Ensuring Trust, Compliance, and Operational Excellence in an increasingly interconnected world
Third party reports
In today’s increasingly interconnected world, organisations routinely rely on centralised functions with the organisation’s group structure, or third-party vendors/service providers to deliver critical functions, ranging from cloud computing and payroll processing to data management and customer relationship platforms. While this reliance on third parties presents its own share of benefits, it also presents organisations with a number of different challenges. Building on the importance of robust internal governance, organisations implement internal controls to protect their assets, produce reliable financial reports, and meet regulatory standards (such as the Institute of Internal Auditors’ Third-Party Topical Requirement, which comes into effect September 2026). When core functions are outsourced, the effectiveness of these controls depends on the procedures followed by service organisations. Without an independent process for validating such controls, organisations may lose oversight and encounter issues such as financial inaccuracies, legal disputes, data security incidents, operational disruptions, or potential impacts on reputation. Incidents relating to third parties are occurring in many industries, such as aviation (Qantas) and online communication (Discord), emphasising the importance of third-party monitoring.
Furthermore, regulations, such as DORA, NIS2 and local laws have increasingly stressed the importance of third-party monitoring and supply chain risk. The monitoring and potential testing performed by organisations does present challenges for third parties. As these organisations schedule meetings, submit inquiries, or request to visit data centres, the process often proves to be extremely time-consuming and demanding for the third party, requiring considerable resources to manage potentially repetitive questions and coordinate efforts to assist their clients in obtaining reasonable assurance that covering of risk is in good hands. This is where a third-party report comes into play.
Third-party assurance reports serve as a bridge between an organisation, such as a service provider, and its stakeholders—providing an assessment, conducted by an independent external auditor, of the controls at service organisations and offering comfort regarding the reliability and security of outsourced operations. These reports help organisations:
- meet compliance requirements (e.g., Sarbanes-Oxley, GDPR, HIPAA)
- facilitate due diligence during vendor selection and ongoing monitoring.
- respond to audit inquiries with robust, recognized evidence.
- enhance transparency and trust across the supply chain.
To address these challenges and provide a standardized approach the industry has developed internationally recognized reporting frameworks—most notably ISAE 3000, ISAE 3402, and the SOC1/SOC2/SOC3 set of reports. These third-party assurance reports are designed to establish trust between service providers and their clients by offering transparent, externally verified insights into how risks are managed and how regulatory requirements are met. By leveraging such frameworks, organisations can move beyond assessments and fragmented evidence relying instead on robust, widely accepted reporting standards that facilitate confidence in the outsourcing relationship.
ISAE vs SOC?
Although similar in nature, ISAE and SOC reports have slight differences. ISAE reports are based on standard defined by IAASB, while SOC reporting is based on standards defined by the American Institute of Certified Public Accountants (AICPA). When deciding whether to pick one or the other, it is important to note where you clients operate. ISAE reports are used outside of the United States, while SOC is intended to be provided to US based clients. However, due to the nature of the ISAE 3000 report described below, the report can be prepared in line with 2017 AICPA Trust Services Principles and Criteria for Security, Availability, Processing Integrity, Confidentiality and Privacy, thus being able to issue an opinion for SOC 2 purposes.
ISAE 3402 and ISAE 3000 reports
ISAE 3402 and ISAE 3000 are international standards established by the International Auditing and Assurance Standards Board (IAASB) to support assurance engagements at service organisations. While both provide frameworks for independent evaluations of controls, they serve different purposes within the landscape of third-party reporting.
ISAE 3402
ISAE 3402 report is specifically designed for assurance engagements where the report covers the effectiveness of controls over financial reporting at service organisations. Its primary objective is to enable user entities—those organisations outsourcing critical financial functions—to gain confidence in the reliability of the processes managed by their service providers. As such scope is focused on processes that can impact financial reporting. An ISAE 3402 report is the European equivalent of a SOC 1 report in the US.
ISAE 3000
ISAE 3000 provides a broader framework for assurance engagements other than audits or reviews of historical financial information. It encompasses a wide variety of subject matters—including sustainability, compliance, risk management, and privacy—allowing for flexibility in reporting against criteria beyond financial controls. As such, it can provide a more in-depth understanding of the auditee’s environment. An ISAE 3000 report is versatile and can be adapted to cover other standards (ex. ISO 27001). It can also be used to emit an opinion for SOC 2 purposes, by aligning the reporting with the 2017 AICPA Trust Services Principles and Criteria for Security, Availability, Processing Integrity, Confidentiality and Privacy.
Path to type 2 third party report
Obtaining an ISAE 3000, or ISAE 3402 report begins with a readiness assessment, during which the service organisation evaluates its existing controls against the relevant criteria or standards. This phase often involves identifying gaps and implementing necessary improvements to ensure the controls are suitably designed. Once the readiness assessment is completed, independent auditors prepare a type 1 report, covering a point in time and providing an initial evaluation of controls in place. Once completed, corrective measures to controls are implemented. Once the controls have been operating for a certain period, a type 2 report can be prepared covering a period of at least 6 months.
All in all, third-party reports are invaluable tools for organisations seeking to demonstrate robust security, transparency, and accountability in their services provided to their clients or other companies within a group. By undergoing rigorous assessments and independent audits, service organisations not only identify and address gaps in their controls but also provide essential assurance to customers, partners, and regulators. Ultimately, these reports foster trust and confidence, supporting business growth and enabling organisations to meet ever evolving regulatory and market expectations.
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