A volatile market—whether caused by a global pandemic, natural disaster, or a supplier’s lack of financial well-being—can cause significant disruption to supply chain processes that manufacturers and distribution companies depend on for goods and services.
One way to determine if your organization is prepared for unexpected disruption is to conduct a System and Organization Control (SOC) for supply chain examination, also known as a SOC for supply chain engagement. Self-selecting a SOC examination for supply chain could provide key insight into the security and effectiveness of your supply chain procedures, technology, and more.
What’s a SOC Audit for Supply Chain?
Along with other SOC reports, including SOC 1®, SOC 2®, SOC 3®, and SOC for Cybersecurity, the American Institute for CPAs (AICPA) developed the SOC Examination for Supply Chain to help organizations demonstrate adherence to internal controls that detect, prevent, and respond to supply chain risks.
What Are SOC Audit for Supply Chain Criteria?
There are two sets of SOC audit criteria used to determine the effectiveness of supply chain systems: description criteria and trust services categories.
Description Criteria
The description criteria are used as a framework for an organization to present a description of their production, manufacturing, or distribution systems.
According to the AICPA, the description criteria for a SOC for supply chain report require the following actions:
- Clarify types of goods. What is produced, manufactured, or distributed by an entity
- Target principal system objectives. Commitments and requirements for a product’s performance, production, manufacturing, or distribution specifications
- Identify system incidents. Incidents resulting from ineffective controls or in a significant failure in the achievement of the entity's principal system objectives during the audit period
- Evaluate risks. Could have a significant effect on the entity's ability to achieve principal system objectives required by a SOC 2 audit
- Highlight relevant system information. The system that produces, manufactures, or distributes the products, including components of the system, inputs used by the system, and boundaries of the system
- Detail controls. Complementary customer and supplier controls
- Underscore trust service criterion. Any specific and applicable trust services criterion that isn’t relevant to the system and the reasons why it isn’t relevant
- Feature significant changes. Common to all SOC reports, these should be during a specific period and addressed by the system
Trust Services Categories
The trust services categories are used as the framework to present the internal controls of an organization and how they’re met through those controls.
Detailed below are several trust services categories and how they relate to supply chain systems.
Security
This category relates to how the supply chain system addresses commitments regarding system protection from physical and logical risks, including cybersecurity risks, such as how a company protects customer business data used to produce or deliver its goods and services.
Availability
This category relates to the availability, delivery, and distribution of a product.
- Availability. The quantity of the product and whether it’s available at the time agreed on with customers.
- Delivery. The delivery commitments made to customers, including the timing of delivery, storage and transportation, and the system requirements necessary to achieve the commitments.
- Distribution. The distribution of the product in accordance with applicable laws and regulations regarding timing, storage, and transportation
Processing Integrity
Processing integrity relates to the system's ability to produce products that achieve performance specifications, such as physical characteristics or functionality of a product.
It also relates to the system's conformity with production requirements established by the entity to meet or comply with laws or regulations, industry standards, or customers' requirements.
For example, a manufacturer may be contractually required to perform industry-standard quality control testing during the production process.
Confidentiality
This category relates to the achievement of specific confidentiality commitments made to customers or business partners, such as the commitments made to a business partner regarding the entity's use of the intellectual property during the production process.
Privacy
This category relates to the achievement of commitments and system requirements identified in the entity's privacy notice or privacy policy, like when a company discloses how it collects information, how the information is used, whether or not it is shared with third parties, and how it is protected and stored.
Why Would Your Organization Self-Select a SOC Audit for Supply Chain?
Even though a SOC audit for supply chain isn’t required, organizations often complete them to prove to internal stakeholders as well as external vendors and suppliers that their processes and controls are secure and in compliance.
There are various reasons for and benefits of self-selecting a SOC audit, such as identifying and mitigating risks, exercising good faith, and setting your organization apart from competitors.
Mitigate Risk
When a supply chain is disrupted, the organization is at risk of failing to meet production or delivery commitments made to customers.
Your supply chain could be disrupted for several reasons, such as:
- Weather and other natural disasters
- Threat of war or military action
- Lack of financial well-being of a key supplier or shipper
- Wide-spread diseases, such as SARS, MERS, or the COVID-19 pandemic, which can affect the entire supply chain
Manufacturers, producers, and distribution companies are looking for visibility across their complex supply chain networks to better understand the risks of doing business with suppliers and the controls the suppliers have in place to mitigate those risks.
The failure to manage these risks appropriately could result in:
- Reputational damage
- Loss of intellectual property
- Disruption of key business operations
- Fines and penalties
- Litigation and remediation costs
- Exclusion from strategic markets
Provide Useful Information for Customers and Vendors
The SOC audit for supply chain can provide useful information to customers and business partners while minimizing the risk of creating vulnerabilities to the organization. Information provided in the SOC report is designed to meet the needs of customers and business partners without disclosing critical defenses that might be targeted by malicious actors.
A SOC audit can also minimize the communication and compliance burden on organizations by reducing the number of information requests from customers and the amount of information sought if requests are made.
Exercise Good Faith
Self-selecting to have the audit performed can demonstrate the implementation and operating effectiveness of a set of internal controls to mitigate the risks associated with security, availability, processing integrity, confidentiality, or privacy.
By having a third party assess the strength of an organization’s controls in these relevant areas, you can begin to provide end-to-end transparency in its processes and technology to customers and other members of the supply chain. You can also demonstrate that your risk response is an integral part of business-as-usual protocols.
Differentiate Yourself from Competitors
A SOC report for supply chain can provide customers and business partners with information that could be used to track the progress of the organization’s supply chain efforts across time and to benchmark those efforts against other organizations.
Offering a SOC report to customers and prospects can provide them with a level of assurance that can’t be found in company-prepared materials because the SOC report indicates that the company’s controls and commitments have been vetted by a third party.
We’re Here to Help
For guidance in preparing for a SOC audit for supply chain, contact your Moss Adams professional. You can also visit our SOC Examinations page for additional resources.