SOC 1 vs SOC 2: Key Differences, Scopes & Audit Guide

The One-Sentence Difference Between SOC 1 and SOC 2

If you only remember one sentence from this guide, make it this: SOC 1 reports focus on internal controls over financial reporting (ICFR) for the auditors of your customers’ financial statements, while SOC 2 reports focus on operational information security, availability, and data protection for everyone else.

Both frameworks originated under the American Institute of Certified Public Accountants (AICPA), and both result in formal, independent attestation reports issued exclusively by licensed Certified Public Accountant (CPA) firms. However, they address entirely different executive stakeholders, answer fundamentally different audit inquiries, and evaluate disparate layers of your technology infrastructure.

If your software platform calculates payroll taxes, processes credit card settlements, manages accounts payable, or generates revenue recognition figures that feed directly into a customer’s General Ledger (GL), their Chief Financial Officer (CFO) and statutory financial auditors will demand a SOC 1. If your software hosts customer data, provides developer tooling, manages CRM records, or runs cloud analytics, their Chief Information Security Officer (CISO) and vendor risk management team will demand a SOC 2.

Confusing the two is an expensive mistake. Contracting an audit firm for a SOC 1 when your buyers are asking for SOC 2 leaves your sales deals blocked in procurement; conversely, delivering a SOC 2 to a customer controller who needs SOC 1 for Sarbanes-Oxley compliance will result in an immediate rejection.

Side-by-Side Comparison: SOC 1 vs. SOC 2

To understand how these two attestation standards differ across legal, technical, and commercial dimensions, examine the detailed comparison below:

When Your Company Needs a SOC 1 Report

A SOC 1 engagement is necessary when your software acts as a financial subservice provider to your clients. Under auditing standards, when an enterprise outsources a business process that impacts their financial ledgers, their independent financial auditor cannot issue a clean audit opinion without reviewing the outsourced organization’s internal controls.

Industries and Product Categories Requiring SOC 1

• Payroll & Benefits Administration: Platforms like Gusto, Rippling, or ADP that calculate wages, execute tax withholdings, and disburse statutory payroll funds directly impact balance sheets and corporate tax filings.
• Payment Gateways & Card Processors: Companies like Stripe, Adyen, or checkout facilitators that handle credit card transaction clearing, merchant payouts, and chargeback reserves.
• Billing, Invoicing & Revenue Recognition: Subscription billing engines (e.g. Zuora, Chargebee) that automate ASC 606 revenue recognition schedules, deferred revenue calculations, and invoice batch processing.
• Enterprise Resource Planning (ERP) & Accounting Software: Core general ledger platforms (e.g. NetSuite, Workday Financials) where journal entries, depreciation schedules, and accounts payable are recorded.
• Loan Servicing & Asset Custody: Fintech platforms managing mortgage portfolios, loan origination, escrow balances, or cryptographic asset custody.

In all these scenarios, an error or unauthorized manipulation within your software could cause a material misstatement on your customer’s audited financial statements. The customer’s financial auditor will request a current SOC 1 Type 2 report each fiscal year to satisfy their Sarbanes-Oxley (SOX) 404 obligations.

The Sarbanes-Oxley (SOX) Section 404 Connection

To understand the legal urgency behind SOC 1, one must understand Sarbanes-Oxley Section 404. Under SOX 404, management and independent auditors of public companies must formally assess and report on the effectiveness of the company’s internal control over financial reporting.

When a public enterprise outsources its billing or payroll calculation to your SaaS platform, your software effectively becomes part of their financial reporting system. If you cannot provide a SOC 1 Type 2 report, the enterprise auditor cannot rely on your data. This forces the auditor to perform direct, manual audits of your production database—an operational nightmare that enterprise buyers avoid by simply mandating SOC 1 up front.

When Your Company Needs a SOC 2 Report

If your software does not calculate or modify financial transactions, you do not need SOC 1. Instead, modern B2B SaaS companies overwhelmingly fall under the umbrella of SOC 2.

SOC 2 was created specifically by the AICPA to evaluate technology companies that store, process, or transmit non-financial data in the cloud. You need a SOC 2 report whenever:

• You Store Customer Intellectual Property or Confidential Data: Platforms storing customer code, legal agreements, business intelligence, marketing metrics, or communication logs (e.g. Slack, GitHub, Snowflake, Notion).
• You Provide Developer or Infrastructure Tooling: Monitoring platforms, CI/CD build runners, API gateways, database hosting, or cloud orchestration tools where compromised access could expose customer production environments.
• Enterprise Procurement Sends Security Questionnaires: When prospects ask about your password complexity, data encryption standards, employee background checks, disaster recovery plans, or penetration test cadence.
• You Plan Upmarket Sales: Enterprise sales cycles exceeding $50k ACV typically require a SOC 2 Type 2 attestation to clear third-party vendor risk assessments.

The Focus of SOC 2: Defense in Depth and Governance

Unlike SOC 1, which evaluates specific financial algorithms and ledger reconciliation, SOC 2 evaluates your systemic engineering hygiene. An auditor reviewing your organization for SOC 2 asks:

• Are developer laptops encrypted, monitored with endpoint agents, and locked with screen-savers?
• Is multi-factor authentication (MFA) strictly enforced across AWS, GitHub, Okta, and Google Workspace?
• Are code deployments governed by automated tests and documented pull request peer approvals?
• Does the company run an annual independent third-party penetration test and remediate high-severity findings?

To assess how closely your current infrastructure meets the 22 baseline Security controls, take our free SOC 2 Readiness Assessment.

The Technical Overlap: Information Technology General Controls (ITGCs)

While the business purpose of SOC 1 and SOC 2 differs, their technical infrastructure requirements share significant common ground. Both audit frameworks rely on a bedrock layer known as Information Technology General Controls (ITGCs).

ITGCs represent the operational foundation that ensures computer systems operate reliably and data remains protected. In both SOC 1 and SOC 2, auditors test the same four ITGC domains:

Because ITGCs overlap between 40% and 60%, a software company that has already built a disciplined SOC 2 infrastructure is well on its way to satisfying the technical prerequisites for SOC 1, should customer procurement ever require it.

When Do Companies Need Both SOC 1 and SOC 2?

Certain high-growth technology companies find themselves at the intersection of financial processing and cloud data hosting. For these organizations, customer procurement is divided: the customer’s finance team requires SOC 1, while the customer’s information security team requires SOC 2.

Common Dual-Audit Profiles

• Modern FinTech SaaS: Platforms that provide financial transaction clearing (SOC 1) while simultaneously storing extensive customer personal data, developer API keys, and corporate analytics in multi-tenant cloud databases (SOC 2).
• All-in-One HR & Payroll Suites: Systems that process employee salaries and tax filings (SOC 1) while hosting confidential employee medical records, performance reviews, and passport scans (SOC 2 Confidentiality & Privacy).
• Procure-to-Pay & Spend Management Platforms: Software that automates corporate credit card disbursements and vendor invoicing (SOC 1) while integrating deeply into enterprise identity providers and ERP APIs (SOC 2).

Executing a Combined Dual-Track Audit Engagement

If your commercial contracts require both reports, do not contract two separate CPA firms at different times of the year. Doing so results in redundant evidence gathering, duplicate employee interviews, and inflated audit fees.

Instead, engage a single qualified CPA firm to conduct a combined SOC 1 + SOC 2 dual-track examination. By testing the shared IT General Controls once, the auditor can populate both Section IV matrices, reducing total engineering interruption by up to 50% and trimming audit costs significantly compared to two isolated engagements. Review budgeting expectations in our SOC 2 Cost Breakdown.

Understanding Complementary User Entity Controls (CUECs)

A critical concept shared by both SOC 1 and SOC 2 reports is Complementary User Entity Controls (CUECs). Neither SOC 1 nor SOC 2 exists in a vacuum: security and financial integrity are shared responsibilities between your platform and your enterprise customers.

In Section III of both reports, management lists specific controls that the customer ("user entity") must implement on their side for your system controls to function effectively. Common examples include:

• Customer IAM Hygiene: The customer is responsible for maintaining unique login credentials, enforcing MFA on their own workforce, and immediately revoking software licenses when an employee departs their organization.
• Role-Based Permission Reviews: The customer must regularly audit which of their staff hold administrative privileges within your SaaS application.
• Data Verification: In SOC 1 environments, the customer is responsible for reviewing monthly reconciliation reports generated by the SaaS tool and reporting discrepancies within 30 days.

When enterprise auditors review your report, they check Section III to ensure your CUECs are standard and reasonable, and then confirm that their own enterprise internal controls satisfy your requirements.

How to Decide: The 5-Step Scoping Decision Tree

If you are unsure which audit to commission this year, walk through this five-step diagnostic framework with your executive team:

1. Step 1: Inspect Customer Contracts and Inquiries. Look at the specific requests in your sales pipeline. Are prospects’ security teams sending vendor risk assessments asking about encryption and penetration tests? That is SOC 2. Are prospects’ finance controllers asking for control reports for their year-end financial audit? That is SOC 1.
2. Step 2: Trace the Financial Data Flow. Does your platform calculate, record, reconcile, or disburse numbers that appear on your customers’ balance sheets, income statements, or statutory tax filings? If yes, SOC 1 is on your horizon. If your system only stores operational files, communication logs, or workflow data, SOC 1 is out of scope.
3. Step 3: Evaluate SOX 404 Exposure. Are your target enterprise customers publicly traded companies subject to Sarbanes-Oxley compliance? Public companies face severe penalties if their outsourced financial systems lack SOC 1 validation.
4. Step 4: Default to SOC 2 Security First. For 95% of venture-backed SaaS startups, SOC 2 Security (Common Criteria) is the highest-leverage first audit. It unblocks enterprise sales across every commercial sector and forms the foundation for future compliance expansions.
5. Step 5: Verify Control Coverage with an Open Checklist. Before signing an engagement letter with an audit firm, audit your technical architecture against the complete control bank using our SOC 2 Interactive Checklist.