PCAOB recommends root cause analysis

The Public Company Accounting Oversight Board wants accounting firms to get to the root of their problems.

In a new report, “Root Cause Analysis – An Effective Practice To Drive Audit Quality,” board staff recommends that auditing firms look beyond the surface of any deficiencies their quality controls systems (or PCAOB inspections) may identify, in order to find out the underlying factors that may be driving them.

“Rather than simply detecting and remediating audit deficiencies, many firms can consider — and we strongly encourage that they do so — focusing more on assessing the underlying root causes of a deficiency, so that the deficiency can be effectively addressed and ultimately eliminated,” the report says.

Staff were quick to acknowledge that root cause analysis is not a single, well-defined methodology, but instead any structured approach to uncovering the underlying causes of a particular phenomenon.

“We have observed that a firm’s deeper understanding of the underlying root causes of a deficiency can result in incremental improvements to a firm’s qualify control system, and may drive further improvements in audit quality,” the report says.

As part of the report, the PCAOB staff lay out the hallmarks of a well-designed RCA process:

• Having a dedicated, diverse RCA team (this is more common for larger firms) or individual.
• Having documented guidance and processes (again, this is more common for larger firms).
• Providing internal or external training in RCA processes.
• Using a variety of data-gathering approaches, including interviews; reviewing time and training records, audit workpapers, and audit metrics; and software and proprietary tools.
• Conducting analysis at the individual engagement level, and more broadly across the firm.
• Prioritizing the highest-risk areas.

The report also includes key questions for audit committees to consider, and more.