Thanks for a great Section meeting yesterday and thanks again for Dave and Bill for an engaging QA presentation (with full set props and all!). They presented on Survivor Stories, a set of case studies from “the QA foxhole” out in the field and we covered everything from imported radios and drug testing to Madagascar vanilla extract and computer monitor quality. Continue reading Photos from the QA Foxhole→
There is a great deal of interest by the quality community in the Sarbanes-Oxley act of 2002 (H. R. 3763). Senator Paul S. Sarbanes and Congressman Michael G. Oxley, created this act to set rules for CEO’s, CFO’s, their attorneys, and their auditors for the creation of financial reports used by investors (e.g. Annual Reports). What prompted this act was the disclosure of major wrong doings in large corporations and major auditing firms. The purpose of the act is to give investors the truth, the whole truth and nothing but the truth.
The alphabet soup
The act spawned a whole set of acronyms which refer to its implementation and interpretation. One hears of SOX, PCAOB, COSO, COBIT and similar acronyms. We will try to clarify some of these terms and show how they fit in.
Title I, the first real chapter of the act, sets up a non-profit corporation called the Public Company Accounting Oversight Board (PCAOB). It is the function of the PCAOB “to oversee the audit of public …, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.”
The act requires the PCAOB to set standards and register public accounting firms. Your editor was told that over 1200 firms have applied and that, to-date, over 800 are registered. You see can full details at the PCAOB’s web site http://www.pcaobus.org/index.aspx under “Registration”.
The act uses the words “quality control” 15 times with four additional mentions of the word “quality”. In all cases, this refers to the auditing firm. The use of the word “quality” relates solely to the financial integrity of the audit report issued by the external auditors.
Sections 302 and 404 require that management establish and maintain internal controls. In both cases, these controls are for assuring that the financial reports are accurate and true. Welytok (2006, p. 156) distinguishes the way the term “internal Control” is used in the two sections. She indicates that in Section 302, the act refers to “disclosure controls and procedures. In Section 404 the act refers to “internal control over financial reporting”. Nowhere does the act require quality control of the audited company.
COSO stands for the Committee of Sponsoring Organizations of the Treadway Commission. “The SEC specifically refers to [COSO] as an acceptable framework for management’s internal control assessment.” (Welytok, 2006, p. 159) Again, the issue is financial reporting not quality control in the sense in which we apply it.
Sarbanes-Oxley and Quality
The Sarbanes-Oxley act has some similarities with ISO 9000. Both are inspection or audit oriented. Both are procedure driven. Both maintain the status quo as far as quality is concerned. In this writer’s opinion, the Sarbanes-Oxley act is valuable for the financial and investing sector. It does not advance quality in its present state. The only group required to look at quality control is the public auditing profession of 800 to 1200 firms. One can read their quality control methods at http://registrationapplications.pcaobus.org/ by going to the bottom of the page and entering the name of an Audit Firm. The PCAOB has set some interim standards for the control of quality of the auditors. One can view these standards at http://www.pcaobus.org/Standards/Interim_Standards/Quality_Control_Standards/index.aspx.
Welytok, J. G. (2006). Sarbanes-Oxley for Dummies.
Walter A. Shewhart, the originator of modern methods for quality, wrote, “For our present purpose a phenomenon will be said to be controlled when, through the use of past experience, we can predict, at least within limits, how the phenomenon may be expected to vary in the future.” (Shewhart, 1931, p. 6)
His definition of “control” was that if a phenomenon, such as the error rate in a call center, was consistent within the upper and lower control limit, it was in control. As long as the process remained unchanged, the phenomenon would continue to generate the same range of errors in the future as it has in the past. If the range of errors is too high for management to tolerate, they, management, must change the process. The workers cannot do any better than the process lets them. To exhort workers to improve without giving the a way of doing this is futile. As Myron Tribus stated in his paper, “Managing to Survive in a Competitive world” (Tribus, 1992, p. 30),”The workers work in the system, the managers should work on the system to improve it with their help.”
Many people think of quality control as an inspection system of output. Workers think of quality control as big brother watching and pouncing if a mistake is detected. Unfortunately these conditions exist and are extremely counterproductive. True quality control looks at the process and determines whether the process is still operating as intended or not. If it has drifted (as evidenced by a special cause of variation) it needs to be brought back into the predictable limits.
One can work with a predictable system to improve it. Improvement efforts on an unpredictable or chaotic system may solve one problem but cause a host of others. Usually, such efforts cause more grief than they solve.
It is unfortunate that the image of quality control degenerated into a perceived police action and so lost its original meaning of cost effective predictable process. One can only hope that as a profession, we re-discover the benefits of true quality control.
Shewhart, W. A. (1931). Economic control of quality of manufactured product. Princeton, NJ: D. Van Nostrand Company.
Tribus, M. (1992). Quality First: Selected Papers on Quality & Productivity Improvement. (Fourth ed.) Alexandria, VA: National Institute for Engineering Management and Systems.