Management Audit

All There To Know About Management Audit

An analysis and evaluation of a company’s management’s abilities to achieve corporate goals is known as a management audit. A management audit does not look at individual executive performance; rather, it looks at how well the management team works for shareholders, keeps good relationships with employees, and upholds reputational standards. It is essential to emphasize that the management audit does not evaluate the performance of individual managers but rather the company as a whole’s management.

Working on a Management Audit

A formal management audit committee is not a part of a company’s board of directors. Instead, board members are a part of the compensation committee, where they evaluate executive performance based on both quantitative data (such as organic sales, EBIT margins, segment margins, operating cash flows, and EPS) and intangible data (such as efforts to integrate acquisitions). An independent consultant will be hired by the board of directors to carry out a management audit. Although the audit may only cover a small portion of the management team’s responsibilities, it is typically comprehensive. Questions like these might be addressed by a management audit:

• What kind of organizational structure has management established? Are there clear reporting lines, or is there ambiguity?
• What are the finance group’s policies and procedures, and does it always follow them?
• How effective are the current approaches to risk management?
• How are the relationships among the company’s employees currently?
• How does management come up with its annual spending plan?
• Are the IT systems of the company kept up to date?
• How responsive is the management team to shareholders?
• How well do you recruit and keep employees? Are there programs for training employees to keep their skills up to date?
• Is management accomplishing its responsibilities to ensure that the business is a “good corporate citizen”?
• Is the company strategically guided toward its financial goals by management?

Scope and Objective of Management Audit

A management audit is more comprehensive than a financial review because it evaluates a company’s other aspects in addition to its finances. It is effective at evaluating management from the highest to the lowest levels. The following are a few major scopes of management audit:

1. Calculate Management’s Effectiveness: It audits every level of a company’s management.
2. Policy and principal implementation are examined to determine whether the company’s policies and principles are implemented successfully.
3. Find the Differences and Examine the Differences in Productivity It is helpful to determine whether or not the company’s pattern is not followed.
4. Suggest Improvements: The management audit recommends making improvements in areas like purchasing, selling, finance, administration, and human resources, among others.

Examining the Specified Organization:

Renewing the formal organization’s structure, personal relationships, policies, procedures, information systems and flows, and decision centres to determine the best ways for management to run an organization.

Assessing the “Live Entity”:

Identifying issues such as what operating personnel are actually attempting to accomplish, the routines and schedules they have established to achieve goals, and measuring the results achieved in light of predetermined objectives and performance standards.

Looking For Obstacles to Profit:

Finding results that are significantly below established standards, as well as breakdowns in operations, programming, and workflow, inadequate and ineffective communication, evaluation, and measurement, and poor organizational structuring and responsibility assignment. The scope of management audit is synonymous with the appraisal areas identified by the American Institute of Management because it requires the appraisal and assessment of the entire organization or management processes as well as an in-depth examination of the system’s operation and performance.

These are the main ones:

1.     The Function of the Economy In Relation To Social Responsibility:

This entails assessing the company’s public esteem value in relation to a variety of interests, including those of shareholders, employees, distributors, customers, and the community in which it operates.

2. Organizational Structure:

Testing measures such as information flow, supervision span, authority relations, and centralization or decentralization of authority are used to conduct the evaluation.

3. Earnings Health:

This necessitates assessing the degree to which the resources have actually resulted in a profit.

4. Benefiting Shareholders:

The evaluation is primarily based on three fundamental criteria:

a) Reduced investment risk,

b) Reasonable return on investment, and

c) Reasonable capital appreciation over time

5. Development and Research:

How much of an impact these past actions had on the company’s progress in the past, and how much of an impact they had on its future development?

6. The Board of Directors’ Analysis:

The evaluation of three fundamental aspects, namely:

(a) Each Director’s contribution and quality;

(b) Teamwork; and

(c) The trusteeship role.

7. Policies for the Financial Sector:

The development of the capital management system, dividend policy, fiscal policy, and controls, as well as their use in various aspects of business operations.

8. Efficiencies in Production:

The assessment of the materials, food, waste management, machinery, and production policy management subsystems, as well as the accomplishments in terms of quantity and quality.

9. Vigor in Sales:

The criteria’s measurement and evaluation, such as:

(a) Developing sales staff

(b) Realizing previous sales potentials, and

(c) Implementing current sales policies to realize additional sales potential

10. Evaluation of Executives:

The evaluation of personnel characteristics as elements for business leaders, such as ability, professionalism, and integrity.

Goals of a Management Audit:

1. Verify Efficiency aims to improve policy implementation and management productivity at all levels.
2. Make a Recommendation to Improve Efficiency: The management audit identifies shortcomings at various management levels and makes recommendations to improve efficiency.
3. Evaluates the Potential of Policies and Planning It audits and evaluates the management-structured policies and plans to determine whether they are being implemented appropriately.
4. Increase Profit: By offering solutions that effectively maximize the company’s resources, it contributes to an increase in the profit margin.

Implementation of a Management Audit

A few sectors of the corporate structures that the Management Audit shall examine are Human resources, marketing, research and development (R&D), budgeting, operations, finance, and information systems. Interviews with employees and management, a look at financial statements and performance, a look at a company’s policies and procedures, a look at training programs, the hiring process, and many other areas will all be part of the management audit. The external audit firm will provide the board of directors with a comprehensive plan to implement after the audit is completed so that the business can function at its highest level. A management audit is carried out by outside firms with specific expertise, contrary to an internal audit, which is performed by the company’s internal audit department. The Boston Consulting Group, McKinsey & Company, and Bain & Company are all well-known firms that carry out management audits.

Need for Management Audit

The reason for conducting the management audit is as follows:

• A management audit is a professional, qualified person’s examination, evaluation, and verification of facts and information about management to improve management’s functioning and performance. During a management audit, an in-depth, constructive, and comprehensive examination of the organization’s structure, departments, divisions, projects, policies, plans, financial control, method of operation, and significant utilization of physical, human, and financial resources is carried out.
• The reason for conducting the management audit is as follows:
• The management audit questionnaire looks at how well management met the goals of the company, how well it planned, organized, controlled, and directed the company’s activities, and how well management’s decisions helped the company reach its goals.
• A management audit provides a management tool that assists the entity in achieving and achieving the set objectives.
• Such an audit is particularly important to diagnose the financial health and operational efficiency of a business undertaking that is going through a rough patch and has been taken over by the Government or financed by Financial Institutions. This kind of evaluation helps to detect and overcome any managerial deficiencies.
• Due to a management audit, the organization adopts a forward-looking approach. This prevents the maintenance concept found in production, which in turn results in having control.

Characteristics of Management Audit

1. Management audit does not evaluate functioning managers or their individual performance. It is an evaluation of a system that looks at how it works now, how it worked in the past, and what needs to be changed in the future.
2. A system of management audits can, in fact, provide valuable information for major policy decisions as well as major structural changes and enhancements.
3. Additionally, management audit contributes to increased enterprise awareness and communication.
4. It improves the control and evaluation system and assists the leadership in its directing role.
5. In a nutshell, a “Management Audit” is a powerful guarantee that nothing will ever go wrong and that nothing will ever go wrong that can’t be fixed right away. It keeps the entire management system under constant review.

Performance Areas of Management Audit

Jackson Martindell of the American Institute of Management first developed the concept’s scope, methodology, and application in his 1962 groundbreaking work, The Scientific Appraisal of Management. Martindell created an analysis sheet with ten thousand critical points of reference by selecting “ten performance areas” as vantage points for an in-depth look at the organization’s structure. Jackson Martindell chose the following ten areas for management evaluation (audit):

1. Organizational Structure
2. Functioning of Management Board
3. Executive evaluation
4. Soundness of earnings
5. Economic functioning
6. Service to owners (Equity and Stockholders)
7. Research and development
8. Fiscal policy
9. Production efficiency
10. Sales vigor (aggressive marketing)

An effective management audit system would require top management’s full support.

Organizational Design:

The efficiency of the organizational structure that the management of the business uses to try to achieve its goals. Testing measures like information flow, supervision span, authority relations, and centralization and decentralization of authority are used in this evaluation.

How the Management Board Works:

The American Institute of Management^[1] (AIM) looked at three main aspects of this appraisal area:

• The merits of each Director and the contributions they make to the board.
• How well the Directors collaborate with one another.
• Whether or not the Directors serve as the organization’s trustees.

Evaluation of the Executive:

In this regard, the AIM has identified three personal characteristics of business leaders. They are ability, perseverance, and honesty. Good management requires that executives collaborate harmoniously and implement sound policies, decisions, procedures, and programs pertaining to the organization’s various activities to ensure continuity. It is possible to evaluate executive performance separately based on each of the fundamental elements because of the crucial roles they play in their organization.

Earnings Stability:

It involves determining the income itself as well as assessing the extent to which the company’s resources, including its assets, have contributed to the profit and its potential in real and measurable terms.

Economic Operation:

The evaluation of the company’s public esteem value in relation to the various interests of contributors, employees, bankers, creditors, consumers, distributors, and the communities or societies in which it operates falls under this category. The extent to which a company’s management and social responsibilities to various interest groups are fulfilled satisfactorily is used to evaluate the social performance of the business.

Service to Shareholders (Owners):

The evaluation of the company’s service to shareholders is primarily focused on the three fundamental criteria in this category.

• Reducing investment risks to a minimum.
• Reasonable capital appreciation over time and a reasonable return on investment

Development and Research:

The evaluation of research policies is crucial, particularly in large manufacturing sectors. The extent to which previous processes for research and development were successful is measured in terms of their contribution to the company’s progress in the past.

Monetary Policy:

The appraisal components in this category aim to investigate and manage the company’s dividend policy, capital structure, organization for developing fiscal policies and control measures, and their application in various corporate activities.

Efficiency in Production:

The materials management, waste control and management, manpower management, and machinery, plant, and equipment management aspects of the management audit are all aimed at assessing production efficiency. The evaluation of production policies based on quantity and quality should also be taken into account.

Vibrancy in Sales (Aggressive Marketing):

In this regard, the management audit uses the measurements of the three criterion objectives:

• How much of the potential for future sales have been realized;
• The extent to which the company’s current sales policies enable management to realize additional sales potential and the level of development of sales personnel.

Management Audit: Pros & Cons

Advantages –

The advantages of such audit are –

1. Identifying management’s current and potential strengths and weaknesses is helpful. Major enhancements or corrections of flaws can be made with this data.

2. It aids in the development of an organization’s planning system and its evaluation. The responsibility for planning is then divided.

3. The communication and control systems are enhanced as a result. It is possible to follow effective management information systems. A proper control system ensures that standards are met.

4. It examines the quality of the decision-making process. It makes it easier for management to make decisions with more objectivity.

5. By continuously reviewing all aspects of the organization and enhancing performance, it safeguards the organization’s interests.

6. Maintaining open lines of communication between the responsibility centres is beneficial to management.

7. In light of changes in the business world, it helps management identify opportunities through innovation.

8. It aids management in assessing control methods and enhancing coordination.

9. It helps management identify the limiting factors that have an impact on profitability and how to eliminate them so that profitability can rise.

10. It suggests to management to improve overall performance and efficiency.

11. Every business relies heavily on its human capital. Management audit aids in the development of human resources and the performance appraisal system.

12. It alleviates pressure management. As a result, the management is able to focus on more pressing and unique issues.

Disadvantages – 

The disadvantages are as follows

1. There is a lack of clarity regarding the management audit’s scope.

2. An annual management audit is not carried out. As a result, nothing can be improved during the interval.

3. Management audit does not have its own set of standard procedures.

4. Finding an experienced and competent management auditor to conduct such an audit is extremely challenging.

5. Authority relations may become more complicated as a result of management audits.

6. The management auditor needs to have knowledge that spans disciplines. In reality, finding an auditor with such expertise is extremely challenging.

7. Management despises having its actions and policies evaluated.

8. The business unit incurs additional management audit costs. As a result, almost all business units believe that incurring these additional costs is unnecessary.

9. In practice, rather than encouraging executive initiative, the management audit discourages it.

10. A large company cannot conduct a comprehensive management audit. As a result, the outcomes are not trustworthy.

11. The executives in charge of management are ill-prepared to deal with the auditor’s criticism. As a result, the executives in charge of management do not support the management audit.

12. The competence of management executives cannot be evaluated by a management auditor.

13. In order to justify his appointment, the management auditor might attempt to point fingers at other people.

14. The management auditor’s recommendations might set off arguments and debates. The executives in management do not share the same opinion.

15. The Management Auditor makes recommendations without much thought or care. It’s possible that you won’t get the results you want in that case.

16. The recommendations are not actually put into action by management. Before they are put into action, it makes a few changes to the recommendations. As a result, the management audit’s goal is not achieved.

17. The manager will always focus on correcting the books of accounts rather than increasing production and efficiency.

Conclusion

Management Audit not only ensures the effective and efficient evaluation and decision-making within the company, but it also eases down the company’s pressure management. If management implements a system that links rewards to executive performance, the business stands to gain additional advantages, as executives will favour an audit of their performance.

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