Management audit is a systematic analysis and assessment of a company's management competencies, corporate governance, managerial practice and capabilities in achieving corporate objectives and goals. The primary purpose of a management audit is not to evaluate individual executive performance but to assess the effectiveness of the management team in serving shareholders, maintaining positive employee relations and upholding reputational standards. It is important to highlight that the management audit focuses on the company’s overall management and the recommended strategic actions for organisational reform along with evaluating the performance of individual managers.
Management audit is becoming increasingly important in relation to the assessment of overall performance. Just as most companies ensure their accounts are audited at least once a year, some progressive organisations have acknowledged the significance of management audits. These audits differ substantially from those conducted by public or chartered accountants, as they do not focus on verifying financial data. Instead, they are carried out for top management, shareholders or owners. Management audit serves as a tool for critically and objectively evaluating the management of an enterprise from the broadest perspective possible. They begin where the annual financial audit concludes, expressing opinion on fair presentation of financial statements. Occasionally, these audits are conducted internally by the management, while at other times, external expertise is sought.
The increasing number of professional managers, the ongoing separation of ownership from management and the broader distribution of shareholders will eventually demand for independent management audits. For this development to take place, it is essential that widely accepted principles for certification attain professional recognition, along with the required training and proper accreditation. Management audit can be perceived as effective as management services of consultancy and advisory firms because the auditor will become an active adviser by offering solutions for management problems and help in the lookout for a successful organisational existence and growth. It evaluates the effectiveness of the integrated management systems necessary for the company to meet its contractual and legal obligations to customers and the community. Likewise, it focuses on assessing the overall performance of the company's management. The scope and breadth of a management audit are extensive and comprehensive. They serve as a valuable tool for top management.
Management audit includes cost management functions, performance measurement and decision making. It also takes care of the economic environment, social accounting and reporting. Management audit is a technique of assessing how effectively the executives can plan, organise, direct and control, and ensure effective and efficient use of available resources like men, material, machines, money and methods for achieving the objectives considering the long term sustainability. Thus it is an audit of various functions and policies to use economic resources placed at its disposal in an efficient manner.
The main purpose of management audit is to assess whether the integrated management systems, which are required to fulfil the contractual and legal obligations for the company to its customers and community, are being effectively implemented, and the true and fair presentation of the results of such an examination is attained. The statutory financial audit has a lot of limitations and, therefore, there is need for an independent appraisal of management performance at various levels including the top most level. Financial audit takes care of the protective aspect of the business; it does not normally carry out any constructive appraisal function of business operations.
In financial audit, the auditor’s opinion depends on observation of the financial statements, annual accounts reports and ledger accounts with reference to original documentary evidence. However, the management audit concentrates on the main sources of decision making in a firm, which can achieve effective and impressive results for profitability. In other words, the report of the management auditor contains the auditor’s opinion on the performance of the management function at all levels.
Management audit requires a business doctor to find the symptoms and to diagnose the company’s ailment at the right time to take corrective action. The approach to management audit needs to be formulated accordingly. Management audit requires an interdisciplinary approach since it involves a review of all aspects of management function. It requires a change in attitude and aptitude and, as such, the need for a “business doctor”.
The following steps can be implemented to cover the entire range of the management audit to examine and detect symptoms and diagnose the weaknesses and suggest remedial action:
1. Conduct an analytical and objective examination of the company's organisation, operations and policies across various functional areas to ensure the optimal utilisation of resources.
2. Provide an objective evaluation of overall performance.
3. Identify weaknesses and assess potential risks and threats.
4. Detect elements of waste, inefficiency and delays that hinder operational efficiency.
5. Report on the effectiveness of operations, plans, organisational structures, policies, and control systems to management.
6. Recommend measures to eliminate any deterrents or disorders present in the system.
It is apparent from the above that management audit is a systematic fact finding process that examines, appraises, correlates and reports on the understanding and effectiveness of various plans and procedures of an organisation.
Management audit should incorporate all factors of production and all elements of costs. This comprehensive approach ensures that every aspect of the organisation's operations is evaluated for efficiency, effectiveness, economy and alignment with strategic goals. By analysing these elements, the management can identify areas for improvement, optimise resource allocation and enhance overall performance. This holistic view is crucial for informed decision-making and sustainable growth. The appraisal of management methods and performance is conducted with reference to the following criteria:
1. Effectiveness of Organisational Structure: Evaluate the soundness of the organisational structure.
2. Alignment with Objectives: Determine whether the organisational structure aligns with the organisation’s plans and objectives to achieve its goals.
3. Assessment of Management Performance: Evaluate how effectively management plans, policies, systems, and procedures have succeeded.
4. Corrective Actions: Identify corrective and co-relational steps management should take to address failures due to bottlenecks, deficiencies, internal friction, shortcomings, misappropriations and fraud.
5. Need for Change: Assess the extent to which management plans, policies, and procedures require dynamic changes for future operations and planning.
6. Utilisation of Resources: Evaluate how effectively available human and physical resources are utilised and determine the need for facility extensions to enhance profitability and future growth.
7. Financial Planning Efficiency: Analyse financial planning efficiency to provide guidance based on recent developments in capital budgeting, project analysis, and profitability.
8. Organisational Manual: Determine if there is a useful and comprehensive organisational manual.
9. Industrial Relations Policies: Evaluate the adequacy and effectiveness of industrial relations policies and procedures.
10.Coordination Among Management Levels: Study the coordination and cooperation issues among various management levels.
11.Organisational Climate: Assess the overall congenial climate for effective business management.
12.Motivation: Examine motivation and morale and their influence on business decisions.
13.Complexity in Operations: Identify complexities in running the business and potential solutions.
14.Control Methods Effectiveness: Evaluate the effectiveness of control methods.
15.Management Information Systems: Assess the effectiveness of management information systems in terms of adequacy, clarity, and promptness.
16.Business Growth Climate: Ensure a proper climate exists for the continuation and growth of the business.
17.Incentive Plans: Evaluate incentive plans aimed at enhancing managerial performance.
18.Management Development Plans: Investigate the existence of management development plans for executive growth potential and executive development training programs aimed at cultivating future leadership.
19.Span of Control: Examine the effectiveness of the proper span of control.
20.Authority and Responsibility Balance: Analyse the balance between authority and responsibility.
21.Functional Guidance Procedures: Confirm the existence of procedures to guide each function’s conduct.
22.HR Policies and Practices: Evaluate the effectiveness of HR policies regarding recruitment, selection, placement, promotions, transfers, terminations, job analysis, job evaluation, labour turnover, staff turnover, absenteeism, and lateness.
23.Security and Safety Policies: Assess the adequacy of security and safety policies.
24.Indifference to Organisational Needs: Study the indifference of personnel to organisational needs.
25.Resistance to Change: Identify the existence of resistance to change and suggest remedial measures to overcome it.
26.Awareness of Organisational Plans: Confirm whether all individuals in the organisation are aware of its plans and objectives.
27.Realistic Goals: Evaluate the realism and achievability of the organisation’s goals.
28.Standards for Performance: Assess whether realistic and attainable standards are in place to guide employees.
29.Sound Business Judgment: Determine the existence of sound business judgement.
30.Management of Differences: The auditor may need to report on the dynamics of power and personality, including the management of differences and potential conflicts of interest at both the top management and executive levels, to help the organisation’s leader discover and implement realistic alternatives for addressing these issues.
31.Human Factor: In terms of the human factor some essential human aspect of the enterprise should be taken care thoroughly:
• HR/Personnel policies
• HR requirements, recruitment, training, and development
• Group development for executives, managers, and trainees
• Salary and incentive administration
• Organisational structure, function and climate
• Industrial relations
• Collective bargaining
• Impact of automation
32.Liberty: Assess whether managers have the freedom and opportunity to engage in creative thinking, as creativity serves as the foundation for business endeavours and activities.
33.Participatory Approach: Evaluate the existence of in-company meetings involving personnel from various departments to discuss issues and determine future actions through improved communication, internal control, methods, systems, and procedures.
34.Compliance: Ensure compliance with statutory and other regulations affecting the organisation.
35.Suggestion Scheme: Determine the effectiveness of the suggestion scheme, if such a scheme exists.
The management audit technique can be applied to all factors of production and elements of costs, extending its activities to assess efficiency in planning during both preparation and execution stages. Upon completing the management audit, the management auditor will not only present its findings but will typically also offer a comprehensive action plan for the top level management. This plan is designed to guide the implementation of recommendations that enable the company to operate at optimal efficiency and effectiveness. By delineating specific steps and methodologies, the management audit seeks to enhance overall performance and empower the organisation to achieve its strategic goals. This process not only addresses any identified issues but also fosters continuous improvement, ensuring that the organisation remains adaptable and responsive to changing circumstances.
(Khanal is Chief Financial Officer at Tilganga Institute of Ophthalmology.)
(This opinion article was originally published in December 2024 issue of New Business Age Magazine.)
