SOX vs. SOC: 6 Key Differences & Which Is Relevant for Your Company

What Is SOX Compliance?

SOX compliance refers to the requirements set by the Sarbanes-Oxley Act of 2002, a U.S. federal law aimed at increasing transparency in financial reporting and preventing corporate fraud. 

Enacted in response to major financial scandals like Enron and WorldCom, SOX imposes strict reforms to improve financial disclosures from corporations and deter accounting fraud. It mandates audits and certifications of financial documents, requiring companies to implement internal controls and procedures to ensure the accuracy and reliability of their financial reporting.

SOX compliance impacts both public companies and accounting firms that work with them. One of the key components is Section 404, which requires management and external auditors to report on the adequacy of a company’s internal controls. Non-compliance can result in heavy penalties, including fines and imprisonment for executives. The goal of SOX compliance is to restore investor confidence by ensuring that financial statements are accurate and reliable.

What Is SOC Compliance? 

SOC compliance stands for Service Organization Control compliance and is governed by the American Institute of CPAs (AICPA). It involves a series of voluntary standards to help third-party service providers manage customer data securely. SOC reports are classified into three types: SOC 1, SOC 2, and SOC 3. SOC 1 reports focus on financial reporting controls, while SOC 2 and SOC 3 reports are geared toward security, availability, processing integrity, confidentiality, and privacy.

SOC compliance is crucial for service organizations that handle sensitive data on behalf of their clients. Achieving SOC compliance demonstrates that a company has implemented appropriate controls to protect this data, which is important for building trust with customers. SOC reports are used by organizations to assess the risk of doing business with service providers, making SOC compliance an important factor in vendor selection processes.

SOX vs. SOC: The Key Differences 

1. Purpose And Scope

SOX compliance is focused on financial transparency and internal controls within publicly traded companies. Its main goal is to protect investors by ensuring that financial statements are accurate and representative of the company’s true financial condition. This requires documentation and audits to verify internal controls over financial reporting.

SOC compliance has a broader scope related to data security for service organizations managing client data. SOC 1 reports concentrate on financial reporting controls, while SOC 2 and SOC 3 reports address a wider array of principles including security, availability, and privacy. Thus, the scope of SOC compliance encompasses not just financial information but all aspects of data protection and operational integrity.

2. Applicability

SOX compliance is mandatory for all publicly traded companies in the United States and their auditing firms. Private companies are generally not required to comply with SOX unless they plan to go public or are acquired by a public company. Additionally, international companies listed on U.S. stock exchanges must also adhere to SOX requirements.

SOC compliance is primarily relevant to service organizations such as data centers, IT service providers, and SaaS companies that handle or process data for their clients. Unlike SOX, SOC compliance is not legally required but is often a prerequisite for doing business with enterprises and government agencies that demand high standards of data security and operational integrity.

3. Regulatory vs. Voluntary

SOX compliance is a regulatory requirement enforced by laws, making it a compulsory practice for public companies. Failure to comply can result in legal penalties, including heavy fines and imprisonment for executives. This regulatory aspect ensures that there is an overarching legal obligation to adhere to the requirements laid out by the Sarbanes-Oxley Act.

SOC compliance is generally voluntary, although it becomes a de facto requirement for companies seeking to do business with organizations that mandate strong data security practices. SOC reports are more about demonstrating best practices in managing customers’ data securely, rather than adhering to a federal mandate. Achieving SOC compliance can give companies a significant competitive advantage by building trust and credibility with potential clients.

4. Reporting Requirements

SOX compliance involves documentation and regular audits to verify internal controls over financial reporting. Companies must not only establish internal mechanisms for accurate financial reporting but must also undergo an annual audit by an external auditor to ensure compliance with SOX standards. This process is resource-intensive and demands continuous effort to meet the stringent requirements.

SOC compliance also requires documentation but focuses on different aspects based on the type of SOC report. SOC 1 audits are geared toward internal controls over financial reporting, while SOC 2 and SOC 3 reports focus on the Trust Services Criteria such as security, confidentiality, and privacy. Organizations must provide evidence that they have implemented effective controls but the reporting is more tailored to their specific service commitments.

5. Levels of Assurance

SOX compliance provides a high level of assurance regarding the accuracy and reliability of a company’s financial statements. This is achieved through stringent requirements for internal controls, documentation, and external audits. The assurance from SOX compliance is intended to protect investors and restore confidence in the financial markets by minimizing the risk of fraudulent financial activities.

SOC compliance offers varying levels of assurance based on the type of SOC report. SOC 1 provides assurance over financial reporting controls, while SOC 2 and SOC 3 assure clients about the effectiveness of controls related to security, availability, and processing integrity. SOC reports are designed to be flexible and provide different levels of assurance depending on the specific needs and concerns of the organization’s clients.

6. Cost and Resource Considerations

Implementing and maintaining SOX compliance can be costly due to the need for audits, documentation, and improvements to internal controls. This can be a significant burden for smaller public companies but is necessary to meet regulatory requirements.

SOC compliance can also involve substantial costs, particularly for organizations pursuing SOC 2 and SOC 3 reports. These costs include not only the audits but also investments in technology and processes to meet the required controls. However, the benefits often outweigh the costs by attracting clients who prioritize data security and operational reliability.

Tips from the expert

Steve Moore is Vice President and Chief Security Strategist at Exabeam, helping drive solutions for threat detection and advising customers on security programs and breach response. He is the host of the “The New CISO Podcast,” a Forbes Tech Council member, and Co-founder of TEN18 at Exabeam.

In my experience, here are tips that can help you better understand and navigate the differences between SOX and SOC compliance:

Leverage automation tools to streamline SOX compliance: Utilize automated tools for continuous monitoring and reporting to reduce the burden of manual processes in SOX compliance. This not only saves time but also ensures more accurate and timely detection of compliance issues.

Implement a risk-based approach to SOC compliance: Tailor your SOC compliance efforts based on the specific risks associated with your business and clients. By focusing on the most critical areas, you can allocate resources more efficiently and provide higher assurance to stakeholders.

Integrate SOX and SOC controls where possible: For companies subject to both SOX and SOC requirements, consider integrating overlapping controls. This can reduce redundancy, lower costs, and create a more unified compliance framework that satisfies both financial reporting and data security needs.

Use SOX compliance as a foundation for SOC 1 audits: If your organization is already SOX compliant, use this as a baseline for achieving SOC 1 compliance. Many of the internal controls over financial reporting can be leveraged, reducing the effort required for SOC 1 readiness.

Consider continuous auditing for ongoing compliance: Instead of relying solely on annual audits, implement continuous auditing practices to maintain ongoing compliance with both SOX and SOC. This proactive approach can help detect issues earlier and demonstrate a higher level of commitment to compliance.

Which Is More Relevant to Your Organization, SOX or SOC? 

Public vs. Private Companies

Publicly traded companies in the United States are required to comply with SOX. This is non-negotiable as it is mandated by federal law. SOX compliance ensures that financial reporting is transparent and accurate, which is crucial for maintaining investor trust and protecting the integrity of financial markets. For private companies, SOX compliance is generally not required unless they plan to go public or are acquired by a public company.

Service organizations, such as data centers, IT service providers, and SaaS companies, typically pursue SOC compliance. This is because SOC reports, especially SOC 2 and SOC 3, address concerns related to data security, privacy, and availability—key aspects for clients entrusting these service organizations with sensitive information.

Regulatory Requirements vs. Client Expectations

SOX compliance is a regulatory requirement, and non-compliance can lead to severe penalties including fines and imprisonment. Thus, for public companies, there is no choice but to comply with SOX. The primary focus here is on ensuring accurate financial reporting and safeguarding against fraud.

On the other hand, SOC compliance, while not legally mandated, often becomes a practical necessity for service organizations. Clients and business partners frequently require SOC compliance to ensure that their data is handled securely and reliably. Achieving SOC compliance can enhance an organization’s reputation, providing a competitive edge by demonstrating a commitment to high standards of data security.

Operational Focus

SOX compliance is centered around internal controls for financial reporting. It requires documentation and regular audits to ensure that financial statements are accurate and free from fraud. This can be resource-intensive, demanding a dedicated compliance team to manage the ongoing requirements.

SOC compliance focuses on the broader operational aspects related to data security and service delivery. SOC 2, in particular, is critical for organizations that must demonstrate robust controls around data security, availability, processing integrity, confidentiality, and privacy. SOC reports are tailored to specific client requirements, making them highly relevant for service organizations that manage sensitive client data.