Inclusive or Carve-Out: How Subservice Organizations Are Presented in SOC Reports

Service organizations typically use subservice organizations (i.e.  third parties) to perform key controls that are necessary, in combination with the controls at the service organization, to meet the applicable control objectives (SOC 1) or Trust Services Criteria (SOC 2).  Services provided by subservice organizations often relate to infrastructure hosting, application development, security monitoring, offsite storage of backups and disaster recovery services.  When these services are included in the SOC report, the service organization has two options for presenting the subservice organization within it’s SOC report: the carve-out method or the inclusive method.

The carve-out method addresses the services provided by the subservice organization by “carving out” (i.e.  excluding) such services from the description of the service organization’s system and from the scope of the examination.  When using this method, the description of the service organization’s system must include the services performed by the subservice organization, the types of controls expected to be in place at the subservice organization (complementary subservice organization controls) and the controls the service organization has in place for monitoring the effectiveness of the subservice organization’s controls.  When using the carve-out method, the service auditor is responsible for determining if the service organization’s monitoring controls are appropriate.

The inclusive method addresses the services provided by the subservice organization by “including” it’s services and related controls in the description of the service organization’s system.  The scope of the report would include the service auditor assessing the design and operating effectiveness of the subservice organization’s controls.  The results of the service auditor’s tests of operating effectiveness of the subservice organization’s controls would be included in section four of the SOC report. Management of the subservice organization would also sign management assertion and management representation letters and the assertion letter would be included in section two of the SOC report after the service organization’s assertion.     

The carve-out method may be appropriate in the following situations:

• If the subservice organization has a Type I or Type II SOC report that covers the applicable services available for management to review.

• If the subservice organization will not provide contractual or other commitments regarding its willingness to be included in the SOC examination.

• If the subservice organization has implemented controls to govern the third party’s services.

The inclusive method may be appropriate in the following situations:

• If a SOC report or other assurance regarding the subservice organization’s applicable services and controls is not available.

• If the subservice organization agrees to be subjected to the examination procedures and is willing to provide the service auditor with a written assertion and representation letter.

• If the subservice organization’s services are extensive, then the usefulness of the SOC report for users of the system may be diminished by excluding the subservice organization’s controls from the examination.

Prior to beginning the reporting period, management should determine what method it should use to present subservice organizations within the report.  If multiple subservice organizations are to be included in the scope of the report, management may decide to use the carve-out method for some subservice organizations and the inclusive method for other subservice organizations.  Generally, the inclusive method requires more involvement by the subservice organization, and management of the service organization should consider the risks associated with the subservice organization’s refusal to cooperate with the examination when determining which method to use.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2023 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
What are the OCC’s Key Areas of Focus for Fiscal Year 2024?
20 Pre-Contract Questions To Ask Your Next SOC 2 Audit Firm
Deutsche Bank Fined $186 Million For Insufficient Anti-Money Laundering Controls
ESG and Internal Audit: Board and Audit Committee Considerations
ESG and Internal Audit
The Latest on the Department of Defense CMMC Certification Levels and Timeline
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Pittsburgh

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×