Management audits

What are Management audits?

The term "audit" in its traditional meaning is used for the reviewing of a financial performance of a business by using standards, which are usually defined by governmental regulatory institutions or other institutions commissioned for that. Then, based on the audit report, managers can implement necessary changes to improve performance and reduce business risks.

Many leading global organisations started to use the basic concept of auditing as a tool for performance assessment of key management processes and systems. This type of audit, called a Management audit or non-financial audit, has two main objectives:

- to check the system's compliance to requirements or standards which can be defined internally, or they could just be best practices used in the relevant industry;

- to judge the effectiveness and efficiency of the system in meeting those standards.

Both types of audit have common features, as they have their differences.

Why and when are Management audits useful?

There are several situations when it is useful to implement a management audit. These are mainly:

- The company is not achieving its objectives as required by owners (shareholders) and the reasons for this are not easy to define;

- The company is doing business in a turbulent environment and competitive pressures require permanent and fast improvements to management processes;

- The company wants to gain an advantage above its competition and become a leader in the industry's development;

- The company would like to acquire or merge with another company and needs to identify potential future risks of integration, which cannot be verified by a standard due diligence.

What can you audit?

You can in fact audit anything which is a part of the management system, and thus is of significance. When deciding about the subject of an audit, the management of the company should be able to answer the following questions:

- What is the company's strategy? What processes are key to achieving that strategy?

- Which processes are important in our strategy towards our competitors? In which of those processes does our performance fall short of industry standards?

- Which processes are most important to our customers now? Which processes will be most important to our customers in five years?

- Which processes may destroy or make integration difficult?

In real life, usually management audits arise in the following areas:

Business strategy audit

This controls whether corporate strategy reflects competitive requirements of the specific business environment, and what the company brings to this environment in terms of its strengths and weaknesses. It also reviews which processes are most important strategically, and thus where to allocate adequate corresponding resources.

Finance management audit

In contrary to the financial audit, this focuses on how organised key finance functions of management are: funding, controlling (planning and budgeting, management accounting and reporting) and treasury (cash management, risk management).

Logistics audit

This covers all elements of a logistics chain, i.e. purchasing, production planning and control, warehousing and distribution - aiming above all on breaking down barriers among them and on improving the relationship with business partners.

Asset management audit

This assesses the way in which available financial resources are employed to tangible assets. This means: purpose of existing tangible assets, evaluation methods and purchase of new assets, sales or disposal of non-utilised assets. Specifically, this audit focuses on asset maintenance in terms of efficiency and risk management.

Technology audit

Which production technologies are most important for achieving the corporate strategy? How could the existing resources be put to better use for a more advanced technology development? How to utilise available technology for achieving competitive advantage? How to acquire technologies for potential outsourcing - as to be assessed.

Information system audit

This verifies how well key company processes are supported by information and communication technologies. It also evaluates the IT system's efficiency and security.

Customer satisfaction audit

This identifies the gap between customer requirements and the current level of service. Furthermore, this audit evaluates ways how to gain competitive advantage based on customer satisfaction and compares customer service performance with competition.

Productivity audit

This audit helps to understand when it is appropriate to increase productivity by cutting or adding allocated resources. It identifies areas where breaking down functional barriers can result in more effective use of fewer resources. It also helps to identify, how an individual department or functional objective complements or contradicts the overall organisational goals.

Corporate identity audit

This reviews how the company is perceived externally. It identifies gaps between how the company is perceived versus how it would like to be seen. It also develops ideas for changing the perceived corporate identity when the company's overall strategy is changing.

Corporate culture audit

This audit seeks to identify shared values and beliefs that will make the suggestion for, and the implementation of change in itself easier. It helps to understand what types of change can be most easily implemented. Furthermore, it helps to understand how to present and integrate new initiatives in a way that makes them acceptable to people within the organisation.

Leadership audit

This clarifies the competencies that leaders must possess in order to be able to contribute to the achievement of a company's strategy, and it measures the actual level of capabilities within the company. It also clarifies to people throughout the company where their skills should be improved.

The result of a Management audit

The result of a management audit is a report for the company's management (shareholders), that describes in a structured way the analysed facts and compares them with defined standards. This audit is a management tool for suggesting performance improvements, but it is not able to improve performance itself. The audits do not prioritise opportunities for improvement, and therefore this remains the exclusive role of the management as to decide this: what has to be done, in what order and what resources to allocate to the next steps?

Management audits cannot mobilise people into action. An audit should not address individual shortcomings, but be used as a defensive tool against them. It should not be used to justify inappropriate initiatives.

Expected benefits from Management audits

Management audits can help managers in a complex business environment to:

- Improve the competitive position of the company;

- Communicate the company's objectives at lower management levels, in particular in situations when these lowers management levels will be expected to handle greater responsibilities;

- Understand processes within the company and gradually break down barriers between departments;

- Promote better procedures in employee minds, and to keep emphasizing them;

- Emphasize the commitment of people throughout the organisation to implement change as a tool for performance improvement in itself.

Why engage a consultant?

Management audits as a method of permanent performance improvement can be carried out with the use of own resources. There is a team of people assigned to each particular area, however, involvement of external consultants can bring certain benefits, such as:

- Obtaining audit methodologies and experience;

- An independent view, not burdened with past development and relations with employees;

- An additional resource alongside employees which may have other commitments.

My own experience

- Assessment of finance management in a meet processing company;

- Review of management accounting methods in a large Czech refinery;

- Review of business strategy and selected internal processes of a Czech manufacturer of air-conditioning equipment.