whether the controls are suitably designed – and, in some cases, whether they were operating effectively over a specified period. An independent external auditor (called the “service auditor” in this context), typically a CPA firm, then evaluates the system and tests the controls. Based on their engagement, the auditor issues an opinion on whether the controls were appropriately designed and (for Type 2 reports) operating effectively, in accordance with the standards set by the AICPA.

Achieving SOC 1 or SOC 2 compliance is a structured, multi-step process that requires thorough preparation and collaboration with auditors. While the focus of each report differs — SOC 1 on financial reporting controls and SOC 2 on controls related to the trust services criteria outlined by the AICPA — the general process for obtaining either follows similar high-level steps:

1. Define the System and Scope. The organization begins by identifying the system or service to be audited, including its boundaries, key components, and relevant processes. This includes defining the services provided, systems used, and control objectives and/or trust services criteria (for SOC 2) to be evaluated.
2. Engage a Qualified Service Auditor. Only licensed CPAs or CPA firms experienced in system and organization control audits (typically from public accounting firms) are authorized to conduct SOC audits in accordance with AICPA standards.
3. Conduct a Readiness Assessment (Optional but Recommended). Many organizations choose to undergo a pre-assessment or "gap analysis" to identify control gaps, clarify documentation needs, and prepare for a successful formal audit.
4. Management Assertion and Evidence Collection. Management prepares a written assertion about the design, and for Type 2 reports, the operating effectiveness of controls relevant to the scope. The organization also gathers documentation and evidence (e.g., policies, logs, reports) to demonstrate compliance.
5. Formal Audit and Testing by the Auditor. The service auditor evaluates the system and tests the controls in place. For Type 1 reports, the focus is on the design of controls at a point in time. For Type 2, the auditor assesses both design and operating effectiveness over a defined review period (typically 6-9 months).
6. Receive and Share the SOC Report. Following the audit, the auditor issues a formal SOC report, including their opinion on the effectiveness of the organization's controls. The organization can then share this report with customers, partners, or regulators to demonstrate trust and accountability.

Key Point: SOC compliance ensures that service organizations maintain rigorous standards for data security, financial reporting, and processing integrity, providing customers and stakeholders with assurance of robust internal controls.

Helpful Tip: Check out AuditBoard’s article on building a SOC report.

Why do SOX and SOC compliance matter?

SOX and SOC compliance matter because they build trust with stakeholders by ensuring transparency, accountability, and strong internal controls. SOX protects investors by requiring accurate financial reporting from public companies, while SOC reports demonstrate that service providers have effective controls in place to safeguard or process customer data. Together, they help reduce risk, prevent fraud, and support responsible business practices.

Final thoughts on SOX v.s SOC

SOX ensures financial transparency for publicly traded companies, while SOC focuses on effective controls around data and systems for service providers. Both are essential for regulatory compliance, risk management, and investor trust.

AuditBoard provides solutions assisting with SOC reporting and SOX management, helping businesses streamline their compliance efforts. Stay informed with our latest webinar on effective compliance strategies. Looking to learn more? Schedule a tailored product walkthrough of AuditBoard’s SOX and/or compliance management solutions today!

Frequently Asked Questions About SOX vs SOC

What are the key differences between SOX and SOC?

SOX and SOC serve different but equally critical purposes. SOX is a federal law that applies to publicly traded companies, requiring them to implement internal controls over financial reporting (ICFR) to ensure transparency, prevent fraud, and protect investors. On the other hand, SOC Reports are issued based standards set by the AICPA (American Institute of Certified Public Accountants) and relate to internal controls at service organizations that are likely to impact financial reporting (SOC 1). While SOX focuses on corporate governance and financial accountability, SOC ensures that service organizations handling sensitive customer data uphold strong internal control in areas likely to be relevant to their customers from a security, availability, processing integrity, confidentiality, and privacy standpoint.

What are the types of SOC reports?

There are three primary types of SOC reports, each serving a distinct purpose. SOC 1 and SOC 2 are the most common, while SOC 3 is not frequently issued.

• SOC 1: Primarily used by organizations whose services impact clients’ financial statements. This report assesses internal controls over financial reporting (ICFR), which is critical for financial institutions, payroll processors, and accounting firms.
• SOC 2: Evaluates a company’s adherence to trust services criteria, including security, availability, processing integrity, confidentiality, and privacy. It is widely used by SaaS providers, cloud computing companies, and data centers to demonstrate strong data security and risk management measures.
• SOC 3 (rare): A high-level version of SOC 2 that provides a summary report for public consumption. Companies often use it to showcase their commitment to security and compliance without revealing sensitive audit details. SOC 3 is the least frequently issued type of SOC report.

About the authors

Trevor David, CPA, is a Manager of Product Solutions at AuditBoard. Trevor joined AuditBoard after six years with EY’s Advisory Services/Business Consulting practice, where he managed co-sourced and outsourced Internal Audit and SOX engagements as well as external audit engagements focused on IT general controls. Connect with Trevor on LinkedIn.