SSAE 18: What You Need to Know

SSAE 18, established by the AICPA, is a critical auditing standard that provides auditors guidance on how to evaluate and report on a service organization’s internal controls and business processes. This auditing standard has a significant impact on SOC 1 and SOC 2 reports, which the article will discuss in more detail. In order to improve compliance and enhance internal controls, knowing SSAE 18 is essential for both service organizations and external auditors. 

This article takes a deep dive into SSAE 18 including its significance, implementation, and challenges while giving valuable advice on how to achieve and maintain compliance. Moreover, it looks at how SSAE 18 impacts service providers, improves risk management, and stakeholder trust by maintaining strong internal control environments.

An Overview of Auditing Standards

Auditing standards are a set of guidelines for auditors to follow when testing the accuracy of financial statements, and the operating effectiveness of internal controls. These guidelines ensure uniformity, reliability, and transparency in financial reporting, which is critical for the disclosure of information to key stakeholders, such as investors, regulators, or managers. The American Institute of Certified Public Accountants (AICPA) along with the Accounting Standards Board (ASB) are responsible for establishing US auditing standards; SSAE 18 being a good example.

The audit landscape is constantly evolving, thus making it necessary for the Auditing Standards Board (ASB) under the AICPA to continuously develop and revise audit standards to keep pace with a dynamic environment. Audit procedures used to evaluate against audit standards apply across various types of engagements; financial statement audits, internal controls audits, or agreed-upon engagements where specific tasks are determined between an auditor and his/her client organization. It is therefore important that CPAs (Certified Public Accountants) stay up to date on recent changes in audit standards and procedures, so as not to compromise audit quality or be non-compliant with these current standards.

What Is the SSAE 18 Audit Standard?

The SSAE 18, or Statement on Standards for Attestation Engagements No. 18, is an auditing standard set up by AICPA that provides guidelines for auditors to examine and report on service organizations’ procedures and internal controls. The effective date for SSAE 18 was May 1, 2017, and it replaces SSAE 16 to better align with other global standards, to ensure that there is a complete and consistent approach towards attestation worldwide. It should be noted that the AICPA did not issue a SSAE 17 due to the way they structure their standards. One of the more significant updates included with SSAE 18 is the recodification of some auditing principles to streamline and modernize the attestation process. The goal of this update was to make the audit process more robust and easier to understand, while additionally placing a larger focus on risk management. The primary focus of SSAE 18 is System and Organizational Controls, or SOC (formally standing for Service Organization Control in SSAE 16), as they are critical when it comes to ensuring the security of a service organization’s operations. These controls cover all systems and processes of a service organization, both financial and non-financial. 

Why Do We Need the SSAE 18 Audit Standard?

The goal of SSAE 18 is to ensure that service organizations have strong controls and processes in place, as service organizations typically handle sensitive financial information and other personal/private data. SSAE 18 audit standard requires service organizations to maintain a strong and effective internal control environment over this critical data. SSAE 18 helps identify areas that may be at risk, while also ensuring that internal controls are performing well. This type of assurance provides organizational stakeholders with confidence that the company can handle and protect sensitive data.

Who Needs, SOC 1, and SOC 2 Audit Reports?

Any organization offering outsourced services or handling financial information needs to have SOC 1, and SOC 2 audits conducted through the guidelines of SSAE 18. Both SOC 1 and SOC 2 reports act as proof that strong internal controls exist, and that compliance with industry best practices has been achieved by the organization. Examples include cloud providers; data centers; and IT service companies among others which run critical functions on behalf of clients. SSAE 18 plays a key role in SOC 1 and SOC 2 reporting framework by providing a means through which controls over financial reporting can be evaluated and assessed. While the acronyms can be confusing, their relation is simple: 

• SSAE 18: Standard that guides the audit process.
• SOC 1 and SOC 2: Specific reports produced by an audit following SSAE 18 guidelines. 

To summarize, SSAE 18 provides the framework and guidelines for conducting the audits that result in SOC 1 and SOC 2 reports. While SSAE 18 outlines the audit process, SOC 1 and SOC 2 reports are the deliverables that communicate the results of these audits to the relevant stakeholders.

SOC 1 vs SOC 2 Reports

Controls over financial reporting are the focus of SOC 1 reports, whereas security, availability, processing integrity, confidentiality, and privacy controls are addressed by SOC 2 reports. Audits following SSAE 18 require that SOC 1 and SOC 2 reports provide an accurate picture of the organization’s control environment, to help identify and reduce any major risks. This results in improved risk management and stakeholder confidence, and ensures that service organizations have strong controls in place and meet expectations from their regulators as well as clients.

• SOC 1 reports focus on controls over financial reporting.
• SOC 2 reports focus on non-financial controls related to security, availability, processing integrity, confidentiality, and privacy.

SSAE 18 vs. SSAE 16: What’s New?

Several changes have been made under the SSAE 18 compared to SSAE 16; they are:

1. Risk Assessment: In comparison with previous standards wherein auditors were only expected to consider risks based on their knowledge about what could happen next within a particular entity; now auditors must also understand operations completely to identify all possible vulnerabilities and where internal control systems might fail or be vulnerable.
2. Management of Third-Party Vendor Relationships: A detailed review of third-party vendors and subservice organizations is now required under SSAE 18. Subservice organizations must also adhere the the required controls and processes to protect sensitive client data. 
3. Management Assertion Letter: Changes have been made to the language within Management Assertion letter and the Service Auditor’s report. This has been done to aide in changes to user entity and subservice organization controls. It also requires that the Management Assertion Letter be signed.
4. Complementary User Entity Controls: As of the SSAE 18 update, the definition of complementary user entity controls has been changed to include only controls that are necessary to meet management’s defined objectives.

As a result, businesses have to adopt much stronger auditing practices to ensure the soundness and effectiveness of their internal controls and processes given these amendments.

Similarities Between SSAE 18 and SSAE 16

Although SSAE 18 introduces several new elements not found in SSAE 16, both standards aim to ensure that the controls implemented by service organizations are dependable, especially in the context of financial reporting. Additionally, they both require Type 2 reports which consider how effectively an organization’s controls work over a period of time.

Below is a chart to show the differences between SSAE 18 And SSAE 16:

What Are the Challenges of SSAE 18?

Implementing and complying with the new standard can be challenging for many companies. Some common challenges include: 

Resource Intensive

The SSAE 18 process can be resource-intensive on an organization’s staff. There can be a significant time requirement to gather all necessary documents, prepare for the audit, and address any problems identified. These requests can be difficult for employees to manage, especially in smaller organizations with limited staff and smaller budgets.

Complexity of Implementation

The complexity involved in implementing an audit guided by SSAE 18 may prove daunting, especially to firms that are new to the requirements of this standard. Ensuring that controls and processes meet the required standards involves a detailed, and often tricky, evaluation and adjustment period. This process becomes even more complex as organizations must align with multiple auditing standards and manage various control objectives simultaneously.

Third-Party Vendor Management

Engaging with third parties introduces another layer of complexity to meeting compliance measures under SSAE 18. For instance, businesses must ensure that vendors strictly adhere to both general and internal security policies, especially when handling critical systems information. To achieve this, organizations may have to periodically monitor activities carried out by third-party contractors throughout the contractual period to keep overall security and integrity of the organization’s systems intact.

Cybersecurity Concerns

In the digital age, service organizations are increasingly concerned about their cybersecurity. To comply with SSAE 18, organizations must implement measures to protect sensitive information and systems from cyber attacks. This includes setting up controls to prevent unauthorized access and data leakage, among other potential threats. 

Risk Management and SSAE 18 

Effective risk management is fundamental to SSAE 18 compliance. This standard is designed to ensure that service organizations have robust internal controls to manage and mitigate risks, particularly those related to financial reporting and data security. For businesses handling sensitive information or providing outsourced services, these risks are particularly significant, with threats ranging from cyber attacks to operational failures. SSAE 18 requires organizations to proactively identify, assess, and address control risks, ensuring the reliability and integrity of their systems. This involves not only the implementation of strong preventive controls but also regularly assessing and continuously monitoring these controls to adapt to evolving threats.

Understanding SSAE 18’s Focus Areas

Although the scope of SSAE 18 may initially seem daunting, it is designed to address critical control areas within a service organization that impact financial reporting, data security, and overall operational efficiency. SSAE 18’s comprehensive approach thoroughly examines an organization’s control framework, identifying deficiencies and providing recommendations for improvement. The standard ensures that all critical aspects of the service organization’s operations are thoroughly evaluated, fostering a more secure and reliable environment for handling sensitive data.

Implications for Internal Auditors

SSAE 18 compliance significantly impacts the internal audit functions within service organizations. Internal auditors are responsible for ensuring that the organization’s controls and processes align with SSAE 18 requirements. This involves close coordination with external auditors, regularly conducting internal assessments, and continuous enhancement of the control environment to maintain compliance. By fulfilling this critical role, internal auditors help sustain the effectiveness of the organization’s internal controls, ensuring they meet the rigorous demands of SSAE 18 and contribute to the overall stability and security of the business.

The Importance of the External Auditor

The external auditor plays a crucial role in the SSAE 18 compliance process. As an independent third party, the auditor must objectively evaluate the effectiveness of a service organization’s internal controls. This evaluation involves thorough testing and detailed analysis of the organization’s processes. The resulting report from the service auditor provides vital assurance to stakeholders that the organization’s internal controls are both effective and reliable. This independent review is essential for validating that the organization consistently meets the high standards set by SSAE 18, thereby instilling confidence among clients, regulators, and stakeholders.

Leverage Technology to Simplify SSAE 18 Compliance

Although managing SSAE 18 compliance may seem overwhelming, having the right technology makes a difference. AuditBoard provides an intuitive audit management platform that streamlines processes, ensures efficiency, and enables organizations to seamlessly meet regulatory standards.

AuditBoard’s automated workflows, real-time data analytics, and detailed reporting tools enable users to have one central location to document internal controls testing, keep track of issues, and remediate them quickly to reduce errors, improve the accuracy of financial reports, and raise the overall quality of audits.

• Automated Workflows: Simplifies audit tasks by automating repetitive processes thereby reducing human error rate while maintaining consistency throughout.
• Real-Time Data Analytics: Enables users to see how different controls are performing across organizations which in turn helps manage risks proactively.
• Comprehensive Reporting: Ensures transparency and accountability of crucial aspects when aiming to meet SSAE 18 standards.

Discover how AuditBoard can transform your audit process and provide increased certainty under the current volatile regulatory framework. Schedule a personalized product walkthrough today!