What is Management Audit? Definition, Advantages, Characteristics

  • Post last modified:20 April 2021
  • Reading time:11 mins read
  • Post category:Finance
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What is Management Audit?

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, the recommendations to ensure its effectiveness where such is not the case.

Definition of Management Audit

Management Audit means an impartial evaluation of management performance beyond that implicitly provided by historical results.<span class="su-quote-cite">Burton</span>
Management Audit may be more specifically defined as being an investigation of a business from the highest level downwards 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 internally.<span class="su-quote-cite">Leslie Howard</span>
The Management Audit may be defined as a comprehensive and constructive examination of an organisation structure of a company, institution or branch of Government, or any component thereof, such as division or department and its plan and objectives, its means of operation and its use of human and physical facilities.<span class="su-quote-cite">William P. Leonard</span>
Management Audit is a future-oriented, independent and systematic evaluation of the activities of all levels of management for the purpose of improving organisational profitability and increasing the attainment of the other organisational objectives through improvements in the performance of the management function, achievement of programme purpose, social objectives and employees’ development<span class="su-quote-cite">The Institute of Internal Auditors Inc.</span>

Characteristics of Management Audit

Management audit does not audit individual performance or sit in judgement over the functioning managers. Management audit is a system’s appraisal, it analyses functioning in the past, studies systems and operations at present and suggests changes for the future.

The information yielded by a system of management audit can indeed be invaluable for large policy decisions and major structural shifts and improvements.

  1. Management audit also helps improve communication and general awareness within the enterprise.

  2. It helps the leadership in its directing function and improvement of the control and evaluation system.

In short, ‘Management Audit’ keeps the whole management system under perpetual review and is a powerful assurance that nothing much should go wrong, and nothing should go wrong which promptly cannot be put right and restored.

Actually, Management audit deals with:

  • The objectives of an organisation;
  • The policies and procedures in terms of the objectives of the organisation; and
  • Adequate performance of an organisation in terms of objectives, policies and procedures.

Performance Areas of Management Audit

this pioneering work in the field (The Scientific Appraisal of Management) published in 1962, Jackson Martindell of the American Institute of Management first developed the scope and methodology of the concept and its application.

Martindell selected ‘ten performance areas’, and using them as vantage points for a probing view of the organisation system, drew up an analysis sheet with ten thousand critical points of reference.

The ten management appraisal (audit) areas chosen by ‘Jackson Martindell are:

  1. Organisational Structure
  2. Functioning of the Management Board
  3. Executive appraisal
  4. Soundness of earnings
  5. Economic functioning
  6. Service to owners (Equity and Stockholders)
  7. Research and development
  8. Fiscal policy
  9. Production efficiency
  10. Sales vigour (aggressive marketing)

An efficient system of management audit would need the full support of the top management.

  • Organisational Structure: The effectiveness of the organisational structure through which the company management seeks to accomplish its objectives. Here, the appraisal is made through testing measures like flow of information, span of supervision, authority relations and centralization and decentralization of authority.

  • Functioning of the Management Board: In this appraisal area, the AIM (American Institute of Management) considered three fundamental elements:
    • The quality of each Director and his contribution to the board.
    • The extent to which the Directors work as a team.
    • Whether the Directors act as trustees for the organisation.

  • Executive Appraisal or Evaluation: In this respect, the AIM has traced out three personal qualities as being elements for business leaders. These are: ability, industry and integrity.

    Good Management demands that the executives should work together in harmony, and ensure company’s continuity by sound policies, decisions, procedures and programs relating to different activities of the organisation.

    Because of the vital roles that executive play in their organisation, it is possible to evaluate their performance separately by each of the basic elements.

  • Soundness of earnings: It involves determination of the income itself and also appraising the extent to which the resources including the assets of the company have realised the profit and their potentiality in real and tangible terms.

  • Economic functioning: This category involves appraising the public esteem value of the company in relation to the different interests like contributors, employees, bankers, creditors, consumers, distributors and the communities or societies in which it operates.

    The social performance of a company and its management is evaluated by finding out the extent to which social responsibilities towards different interest groups are satisfactorily discharged.

  • Service to owners (Shareholders): Under this category, the assessment is made of the company’s service to the shareholders mainly concentrating on the three basic criteria.
    • Minimisation of risks to investment.
    • Reasonable return on investment and
    • Reasonable appreciation of capital over a period of time.

  • Research and Development: The evaluation of the research policies particularly in big manufacturing industries is of crucial importance.

    The extent to which research and development processes carried on in the past was successful is evaluated in terms of the part played by them in the company’s past progress.

  • Fiscal Policy: Under this category, the appraisal elements aim at studying and managing the company’s capital structure, dividend policy, organisation for developing fiscal policies and control measures and their application in different areas of corporate activity.

  • Production Efficiency: In appraising production efficiency, the management audit aims at the evaluation of materials management, waste control and management, manpower management and management of machinery, plant and equipment. |

    The appraisal of production policies of achievement in terms of quality and quantity should also be duly considered.

  • Sales vigour (aggressive marketing): In this regard, the management audit makes use of the objectives measurements of the following three criteria:
    • The extent to which the past sales potential has been realised;
    • The extent of development of sales personnel and
    • The extent to which the present sales policies of the company enable its management to realise further sales potential.

Advantages of Management Audit

  • It helps in setting up an organisation framework to implement the plans.

  • It helps in designing and reviewing “Management Information System” (MIS) for decision making to help in coordination, motivation and control of the operations.

  • It helps top management in framing basic policies for the organisation and to define goals and objectives.

  • It also helps in analyzing SWOT of the organisation and assist in making the organisation stronger.

  • It helps in pursuance of the objectives of the organisation, and helps in preparing a viable and achievable plan for the organisation.

  • It also helps the Government in identifying improper or wasteful use of funds, checking extravagant organisation practices and curbing ineffective use of physical resources.

  • It is essential whenever a unit is planned to be taken-over or an amalgamation or merger with other unit is proposed.

Qualities of Management Auditor

The different qualities of management auditor in specific are discussed below:

  • The Management Auditor should have the ability to grasp the business problems.
  • He should have a general understanding to the nature, purposes and objects of the organisation.
  • He should have the ability in determining or assessing the progress of the organisation.
  • He should have expert knowledge on the principle of delegation of authority, management by objectives, management by exception, management planning and control and the different budgetary systems and those of internal control devices.
  • He should have sufficient knowledge and experience in preparing various reports for presentation, to the different levels of management including the top management.
  • He should have general understanding of different laws – general laws, company law, tax low, FERA, MRTP etc. that affect the functioning of the whole of the organisation.
  • He should have background knowledge about Engineering, Statistics, Costing, Management Accounting, Financial Accounting, Industrial Psychology, Managerial Economics, etc.
  • He should be tactful in dealing with different personnel of the organisation. It means, he should have sufficient knowledge of man management. It is vital to note in this context that ‘man’ is the essence of all elements of profits.
  • He should have pleasing and dynamic personality.

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