Root cause analysis and audit quality
Root cause analysis (RCA) originated in the engineering industry but is increasingly being used by audit firms to improve audit quality.
Root cause analysis (RCA) consists of a penetrating analysis of processes to identify the “root” or fundamental cause (as opposed to the symptoms) responsible for process failures, problems and deficiencies which have occurred when carrying out a series of tasks comprising an organised activity. The shortcomings identified from the RCA are then redesigned to eliminate (or at the very least reduce) their likely repetition. RCA is seen as a powerful tool to improve the quality of output and is part of the broader field of Total Quality Management (TQM). RCA is sometimes described as “preventing fires in the first place rather than having to extinguish them later” - basically fire prevention rather than fire-fighting.
RCA was invented over a century ago in Japan by Sakichi Toyoda[i], who was a distinguished Japanese inventor and engineer in the textile machinery industry. His seminal ideas on quality improvement (“the five whys”) were developed further during the late 1940s by a far-sighted American engineer and management consultant called W. Edwards Deming. From the early 1950s, the Japanese manufacturing industry followed Deming’s advice and used it to achieve outstanding results, enabling them to greatly reduce defects, waste and the need for rework in the entire production process. This led to significantly improving the quality and reputation for reliability of their products.
Much later, RCA techniques were to be adapted, with similar outstanding success, in the USA by well-known multi-national firms such as Ford, General Electric and Motorola. RCA has since been introduced into other fields such as:
- IT and telecomms
- Accident analysis (e.g. in aviation and railways)
- Financial services
- Management consultancy
RCA basic principles
- Define carefully the problem - keep asking “why” things (deficiencies) occurred.
- Gather and manage the evidence (data).
- Identify and map out the various relationships relevant to the problem.
- From this identify the key relationships which must either be removed or improved to prevent the problem recurring.
- Devise a solution that will either remove the root cause behind the problem or at least greatly reduce the likelihood of that problem recurring.
- Introduce this solution and then continue to monitor its effectiveness.
An everyday example of RCA
Imagine that a firm has a common user “pool” vehicle for occasional ad hoc work-related use by its employees.
- Problem/deficiency: One morning an employee wanting to drive this vehicle finds that it won’t start – why?
- Symptom: Its battery is found to be “flat”, probably largely attributable to the vehicle not having been driven for some time.
- Key relationship: Why did this happen - No member of staff has checked regularly that the battery was kept charged - why?
- Root cause: No named competent person is responsible for checking the battery appears to be fully charged and taking appropriate action (by informing the facilities manager) if it seems low (i.e. starts with some difficulty)
- Solution: A specific member of staff (and a named alternate if the specific person is not available) is made responsible for checking twice a week that the vehicle starts without difficulty and is in good mechanical order.
RCA in an audit context
RCA is now being used as a tool to drive improvements in audit quality.
In September 2016 the Financial Reporting Council (FRC) issued a publication which considered the then current use by large accountancy firms of RCA.
RCA is an established process in a number of industries and is a developing area in the audit profession, where it typically relates to understanding why deficiencies have occurred on audits … These matters are generally identified during the firms’ “internal" inspections of audits, as part of their audit quality monitoring process, and “external” inspections, carried out by the FRC or other audit regulators.
Benefits of RCA for auditors?
- It can help to prevent the recurrence of issues in both internal (the firm’s own) quality control, compliance reviews and external reviews.
- It can be used to stimulate improvement by highlighting examples of good practice to be adopted throughout the firm.
- It can help to give providers of professional indemnity insurance additional confidence in the effectiveness of a firm’s quality control procedures in striving to maintain and improve the standard of its audit work.
- It can provide additional evidence that the firm is following what is best practice in the audit profession and is striving to meet the rising expectations of investors, regulators and the public.
Future RCA developments for auditors
The recently issued International Auditing and Assurance Standards Board (IAASB) Exposure Draft on a new International Standard on Quality Management (ED-ISQM1) proposes a requirement for audit firms to adopt RCA methods. The aim is to engender continuous improvement by highlighting examples of good practice and helping to improve audit quality by preventing recurrence of issues which have arisen in recent monitoring or compliance reviews.
In 2017, The International Federation of Accountants (IFAC) also published a step by step guide to RCA.
[i] His son, Kiichiro Toyoda, founded the Toyota Motor Corporation in 1937.