Management Audit: Definition, Meaning and Fundamental Concepts

After reading this article you will learn about Management Audit:- 1. Definition of Management Audit 2. Meaning & Concept of Management Audit 3. Fundamental Concepts 4. Scope and Process.

Definition of Management Audit:

There is no general agreement as to the precise meaning of the term:

Management Audit…… The term has been defined differently by different authorities as under:

1. “Management Audit would……………… concern itself with the whole field of activities of the concern, from top to bottom, starting, as always, where management control is concerned, from the top, because we are primarily concerned with where the general management is functioning smoothly and satisfactorily.” [T. G. Rose]

2. “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 of any component thereof, such as a division or department, and its plans and objectives, its means of operation and its use of human and physical facilities.” [William P. Leonard]

3. The Management Audit is “an informed and constructive analysis, evaluation and series of recommendations regarding the broad spectrum of plans, processes, people and problems of an economic entity.” [Camp-field]

4. “Management Audit is a technique by which management can assess how effectively the executives and managers of the company plan, organise, direct and control the use of men, money, materials, machinery, equipment and facilities to achieve corporate goals……………….A technique for regularly and systematically appraising a unit striving for functional effective­ness against corporate and industry standards by utilizing personnel who are not specialists in the area of study. The ultimate objective is to assure the management that its aims are being effectively carried out and/or conditions that require improvement are identified.” [Account­ant’s Journal (March-June, 1979)]

5. “The 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.” [Leslie Howard]

6. “Management Audit……………..would require scrutiny of both structural and functional aspects of an organisation……………..the former providing the framework in which functions take shape. Unless one goes into the policies guiding actions of management and bringing forth different types of results, performance assessment can be at best partial.”

Meaning & Concept of Management Audit:

There has, thus, emerged over the years an array of meanings and definitions of this new art of auditing. To sum up the above views, it can be stated that the Management Audit is a forward looking audit in the broadest sense.

It is an objective appraisal of the structure and of its working in an organisation by a team of specialists, emphasis being on problem-identification rather than problem-solving. So, one has to go deeper to detect or pinpoint the areas which necessitate attention and improvement.

To be specific it evaluates the existence of well-defined objectives, and examines whether policies are consistent with objectives and understood properly at all functional levels. The thrust of this audit concept is, therefore, on evaluation, with appropriate analysis for improvement on contribution towards industrial development rather than haphazard growth of industries in the pursuit of achieving targets.

The definition given by W. P. Leonard probably brings out the real meaning and concept in the true sense of the term. On the whole, the concept of Management Audit is evicting and stimulating but its real meaning, scope and relationship with the real world is not very much clear. The concept is just possibly roaming in the literature. It is at the nascent stage of theory building. In spite of this, there is no doubt that Management Audit is becoming internationally acceptable.

Fundamental Concepts of Management Audit:

The essential ingredient, inherent in the concept of management audit, is the evaluation of how well the activities have been planned, how performance is measured and how effectively these are organised to carry out responsibility.

The concept puts particular emphasis as to suitability, practicability and present compliance or otherwise of the organisation with its designated objects, its current standing in relation to the general public, etc.

In a schematic diagram:

Scope and Process of Management Audit:

The scope of Management Audit can be as broad as the management process itself.

In this context, Camp-field outlines a few scopes as below:

“1. Studying the prescribed organisation—reviewing formal organisation structure, personal inter-relationships, policies, procedures, information systems and flows, and decision centres in order to determine what management has established as optimum arrangements for running an entity.

2. Evaluating the ‘live-entity’—determining such problems as what operating people are really trying to accomplish, the schedules and routines they have established to attain objectives, and a measure of the results achieved in the light of predetermined goals and standards of performance.

3. Searching for Profit inhibitors—uncovering poor organisational structuring and responsibility assignment, breakdowns in operations, programming and work flow, inadequate and ineffective communications, evaluation and measurement; and disclosing results that fall significantly below established standards.”

Since the concept of Management Audit requires the appraisal and assessment of total organisation or management processes and examines in depth the functioning of the system and its performance, its scope is synonymous with the appraisal areas identified by the American Institute of Management.

The scope of management audit can, therefore, be expressed by a chart below:

‘Management Audit’ Process:

Fundamentally the activities to be undertaken by a management audit team in its review of each functional area (e.g. Sales management, Production management. Industrial engineering management, Materials management, Personnel management, Financial management, General administration, etc.) Include—

(a) Collection and analysis of relevant statistics and reports used by the management.

(b) Establishment of priorities for various functional activities to be reviewed.

(c) Interviews and meetings with the management levels (senior/middle/supervisory) in order to ascertain:

i. how plans are developed,

ii. how resources are controlled, and

iii. how performances are evaluated.

Accordingly, a management audit process typically consists of three phases:

Phase I—Diagnostic Overview,

Phase II—In-depth Review, and

Phase III—Implementation Programme.

The result of management audit process at the conclusion of Phase II is a Balanced Report providing:

(i) An objective analysis of the effectiveness of the organisation’s total operations,

(ii) A programme to implement improvements on a priority basis, and

(iii) An indication of the achievable benefits.

For a better success, a management audit team must be ‘a friend, philosopher and guide’ to the organization and must not encourage distrust. In a management audit process, a controversy centres on identifying criteria or standards against which the performances should be judged.

Thus, for an audit team, the requisite need is to draw up an internal set of performance standards against which an organisation can measure its own improvements and efficacy over time.