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Are You Fixing the Wrong Problem? Using Six Sigma Tools and Root Cause Analysis to Efficiently Remediate Regulatory and Audit Findings

Apr 26, 2019

Lean/Six Sigma is a collection of tools and techniques developed to identify the cause of defects to either reduce or eliminate them. While Six Sigma was originally established in the manufacturing industry, these tools can be applied to the financial industry to streamline processes, improve customer experiences, and reduce or eliminate errors that lead to audit and regulatory issues. 

Exam and audit comments are defects in processes that have been identified through the audit or exam. The primary objective is to find a solution that satisfies the examiners or auditors. In many cases, responses require quick turnaround times, so another verification, approval or checklist is added to procedures. Processes and procedures evolve in response to these findings, but each change added or removed alters the intended purpose of the process or procedure. Over time inefficiencies, control weaknesses, or customer service deficiencies develop, and when employees are asked why some procedures are performed in a certain way, a common response is “because we have always done it this way.” 

Six Sigma tools can be used to identify the root cause(s) of a process failure. Once the root cause is identified, the core issue can be addressed instead of continuously applying band-aids to the symptoms.

The process of identifying the root cause is particularly beneficial when working through compliance exam findings. The FDIC Compliance Examination Manual (March 2017) identifies the root cause as one of the four factors to be used to assess violations of law and consumer harm. A root cause in this context could be considered a critical weakness in a financial institution’s compliance management system and could have a negative impact on the Consumer Compliance Rating and the level of supervisory concern. Examiners will frequently require a detailed root cause analysis to determine the appropriate corrective action. 

To efficiently remediate regulatory or exam findings, it is critical to understand the underlying cause. The following hypothetical exam finding will demonstrate how lean tools can be used to determine the root cause during the analysis process:

The Home Mortgage Disclosure Act (HMDA) report contained significant errors, which appears to be a result of the method used to collect HMDA data. 

The biggest challenge in this step is determining the difference between a root cause and a symptom. For example, management decides to implement a checklist to verify all of the HMDA data to the loan application to eliminate reporting errors. In this case, the reporting errors were just a symptom of the real issue, and a solution was created to correct the symptom before the real cause was identified. 

A technique referred to as the “5 Whys,” developed and used at Toyota Motor Company in the 1950s, can be used to uncover the root cause. As the name implies, the question “why?” must be asked five or more times to drill down to the true reason the problem occurred.   

Here is an example using the “5 Whys” to determine the root cause of the example above: The financial institution has been cited for multiple violations of incorrect data collection and errors in entry for the Home Mortgage Disclosure Act. 

Why are there repetitive input errors on the HMDA report?

Because the processors failed to input the correct information on the HMDA form.

Why did processors fail to input the correct information on the HMDA form?

The processors indicated the information input on the HMDA form was taken from the loan application.

Why did the processors use information from the loan application to complete the HMDA form?

Because the current procedures indicate that processors should complete the HMDA form using information obtained from the loan application.

Why did the procedures indicate HMDA data should be taken from the application?

The procedures to use the loan application data were established because it was more efficient to use the data on the loan application than it was to review the entire loan file to obtain more accurate information. 

Why was the information on the loan application different from the information in the loan file?

This is the root cause: There are no procedures to ensure the source document used to obtain the HMDA data, in this case the application, is the same as the information in the loan file.

Based on the results of the root cause analysis, implementing procedures to complete a checklist to verify all of the HMDA data to the loan application would add an unnecessary step and would yield the same negative results. In this case, it is necessary to review the entire process for logical points where this data could be reliably collected and opportunities to incorporate HMDA data collection. Evaluating the process that is currently used is more effective in increasing accuracy and potentially reducing duplicated work.

The root cause analysis can be applied to any area in the financial institution to address processes that have evolved over time in a way that altered the intended purpose. Using Six Sigma tools provides the institution the opportunity to proactively find solutions for outdated procedures that are potentially creating inefficiencies, control weaknesses, or customer service deficiencies.  

Contact Wipfli to learn more about using the lean process, root cause analysis, and other Six Sigma tools to address audit and exam comments, strengthen internal controls, and gain operating efficiencies.


Danielle M. Heidemann, CIA
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