ISQM1 and Root Cause Analysis 2 - RCA Triggers in Audit & Assurance

The proposed International Standard on Quality Management (ISQM1) paper sets out a structure of wide-ranging proposals that, when implemented, will encourage substantial changes in quality management related to audits, reviews of financial statements and other assurance or related engagements. 
 
At the core of ISQM1-ED is a genuinely proactive, risk-based approach to quality management.  One that proposes high quality Root Cause Analysis (RCA) as the preferred method for firms to ensure that audit deficiencies are fully understood, addressed and explained.  As global RCA specialists within audit and accountancy, we have prepared four short articles expanding upon the objectives and benefits of RCA, as laid out within the proposed ISQM1 framework.


  
ISQM1 and Root Cause Analysis 2.
RCA Triggers in Audit & Assurance.
 
In this short article, the 2^nd of 4 on Root Cause Analysis (RCA), we will be covering 3 topics; a reminder of where RCA came from, a clarification of what firms should use RCA for, and some explanation of when firms should, and shouldn’t, use the method. 
 
The origins of RCA.
 
Contemporary structured problem solving known as Root Cause Analysis (RCA) evolved from the needs of the engineering and scientific industries to get back to first principles when complex, or recurrent problems, held back or derailed their progress.  When systemic or organisational problems result in large scale loss of life or catastrophic environmental failings the pressure to fix first time, every time is enormous – and there is nowhere to hide.
 
In recent years RCA has become valuable to a number of complex sectors where the failings and deficiencies could be seen as very different, but no less serious.  Global firms and agencies in Healthcare, Finance and IT have all adopted the core problem solving principles of RCA; a shared language, a transferable structure, visual cause and effect analysis, evidence-based decisions and streamlined reporting.  For firms who have adopted and integrated an effective RCA method, the positive outcomes benefits have been immediate and have delivered substantial leaps forward in many critical areas of performance.
 
What are firms expected to use RCA for?
 
As a result of the above, we have seen the language and principles of Root Cause Analysis adopted in a growing number of audit and accountancy firms.  Firms looking for less deficiencies, improved compliance, and significant marginal gains (essential for gaining a sustainable competitive advantage) have started to apply structured and measurable means of revealing root causes of issues.  Perhaps because RCA, with its deliberate, step by step approach is especially well suited to the forensic and logical mindset of successful accountancy professionals.
 
In addition, many regulators are demanding far clearer explanations of audit deficiencies and the solutions and mitigations firms intend to apply – and for them, RCA is the obvious method.    As a consequence of this development, industry associations, determined to improve the performance and reputation of their members, are also strongly supportive of RCA. The most significant recent addition being the IFAC/IAASB though their forthcoming ISQM1 paper on international audit deficiencies.  The objective of ISQM1 is to deliver very clear guidelines around quality control and audit management, much of it underpinned by the requirement to adopt high quality RCA.
 
When should firms use Root Cause Analysis?
 
With Root Cause Analysis increasingly recommended as the process for solving problems and reducing risk within the audit profession, it is important that firms know when to use it– and, when not to.   
 
For RCA to be an effective process ISQM1 highlights that it is important for firms to have a clear set of threshold criteria which will enable them to know precisely when using structured RCA methods would be beneficial.  These triggers will vary between firms, but they are typically driven by five key metrics:
 
1. Regulatory Rules
2. Client Complaints
3. Revenue Losses
4. Increased Costs
5. Internal Organisational Issues
 
But of course, not every complaint, cost or loss demands a structured analysis. Using a formal RCA process to address too many of these issues is problematic in the sense that it would quickly become too be resource heavy and generate more actions than could be easily addressed.  But equally, using the method too sparsely is also problematic.   Therefore, all firms need to set the threshold criteria in their own equivalent of the ‘Goldilocks’s Zone’; aka - not too high and not too low. 
 
Finally, ISQM1 also looks beyond RCA being used as solely a problem solving tool and discusses the potential utility of using the tool to deep-dive into projects and initiatives that were especially successful. Understanding positive outcomes at a granular level can only help firms become more robust, compliant and successful.  However, at this early stage, ISQM1 appears to park this approach as a recommendation, rather than as a directive.  Needless to say, though, when firms do adopt an evidence based, analytical model to solve their complex and recurrent problems, the benefits do not stop at just traditional ‘problem solving’ – all forms of decision making, project management and strategic planning always benefit.
 
If you would like to know more about Sologic Root Cause Analysis and how the methodology can help your firm improve audit quality, solve problems and improve performance please contact us.