Black Box Audit Case Study

The accounting profession’s approach to audits has traditionally been rooted in SALY (Same as Last Year), but many are now progressing towards a well-designed digital platform encouraged by the upcoming changes and requirement for a System of Quality Management.

While it may not be a concept associated with the accounting profession we can learn and apply ways of working from the Airline industry and the well known little black box to improve overall audit quality.

 

What is the Black Box Audit?

The black box audit is something everyone will be fundamentally aware of. However, we are less cognisant of the level of collaborations, sharing of gathered insights and expertise that is an outcome of the ability to use technology, to compare, contrast and learn from. This is something that the accounting profession needs to take seriously.

Sharing best practice in order to implement the new standards related to quality management individually firm by firm is going to improve quality, but it isn’t necessarily going to improve the profession as a whole.

 

The Airline Industry Example

The airline example is one we can learn from; airlines don’t wait for an airplane to crash to do a root cause analysis on why did it crash? And it doesn’t take three to six months for that to happen.

The investigation of a crash is not solely focused on the crash itself. The airline doesn’t just learn from things that have gone wrong but by having an embedded approach to what we could liken to file reviews or engagements. If in an audit an issue is raised with the opinion expressed, we would conduct a file review to establish if we came to the right conclusion and if the work we did was enough to draw that conclusion. If we find that we didn’t, we then need to work out why. This feedback loop is something that will result from designing a system of quality management.

Executing the engagement, finishing it, signing the opinion, conducting the file review and then doing the root cause analysis can take a lot of time. As an estimate it would probably take more than a year to establish from the exercise what has happened. This wouldn’t happen in the airline industry.

 

The Airline industry does not just rely on the pilots, the cockpit and the dashboard, giving them real-time insights on that one flight that they’re doing. They have all the metrics, the measurements. Just as in an audit engagement we would look to our audit quality indicators as to how is that engagement being performed live by the pilot or the responsible individual such as the audit partner.

There is also a central oversight of all of the flights that are going on across the airline, across the airport, across the broader spectrum. And that’s somebody sat in a control tower, who’s monitoring everything that’s going on. In audit this would be similar to someone who has that technical oversight centrally across the firm.

If we have somebody who’s standing across all of the engagements or flights and has picked up something in the engagement, indicating there is something with this flight or audit that is not going correctly. This could mean it is going to end in a crash. It’s going to end in the audit opinion being incorrect. And so we want to jump in now and make the needed correction.

Perhaps we find the team involved needs more support, perhaps they just don’t understand exactly what they’re trying to do with the data or necessarily the importance of what the effort is. How can we get in and address that and make sure we get to the right audit opinion?

 

What can we learn from the Black Box technique?

There is now an opportunity to look beyond completed file inspections.

  • What about in-flight file inspections?
  • What about audit quality indicators that can give us the opportunity to correct something before it’s wrong?

This could prove more efficient than doing root cause analysis because once you identify something really didn’t go well and you have to retrospectively investigate it becomes more difficult. For those that are not familiar with root cause analysis you will have to become familiar with the process and be able to identify issues such as, software failure, people didn’t understand what they were doing.

What are the benefits of implementing this technique?

By implementing risk identification, you can track whether something looks like it’s going wrong before it happens. Things like how much time is spent on planning, things being done in the right order, the wrong order and so on. Now you need to be imaginative because you need to relate it to how your firm operates and what your most likely risks are. These risks will change over time. You will need to shift your quality indicators to take in to account for example, a new standard being introduced, then that might be a particular risk area for several years whilst it becomes embedded. You can set flags and the person with operational responsibility for the system for their system of quality management can live track and see if something is not going right.

When it comes to culture, firms need to change, not just to a quality culture which the standards emphasise but we need a culture where everybody sees their responsibility to do a quality piece of work and one where you can accept that you make mistakes. When firms intervene

because you’ve seen an audit quality indicator go red flag status, this needs to be used as a learning opportunity to build knowledge and understanding of the reasons behind what went wrong. For example, highlighting a lack of resources due to sickness which would need to be handled with sensitivity. The aim is to enhance the system of quality management not to create a fear of making mistakes.

By considering a Black Box testing approach in audit the practical changes that can be made will only enhance and lead to a stronger system of quality management.

 

Julia Penny Guide

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