What is the Management Audit and it...
A management audit is an assessment and analysis of the competencies and capabilities of an org...
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.
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:
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:
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.
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.
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:
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.
Testing measures such as information flow, supervision span, authority relations, and centralization or decentralization of authority are used to conduct the evaluation.
This necessitates assessing the degree to which the resources have actually resulted in a profit.
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
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?
The evaluation of three fundamental aspects, namely:
(a) Each Director’s contribution and quality;
(b) Teamwork; and
(c) The trusteeship role.
The development of the capital management system, dividend policy, fiscal policy, and controls, as well as their use in various aspects of business operations.
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.
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
The evaluation of personnel characteristics as elements for business leaders, such as ability, professionalism, and integrity.
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.
The reason for conducting the management audit is as follows:
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):
An effective management audit system would require top management’s full support.
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.
The American Institute of Management (AIM) looked at three main aspects of this appraisal area:
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.
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.
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.
The evaluation of the company’s service to shareholders is primarily focused on the three fundamental criteria in this category.
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.
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.
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.
In this regard, the management audit uses the measurements of the three criterion objectives:
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.
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.
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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