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SOC Reports

Red Flags in Critical Vendor SOC Reports

Oct 17, 2018 by Desiree Ericksen

When you begin your initial due diligence or regular monitoring of a vendor, one of the first things to do is to request all their SOC reports. You also need to ask for the SOC reports for any critical subservice organizations (fourth parties). This includes both SOC 1 and SOC 2 reports.

Why Do You Need to Request a SOC 1 and SOC 2 Report?

Often times, there’s an overlap of information between the SOC 1 and SOC 2 reports, yet there are some distinct differences. First, SOC 1s have more freedom to include information surrounding specific products and services offered and focus on financial controls.

A SOC 2 is a little stricter in the control requirements as they are laid out based on the Trust Services Criteria selected. The trust services criteria include security, availability, processing integrity, confidentiality and privacy.

Noticing Red Flags in Vendor SOC Reports 

Regardless of whether you’re reviewing a SOC 1 or SOC 2, there are potential red flags to always watch out for which include the following:

  • Words like “inadequate” or “misrepresentation”. Look for them in the Service Auditors Report section.
  • Did the Service Auditor provide a “Qualified Opinion”? This means that there may be some concerns that you should review further.

Other potential red flags to be on the lookout for include: 

  • Report Format – SOC reports follow a standard format. Is that format being followed?
  • Report Date – It’s important to review the most current report available. If the vendor is providing an old report then you will not be able to properly assess controls.
  • Report Variations – This includes inadequate testing, testing 2013 evidence as new, modifying the report or removing pages. All are signs that something is awry.
  • Exceptions – Are there exceptions and are they repeated exceptions from previous reporting periods? If there are exceptions, management should provide a response to them.

Now that you have reviewed the SOC report and identified potential red flags, what do you do? How do you address your concerns and provide evidence of your due diligence? 

How to Address SOC Report Red Flags

Here are some ways to address the red flags found:

  1. Further review management’s response to exceptions in the report, if provided. Is the response adequate, was the exception resolved onsite or were there mitigating controls in place?
  2. Ask the vendor for further clarification. If the exceptions are material, get an official response from the vendor.
  3. Place the vendor on higher frequency monitoring if necessary.
  4. Establish a good communication flow with the vendor.

If you're still uncomfortable or don’t feel as if the vendor has adequately addressed your concerns, then you can work towards modifying the contract upon the next renewal or terminating your relationship with the vendor.

It’s advantageous to your organization to understand the potential red flags that may be present in a vendor’s SOC report. By knowing what to look for you will have a better chance of identifying and addressing issues before they may become a bigger problem.

Want to learn more about properly analyzing a vendor SOC report? Download our eBook

Analyzing a Vendor SOC Report eBook

Desiree Ericksen

Written by Desiree Ericksen

Desiree is a self-motivated financial services industry leader with 14 years’ experience through nearly all financial institution operations, from teller to Vice President – IT/Security Officer. Now providing detailed analysis to financial services companies, she is able to apply years of direct subject matter knowledge, analyzing inherent risk of vendors and their subservice providers. She earned a Bachelor’s degree in Business Information Systems and is a Certified Information Systems Security Professional (CISSP). Through her experience in regulatory, internal and external audits, she has first-hand experience in what challenges financial services organizations are facing in third party risk management.

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