Root Cause Analysis Is Transforming Audit Quality

Jonathan Batchelor | November 6, 2017

The American satirist HL Mencken famously quipped that “For every complex problem there is an answer that is clear, simple, and wrong.” This could have been tailor-made for many finance-focused professions. Ask yourself, how many times have you or your teams applied the “obvious” solution to a problem only to discover, soon enough, that the solution wasn’t quite the “fix all” we hoped for?

If your firm hasn’t encountered Root Cause Analysis (RCA) yet, the chances are you will soon. Very soon. RCA is one of a group of classic methodologies known as structured problem solving. In its various iterations it has dominated problem solving in sectors like engineering, manufacturing, supply chain, and construction for well over a half a century. Since the turn of the 21st century, the method has become increasingly nuanced and versatile. Recently it has been adopted by many of the large international consulting firms as well as several leading tech companies, and many banking, insurance, and accountancy firms, as their primary method to uncover systemic faults and barriers to growth.

Today, we find that RCA is one of the hottest topics in the world of audit and accounting. In fact, as regulation and complexity increase across almost all professional sectors, RCA is now the go-to problem solving methodology amongst a new generation of senior professionals and strategic thinkers. This was highlighted just last year when the World Economic Forum’s Survey of Firms published a report illustrating that structured problem solving was now the single most important skill required in the modern workplace, although they also highlighted that it is a skill in all too short supply.

In fact, a growing number of professional bodies are now encouraging the accountancy profession to embrace RCA as a way to improve overall audit quality and meet the expectations of stakeholders and regulators. The International Forum of Independent Audit regulators, for example, states:

“(We) view robust Root Cause Analysis and implementation of responsive actions to be fundamental to improving audit quality. It is critical that firms have processes in place that enable a timely, thorough assessment to identify recurring root cause issues—whether positive or negative—and to take appropriate actions.”

Indeed, at Sologic, we’ve heard from regulators in associated professions who state that, “if firms cannot tell us what went wrong then we’re left with two conclusions, either there is cover-up in place or, worse still, the firm still doesn’t know why it went wrong.”

So, what exactly is an effective RCA and what does it deliver in terms of audit quality? At its core, RCA is a process for identifying the causes of problems or events in order to prevent them from recurring. It is based on the idea that effective management requires more than putting out fires for problems that develop, but finding a way to prevent them. RCA can also be a means of identifying good practice as part of continuous improvement and rewarding evidence-based decision making. The methodology assists audit professionals with:

  • Identifying underlying causes of significant problems or successes
  • Delivering solutions with immediate and lasting impact
  • Helping establish best practice and greater efficiency
  • Compliance with the expectations and guidelines of regulatory bodies
  • Building a better reputation and experience for clients
  • Instilling a deep-rooted positive problem-solving culture in your firm
  • Automated reports for better transparency and compliance
  • Creating a competitive edge for winning new business

Firms, however, do need to be effective in their RCA activities. Executed effectively, an RCA is an incredibly powerful, evidence-based method that uncovers a myriad of interrelated causes that provide previously hidden opportunities for solutions, both big and small. Most of these tend to be systemic and process driven, thus taking the spotlight off of individuals and thereby mitigating cultures of excessive blame—a significant source of stress, data corruption, and failures in overall quality. On the contrary, RCA done poorly will not only be ineffective in these areas, it will direct actions and valuable resources in the wrong direction. As the Institute of Chartered Accountants of England and Wales points out in their recent paper, Improving Audit Quality, “RCA that is not sufficiently robust may not identify the real root causes for findings. If the wrong cause is identified, the wrong remedial action will be taken.”

At Sologic we have been delivering world-class RCA training and consultancy alongside the most effective problem solving and reporting software in the marketplace for almost 20 years. As both Managing Director of Sologic (EMEA) and someone who has background as a financial director in the financial services industry, I was quick to see how RCA could be transformative in accountancy and audit. Although we’ve seen a number of new markets for RCA, we have developed a strong position with financial industry regulators and many of the leading organizations in banking, financial services, and accountancy in particular. As a result, we have adapted our training, development, and software products to meet the exacting needs of these sectors. Nowadays, our trainers really understand the audit sector and our case studies and learning materials are derived from real-life accountancy challenges.

I feel a great benefit of RCA is that it encourages businesses to be evidence based and realistic. We know every organization has problems that come in all shapes and sizes. But it’s the recurring problems that really hold them back. And as organizations become more complex, work across more sectors, and hold more data, finding and applying solutions has become a greater and greater challenge. Firms that embed an effective process and culture of RCA experience a significant improvement in areas as diverse as compliance and continual improvement, client satisfaction and employee engagement, not to mention profit and efficiency. Firms discover that structured problem solving and investigation underpin many areas that allow genuine growth.

I’ve seen that once RCA methods become fully embedded in firms, they tend not to stop at pure problem solving. They also help underpin corporate memory and institutional learning, providing huge efficiency savings in quality, and a reduction of repeat errors. Firms who develop an RCA culture internally provide their workforce with a skillset that will transform engagement, retention, and performance. The method delivers significant improvements in evidence-based thinking, team integration, mindset, and corporate memory.

Perhaps I’ll leave the final word to the UK Financial Reporting Council:

“A key objective of RCA is to improve audit quality by having a better understanding of how audits can improve. We expect all the firms we inspect to make continuous improvements so that, by 2019, at least 90% of FTSE 350 audits reviewed will be assessed as requiring no more than limited improvements. Effective RCA should help to achieve this.”

Jonathan Batchelor

Managing Director, Europe - Middle East - Africa (EMEA), Sologic

Jonathan Batchelor is responsible for the operational and commercial activity for the business across the EMEA region. Overseeing Root Cause Analysis focused training delivery, software deployment and facilitated investigations to clients covering a broad number of sectors and geographical locations. Prior to his appointment with Sologic, Jonathan worked for a number of years within the commercial finance sector in the UK, most noticeably as founding partner of one of the East of Englands largest commercial finance brokers. This was followed by a number of Director level positions focusing on training and development for the Oil & Gas and Renewable sectors. Jonathan holds a firm belief that effective Root Cause Analysis has a place across all industries and through all tiers of organisations.

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