Management audit as a concept in management literature evolved over a period of seven decades. It was T.G. Rose, an industrial consultant from the United Kingdom who had first introduced the concept of management audit in a paper he presented in 1932 before the Institute of Industrial Management (now merged with the British Institute of Management).
The management audit concept, however, received greater attention in the United States of America. Jackson Martindell, an investment consultant and founder President of the American Institute of Management (incorporated in 1948) developed a logical system of the concept of management and employed it for evaluating 52 publicly owned companies from 1948 to 1960. These studies were published under the title, “Investment Value of Management Excellence”.
Few business terms have had as many meanings in so short a period of time as management audit. For this reason the modern management audit is often confused with its better known (and understood) historical antecedent – financial audit. Both of course, involve the gathering of information that can aid decision making – a process as old as history. But as the requirement of an increasingly complex society transformed the King’s Court of simple times into to-day’s “executive court” of economic forecasters, lawyers, accountants and management consultants, so too have the demands of contemporary business environment created a need for analysis broader in scope and purpose than the financial audit.
The modern management audit meets this need and can be distinguished from financial audit in the following ways:
(1) Purpose: the management audit is an evaluation of management. As such it involves both the effectiveness of established policies and procedures and their underlying concepts and principles. The financial audit in contrast, is a tool for management. Although a financial audit can critically appraise accepted fiscal practices, it more often focuses on an organisation’s degree of compliance with such practices. (2) Information base: the management audit is as dependent on factual evidence as financial audit. But it also provides informed conclusions and recommendations about leadership and administration that include but extend beyond the financial realm. (3) Range of enquiry: the management audit generally involves a different level of qualitative evaluation from the financial. Specifically, it must consider the insight fullness of leadership, the soundness of objectives, goals and strategies and the relative efficiency of operation and administration (4) Frame of reference: the management audit looks at the future implications of management decisions and actions, and in contrast to the financial audit places significantly greater emphasis on both the business planning process and the identification and fulfillment of related resource needs.
Salient features of management audit are:
(a) Management audit is of a recurring nature. It does not necessarily have an annual feature. It can be as immediate as three months or it can be as long as three years.
(b) The management audit need not necessarily be carried out after an organization has fallen sick. It is preventive rather than curative in nature. The apparently healthy and profitable units require the audit of their systems, procedures, methods, techniques and costs.
(c) The management audit has various facets which include the appraisal of corporate structures, directorate, fiscal policies, investor relations, heath of earnings, production efficiency, cost control policies, executive thinking and others.
Many factors have influenced the need for management audit. Major influences may be identified as below:
(1) The largest group which is interested in the appraisal of management is the individual investor group. With the number of companies proliferating every month and making tall claims about their future, the individual investor who is not adequately informed about the corporate world, has been pushed into an island of confusion. Concepts of management audit may help investors in trimming promoters' promises to their real contents.
(2) The second group pertains to the institutions in the field of long term financing of existing and new ventures. This group has to discard intuitive methods and base their decisions on the systematic appraisal of management of client companies.
(3) The third group consists of business corporations and the government. It is highly desirable that in a contract of a large value, the contractor should be in possession of not only the necessary engineering capabilities but also of management capabilities. The US department of defence carries out an audit of every aspect of management of the companies bidding on every defence contract including their plans to manage the contract, their proposed organizational structure, their staffing in key positions and their approach to and method of control. This approach is based on the belief that in a major contract there is almost no single factor more important to economical and depend able performance than the quality of the company’s management.
(4) The fourth group comprises the government audit authorities. The US Government Accountability Office (GAO) has developed a comprehensive audit of financial efficiency and performance auditing of government expenditure. The total audit approach exists in the Ministry of Defence of the United Kingdom.
(5) The board of directors would be the major beneficiary of management audit as they can increase their knowledge of the corporate management’s strengths and weaknesses in strategic areas of management.
(6) Lastly there are acquisition decisions wherein the purchaser is concerned with the determination of the monetary value of the firm and the resources that may have to be injected into the company which will probably be better analysed if accompanied by management audit also.
Corporate environment in Pakistan
People with knowledge of conditions in Pakistan would not deny the existence of corporate malpractices both in the public and private sectors. Suppression of material income to reduce profits by smaller companies is a very common practice.
Having two sets of books is the norm rather than exception to the rule. But as opposed to this, the blue chip companies both in the public and private sectors use several methods, all of them perfectly legal, in making account books look better than they actually are.
The favourite techniques include changing the methods of depreciating assets and valuable stocks, excessively capitalizing interest to be paid on loans taken to acquire assets and not providing for disputed liabilities.
It is no small wonder, therefore, that some government agencies, especially taxation authorities, place little reliance on the auditor’s certificate. The users of financial statements expect more from auditors and accountants.
There are items such as inflation accounting and consolidated or group accounts which have not been made legal yet. Thus the discerning public wants to know, for example, the current value of assets, the consolidated position of a group of companies and would be happy to have not only an edited version of the directors’ report but other related information included in a company’s annual report. The management auditor can make up for these deficiencies by adequate dis-closure and an objective assessment of the management’s performance of he is given sufficient powers under his terms of reference.
In Pakistan we have experienced an increasing number of sick units in the last three decades. The shareholders of many public limited companies have not received any dividends on their investment for a long time. Many public sector enterprises are a burden on the government budget. The need of the hour is that accountability and cost consciousness be introduced at each step.
We have to introduce more effective and efficient reporting systems based on overall managerial functions rather than time honoured transactions based audits in order to evaluate the systems, procedures ideas and their suitability for the organizational objectives. A properly organized and periodic management audit could go a long way to over come these short comings and contribute to a healthy and progressive social and economic order in the country.
Source: http://jang.com.pk/thenews/mar2010-weekly/busrev-08-03-2010/p9.htm
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