Root cause analysis, more fun than a root canal? When it comes to enhancing audit quality, it shouldn’t be this painful

As auditors strive to enhance audit quality they are often advised that a root cause analysis would help them respond to audit deficiencies.

As auditors strive to enhance audit quality they are often advised that a root cause analysis would help them respond to audit deficiencies. Why is root cause analysis so important, and how do you do it?

The Institute of Chartered Accountants in Australia (ICAA) recently issued a paper titled Sharing Experiences on Audit Quality. The paper is in response to a call for action by the Australian Securities and Exchange Commission and sets out ideas of the six largest Australian audit firms on new ways to address issues around firm culture and accountability, experience and expertise, and supervision and review to improve audit quality. Any audit firm interested in addressing these key areas of quality control systems will find this paper useful.

A key message in the paper is that firms should not necessarily implement all the ideas presented. It is critical beforehand to have conducted a robust root cause analysis. This message really struck a chord with me.

Over the years, I have read many public reports by audit inspectors, whether it is the Canadian Public Accountability Board (CPAB) reports on the audits of reporting issuers, or reports by provincial practice inspectors. I often see what appear to be recurring themes. Why do the same issues seem to recur year after year? Is there some training tool, guidance material or practice aid missing from the auditor’s arsenal that could eliminate the problem? If so, what is needed? As I considered these questions, I formulated in my mind a sort of decision tree to examine the issue. With my decision tree it became clear that different causes of audit execution issues may drive different possible solutions from the parties responsible for taking action. For example, a recurring problem with audit execution might need the attention of any or all of:  the standard setter, organizations that develop training courses and non-authoritative guidance for practitioners, partners responsible for designing and monitoring a firm’s quality control systems, or the partners and staff in the field. I began to see how important it is for an individual audit firm to be clear on the underlying causes of audit deficiencies so it can develop appropriate responses that specifically address them

This brings me back to the ICAA paper. The paper notes that there are a number of tools for undertaking a root cause analysis and refers to the “5 whys” theory, which presumes that it will take five rounds of questioning on why a certain thing happened to understand the root cause and the real issue. While tools such as the “5 whys” theory are widely available and may be of general application, limited research I have done into the background to some of the most common ones suggests they were designed initially by large car companies and electrical product manufacturers. Can these tools work well in the audit profession which seems quite different from the manufacturing world, or is there a more effective root cause analysis tool that could help deal with the complexities of the audit world?

If an audit root cause analysis tool already exists I am not aware of it. In my view, effective tools are needed if there are to be substantive breakthroughs that will enhance audit quality. They might even make root cause analysis less painful than a root canal.

Keep the conversation going….have you used root cause analysis tools in your work? Do they work, and do you think they might be adapted for the audit environment?

Post a comment below; or email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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