Management Audit: Definition, How It Works, and What It Addresses

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. It is important to stress that the management audit assesses the overall management of the company, not the performance of individual managers.

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.
  • A management audit does not evaluate individual managers but rather the overall management of the company in its ability to achieve its goals.
  • The board of directors will hire independent consultants to conduct the management audit rather than use the company's internal audit team.
  • Once a management audit is complete, the external audit company will provide an entire plan for the board of directors to implement to effect change.

How a Management Audit Works

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).

The board of directors will 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 that the management team runs the company.

Implementing a Management Audit

The goal of a management audit is to identify the weaknesses of the management team. The audit is most often carried out on a companywide basis but it can also be isolated to certain business segments. The goal is always to find out how effective management is and where it can improve.

Areas that a management audit will cover but are not limited to include human resources, marketing, research and development (R&D), budgeting, operations, finance, information systems, and corporate structure.

The management audit will consist of interviews with management and employees, an analysis of financial statements and performance, a study of a company's policies and procedures, an evaluation of training programs, the hiring process, and many other areas within an organization.

When the audit is complete, the external audit company will not only provide its findings but will most often provide an entire plan for the board of directors to implement so that the company can operate at an optimal level.

In contrast to an internal audit, which is carried out by the internal audit department of a company, a management audit is conducted by outside companies with specific expertise. Well-known companies that conduct management audits include McKinsey & Company, Bain & Company, and the Boston Consulting Group.