The regulator reviewed the six largest UK audit firms, looking at the RCA they performed for external and internal inspection results identified in 2015. The FRC evaluated the processes the firms undertook, and the output of those processes.

The FRC says RCA is an established process in a number of industries and is a developing area in the audit profession, where it typically relates to understanding why deficiencies have occurred on audit.

Its review found that all six firms are improving their RCA process and some are more advanced than others. The FRC recommends that the firms improve planning and training on the process, consider using individuals and RCA techniques from outside the audit practice, and adopt more consistent processes for investigating causes for internal and external inspections.

The FRC’s summary of its findings across all firms shows that most did not prepare a formal plan or timetable at the start of the process, but the RCA was performed on a timelier basis compared with prior years.

The total time spent by firms on RCA was estimated to range from nine to 260 days. The firms that provided the most resource generally appeared to have the most thorough process and output.

The firms considered interviews with audit teams to be the most important part of the RCA. The interviews were with the audit engagement partner and often audit manager, but there were few interviews with the engagement quality control reviewer (EQCR) or more junior members of staff. There was limited evidence of a structured approach to the interviews.

Most of the root causes identified by firms related to the knowledge or behaviours of individuals on audits. Other causes identified related to the direction and review of the audit by partners and managers, the level of resources and project management related matters, or the adequacy of the firm’s processes.

The FRC found examples where the RCA had affected positively the actions to address the underlying issues by ensuring that the actions focused on the identified causes.

While a summary of the causes was communicated to the head of audit at all firms and the board (including non executives) or leadership team for most firms, they were not communicated to external parties, such as audit committees. The RCA processes and results were also not communicated in the firms’ transparency reports.

The FRC made a number of recommendations for improvement by the firms, including the need to prepare a formal plan and timetable at the start of the RCA process; issuing guidance and providing  training to those taking part; using individuals outside the audit practice or the firm, such as behavioural specialists, to provide additional support in performing the interviews; improving the consistency of the processes; considering a greater focus  on behavioural related training as an action to address related root causes; and communicating details of the RCA in the firms’ transparency reports.

Melanie McLaren, FRC executive director, audit, said: ‘The FRC seeks to promote continuous improvement in audit; RCA helps to identify the underlying causes of matters affecting audit quality as assessed by the FRC and the firm’s internal inspections. 

‘Importantly, it provides a better understanding of how audits can improve and enables firms to implement targeted actions to help prevent issues reoccurring. It can also be a means of identifying good practice.’

The FRC’s Audit Quality Thematic Review: Root Cause Analysis is here.