What is a 'Management Audit'

A management audit is an analysis and assessment of competencies and capabilities of a company's management to carry 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.

BREAKING DOWN 'Management Audit'

A company's Board of Directors does not have formal management audit committee. Instead, Board members sitting on the compensation committee assess the performance of individual executives using quantitative information (organic sales, EBIT margins, segment margins, operating cash flows, EPS, etc.) and unquantifiable or intangible elements (e.g., effort put into integrating an acquisition).

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 a comprehensive one, touching many key aspects of the responsibilities of a management team. A management audit can address such questions as:

  • 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 with 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 work force recruitment and retention? Are there training programs to keep skills current among employees?
  • Is management doing its job to hold out the company as a "good corporate citizen"?
  • Importantly, is management strategically guiding the company to financial targets?

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 where the management team excels and lower marks where improvements have to be made. The Board would take these recommendations into consideration and compel changes in the way the management team runs the company where it believes it is necessary.

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