Management Audit: Concept and Scope

Management Audit: Concept and Scope

What Is a Management Audit?

A management audit refers to evaluation of the competencies as well as capabilities of a firm’s management in undertaking corporate objectives. The primary purpose of a management audit is not assessment of individual performance of executives, instead it includes assessment of effectiveness of the management team in preserving the shareholders’ interests, maintaining strong and enduring relations with the employees, and keeping up repute. It is imperative that the management audit evaluates the entire management of the organization, not the performance of individual managers.

It takes into consideration both financial as well as non-financial factors. For example, it covers business organizational objectives, efficacies of the administration, economic environment, organization framework, various elements of organisational departments, its operations, control procedures, and usage of physical facilities and human resources.

Thus management audit indicates critical evaluation of management of the business enterprise from the broadest possible viewpoint. The main thrust of this audit is, for that reason, on evaluation, with proper study for improvement on involvement and role towards industrial development.

 

Objectives of Management Audit:

1. To present recommendations to improve efficiency: Management audit detects incompetency in different echelons of management and suggests methods for improvement of efficiencies.
2. To test and validate efficiency: Management audit aims at improving productivity at different levels of management and implementation of policies.
3. To analyse the overall ability of strategies, policies and planning: It audits and analyses the policies processes structured by the management and reviews if it is suitably implemented.
4. To increase profit: It assists in increasing the profit margin of the business by presenting solutions to optimize the resources in a valuable manner.

The Scope of Management Audit:

Management audit is quite broad in comparison to a financial review as it not only analyses the finance but also other aspects of a company. It has the capability to assess management at different levels. The main scope of management audit are hereby mentioned below:

• Enumerate the effectiveness of the management: It audits all levels of management (from top to middle to bottom) of the company.
• Implementation of principles and policies: Management audit reviews whether all the policies and principles implemented by the company is effectual and successful.
• Detect and examine the differences:  It assists in identifying the productivity differences and whether the pattern set by the businesses is not properly fulfilled.
• Present recommendations for improvement: The management audit presents suggests for improvement in segments such as human resources, finance, marketing and sales, and administration among many others.

How a Management Audit Works

Board of directors of a company does not have a formal committee for management audit. Board executive assess the performance of individual executives by using quantifiable information (such as Earnings Per Share-EPS, Earnings Before Interest and Tax-EBIT margins, profit margins, cash flow and others) and by using unquantifiable components (such as acquisition). In this case, the board can appoint an independent auditor/consultant to undertake management audit. The audit may address questions as mentioned herein below:

• How much effective is the present risk management procedures?
• Is the company having up-to-date and advanced IT SYSTEM?
• Is the management of the company trying to make sure that the business entity is “a good corporate citizen”?
• What is the structure of organization arranged by the management?
• Is the company having clear lines of reporting or is it diluted or confusing?
• What are the policies, strategies and procedures of the company and is it in compliance?
• How effectively does the management of the company present the annual budget?
• Is there good relations among employees of the organization?
• How effective is the recruitment, selection and retention policies of the company? Has the management set up training programs for Upskilling their employees?
• Is the management of the business enterprise responsive to its stakeholders?
• Is the management effectually leading the way towards successful fulfilment of the financial targets of the company?

Advantages of Management Audit

• Management audit assist in establishing an organisation framework to execute the plans
• It assists in devising and assessing the “Management Information System” (abbreviated as MIS) for proper decision making so as to help in the process of coordination, motivation as well as control of business functioning.
• It assists top management of the enterprise in devising basic policies and procedures and in defining the goals and objectives.
• It assists in evaluating SWOT (Strength, Weakness, Opportunity and Threat) of the business and helps in developing stronger foundation of the business.
• It assists in pursuance of the goals of the business, and aids in presenting a viable and achievable plan for the business entity.
• Management audit also assists the government in detecting uneconomical use of funds, limiting extravagant practices, and cutting in effective usage of physical resources.

10 Main Areas of Management Audit

Structure of the organization:

Management audit checks the efficacy of the structure of the organisation through which the business management intends to attain its pre-determined objectives. In this case, the assessment is mainly carried out by using measures such as flow of information, span and coverage of supervision, centralization and decentralization of authority and relationship with the authority.

Operations of the Management Board:

In this segment of assessment, three rudimentary elements are taken into consideration, namely:

• Overall quality of each of the directors of the company and their contribution to the board.
• The degree and extent to which the directors of the company can effectively perform as a team.
• Whether the directors operate as trustees of the business organization.

Appraisal or assessment of executives:

Three qualities that are considered as important elements of an effective business leader are ability, integrity and industry.

Effective management necessitates that the executives of the business should work cooperatively, and make sure continuity of business by abiding by the policies, programs, and procedures associated with different activities of the entity. As the executives play an important role in the organisation, it is possible to analyze their performance discretely.

Reliability of earnings:

This aspect involves ascertainment of the income and appraising the degree to which the resources (counting the assets) of the business have realized profit and their ability in real as well as tangible terms.

Economic operations:

This segment includes assessing the value of public esteem of the business related to various interests such as consumers, creditors, employees, and the society in which it operates.

The overall social performance of the company and its administration is gauged by examining the extent to which social accountabilities are discharged towards diverse interest groups adequately.

Response to shareholders:

In this segment, the evaluation is mainly made of the service of the company towards the shareholders, primarily, focusing on three main criteria:

• Minimization of risks to investments
• Viable return on investment and
• Reasonable appreciation of capital over time

Research and Development:

Analysis of the research policies, especially, in manufacturing firms is of utmost importance. The extent and degree to which research and development procedures are undertaken in the past was successful.

Fiscal Policy:

In this segment, the assessment elements aim at studying and handling the company’s capital structure, dividend policy, fiscal policies, control measures and their implementation in various sections of the business.

Production Efficiency:

In evaluating production efficiency, the management audit mainly intends to appraise efficiency in management of materials, waste control, machinery management, and manpower management. The assessment of production policies of attainment with regard to quality and quantity need to be duly considered.

Sales and Marketing:  

Particularly, the management audit deals with objectives of three different criteria:

• Degree to which the sales of previous period has the potential to be realized;
• The degree of development of sales personnel
• The extent to which the current sales policies of the corporation assist its management to realize sales potential.

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