ISQM1 and Root Cause Analysis 1 - Revealing the 'Unknown Unknowns' in Audit & Assurance

In early 2002, the then US Secretary of Defense, Donald Rumsfeld made a statement on the impending Iraq War which confused and intrigued the world’s onlookers in equal measures. 
 
“Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know…it is the latter category that tend to be the difficult ones.” 
Donald Rumsfeld, US Secretary of Defense. 2001 – 2006.
 
With this short statement, Rumsfeld brought public attention to the concept of known knowns, known unknowns, and unknown unknowns.  Somewhat ridiculed at the time, the concept which he had in all likelihood picked up from his recent visits to NASA, is now central to thinking in project management, strategic planning, complex audits and risk management. 


 
ISQM1, currently in its Exposure Draft form, encourages the use of high quality Root Cause Analysis (RCA) as the critical means of revealing and predicting painful, hidden audit deficiencies - deficiencies we could easily liken to Rumsfeld’s ‘unknown unknowns’.  
 
RCA is essential because while ‘known unknowns’ result from situations which are recognised by our teams but are poorly understood, ‘unknown unknowns’ are different.  
Unknown unknowns can be defined as ‘Circumstances, events, or outcomes that are impossible to predict, plan for, or even know where or when to look for them because there had been absolutely no prior experience, or theoretical basis, for expecting that particular outcome’. A scenario that would almost certainly sound familiar to any professional involved in reviewing audit quality cases. 
 
However, ED-ISQM1 points out that in reality, most ‘unknown unknowns’, are far from being impossible to find or imagine in advance.  In fact, almost all are identifiable if the correct analytical tools are used, which is where high quality Root Cause Analysis (RCA) comes in.  Central to RCA is the analytical tool of Cause and Effect charting, a visual process which allows audit professionals to logically map out the causality of events, projects and investigations. Done effectively, cause and effect charts logically structure what we know to have happened AND also reveal, in some clarity, much of what we don’t know – effectively the hidden (or overlooked) gaps in our knowledge. This is essential for firms looking to reveal unidentified deficiencies within individual audits and across their wider audit behaviour.  Thereby solving problems andreducing risk.
 
As a visual tool, Cause & Effect charts turn the abstract into the actual, and the concealed into the open – making the search for unidentified failings or abstract risk considerably simpler.  Or put another way, we get a simple to understand map of known knowns, known unknowns and, crucially, unknown unknowns.  And we can also see how they interact and impact on each other.  If that wouldn’t transform audit quality, it’s hard to see what would.
 
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.