What Is a Management Audit?

A management audit is an analysis and assessment of the competencies and capabilities of a company's management in carrying out corporate objectives. The purpose of a management audit is not to appraise individual executive performance but to evaluate the management team in its effectiveness to work in the interests of shareholders, maintain good relations with employees, and uphold reputational standards.

The management audit assesses the overall management of the company, not the performance of individual managers.

How Management Audits Work

A company's board of directors does not have a formal management audit committee. Instead, board members sit on the compensation committee and assess the performance of individual executives using quantitative information (organic sales, EBIT margins, segment margins, operating cash flows, and EPS) and unquantifiable or intangible elements (e.g., efforts toward acquisition integration).

Key Takeaways

  • A management audit is an assessment of how well an organization's management team is applying its strategies and resources.
  • A management audit evaluates whether the management team is working in the interests of shareholders, employees, and the company's reputation.
  • The board of directors will hire independent consultants to conduct the management audit.

The board of directors would hire an independent consultant to conduct a management audit. The scope of the audit may be narrow, but in most cases, it is comprehensive including many key aspects of the responsibilities of a management team. A management audit might address such questions as the following:

  • What organizational structure has been set up by management? Are there clear lines of reporting, or is there confusion?
  • What are the policies and procedures of the finance group, and is it always in compliance?
  • How effective are current risk management measures?
  • What is the state of relations among the employees of the organization?
  • How does management put together its annual budget?
  • Are the company's IT systems kept up-to-date?
  • Is the management group responsive to shareholders?
  • How effective is workforce recruitment and retention? Are there training programs to keep skills current among employees?
  • Is management doing its job to ensure the company is a "good corporate citizen"?
  • Is management strategically guiding the company toward its financial targets?

Fast Fact

Management audits are often conducted before mergers, restructurings, bankruptcies, and succession planning; they can identify weaknesses in a company's management.

Depending on the scope of the exercise, a management audit could take weeks or months. The audit result would resemble a report card with high marks in areas where the management team excels and lower marks where improvements could be made. The board would take these recommendations into consideration and compel changes, wherever necessary, in the same way the management team runs the company.