5 Types of Compliance Audits (and Why You Might Need Them)

Ariel Diaz
Ariel Diaz  |  November 13, 2018

Compliance audits don’t sound like a ton of fun, but they may be a necessary evil for your business.

You might reach a certain inflection point in your company’s growth where your customers need reassurance when it comes to cybersecurity practices and data-handling. Or, in many cases, auditing may be a byproduct of doing business in a certain industry or region of the world.

5 types of compliance audits

Regardless of your specific situation, it’s important to have a working knowledge about the types of regulatory compliance audits, what they entail, and whether or not they’re right for you.

1. SOC 2

SOC 2 is a compliance audit defined by the AICPA (The American Institute of Certified Public Accountants) that applies to any service provider that holds or processes customer data in the cloud. As a result, a lot of SaaS companies end up undergoing SOC 2 compliance audits to prove that their practices are up to snuff with regulatory standards.

To achieve SOC 2 compliance, most companies prepare themselves for anywhere from six months to a year, including identifying the scope of the audit for their businesses, developing policies and procedures, and putting new security controls in place to reduce risks.

When you’re ready, you’ll hire a licensed certified public accountant (CPA) audit firm to conduct the audit. The actual process involves scoping, artifact document collection, and an on-site visit. While in your office, the auditor will conduct interviews and review submitted material.

There are a two different types of SOC 2 audits:

  • SOC 2 type I: This audit is conducted at a single point in time and answers the question: Are all the security controls we have designed properly?
  • SOC 2 type II: This type occurs over a period of time, which typically covers six months the first time and a year thereafter.

Does it apply to my business?

SaaS vendors that sell to enterprises need to be SOC 2 compliant in many cases because enterprises are subject to their own security and compliance requirements.

Being SOC 2 compliant helps with the sales cycle, giving enterprise customers peace of mind to do business with you.

Beyond customers and prospects, board members, partners, and insurance companies may find value in a SOC 2 audit, as these audits report on what you’re actually doing, rather than what you aspire to do in the future.

Blissfully ended up undergoing a SOC 2 audit as an early-stage startup because we wanted to put a stake in the ground around security and establish the best-practices we’d need from the beginning (rather than retrofit existing practices).

Some organizations may choose to wait until they have additional time and resources to dedicate to an audit.

2. ISO 27001 (Part of ISO or IEC 27K Series)

ISO 27001, part of the ISO/IEC 27K Series, is an information security compliance standard that helps companies manage the security of assets, such as employee or third-party data, financial information, and intellectual property.

Like SOC 2, the standard involves a risk management process that includes people, processes, and technology.  Both standards require that an independent auditor assess a company’s security controls to ensure it's mitigating risks properly.

Many organizations seek to achieve an ISO 27001 certification for similar reasons to SOC 2 compliance. Some of the key differences between SOC 2 and ISO 27001 are as follows:

  • Certification vs. Attestation: ISO 27001 is a certification, and SOC 2 is an attestation. An attestation means that an independent auditor has given you an opinion that your security controls meet the guidelines set in SOC 2. The ISO standard is certified against, meaning that you confirm with ISO’s information security management standards – there are not a ton of differences between these two.
  • Deliverables: With ISO, you receive a certificate. With SOC 2, you receive an evaluation from your auditor.

Does it apply to my business?

When choosing between SOC 2 and ISO 27001, many of your core motivations may be similar, including a desire to demonstrate a commitment to compliance to customers. It’s important to research which standards meet your industry or customer requirements – one is not “better” than the other.

3. General data protection regulation (GDPR)

The EU’s general data protection regulation (GDPR) is one of the most comprehensive government-imposed data privacy frameworks implemented to date. It went into effect in May 2018 and is meant to protect the data privacy of EU citizens.

However, this compliance regulation doesn’t just apply to European companies – anyone who processes the data of European citizens is required to comply.

GDPR auditing today is mostly self-driven. CSO Magazine recommends a four-step process comprised of the following:

  1. Planning: Go through the law’s requirements step-by-step and create a plan of action, in terms of owning key processes and improvements.
  2. Gap analysis: Find the gaps in your company’s processes and report any areas that are out of alignment with GDPR requirements.
  3. Prioritize and remediate gaps: Rank and prioritize the key areas to remediate based on risk level.
  4. Test new processes: Once remediation takes place, assess the effectiveness of the new processes that are put in place.

Companies also need to be aware that GDPR compliance violations come with hefty fines, amounting to up to €20 million, or 4 percent of the worldwide annual revenue of the prior financial year, whichever is higher. In the event of a data breach, your company may receive fines if compliance violations are discovered.

Does it apply to my business?

Answer this simple question: Do you process the data of EU citizens or do you plan to do so in the future? If the answer is yes, it might be time for a GDPR self-audit.

4. Sarbanes-oxley (SOX)

The US government passed SOX in 2012 to protect shareholders from inaccurate financial reporting and accounting errors from public companies. The act was passed in response to major financial scandals, such as Enron, Tyco, and WorldCom. The rules apply to U.S. public company boards, management, and public accountants, according to Wikipedia.

The regulation is made up of both financial and IT requirements. For example, IT departments are required to properly store and manage corporate records. The rules require that there’s no tampering with regulated documents and that they’re properly encrypted and securely stored using the same guidelines as public accountants.

From a financial and management perspective, SOX requires that management teams take responsibility for their own financial records and that specific financial disclosures are made to shareholders – including off-balance-sheet transactions and stock transactions of executives.

Does it apply to my business?

If you operate a public company, or plan to IPO in the near future, it may be time to get your financial and IT house in order for a SOX compliance audit.

5. Industry-Specific Compliance Audits

There are many industry-specific regulations, and, depending on your industry, compliance is mandatory. A few examples include:

  • PCI-DSS (credit card and payments industry): Designed to protect consumers, the PCI compliance standard focuses on merchants, financial institutions, and payment solution providers. The implications of PCI compliance are huge, because retail point-of-sale systems are a top target for hackers (hello, infamous Target breach.)
  • HIPAA (health care industry): If you’ve seen a doctor in the last decade, you’ve probably received a patient disclosure form that’s a part of the HIPAA compliance regulation. HIPAA is designed to protect patient information and, with the increase in electronic medical records, ensure that this highly personal data doesn’t get into the wrong hands.
  • FINRA (investment industry):  Through FINRA, the U.S. Securities and Exchange Commission regulates everyone who registers as a stock broker or broker-dealer firm, protecting investors against potential fraud. These firms and individual brokers are audited on an annual basis to ensure compliance.
  • FISMA (federal government): FISMA regulations require that U.S. governmental organizations keep their data secure. Having a solid set of information security best practices is a foundational step to ensure compliance.

Final words

If you’re wondering whether your organization has the time or resources to proactively conduct a compliance audit, consider a few questions.

Does the audit help you potentially enhance your business by improving security or helping the sales team close deals?

What is the cost of non-compliance? Based on my company’s experience with SOC 2, it’s always better to be proactive about compliance, locking down the policies and procedures your company – and your customers – need to stay safe.

Ariel Diaz
Author

Ariel Diaz

Ariel Diaz is a serial technology entrepreneur, and is the founder and CEO of Blissfully. Blissfully is a SaaS management platform that gives you the visibility and tools to optimize spending, manage vendors, and simplify IT operations across your organization.