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PCAOB staff report recommends root cause analysis to improve audit quality

Written on May 21, 2024

The PCAOB has published a staff report about how a root cause analysis (RCA) can lead to improved audit quality. 

The 9-page report covers general considerations, other observations about root cause analysis from audit inspections and key questions for firms to consider. 

An audit firm’s understanding of the underlying reasons behind a deficiency can result in incremental improvements to a firm’s system of quality system, which in turn would improve audit quality, the report notes. 

This comes as inspection results have shown high audit deficiency rates.  

RCA is a multifaceted approach, not a single well-defined process or methodology, and firms should consider what makes sense for their facts and circumstances. And RCA does not mean that only one factor is the cause of an issue. 

“Selecting from a list of potential causes, opting for prepopulated fields, or even using the five whys technique, although helpful, appears to be too linear and limiting for complex problems, and these methods will not likely show the many intricate interrelationships between each cause and associated effect,” the report explains. 

The term “five-whys” refers to a strategy of asking “why” five times, drilling down to the root cause. 

The staff report provides the following characteristics and practices of a well-designed RCA process: 

  • Dedicated team 

  • Guidance and training 

  • Data gathering and tools 

  • Scope 

  • Level of analysis 

  • Prioritization 

  • Conclusions 

  • Monitoring remedial actions 

  • Reporting 

The staff found that large audit firms have formal RCA processes at varying stages of design and implementation. 

Smaller firms have a process tailored for their structure and size. But inspectors also found that many small firms either had limited or no RCA procedures. 

The staff also saw that certain firms have metrics such as milestones, distribution of hours during the year, partner workload, partner industry experience, and use of specialists, among others. 

In addition, the report highlights challenges at certain firms, including persistent criticisms and delayed causal analysis.  

Galasso Learning Solutions released a video blog for OSCPA members which you can access here.  

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