Simply defined, the management audit is a comprehensive and thorough examination of an organization or one of its components. The audit is implemented to identify problems or significant weaknesses in the organization or corporation, thus providing management with a tool to address and repair the problem area.
The audit is not a new or recent idea. History tells us of the presence of auditors in Pharaoh’s Egypt and the classical periods of Greek and Roman history. As businesses developed and grew over the centuries of recorded history, the need for controls became increasingly important. Financial auditing became a standard in American businesses and, following the lead of New York State, certification for accountants was enacted as legislation in many states. The financial audit is now fully integrated into business practices. The internal audit follows the spirit of financial auditing and surpasses it to examine operational matters as well. Another natural extension is operational auditing. While internal auditing is conducted by employees within the organization, an operational audit is generally completed by an internal task force or external analysts.
The management audit is now widely accepted in the business field. For more than 40 years, corporations and nonprofit organizations have utilized the management audit as a comprehensive tool. In 1932 T. G. Rose, a lecturer in management at Cambridge University and former manager for Leyland Motors, embraced the concept of an annual organizational and management audit; Queens University School of Business professor William P. Leonard followed suit, urging a comprehensive examination of the business entity. Additional credibility stemmed from the General Accounting Office of the federal government, an office charged with independent audits of government agencies.
The management audit is defined by its scope and objectives. The scope is broad and generally includes all functions of the organization, including objectives and strategy, corporate structure, organizational planning, the budgeting process, human and financial resources management, decision making, research and development, marketing, equipment and operations, and management information systems . This breadth extends to recent, present, and future operations and covers external issues as well as internal concerns. Objectives of the management audit include the development of recommendations and improvements, as well as increased awareness of the credibility and acceptance of the audit’s results. The process is more an audit of management, in order to enhance corporate profits and financial stability.
The audit follows a logical, step-by-step format, including initial interviews with key managers. A study team uses the interview process to define the scope of the audit, including the areas or functions to be studied. Next, the team requests various forms of documentation, including budgets, planning documents, corporate reports, financial statements, policy and procedure manuals, biographical material, and various other documents. Following this stage, the study team then prepares a schedule and detailed plan of study, all aimed at proceeding to the internal fact finding step. Fact-finding relies once again on interviews, documentation, and personal observation of facilities and organizational work patterns. By the time these steps are completed, the study team develops a thorough understanding of organizational structure and operations.
The team generally turns next to an external review, using interviews to determine the opinions and attitudes key people outside the organization have about its operations. Examples of those interviewed are customers, representatives of financial institutions,and employees of federal agencies having contact with the audited organization. These interviews provide the team with more objective evaluations, and lead to an analysis of all the information and data now gathered. Organizational performance is profiled, then efficiency and effectiveness are evaluated and compared against industry norms. While many criteria can be measured quantitatively, team members have to use sound judgment and objectivity when evaluating issues that cannot be measured. In turn, the organization’s management has to be receptive to the audit process and demonstrate clear acceptance of audit findings.
The study team then develops conclusions and recommendations which are communicated to the organization’s management. These final two stages—conclusions/recommendations and communication—are essential to the management audit process. The audit is expected to identify corporate strengths and weaknesses, sources of problems, and potential problem areas. Recommendations for correction are presented to top management. The final report comes in the form of an overall plan of action, which includes prioritized recommendations, the specific units and individuals expected to carry out the recommendations, a schedule for action, and expected results. When conducted with thoroughness, objectivity, and timeliness, the management audit becomes a powerful tool for corporate and organizational executives who seek to improve effectiveness and efficiency.
An important aspect of the management audit is the composition of the study team. Both internal and external analysts are frequently used on audit teams; the composition depends on several factors, including the need for independent appraisal, the lack of human or financial resources to conduct the audit, and the need to provide an external audit to contrast against internal findings. In some instances, associations such as the American Institute of Management (AIM) provide audit teams. The AIM has developed ten categories of the management audit, and many audits apply these same categories. They include:
- economic function
- corporate structure
- health of earnings
- service to stockholders
- research and development
- directorate analysis
- fiscal policies
- production efficiency
- sales vigor
- executive evaluation
Management audits are not limited to business corporations. Nonprofit organizations—including educational institutions, hospitals, and churches—often use the management audit to attempt to improve operations. When conducted effectively, and when recommendations are applied properly, the management audit has proved its usefulness as a management technique.