We know that doing business is a very complex and complicated activity. The more you’ll scale up, the more complex/complicated it will get. This is not a worry but an exciting challenge and delightful part for risk-takers, as often than not, when these activities are well managed, profits/sales rise. Today the small and medium enterprises are also coming on terms with taking external assistance, like outsourcing, consulting, and more.
What is a Management Audit?
Today, many consulting firms suggest that enterprises undergo a management audit. It is a method of systematic evaluation of the management activities at all levels of management to examine, review, and appraise the administration’s various policies and actions based on specific objectives standards. These audits are one of the primary services of today’s consulting firms. The main reason for this is that they highlight the opportunities and threats of the business.
The management audit provides a broader scope and more in-depth insight into business activities than just going through annual reports. The audit shed light on areas where effectiveness and efficiency need to be well managed. In these times, when the business landscape is continuously changing and getting more dynamic, management audits enables business management to achieve business goals without getting deviated.
“Won’t companies will like to eliminate all kinds of inefficiencies and develop better, robust, and strategic management protocols?”
Focus And Objective of Management Audit
These audits shall always be performed by an external management professional and or a consulting firm. This enables the top management to continue with daily activities. When done by an external source, the audit is done through a fresh perspective it needs, as many deviations are often the ones which management have overlooked or are doing them less fruitfully.
When a management consultant is given the task of auditing your company, they have several focuses and objectives to reap the best results.
Focus Areas Of Management Audit:
Management audit covers a wide area comprising every business function and activity, including marketing, manufacturing, sales, HR, and more. The following are the key focus areas of its several focus areas.
- Management policies- The current policies need to be assessed for their compliance with today’s industry laws and terms; rarely a company hasn’t taken care of this. The other part is to check their relevance with changing processes and methodologies.
- Resources Utilization- Whether raw material, workforce, machines, or more, it is essential to take care of every aspect that helps business grow and run.
- Checking Business Plan- Whether establishing a business or an already established, it is important to assess the tactics and strategies behind the business plans and models. This assessment takes the management closer to realize its potential.
- Team Efficiency- Individuals are appraised and recognized, but when a team is seen as a whole and recognized, we follow a more coordination friendly approach.
- Recruitment and Retention Policies- Employees are the most valuable resource for the firm. It is important to go through how it recruits and retains its employees in a satisfying and growth-oriented way.
Primary Objectives Of A Management Audit:
With such a wide focus, a management audit also has many objectives. All the objectives are directly linked with business survival, growth, and expansion. From the multiple objectives, it’s primary objectives are:
- Clearly defining the prime goals of the organization.
- The setting of a well-defined organizational structure with clear-cut lines, i.e., communication channel, organizational hierarchy, and more. (to avoid confusion during business reporting at the close of the day).
- The setting of detailed targets for all the segments of the company
- Challenging existing rules and regulations to maximize the effectiveness level
- Suggesting improvement measures for encouraging business performance
- Suggesting ways to restructure the organization and ensure high-quality service at all quarters
- More effective resource utilization planning
- Incorporating management information systems to reach production and work efficiency goals
- Identification of weak points or managerial inefficiencies concerning cores functional areas of the business, i.e., finance, sales, and production.
As we have repeatedly mentioned, management audits cover all the areas of business and analyze them with depth to identify all the potential threats, problems, and issues to the business. It is essential to ensure full support and transparency with the consultant who is performing the deed.
“It’s more about the process than the theory. How an audit is performed, significantly affects the findings or the conclusion from such an audit.”
Importance Of Management Audit
It must be clear by now that management auditing is a means of evaluating the company’s management and its operations. Creating, upgrading and maintaining a smooth system of internal controls is crucial for achieving the objectives, forming reliable financial reports, preventing threats, acknowledging opportunities, and minimizing the cost of capital.
- Laying the Path Towards Achievement of Business Objectives
Management audit is the best way to know what’s happening in your business as it covers various activities within the branches, departments, and business processes. Management audit includes analyzing your daily, monthly, and annual reports too. Apart from just statistics, it involves making you understand your activities’ trend and the reasons behind it.
This information can then be compared with the formulated business standards and deviations, if any, can be treated as per the protocols. Management audit like this enables the company to stay on the path of pursuing and attaining its various corporate objectives. The audit will evaluate the processes in multiple forms to facilitate supervision and monitoring, preventing and detecting irregular transactions, measuring ongoing performance, maintaining adequate business records, and promoting operational productivity.
The consultants will also review the design of the internal controls and will informally propose the improvements. They will also document any material irregularities to facilitate further investigation in the matter, and the management hence will receive a detailed evaluation.
- Clarity Of Business Process
When top-level management is aware of everything that’s happening under its administration, won’t it benefit it? The companies need to assess at what position they are in the market but also check their management of operations. Management audit also shows the need to consult a specialized management consultant as well.
Today consultants of various expertise are there in the market to support and assist businesses for different functional areas. Management audit provides the solutions for all the business problems, but if some areas require a bit longer assistance, then the company can hire management consultants for the same.
- Proper Assessment And Management Of Business Risks
With ensuring the correct path to achieve goals, management audits also re-assess the risks of management. The consultant will assess the risk of the current business activities, project the potential threat as per changing the business environment,, and foresee possible management drawbacks. If the management audit is disturbed or not given the proper information by the management, it would surely receive the unreliable financial forecasting and unchecked future risks.
Risk management also means bettering the allocation of resources to the company’s different activities. There can be different product lines, segments, or simple business functions, balancing an effective and less risky allocation of resources is necessary. Additionally, the financial aspect will also re-assess the company’s assets and liabilities. This can also clear the plan of the company for cash management and investment planning. The company will also be able to produce goods and services smoothly, reliably, and consistently.
Accordingly, the management audit will be crucial to prevent debilitated misstatements in a company’s records and reports.
- Fraud Prevention and Detection
The management audit serves a vital role for companies as a medium for fraud prevention too. The analysis of the company’s operations and assessment of the systems and internal controls prevents and detects various forms of fraud and other accounting violations.
Auditors also assist in designing and modifying the internal control systems, the purpose of which includes fraud prevention too. If a company is known to have a competent and thorough audit system in place, reputation alone may prevent any intruder from attempting a scheme to defraud the company.
- Understanding Cost of Capital
This is another significant financial concern for business management. The cost of capital is often steep for small and medium enterprises to realize, but it is essential as it gives the idea of the organization’s financial strength. So regardless of the business size, it is an important component of management audit.Also, it significantly affects an enterprise’s profit margin as well.
The cost of capital affects decisions on whether to take a risky step or not. It also influences the return on risk and investment. As learned earlier, management audits help in reducing various forms of risk for an enterprise, they also facilitate in achieving the positive influence of cost of capital to achieve higher returns on the investment.
In today’s time, reports matter on policies and their implementation. It is essential to improve the efficiency of management. So hence the management auditors will advise the management on various matters related to the performance of multiple departments as well as the same as the organization as a whole. The auditors may or may not be any finance and accountancy person, but they evaluate the actual performance by comparing it with predetermined business standards and the industry. They will also reveal any defects and irregularities in the working of management. Overall, a management audit is the critical determiner of business performance and growth projection.