A management audit is an analysis and assessment of the competencies and capabilities of a company’s management in carrying out corporate objectives. The purpose of a management audit is not to appraise individual executive performance but to evaluate the management team in its effectiveness to work in the interests of shareholders, maintain good relations with employees, and uphold reputational standards.
A company’s board of directors does not have a formal management audit committee. Instead, board members sit on the compensation committee and assess the performance of individual executives using quantitative information (organic sales, EBIT margins, segment margins, operating cash flows, and EPS) and unquantifiable or intangible elements (e.g., efforts toward acquisition integration).
Two words can exactly give an answer to the most pertinent question – why management audit is necessary for an organization ?
They are “Efficiency” and “Profitability”.
There may be loopholes in the organizational structure, methods, and practices in the management of a business organization which need to be identified. An independent person (sometimes an internal employee) is assigned for the task who takes a neutral, non-biased view to point out the lapses in management techniques. This happens to be the prime aim of management audit (also dubbed as operational auditing).
In short, the role of a management auditor is to provide a critical appraisal of the business structure. The critical analysis thus becomes a pointer to necessary actions required to be taken to sort out the lapses, thereby promoting overall efficiency of the workforce and enhancing business profitability.
The process of auditing is pretty simple – some questionnaire needs to be answered followed by rounds of interviews with employees and managers.
The Sunny Aspects of Having a Management Audit
It is healthy for a business organization to have a business audit from time-to-time. A business owner would get an insight into:
Whether the management style is conducive to the business purpose ?
Whether the company management has effectively been able to control overall business operations ?
How good is the management team to nurture healthy relationship with the employees and shareholders of the company ?
Is the management team able to uphold company’s reputation ?
Management auditing focuses on:
Assessing existing management policies
Proper utilization of resources
Assessing the tactics and strategies behind current business plans
Appraisal of team efficiency rather than an individual
Recruitment and retention policies of the company
The top objectives of having a management audit are:
Clearly define the prime objectives of the organization
Setting of a well-defined organizational structure with clear-cut lines of who reporting to whom (to avoid confusions during business reporting at the close of the day).
Setting of detailed targets for all segments of the business
Challenging existing rules and regulations to work out on effectiveness level
Suggesting improvement measures for giving an impetus to business performance in the forthcoming months
Suggesting ways to restructure organization and ensure high quality service at all quarters
More effective resource utilization planning
Incorporating management information systems to reach production and work efficiency goals
Identification of weak points or managerial inefficiencies in respect to cores functional areas of the business, namely finance, sales and production.
In cue to the above point, it is noticed that management audit has a connection to the finance analysis. It brings forth the discussion which has been stated just below.
Is Management Audit Same as Financial Audit?
Management audit is all about examining, reviewing and evaluating non-financial data generally. As stated in the objectives, it can identify weak spots in managerial processes of finance department. It can address some financial questions too, like:
The management’s role in annual budgeting of the company
The compliance level of the current policies employed by the finance team of the company.