Root Cause Analysis and Critical Thinking: Every Auditor’s Essential Tools
For auditors to be successful, they need several tools in their toolbox. But few are as important as root cause analysis and critical thinking. These tools aren’t just essential to auditing work; they also help achieve better audit results on every project.
Why Root Cause Analysis and Critical Thinking Are Necessary
To understand the importance of root cause analysis and critical thinking, let’s start with a story.
Sales VP Mary Lou looked across the table at the internal audit team. From her perspective, the audit findings had merit. She could see the potential for enhanced efficiency, quicker customer collections, and even improved customer satisfaction.
But the audit team limited the potential benefits of their ideas—their recommendations—to “enhanced internal controls.” In her opinion, they had missed the boat.
You see, Mary Lou’s point of view was all about sales, revenue, collectability, and customer retention. Internal controls rested in the distant background of her day-to-day priorities.
Professional staff in internal and government audit departments are tasked with:
- Objectively analyzing performance
- Testing compliance
- Making meaningful, practical recommendations where action is needed
Among the many challenges internal and government auditors face is the broad scope of our mission.
Historically, auditor training has focused on compliance verification via examination of past events and transactions. Management—especially senior management like Mary Lou—certainly learn from the past but act toward the future. Toward goal achievement. Toward meeting and handling risks and opportunities coming up fast or down the road on the horizon. They tend to leave what happened yesterday in their rearview mirror.
Deep analysis of past events certainly provides the foundation for improvement now and going forward. The challenge for auditors who dwell heavily on past events is to bring their suggestions forward to managers looking in the opposite direction—where we’re going, not where we’ve been. Bridging that past-to-future gap is often lost in the audit project process.
Enter into the scene the two magical audit tools: root cause analysis and critical thinking. Let’s address critical thinking first.
What Role Does Critical Thinking Play in Auditing?
In general terms, critical thinking is the process through which we become conscious of our thoughts, reasoning, prejudices, and conclusions. In short, it involves thinking intentionally.
In our auditor training events, we cover six components of critical thinking that have a direct bearing on audit results.
- Understanding the logical connections between ideas
- Identifying, constructing, and evaluating arguments from all sides of an issue
- Seeing inconsistencies and mistakes in reasoning – both our own and by others
- Solving problems systematically – relying heavily on facts; less so on emotion
- Identifying the relevance and importance of ideas
- Reflecting on the justification of beliefs and values – and actively blocking our many biases
In these internal auditor training programs, we use real-world examples encountered by audit and compliance professionals to construct fact-based arguments before building solutions. Recommendations must reflect the perspective of those we serve and are trying to influence. In these training workshops, too often participants jump right to item 4 on the list: solving problems systematically. After all, from past training and project experience, auditors become heavily solutions-focused. “Here’s the issue we found during our audit. Now fix it!” is the implicit message we preach.
But when we step back, park our beliefs for a second, and look instead at issues 100% from the other person’s point of view, consistently better results blossom.
Does “control improvement” really drive the thinking of the head of sales?
Is “full compliance” the primary motivator of loan officers who are compensated for closing deals?
Is cybersecurity—while critical to the organization—really front of mind for managers in the shipping and receiving functions?
Disciplined application of critical thinking starts by giving yourself permission to pause, clear your thoughts, park your biases, reflect on the facts, and consider the other person’s point of view. Only then do you build a recommendation.
Of course, knowing with certainty the real reason why a condition exists in the first place is a great help. That’s why we stress the importance of root cause analysis in addition to critical thinking.
What Role Does Root Cause Analysis Play in Auditing?
Root cause analysis (RCA for short) is a disciplined, organized engineering process through which the real fact-based reason why an event or anomaly occurred is identified. RCA has been adapted and utilized in thousands of business, education, government, and not-for-profit organizations. By combining root cause analysis and critical thinking, auditors have a one-two-punch capability to get to the all-important REAL cause of audit observations and findings. This is a crucial step before making recommendations.
In my consulting and auditor training work, we emphasize five questions from RCA:
- What happened?
- Why did it happen?
- What options are available to address this issue?
- What’s the cost/benefit of each option?
- What’s the recommended option?
The first two questions are the heart and soul of audit findings.
Our audit testing and interviewing bring forth “What happened?” The exceptions, red flags of non-compliance, and other anomalies are the starting point of audit reporting. An auditor with even modest experience can handle the first question.
Question two—“Why did it happen?”—gets a little trickier to address. This is exactly where root cause analysis and critical thinking bring forth results.
When there’s an event that requires the attention of engineers (e.g., when the electrical power goes out in a ten-square block city neighborhood), the engineers start by making a list of all possible causes. It could be the result of a lightning strike, a street repair contractor who accidentally cut an electric line, an auto accident where a vehicle struck a pole and severed electrical cables in the process, a system overload during peak usage periods, faulty equipment, etc.
Using RCA principles, no cause is ruled out. Each is tested until the actual cause is found. Only then can the engineers and repair crews know what corrective action to take.
The same applies to auditors. When we identify a reportable condition, we evaluate all possible causes:
- Faulty process design
- Poor training
- Human fatigue
- Intentional action (or inaction)
- And so on…
This is a necessary step in the search for the one true cause. Just like the engineers, only then can we suggest corrective action that will work.
Unfortunately, that’s where many auditors stop—with question two. And stopping certainly addresses the minimum standard of what’s expected of government and internal auditors. “Here’s what happened. Here’s why.”
But there is so much value in going further—value in the eyes of management, our boards, and the public for government auditors.
Questions three, four, and five are where the fun in auditing can be found. Yes—internal auditing and government auditing can be fun. For example, when we see the smiles on managers’ faces when they realize the benefits to them of our ideas. And it’s fun when we feel really good about the value derived from our work.
So, go further. Explore question three—“What options are available to address this issue?” And do it with the diligence, discipline, and patience of engineers. Resist the knee-jerk impulse to recommend the obvious or easy action.
Dive into question four—“What’s the cost/benefit of each option?” Consider not only the dollars and cents of each but also the management and staff time, energy, and emotion involved in making changes.
And last, give a strong push from question five—“What’s the recommended option?” Determine the BEST option. Respect our auditing standards of objectivity and independence. But find a way to present your analysis-rich consultative suggestion. THAT’s exactly what management wants and needs.
Put Root Cause Analysis and Critical Thinking into Action
Don’t underestimate how powerful these tools can be. Take full advantage of them in your work. When brought together, root cause analysis and critical thinking provide the blueprint for better audit results on every project.