Root Cause Analysis

What is root cause analysis and why is it necessary?

Root cause analysis (RCA) is a problem-solving method used for identifying the root causes of faults and/or problems, for example, the underlying causes behind review findings, whether specific to one audit, or more widespread inside the firm as a whole or further afield. RCA is conducted with the aim of developing appropriate and achievable remedial action to prevent recurrence of the issues identified.

According to the 2017 IRBA Public Inspections Report, “There is a significant misunderstanding of the Root Cause Analysis (RCA) and, in many instances, [it] would either be incorrectly prepared/identified or not prepared at all.”
The main purpose of an RCA is to determine the cause, rather than the symptoms of an issue, i.e. the reason WHY it happened:

  • Why was there a lack of documentation?
  • Why was there human error?
  • Why was the partner not involved in the audit?

How do you perform an RCA?

When, on which files and by whom

Audits are performed annually — the ideal is to process all actions and corrections stipulated by any quality review findings at the last review well in time for the following year’s audit.
Based on the 2017 IRBA Public Inspections Report, the majority of audit firms have the same issues, but each firm decides on which files they want to perform the analysis and there are a number of ways in which the review findings can be filtered. The audit firm may, for example, select one of the following:

  • High-risk jobs only
  • Internal monitoring reviews
  • Engagement quality control reviews
  • IRBA inspections
  • Reviews with good review results — valuable lessons may be learned.

If firms want to find the reasons for people behaving as they do, it is recommended that they look at a wider range of files and reviews.
When identifying the right person to perform the analysis, firms should consider factors such as the required level of skill and experience, objectivity, authority, and internal policies and procedures. Depending on the size of the firm, the following people may be considered:

  • Audit teams
  • Members of a central function
  • Someone outside the audit function
  • A third party.

Issues that might result in root causes

Examples of some root causes identified

According to the 2017 IRBA Public Inspections Report, “The following are the most common root causes identified by auditors during the year:

  • Lack of training
  • Human error
  • Templates/methodology
  • Lack of supervision and review
  • Time pressure
  • Lack of engagement/partner involvement
  • The allocation of a team that lacks the right skills and experience.”

In addition, the Institute of Chartered Accountants in England & Wales (ICAEW) provides the following examples of root causes that might be problematic:

  • Staff competence
  • Engagement team dynamics, e.g. toxic combinations, gaps in skills or experience, lack of continuity and over-familiarity
  • Time available
  • Being understaffed for the job
  • Lack of clarity on competencies needed and responsibilities
  • Personal, ethical and attitudinal issues:
    • Cutting corners
    • Poor work attitude
    • Unwillingness to acknowledge, or learn from mistakes
    • Unwillingness or inability to direct, supervise or review effectively
  • Process issues:
    • Are policies and procedures well framed, comprehensive and well understood?
    • Does on-the-job mentoring and review take place in a proper way? (in relation to personal, ethical and attitudinal issues)
    • Compliance with policies and procedures
    • Does the staff appraisal system drive improvement, or is it cosmetic?
    • Failure to consult when appropriate (related to personal, ethical and attitudinal issues)
    • Poor project management (related to a poor work attitude)
    • Are the necessary safeguards applied effectively?
  • Leadership issues:
    • Do staff receive appropriate leadership?
    • Is change effected when required?
    • Is leadership cosmetic or real?
  • Client issues:
    • Is it fair to expect the firm to serve its client base? (in view of competence, resources and specialisation)
    • Are review findings rooted in difficulties with client interaction, e.g. fee pressure, unreasonable time pressure imposed by clients, poor quality, or information arriving late from clients, most likely due to external factors?

Remedial actions

Correctly identifying and assessing the root causes will enable the firm to develop and implement achievable remedial activities, such as:

  • Enhancing and improving audit methodology
  • Focusing on joiners and/or leavers, and implementing contingencies
  • Project management improvement through training and guidance
  • Real-time monitoring and regular review
  • Relevant and customised training
  • Review of software and audit procedures on a continuous basis
  • Robust review of resources allocated
  • Sufficient guidance and communication to all teams
  • Vigorous coaching and guidance.

The firms’ leadership and tone at the top are crucial to achieving consistent, sustainable high audit quality throughout their respective firms. — IRBA

Resources

  • IRBA: Public Inspections Report, 2017
  • ICAEW: Improving Audit Quality Using Root Cause Analysis: A Paper for External Auditors, 2016

RCA example

Figure 1: Improving Audit Quality Using Root Cause Analysis: A Paper for External Auditors, 2016 (ICAEW)

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