Appraisal Areas of a Management Audit

This article throws light upon the ten main appraisal areas of a management audit. The appraisal areas are: 1. Economic Function vis-a-vis Social Responsibility 2. Corporate Structure 3. Health of Earnings 4. Service to the Shareholders 5. Research and Development 6. Analysis of the Board of Directors 7. Fiscal and Financial Policies 8. Production Efficiency 9. Sales Vigour 10. Executive Evaluation.

Management Audit: Appraisal Area # 1.

Economic Function vis-a-vis Social Responsibility:

This involves appraising the public esteem value of the company in relation to the different interests like shareholders, employees, creditors, distributors, consumers and the communities or societies in which it operates.

Supply of the right quality of goods to consumer at the right place, right price, right time and in right quantity are the useful indices to appraise management performance towards the consumer. Reasonable pay, safety, worker’s participation, industrial relations, welfare activi­ties are the aspects for evaluating management performance towards employees.

Social audit may be useful to appraise business performance towards community. Compliance with law, adoption of fair trade practices and timely honest payment of taxes indicate the management’s social performance towards the state.

Management Audit: Appraisal Area # 2.

Corporate Structure:

The appraisal is made through testing measures like flow of information, span of supervision, authority relations, and centralisation and decentralisation of authority.

Management Audit: Appraisal Area # 3.

Health 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.

Management Audit: Appraisal Area # 4.

Service to the Shareholders:

The assessment is made on the three basic criteria:

(a) Minimisation of risks to investment,

(b) Reasonable return on investment, and

(c) Reasonable appreciation of capital over a period of time.

Management Audit: Appraisal Area # 5.

Research and Development:

The extent to which research and development activities carried on in the past was successful is evaluated in terms of the part played by them in the company’s past progress and also in terms of how successfully the research policies are preparing and assisting the company for future progress and improvement in the class of industries to which it belongs.

Management Audit: Appraisal Area # 6.

Analysis of the Board of Directors:

In this appraisal area, the AIM considered three fundamental elements:

(a) The quality of each Director and his contribution to the Board.

(b) The extent to which the Directors work as a team.

(c) Whether the Directors act as trustees for the organisation.

Management Audit: Appraisal Area # 7.

Fiscal and Financial Policies:

The company’s capital structure, dividend policy, organisation for developing fiscal policies and control measures, and their applications in different areas of corporate activity are examined.

Management Audit: Appraisal Area # 8.

Production Efficiency:

In appraising production efficiency, the management audit aims at the evaluation of materials management, waste control and management, manpower management (especially management of non-executive employees), and management of machinery, plant and equipment. The appraisal of production policies and achievement in terms of quality and quantity should also be duly considered.

Management Audit: Appraisal Area # 9.

Sales Vigour:

Significant variations in sales policies and marketing strategies being followed by different companies do exist even in the same line of industry.

In this regard the Management Audit makes use of the objective measurements of the following three criteria:

(a) The extent to which the past sales potential has been realised,

(b) The extent of development of sales personnel,

(c) The extent to which the present sales policies of the company enable its management to realise further sales potential.

Management Audit: Appraisal Area # 10.

Executive Evaluation:

Each of the appraisal areas indicated above in one way or the other evaluate performance of business executives. However, since management is the most dynamic element of every enterprise, its performance needs are to be evaluated separately.

In this respect, the AIM has traced out three personal qualities as being elements for evaluation of business leaders. These are ability, industry and integrity. Because of the vital roles that the executives play in their organisation, it is possible to evaluate their performance separately by each of the basic elements.