Understanding Complimentary Subservice Organization Controls

A subservice organization is an external entity engaged by a service organization to perform specific tasks or services on its behalf. These tasks or services are typically part of the overall service offering provided by the primary service organization to its clients. The primary service organization relies on the subservice organization’s expertise, resources, or infrastructure to deliver the services. Complimentary subservice organization controls, or CSOCs, are the set of controls implemented and performed by the subservice organization, which in combination with controls at the service organization, are necessary in order to achieve a control objective (SOC 1) or a trust services criteria (SOC 2).

• Data centers: A service organization may rely on a third-party data center to host its servers, network infrastructure, or applications. Controls typically include physical security measures, environmental safeguards, and redundant power systems.
• Payment processors: A service organization might outsource payment processing to a specialized payment processor to manage transactions securely and efficiently. Controls include encryption protocols, PCI DSS compliance measures, and transaction verification systems.
• Cloud service providers: A service organization may use cloud-based infrastructure or software-as-a-service (SaaS) solutions provided by third-party cloud service providers. Controls involve access management, data isolation mechanisms, and security monitoring.
• IT support and maintenance: A service organization might engage a subservice organization to provide ongoing IT support, maintenance, and system updates. Controls include change management procedures, incident response protocols, and access limitations.
• Human resources and payroll services: A service organization could outsource HR functions, such as benefits administration or payroll processing, to a subservice organization. Controls focus on data privacy, segregation of duties, and comprehensive audit trails.

As organizations increasingly outsource critical functions, they need to ensure that their service providers have strong internal controls in place. The effectiveness of these controls can have a significant impact on the primary organization’s ability to manage risk, maintain regulatory compliance, and protect sensitive data.

Complimentary Subservice Organization Controls help to address this need by providing a means to assess the subservice organization’s internal controls. By implementing CSOCs, the primary organization can gain greater visibility into the subservice organization’s control environment and better manage the risks associated with outsourcing.

Organizations that implement CSOCs must navigate multiple regulatory frameworks depending on their industry and geographical location. Financial institutions must comply with regulations like the OCC Bulletin 2013-29, which provides guidance on third-party risk management, while healthcare organizations must address HIPAA Business Associate requirements that extend to subservice providers.

For publicly traded companies, SOX compliance requires consideration of how subservice organizations impact financial reporting controls. Meanwhile, organizations handling personal data must ensure their subservice organizations comply with privacy regulations like GDPR and CCPA, which impose specific requirements for data processors and sub-processors.

Industry standards like ISO 27001, NIST CSF, and PCI DSS also provide frameworks for managing third-party relationships and establishing appropriate controls. These standards often require organizations to assess and monitor the security controls of their service providers, making CSOCs an essential component of compliance efforts.

Monitoring CSOCs is crucial for organizations to manage the risks associated with outsourcing critical functions effectively. By regularly monitoring these controls, organizations can ensure that their subservice providers continue to maintain robust internal controls, enabling them to identify potential issues early on and take appropriate action to mitigate risks.

1. Establish a Monitoring Framework

The first step in monitoring CSOCs is to establish a comprehensive monitoring framework that outlines the key controls to be monitored, the frequency of monitoring, and the monitoring methodologies to be used. This framework should be aligned with the organization’s overall risk management strategy and consider factors such as:

• The criticality of the outsourced functions
• The complexity of the services provided
• The sensitivity of data handled by the subservice organization
• The potential impact on the organization’s risk profile
• Specific technical controls requiring validation (encryption, access controls, etc.)
• Automated monitoring capabilities versus manual assessment needs

2. Leverage SOC Reports

SOC reports, provided by the subservice organization, are a valuable resource for monitoring CSOCs. These reports offer insights into the subservice organization’s control environment, including the design and operating effectiveness of their controls. Organizations should:

• Review SOC reports thoroughly upon receipt
• Focus on the testing methodology and results for critical controls
• Identify any exceptions noted and evaluate the impact
• Assess complementary user entity controls mentioned in the report
• Compare findings against previous reports to identify trends
• Use report findings to inform risk assessment and remediation plans

3. Conduct Periodic Assessments and Audits

Periodic assessments and audits are essential for ensuring the ongoing effectiveness of CSOCs. These assessments should:

• Evaluate the subservice organization’s control environment using risk-based approaches
• Identify potential gaps or weaknesses through technical testing when appropriate
• Validate remediation of previously identified issues
• Incorporate specialized testing for high-risk areas (e.g., penetration testing)
• Recommend corrective actions where necessary with clear timelines
• Align frequency with the risk level of the outsourced functions

4. Foster Collaborative Communication

Effective monitoring of Complimentary Subservice Organization Controls requires open communication and collaboration between the primary organization and the subservice organization. This includes:

• Discussing any changes to the subservice organization’s control environment
• Sharing information about potential risks and emerging threats
• Establishing clear escalation procedures for control failures
• Maintaining regular governance meetings focused on control effectiveness
• Working together to develop and implement appropriate controls
• Creating channels for real-time incident reporting and response coordination

5. Continuously Improve CSOCs

Monitoring CSOCs should not be a one-time activity but rather an ongoing process of continuous improvement. Organizations should:

• Regularly review the effectiveness of their CSOC monitoring framework
• Identify areas for improvement based on monitoring results
• Implement changes as necessary to address emerging risks
• Incorporate lessons learned from security incidents
• Update monitoring approaches as technology and services evolve
• Document improvements and communicate changes to stakeholders

Understanding and monitoring CSOCs in third-party risk management is essential for organizations looking to mitigate the risks associated with outsourcing critical functions. By implementing a strategic approach to monitoring CSOCs, organizations can gain greater visibility into the subservice organization’s control environment, identify potential risks early on, and take appropriate action to mitigate these risks.

Through effective CSOC management, organizations can safeguard the security and operational excellence of their outsourced functions, protect sensitive data throughout their digital supply chain, and maintain the trust of their customers and stakeholders. Connect with experienced auditors to ensure your CSOC strategy is robust and aligned with industry best practices.

Please reach out if you would like to learn more about how Audit Peak can assist you with your SOC 1 and SOC 2 compliance or for a free consultation. WE WILL TAKE YOU TO THE PEAK.