Management audit means the examination, review of various policies and action of the management on the basis of certain specified objectives.
The management audit is conducted to critically evaluate the activities and efficiency of the management. It is an independent appraisal activity.
Learn about:- 1. Introduction to Management Audit 2. Definitions of Management Audit 3. Concept 4. Scope 5. Objectives 6. Need and Importance 7. Process Adopted for the Implementation of Management Audit
8. Approaches 9. Preliminaries 10. Qualification of Management Auditor 11. Activities Performed by Management Auditor 12. Duties of Management Auditor 13. Management Auditor’s Report 14. Advantages and Disadvantages.
Management Audit: Definitions, Objectives, Scope, Approaches, Advantages, Disadvantages and Importance
Management Audit – Introduction
Management Audit is of recent origin as compared to statutory audit. Management Audit is otherwise called Operational Audit. When the functions of the statutory auditor expanded, the need arose for the review of the management process. Initially, the statutory auditor was required to state whether the Balance Sheet and Profit and Loss account were prepared according to the Companies Act and furnish a correct and unbiased picture of the state of affairs of the company.
The statutory auditor never goes beyond this limit. The reason is that the growing size and complexity of the business organisation resulted in development of new audit i.e., Management Audit.
Besides, the statutory auditor is not expected to verify whether policies laid down by the management are properly put in to practice or not; to evaluate the execution of various management functions and processes in order to improve its efficiency; to find out whether a change in the method of purchase is beneficial to the company; he is not expected to suggest that a change in the system of running the business would be beneficial to the company.
The success or failure of a business or a company depends fully on the quality of management. Management Audit is an overall scientific appraisal of the quality of management. In our modern business world, it is necessary that the management auditor should consider the factors of production and various elements of costs. The reason is that each company wants to minimise the cost of production by eliminating wastage and utilising full manpower to make a mark in the competitive business world.
In the present computer world, the company wants to get management consultancy services to locate deficiencies in the performance of management functions. Competent staff members are not available to business concerns in the management cadre or some specialised areas such as – operation research, electronic data processing, production control and the like.
If a person has specialised in these areas, he will not be willing to work in a business concern. He wants to practise as a Management Consultant. At the same time, he wishes to work as Management Auditor and demand high fees. The client is ready to pay him high fees because the client can earn profits more than what he actually spends on consultation.
Management Audit is a new concept in the field of auditing. The expansion of internal audit is now called Management Audit.
Management Audit – Definitions
Management audit means the examination, review of various policies and action of the management on the basis of certain specified objectives.
The management audit is conducted to critically evaluate the activities and efficiency of the management. It is an independent appraisal activity.
It will be useful to study a few definitions of management audit to understand the concept.
Some of the definitions are given below:
William P. Leonard defines, “Management audit is a comprehensive and constructive examination of an organisational structure of a company, institution or branch of Government, or of any component thereof, such as a division or department, and its plans and objectives, its means of operations, and its use of human and physical facilities.”
The Institute of Internal Auditors Inc. defines, “A Management audit is a future- oriented, independent and systematic evaluation of the activities of all levels of management for the purpose of improving organizational profitability and increasing the attainment of other organizational objectives through improvements in the performance of the management function, achievement of programme purpose, social objectives and employee’s development. Included are an evaluation of the management control system in terms of existence, compliance and adequacy; the management decision- making process in terms of existence, compliance and relevance to the attainment of organizational objectives; the management decision itself in relation to the organizational objectives and the quality of management. The resultant audit report both identifies problems, recommendations and solutions.”
H. Washbrook, “The total examination or part of it, include checks on the effectiveness of managers, their compliance with company or professional standards, the reliability of the management data, the quality of performance of duties, and recommendations for improvement. These are variously termed as management audits, administrative audits, operations audits, or management and administration audits. Management and administration audit is an independent assessment of the soundness of the business unit and its ability to face the business problems of the future.”
Leslie R. Howard, “Management audit is an investigation of a business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient organisation and smooth running of the internal organisation.”
To the American Institute of Management, “Management auditing is a diagnostic appraisal process for analysing goals, plans, policies and activities in every phase of operation to turnover unsuspected weaknesses and to develop ideas for improvement in areas that have escaped management attention.”
Taylor and Perry, “Management auditing is a method to evaluate the efficiency of management at all levels throughout the organisation, or more specifically, it comprises the investigation of a business by an independent body from the highest executive level downwards, in order to ascertain whether sound management prevails throughout, and to report as to its efficiency or otherwise, with recommendations to ensure its effectiveness where such is not the case.”
William F. Kelly, “A management audit is a critical review of an organisational structure and administration. Its purpose is making recommendations for adjustment and improvement. An audit may involve a whole company structure or be restricted to one of its parts such as division or department.”
Michael Stephen R., “The business counterpart of human physical examination is the management audit. In many ways, it is like a financial audit in which the financial operations of the company are tested against commonly accepted standards and practices. In the same way, Management Audit is an examination of the administrative operations and organisational arrangements of a company using commonly accepted standards of good management for evaluation.”
Federal Financial Officers’ Institute, Canada defines, “A systematic independent appraisal activity within an organisation for a review of the entire departmental operations a service to management. The overall objective of operational auditing is to assist all levels of management in the effective discharge of their responsibilities by furnishing them with objective analyses, appraisals, recommendations and pertinent comments concerning the activities reviewed.”
Roy A. Lindberg and Theodore Cohn define, “A technique for regularly and systematically appraising units or function effectiveness against corporate and industry standards by utilizing personnel who are not specialists in the area of study with the objectives of assuring a given management that its aims are being carried out and/or identifying conditions capable of being improved.”
A careful analysis of the above definitions of experts enables to ascertain that management audit covers the following areas:
1. Examination of organisation structure in full or part thereof.
2. Checking the operations of management and its effectiveness.
3. A critical appraisal of activities of management executives.
4. Examination is to be carried on independently by experts.
5. Evaluation of the functioning of the management board.
6. Analysing goals, plans, policies and activities of the management.
7. Evaluation of the earning capacity of the management.
8. Identification of management weaknesses and suggesting suitable measures for rectification.
9. Making management to face or tackle any problem effectively in future.
Management Audit – Concept
Management audit may be defined as the systematic and dispassionate examination, analysis, and appraisal of management’s overall performance. It takes into account financial and non-financial factors including economic environment, their effect on the administration and goals of the business organisation.
It is essentially a procedure or a form of appraisal of the total performance of the management by means of an objective and comprehensive examination of the organisation structure, its components such as department, its plans and policies, methods of process or operation and controls, and its use of physical facilities and human resources. Thus, management audit signifies critical assessment of management of the enterprise from the broadest possible point of view. The thrust of this audit is, therefore, on evaluation with appropriate analysis for improvement of contribution towards industrial development.
In this regard, George A. Terry states:
“The planning, organising, actuating and controlling compared to what might be called the norm of successful operation are the essential meaning of management audit. It reviews the company’s past, present and future. The areas the company covers are examined with a view to determine whether the company is achieving maximum results out of its endeavors”.
1. Management audit concerns itself with the whole field of activities of the concern, from top to bottom, starting, as always, where management control is concerned, from the top, because we are primarily concerned with where the general management is functioning smoothly and satisfactorily.— T. G. Rose.
2. Management audit may be defined as a comprehensive and constructive examination of an organisation structure of a company, institution, or branch of Government, or of any component thereof, such as a division or department, and its plans and objectives, its means of operation and its use of Human and physical facilities. —Willam P; Leonard.
3. Management audit is an informed and constructive analysis, evaluation and series of recommendations regarding the broad spectrum of plans, processes, people and problems of an economic entity. —Camp field.
Management Audit – Scope
1. Studying the prescribed organisation:
Renewing formal organisation structure, personal interrelationships, policies, procedures, information systems and flows, and decision centers in order to determine what management has established as optimum arrangements for running an entity.
2. Evaluating the ‘live-entity’:
Determining such problems as what operating people are really trying to accomplish, the schedules and routines they have established to attain objectives, and a measure of the results achieved in the light of predetermined goals and standards of performance.
3. Searching for profit inhibitors:
Uncovering poor organisational structuring and responsibility assignment, break-downs in operations, programming and work flow inadequate and ineffective communication, evaluation and measurement, and disclosing results that fall significantly below established standards. Since the concept of management audit requires the appraisal and assessment of total organisation or management processes and examines in depth the functioning of the system and its performance, its scope is synonymous with the appraisal areas identified by the American Institute of Management.
These are as follows:
1. Economic function vis-a-vis social responsibility:
This involves appraising the public esteem value of the company in relation to different interests like shareholders, employees, creditors, distributors, consumers, and the community in which it operates.
2. Corporate structure:
The appraisal is made through testing measures like flow of information, span of supervision, authority relations, and centralisation/decentralisation of authority.
3. Health of earnings:
This requires appraising the extent to which the resources have realised the profit in real and tangible terms.
4. Service to shareholders:
The assessment is made mainly on three basic criteria:
(a) Risk minimisation to investment,
(b) Reasonable return on investment, and
(c) Reasonable appreciation of capital over a period of time.
5. Research and development:
The extent to which these activities carried on in the past was successful in the company’s past progress and was contributory to the future development.
6. Analysis of the board of directors:
The assessment on three fundamental elements, viz.:
(a) Quality of each Director and his contribution,
(b) Team work, and
(c) Trusteeship role.
7. Fiscal and financial policies:
The evolution of capital management system, dividend policy, fiscal policy and controls and their application in different areas of corporate activity.
8. Production efficiency:
The evaluation of the management sub-systems relating to materials, labour, waste control, machinery, production policy and the achievements in terms of quantity and quality.
9. Sales vigour:
The measurement and evaluation of the criteria, such as:
(a) Development of sales personnel,
(b) Attainment of past sales potentials, and
(c) Current sales policies to realise further sales potential.
10. Executive evaluation:
The assessment of personnel qualities as being elements for business leaders, e.g., ability, industry and integrity.
Management Audit – Objectives
The basic objectives of management audit are given below:
1. To identify the level of achievement of the main objectives of the organisation.
2. To identify the defects or irregularities of management executives.
3. To ensure that the management is going to achieve the objectives.
4. To help the management to do efficient administration of the operations.
5. To help the management executives in the effective discharge of their responsibilities.
6. To suggest to the management the ways and means available to achieve the objectives.
7. To improve the profitability of the organisation.
8. To obtain or utilise the full efficiency of the management.
9. To help the management executives in the effective discharge of their duties.
Some other objectives of management audit include:
1. To find the level of achievement of strategies, goals and objectives
2. To find the suitability of the organisation structure to the organisational strategies
3. To observe the degree and direction of utilisation of various resources in tune with the organisational strategies
4. To identify the deviations against the set standards or the benchmarks of the industry
5. To suggest the measures to correct the deviations, if any and to improve the management system
6. To help the management in improving the execution aspect of policies, objectives etc.
Management Audit – Need and Importance (With Reasons)
Management Audit has become necessary on account of the following main reasons:
1. Management audit examines whether the policies laid down by the company are carried out properly or not.
2. It helps in the improvement of the performance of the various managers including the general manager.
3. Management audit offers suggestion to eliminate wastage or reduce the cost of production.
4. It helps the general manager or the managing director to analyse the performance independently.
5. Management Audit points out the ways available to maximise profit and for optimum utilization of all resources.
6. It finds out the weaknesses or shortcomings which are responsible for inefficient performance and brings improvement in performance.
7. Management Audit can ascertain the financial soundness of the company.
8. It helps the management to sort out financial and non-financial incentive schemes and link them with the performance.
9. Banks and financial institutions may require management audit to find out whether the loan amounts have been properly utilised or not.
10. Management Audit assists the foreign collaborators to assess the progress and performance of the management of the concern with which collaboration has been undertaken.
11. In India, public enterprises follow the rules and procedures but do not evince interest in their achievement and results. Management Audit suggests to the public enterprises that they should change their outlook and insist on improving their efficiency.
12. The management audit is necessary to find out the best methods of improving efficiency.
Management audit play pivotal role in making the company efficient due to the following reasons:
1. Management Audit sets the policies and objectives right in view of changing environment, competitors’ strategies, changes in technology, consumers’ preferences etc.
2. It helps the management in improving its systems in view of developments or creations in management principles, techniques and approaches.
3. It helps the management in improving its performance in execution of policies and in utilising resources.
4. It sets the direction of objectives policies and business definition.
5. It provides scope to the business to interact openly with the environment and maxmises the benefit of the environmental opportunities and controlling the effects of environmental threats.
Management Audit – Process Adopted for the Implementation of Management Audit
Generally, the following process is adopted for the implementation of management audit:
(1) Objectives for Introducing Management Audit System:
Firstly of all the objectives for introducing management audit system are determined by the directors. At the same time the management auditor is also appointed.
(2) Collection of Facts:
After the appointment of the auditor, the work of inquiry begins. During the course of the inquiry he inspects the record, interviews the managers, and looks into the policies of the enterprise, organisational structure, motivation and the systems of communication. Apart from this he judges the quality of the managerial decisions taken during a particular period of time.
(3) Critical Appraisal:
After having collected all the necessary facts he analyses them and tries to find out the activities which were unnecessary and useless and what decisions proved unsuccessful and why.
(4) Suggestions for Improvement:
The job of a management auditor is not only to point out the weaknesses but also to make suggestions for improvement. Thus, in the end he sends his report to the Board of Directors along with his suggestions.
Management Audit – Top 13 Approaches
A management auditor should frame an audit programme before starting management audit. If the management auditor follows the under mentioned approaches, he can perform his duties efficiently with the help of a good audit programme –
1. He should evaluate the formal organisation structure and organisation charts.
2. He should appraise the management information system in operation.
3. He should study the various policies followed by the management.
4. He should review the extent of authority assigned to the management executives and the responsibilities fixed on them.
5. He should study leave rules and procedures.
6. He should observe the inter-relationship of various management executives.
7. He should study the existing layout of the organisation.
8. He should review the various standards fixed by the management.
9. He should assess the impact of decisions taken by the management executives.
10. He should study the statutory regulations followed for the running of the company.
11. He should review the working conditions and working environment of the management executives.
12. He should study the main objectives and subsidiary objectives of the company.
13. He should review the various levels in the organization hierarchy.
The success of management audit is fully based on the skill and the competence of the management auditor.
Management Audit – Preliminaries
A single person cannot possess the various skills required for conducting management audit. The management audit should be conducted by a team of experts in order to produce best results.
Therefore, the management audit team should consist of members who are experts in different fields such as accounts, engineering, science, psychology and the like. These persons should undergo proper training. Top management should extend all cooperation and provide necessary facilities to them to acquire skills required to appraise the various areas of management.
The management auditor should perform certain duties i.e., preliminary work before commencing the auditing work.
These are briefly explained below:
1. He should observe organisation climate.
2. He should study the nature of appointment of management executives.
3. He should study the psychology of management executives.
4. He should identify the inherent talents of management executives.
5. He should find out the degree of involvement of management executives in the performance of work.
6. He should fix the standards for various types of activities.
7. He should observe the treatment of executives and workers by management.
8. He should find out the extent of freedom given to management executives in the performance of work.
9. He should find out the control techniques applied by the management.
10. He should identify the level of job satisfaction available to management executives.
11. He should find out the adequacy of staff members.
Management Auditor should get proper authority from the management to authenticate his appraisal activities. In other words, he should have obtained a clearly defined authority from the management.
Management Audit – Qualification of Management Internal Auditor
There is no prescribed qualification for a management auditor. The reason is that management audit is the latest development of internal audit and laws do not insist on it. So, it is said that the internal auditor himself can carry out the management audit also.
As such, the management audit work can be assigned to the internal auditor on account of the following reasons:
1. Internal auditor has a good knowledge of the organisation structure, nature of business, real problems of management and the like. Therefore, it is possible for him to offer valuable suggestions.
2. The internal auditor finds an opportunity to gain knowledge of the performance of management in all aspects.
3. The inter-relationship of the personnel is well known to the internal auditor.
4. The personal strength and weaknesses of the employees are well-known to the internal auditor.
5. The internal auditor examines the flows in the working of all the departments of an organisation.
6. The internal auditor can easily understand the factors which necessitate management audit.
Some express the view that the management audit work should be assigned to a person other than the internal auditor on account of the following reasons:
1. An external auditor can look after the affairs of the company in a different way or from a different point of view.
2. He is not a paid employee of the company. So, he fearlessly offers suggestions to remove the bottlenecks in the performance.
3. He would have rich experiences in various fields. He knows very well the best methods which help to improve the efficiency of the personnel.
4. He has technical knowledge.
These two views have sound reasons to be upheld. It is very difficult to find out who will do management audit very efficiently and economically. In any case, the management audit does not come under the purview of statutory audit.
Now-a-days, there is no statutory body which prescribes any qualification for a management auditor. Management experts are invited to conduct management audit. They are designated as management consultants. The management should consider the technical proficiency of the management consultants while appointing a management auditor.
It is advisable to appoint a person other than the internal auditor and statutory auditor as a management auditor. If the management follows this practice, it is sure to get valuable suggestions for improving the efficiency of the management executives.
Management Audit – Activities Performed by Management Auditor
Management auditor performs the following activities:
1. Scanning external environment
2. Scanning the company’s vision, mission, objectives, philosophy, policies, goals and strategies
3. Evaluating the industry benchmarks in terms of objectives, strategies, organisational structure, profitability, productivity etc.
4. Evaluating the internal environment of the company in terms of benchmarks
5. Evaluate the key managers, their capabilities, styles and performance
6. Evaluate the current management styles and approaches in another companies also
7. Evaluate the potentialities of managers and their creative skills
8. Evaluate freedom and autonomy provided to employees in order to make use of their talents
9. Evaluate the degree of involvement of managers in policy making as well as execution.
Management Audit – 20 Important Duties of Management Auditor
It is very difficult to fix the duties of management auditor. However, he shall deal with a few areas of work.
The management auditor may proceed to check the following items:
1. Purchasing practices followed by the management.
2. Sales practices i.e., receipt of order and its execution.
3. Critical analysis of the manufacturing process.
4. Inspection of a factory i.e., neatness in the production place.
5. Storage facilities.
6. Safety measures with regard to raw materials, finished goods and various assets of a company.
7. Internal transport system with regard to men and materials.
8. Maintenance of records.
9. Customer service.
10. After sales service.
11. Treatment of complaints made by customers.
13. Quality inspection practices with regard to raw materials and finished goods.
14. Communication system prevailing between production department and sales department.
15. Efforts adopted to minimize the cost of production.
16. Channel of distribution followed by the company.
17. Cash payment made to creditors.
18. Cash collection got from debtors.
19. Approval of bad debts and the procedure of writing off these bad debts.
20. Safety measures available to workers in the production place.
Management Audit – Management Auditor’s Report
The management auditor should make a correct assessment of the working of the organisation. For this purpose, he should prepare a report which contains findings and conclusions of the management audit. He should present his report lucidly without any ambiguity.
The statements which are included in the report should be correct. The correctness of the statement is based on the information received by the management auditor while engaged in the audit work. He should not hesitate in criticising the management.
The management auditor presents his report with courtesy and avoids unnecessary pungency in words. He should express his views regarding the relationship prevailing between the management and the staff.
Generally, the following matters have to be dealt with in the report:
1. Express opinion about the returns on investments.
2. Comparison of the actual performance with the standards set by him or the management.
3. Comment on the operating costs of the company.
4. Express opinion about the utilisation of plant and machinery.
5. Recommendations for improvement.
6. Findings and conclusion.
Management Audit – Advantages and Disadvantages
The main advantages of management audit are discussed below:
1. It helps to identify the present and potential strength and weaknesses in management. With this information, major improvements or rectification of defects can be made.
2. It assists in establishing and reviewing the system of planning in an organisation. Then, it allocates responsibility for planning.
3. It helps to improve the communication and control system. Effective management information systems can be followed. Proper control system ensures no deviations from standards.
4. It reviews the decision-making-process and the quality of decision. It helps the management to bring about more objectivity in decision-making.
5. It protects the interests of the organisation by continuous review of all aspects of organisation and improving the performance.
6. It helps the management to ensure free flow of communication between the responsibility centres.
7. It assists the management in identifying the opportunities through innovations in the light of changes in the business world.
8. It helps the management to improve co-ordination and to evaluate the control techniques.
9. It assists the management in pinpointing the inhibiting factors which affect the profitability and the ways to remove them so that the profitability may improve.
10. It suggests to the management to bring about better efficiency and overall improvement.
11. Human resource is crucial in every organisation. Management audit helps the management to improve performance appraisal system and to develop human resources.
12. It relieves the management of pressure. Thus, the management can devote more attention to important and special matters.
Management audit is not free form limitations or disadvantages.
It has some disadvantages also:
1. The scope of management audit is not well defined.
2. Management audit is not conducted every year. So, it is not possible to improve anything during the interval period.
3. Management audit has no standard techniques of its own.
4. It is very difficult to get a competent and expert management auditor to conduct management audit.
5. Management audit may create complexity in authority relationship.
6. Inter-disciplinary knowledge is essential to the management auditor. In practice, it is very difficult to get an auditor with such knowledge.
7. Management does not like to have its policies and actions appraised.
8. Management audit expense is an additional one to the business unit. So, almost all business units consider it unnecessary to meet these additional expenses.
9. In practice, the management audit discourages the initiative of executives rather than encouraging them.
10. It is not possible for a large concern to undertake intensive management audit. Hence, the results are not reliable ones.
11. Management executives are not ready to face criticism of the management auditor. So the management executives are not in favour of the management audit being conducted.
12. Management auditor is not in a position to assess the competence of management executives.
13. Management auditor may try to find fault with others in order to justify his appointment.
14. The suggestions of the management auditor may create an occasion for arousing controversies. There is no consensus of opinion among the management executives.
Bradford Cadmus has stated that, “unless the auditor is assigned this project as a special study, he is not in a position to make definite recommendations as to change his primary responsibility which is fulfilled when he has brought the results of the policy to attention through his report – which should present the facts in such manner that the situation may not be overlooked or dismissed without adequate review at an appropriate management level”.
15. Management Auditor makes recommendations casually or carelessly. In that case, the desired results may not be obtained.
16. Management does not implement the recommendations as such. It makes some changes in the recommendations before implementation. So, the purpose of the management audit is defeated.
17. Manager will always pay attention to keep the books of accounts correct instead of concentrating on more production and efficiency.
Under these circumstances, the management audit is an effective and efficient tool for the management to exercise control if the management audit is properly conducted. The company can derive more benefits if the management adopts a system to link incentives to the efficiency of the management executives who will also favour the management audit assessing their performance.