Circumstances Leading to Development of Management Audit

This article throws light upon the eight major circumstances leading to development of management audit. The circumstances are: 1. The Size, Scale and Complexity 2. Need to Improve Productivity 3. Granting Financial Subsidy 4. Take-Over Bids 5. Societal Need 6. Need for Periodical Check-Up 7. Foreign Collaboration 8. Equity Participation.

Circumstance # 1. The Size, Scale and Complexity:

Business operations continue to grow larger, bigger and wider for a search and drive to produce more goods at progressively reducing unit costs. The very size and scale lend complexity to the affairs of the organisation. Eventually a stage comes when further development or expansion is either uneconomic or unmanageable.

In order to deal with the problems of complexity several management accounting practices or techniques have been evolved, such as Budgetary Control, Statistical Quality Control, Value Analysis, Operational Research, PERT, PACE, CPM, Zero-based Budgeting, etc. These techniques help to overcome the limitations imposed by the growing size of business enterprises. Management Audit is meant to overcome the human limitations of Top Manage­ment.

Circumstance # 2. Need to Improve Productivity:

The industrial development, now-a-days, is charac­terised by a continuous search for improvement of productivity-cum-efficiency through economic utilisation of resources—national, physical, human and capital because of their constraints and limitations. Some of them can be quantified and measured but some others cannot reasonably be measured or quantified. So is the case with their application for economic activity.

Management is a resource which decides about the ‘means’ to achieve an economic activity, the ‘ends’—through planning-formulation-implementation process. ‘Management’ is difficult to meas­ure, and the results obtained through improvements in managerial efficiency cannot be computed reasonably. Management Audit aims at increasing the productivity of a vital intangible ingredient of an organisation, namely, ‘Management’. Thus, this audit is called for in a world of diminishing resources.

Circumstance # 3. Granting Financial Subsidy:

Assistance by the Government or Financial Institutions to sick enterprises cannot be a permanent solution unless the basic problem of sickness is cured. Identification of problem situations (for example, Corporate planning deficiencies, Organisation’s structural defects, Weakness in materials and facilities, Ineffective management control systems, etc.) is pre-requisite before revival schemes are adopted.

Such circumstances warrant the necessity of Manage­ment Audit. If financial aid is granted without having management audit, similar type of un-identified problem is likely to recur and hit the economic viability of a business enterprise.

Circumstance # 4. Take-Over Bids:

When a business firm plans to acquire another business enterprise or the Government desires to take over any enterprise, the acquiring organisation needs to study and evaluate fundamentally the other firm’s three aspects:

(a) Financial aspects (e.g., Sales, Growth, Profitability, Accounts Receivables/Payables, Retained Earnings, etc.)

(b) Technical aspects (e.g., Product attributes—quality, image, productivity, tech­nology, etc.)

(c) Management aspects (e.g., Competent personnel, Management practices on labour-management/customer-management, social orientation, etc.), with a view to determining the relative strengths and weaknesses and gauging the potentialities.

Such exercise takes the form of Management Audit, at least in a limited sense. The Government, as a result of management audit, may find that if the existing management is replaced by competent personnel the question of take-over may not arise. With the background knowledge of the financial environment and of the state of technology obtaining, the top management would be able to determine policies for merger or diversification by takeovers.

Circumstance # 5. Societal Need:

A business enterprise, now-a-days, is no longer the private concern of the owners alone. It must meet the needs of society. The Government, the consumers, the employees and the citizen have a stake in the efficient running of an industrial organisation.

These groups would like to be assured that the top and middle levels of management discharge their functions efficiently and to the best advantage of society. Routine Management Audit would not only satisfy these interest groups but would also guide the management in the application of scientific methods of business and industrial management for social well-being.

Circumstance # 6. Need for Periodical Check-Up:

The view that Statutory Cost Audit and Financial Audit and the provision of Internal Audit in an organisation take care of the entire organisation systems is not wholly correct. These audits ‘so far have been essentially legalistic in terms of the time given to auditors, nature of certification required to be given, elbowroom provided for auditors for going into different areas of management functions’.

Again, the so-called Performance Audit or Operations Audit concerns itself ‘with managerial kinetics as against potential’. The periodicity of the Statutory Audits is generally annual and concerns the past without any forward- looking approach.

The pitfalls in organisational structure and organisation and management, such as unsuitability of structure to meet the enterprise needs, poor leadership, internal friction, inability to make decisions, poor vision and imagination in determining short and long-range plans and objectives, etc. are not brought to light by these audits.

Routine check-ups at regular intervals to prevent stagnation and deterioration by the management or external specialists for its own management suggest circumstances to conduct Management Audit. This need is felt by the enlightened managers who realise the value of self-introspection in maintaining the vitality of the organisation.

The type of the following problem situations warrants the circumstances for management audit:

(a) Substandard performance of a particular department;

(b) Reason to suspect that a report on a major problem in a functional/operational area is not comprehensive;

(c) Need to identify areas where detailed cost-saving and efficiency studies will bring fruitful results;

(c) A new business just set up or another business just acquired, etc.

Circumstance # 7. Foreign Collaboration:

The foreign collaborators, while investing funds in the associated companies, may feel the necessity of conducting Management Audit of those units or which collaboration agreement is likely to be finalised. This would ensure that the funds are invested for growth and expansion.

Circumstance # 8. Equity Participation:

Now-a-days, LIC, IFC, UTI and other financial institutions take part in the equity share capital of the undertakings. They may conduct Management Audit to avoid possible losses arising from inefficient management.