Risk Management is a fundamental component to consider when readying your organization for a SOC 2 examination. Complying with the American Institute of Certified Public Accountants’ (AICPA) SOC 2 trust services categories: security, availability, processing integrity, confidentiality, and privacy—specifically those related to risk management—will ensure your organization achieves the best possible SOC 2 report.
Risk Management Planning From the Top Down
Risk mitigation is not a static endeavor. As threats evolve, so should your organization’s risk management plan. Risk management should be an ongoing process, with buy-in from all stakeholders, to identify relevant risks and remediation options. Your plan must be formalized and documented to validate and support operating effectiveness of the process throughout the period under audit. From a SOC auditor’s perspective, if a process or plan isn’t documented then it can’t be confirmed.
We recommend that, at least once a year, management and relevant oversight groups (ex. Board of Directors) facilitate a discussion of the organization’s:
- Commitments and system requirements
- Plausible threats to meeting those commitments and requirements
- Means of mitigating threats
It’s also a best practice to ensure that risk management is continually surfaced during regular oversight discussions.
Navigating Commitments and System Requirements
As shared above, the discussion around risk management begins with defining your organization’s commitments and system requirements. To make this a productive conversation, we recommend addressing the following questions:
- What contracts are in place and what do they obligate us to deliver?
- What resources will we need to meet those obligations?
- What information will we receive in the process that will require protection?
Identifying Plausible Threats
Once your organization’s commitment and system requirements have been identified, it’s time to consider factors that might threaten your ability to perform. These might include:
- Laws, regulations, and standards: These can change frequently. Even if the text stays the same, their interpretation and enforcement can be influenced by the decisions of courts, agencies, and independent governing bodies.
- What You Need to Consider: What rules currently apply to our business, and can we demonstrate that we’re following them?
- Internal threats: Personnel, budgetary, and/or operational issues can impact your objectives and overall success. From succession planning and employee training to modernizing technology and upgrading security systems, internal inefficiencies must be identified and addressed.
- What You Need to Consider: What systems and programs do we need to update or implement to sustain and optimize operational performance?
- External (third-party) threats: Your organization must implement logical access security measures to protect against external threats. This is especially true if vendors you work with have access to your customers’ data. It’s critical to secure your rights via contracts, security agreements, or opinions of counsel.
- What You Need to Consider: How might our customers, vendors, or business partners impact the achievement of our objectives?
- Fraud-related threats: These can arise internally or via third parties. Fraudulent reporting, misappropriation of physical assets or trade secrets, instances of corruption or misconduct, and similar issues can all impact your ability to fulfill your commitments.
- What You Need to Consider: Are there internal or external incentives or pressures to increase the chance of fraud threat? Are there instances where our management can override a control?
- External changes: Changes to the regulatory, economic, and physical environment in which your business operates are often out of your control, yet proactively planning for the seen and unforeseen is an effective exercise.
- What You Need to Consider: What’s on the horizon in our industry or among our competitors? How might consumer (or vendor) demand change?
- Internal changes: Your business plans can also impact your risk profile. For example, upgrading your technology, expanding product lines, moving or opening a new location, acquiring or merging with another organization, a change in leadership, or even a period of rapid growth can create challenges or a change in attitudes or philosophies on internal controls.
- What You Need to Consider: What changes do we need to account or prepare for in the coming months or years that might challenge our systems, methods of operation, and relationships with vendors, business partners, and customers?
Mitigating Risk Based on Identified Threats
Now that you’ve identified the threats to your organization, the next step is to design a plan of action to mitigate them.
The proposed method(s) will depend on the gravity of each risk based on three primary determinants:
- The probability of occurrence
- The anticipated impact (high, medium, or low) on your operation
- The cost to address it, including actual expenses and missed opportunities
- Based on that assessment, leadership should then determine a response strategy, which might include one of the following actions: accept the risk, take preventive steps to avoid or minimize it, or insure against the loss if it should occur. This is what will essentially become your risk management plan.
How Will Effective Risk Management Impact Your Business?
Most leaders understand that growth and innovation create opportunities but often overlook the associated risks. Exposed vulnerabilities have caused significant damage to many companies that could have been prevented or reduced with the proper planning.
As key takeaways, it’s important to understand that a clear and effective risk management process and plan, including ongoing risk analysis, can help:
- Provide leadership with the information they need to understand factors that could negatively influence operations and make confident business decisions
- Control losses, increase resilience, and gain a competitive advantage in the face of setbacks as minor as a power outage to as major as a cyber-attack or global pandemic
- Spur enhancements and provide a planning benchmark for future innovation
- Increase the time, effort, and level of commitment needed for a successful SOC 2 examination and a clean SOC 2 audit report
In closing, take the steps needed to incorporate the SOC 2 required risk assessment into your process to reduce your organization’s overall exposure to threats and get you one step closer to SOC 2 compliance.
Ready to Get Started Now?
If you’d like to discuss how our team can help with your SOC 2 examination needs, please contact us to speak with an Audit expert.
Download our eBook, “A Comprehensive Guide to SOC Reports” to learn additional pertinent information around SOC examinations, report types, finding the right auditor, and much more.