There are compliance requirements for product companies. There are compliance expectations for service companies – particularly those that store customer data or perform critical function. The audit and compliance world considers these two business models to be two separate animals and why this is important is critical to understanding if you operate a service organization.
Where product companies get audited largely on their internal operations and financial controls, service organizations get audited on how their operations impact other businesses. This shift in perspective changes everything from the auditor review to the compliance frameworks involved.
The Major Difference
When a company purchases a product, they own it. They are responsible for using it. If there’s a problem or a malfunction, it’s their problem alone to fix, replace, or discontinue use. They have the risk.
Service is a different animal. When a company hires another company to provide them with a service, they’re offloading a portion of their business operations or data to another company and they don’t have control over service delivery, adequate security measures or reliable processes. The service provider has the potential risk which trickles down immediately to the entity to whom it services.
This is why service organizations face the elevated means of requiring audits from relevant organizations because their customers need third-party validation that whatever controls the service organization is applying are being applied – and correctly.
What Customers Need to Show
Product manufacturers can show quality through sampling, warranties and customer satisfaction measures. It’s harder for service organizations because what they need to prove are operations that relate directly to control standards over the service in question.
For example, an organization that pays its employees using a third-party payroll service needs to have controls in place that limit payroll discrepancies while also maintaining employee data. A financial institution that leverages third-party cloud infrastructure needs documentation proving that there are security controls in place relative to access of all company applications and proprietary information. A group that relies on third-party payment processing needs assurance that financial controls are operationally sound.
These are not checks at a single point in time; these are continual concerns and this is why it’s so important for service organizations to understand soc 1 vs soc 2 as the nature of the audit required will depend on whether it impacts financial reporting or security/availability/access controls. Product manufacturers rarely face these distinctions because the compliance requirements differ.
The Scope of Audit
When an auditor assesses a company in a product capacity, the main focus is on that company’s financial statements, internal controls and applicable regulations. It’s an audit about that company.
When an auditor scrutinizes the controls of a service organization, they contemplate those controls as they apply directly to customers of the organization in question. They’ll assess how data will be handled, how the service will be delivered, what will happen if something goes wrong, and whether there are controls in place ensuring deviation that could impact customer operations is avoided. Any process or system related to customer business functions is fair game for auditor critique.
This means that service organizations need enhanced levels of documentation; they’re not merely proving they can run their own businesses effectively, but instead that they can manage responsibility granted to them by customers who’ve offloaded business needs onto them.
The Customer’s Auditors Are Interested In Your Audits
One facet that surprises service organizations is that their clients’ auditors will want to review their controls. When a company uses the services of an outside entity for critical functions, however, their auditors must evaluate whether or not that specific service relationship poses additional risk.
For product companies, there is rarely concern from customer auditors regarding the internal workings of vendors; they may inquire about existing inventory levels as existence assertions but that’s as far as it goes without an extensive survey of the vendor’s control environment.
But for service organizations, auditors definitely care. If the function has something to do with financial reporting – payroll processing or transaction management – the financial reporting audit for the customer now has a component about this other company. If the controls there are weak or not audited properly, it creates issues for the client auditor’s opinion.
This is why third-party audit reports are critical for service organizations; they’re not only nice to have – but they’re often necessary for customers to satisfy their own auditors.
The Nature Of Periodic Review
At certain points in time when a product is delivered or sent out for purchase – and at purchase – quality can be verified. Service quality needs ongoing validation because they are delivered over time.
A customer can receive everything the service organization promised up front and six months down the road find their contract being serviced poorly for one reason or another. The customer has no way of knowing if, between point in time A and point in time B, anything has gone wrong unless there is validation continually throughout the process.
This encourages emphasis on period-related reports which assess operation over months instead of static periods of time with a punch list. Regulators want to see monitoring consistently and if operation deficiencies occur, they want them caught timely with remediation efforts made. This isn’t required by product companies.
Data Handling
Service organizations handle customer data – from user files to enterprise records to financial transactions and operational details where applicable. Product companies may collect data as it relates to purchases but in terms of processing, they’re not working with customer critical business data ongoing.
This data handling creates security and privacy measures that require specific audit focus. Auditors will evaluate how data is protected and whether controls exist in terms of access, transmission, retention and destruction.
These aspects become relevant for audits and service organizations rarely face scrutiny relative to data unless it’s gained through security measures which protect customers throughout their entire lifecycle.
Interconnectivity Measures
When a customer utilizes the services of a third-party vendor, they’re dependent upon that vendor for operations. If something goes awry or unreliable service occurs, their operations will fail. This isn’t true with products.
Thus auditors who take a look at these controls want to know availability, disaster recovery options, business continuity and incident response procedures – what happens if something goes wrong? How fast can something get back up again? How does the customer know?
These questions become important when assessing service organizations but rarely apply to product assessments because there’s not an integrated nature with products.
Industry Communication Necessity
Service organizations must communicate their control environment to customers in standardized fashions; it would be costly if every individual customer sent its auditors out to assess every service organization so practicality prevents this from occurring.
Thus standardized audit reports are created by certain types of audits which allow customers and their auditors to assess them without creating their own standards.
Product companies rarely need an audit-framed assessment of their internal control environment – certainly there may be specifications provided in terms of quality achieved but nothing beyond what would be assessed for compliance at the internal level.
Regulations Tie In
Certain services prompt different regulatory requirements. Financial services, health services and payment processing all require additional requirements relative to government oversight in these areas for entities providing such services.
When a company provides these services, they assume compliance regulations that would not apply for product companies providing similar products. Thus if a company sells healthcare-related software it may fall under standard commercial regulations; however, if they provide hosted patient information services, they’re subject to HIPAA – and possibly other healthcare-relevant requirements – that would not apply for a product company in this industry.
These regulatory overlays add another layer to why certain service organizations are audited differently than product-related organizations; they’re not seeking good practices necessarily but compliance efforts with operations in these industries that require specialized attention through auditing efforts.
Cost/Resourcing Concerns
All of this consideration holds additional costs that product companies generally do not incur. Service organizations spend more on compliance efforts, have staff either dedicated or cross-functionally tasked with audit interaction efforts as well as control documentation related to more than other enterprises would be necessary.
These aren’t optional allowances; they’re table stakes for successful operation as a service organization – especially relevant if providing services in B2B settings where customers will engage in due diligence. Those who skirt these expectations find themselves unable to win deals with clients who care about risk mitigation.
These resource expectations also require ongoing maintenance efforts and not just one-time allowances. The need to maintain audit readiness perennially, keep documentation up-to-date and controlling efforts applied consistently through testing measures and answers to customer audit inquiries become permanent responsibilities of working with these organizations.
Competitiveness
There is no competitive issue with product companies getting audited; competition relies upon price and deliverables specifications/products features/quality.
There’s a competitive element with articulating demonstrable effectiveness where competitors offer similar capabilities at similar prices but when one has expansive audit reports demonstrating justified controls implementation, risk-averse clients will gravitate towards the one that has invested in appropriate efforts and compliance reporting.
Thus it’s not merely fulfilling required standards; instead, it’s leveraged as competitive advantage which won’t happen with product compliance so easily through auditing efforts since their assessments differ from compliance needs in this capacity.
Learning How It Happens Going Forward
Sometimes executives come from a background where they’ve transitioned an organization from product-based models into service models and underestimate how much their audit/compliance needs will change. They find comfort in what they’ve had thus far established only to learn after an extensive audit that customer expectations differ when it’s time for them as soon as auditors partner because now entry is brought forth proactively generating expectations on both sides that weren’t previously met with what’s considered quality.
At first this isn’t more difficult than operating as product companies – it’s just different – and it’s different at the front end so it’s better prepared for early on instead of scrambling later on when audits reveal gaps due to customer due diligence being so much more detailed than what’s typically given product companies along the way (and what’s avoided until they’re successful).
Operations often find themselves feeling overwhelmed when everything is new; instead there’s much more easy access version of what’s tangible sooner rather than later. Even though preparation efforts justify an audit approach in a service organization compared with how it’s handled across what’s clear for strong upfront support isn’t as logical as different focuses with expectations require different efforts that’s now easier said than done after learning through experience across two boundless worlds.
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I’m Emma Rose, the founder of tryhardguides.co.uk, and a content creator with a passion for writing across multiple niches—including health, lifestyle, tech, career, and personal development. I love turning complex ideas into relatable, easy-to-digest content that helps people learn, grow, and stay inspired. Whether I’m sharing practical tips or diving into thought-provoking topics, my goal is always to add real value and connect with readers on a deeper level.
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