Report

By Surendra Bhusan Shrestha

Organizational hurdles

By resolving the conceptual concerns, we have only looked at a part of the problem. There are other operational hurdles that makes theorizing and practicing even more difficult and complex. Complete agreement of views does not seem to exist in the following areas:

Who should do the audit?

If a management audit in the nature of the definition given earlier is to be conducted, it requires a thorough working knowledge of the operations of the company, apart from the other essential requirements of common-sense, experience and an understanding of the organizational culture.

Professional management consultant firms rank very high in their independence and objectivity of the audit in comparison with the in-house audit teams. In-house audit teams rank high in terms of working knowledge of the operations of the company and understanding of the organizational culture. However, independence and objectivity are states of mind, and they can very well be fitted into an internal audit set up by a continuing and total management support, whether the function is carried out in-house or is sourced out.

Should the management auditor be technically qualified?

Though are auditor may, in his examination, recognize that operational exposures are significant areas of concern, his practical ability to evaluate and analyze these exposures may be limited by the very technical nature of some of the cause and effects. The majority of the auditors may be expected to have experience only in financial auditing. This by itself is sufficiently demanding. He cannot normally be expected to possess technical proficiency.

Many questions relating to operational efficiency are especially technical because their solutions may permit an immense variety of potential alternatives. The evaluation of these alternatives may require technical knowledge. There are also situations that need working which are beyond human capabilities for which the knowledge and use of computer is essential.

However, the common business observation that unsatisfactory conditions exist which are not being effectively acted upon does not require such a level of technical knowledge. In many cases, the generalist auditor may find obvious deficiencies such as: i) controls established but not enforced; ii) policies misinterpreted; iii) policies originating at a very low level not reviewed at a higher level; and iv) policies and controls needed where none exist, and policies needing revisions.

A pilot need not know to construct an aircraft. He should, of course, know what instruments convey what message and how to react to it. Now there seems to be general agreement on the view that the management audit should be multi-disciplinary-with financial analysts, production analysts, industrial psychologists and systems analysts.

Should management audits be made mandatory?

Audit of accounting systems can be made mandatory because accounting principles, conventions and standards can cut across the divergent management styles. However, making management audit mandatory, calls for the formation of a common set of procedures for appraising management performance. The task of evolving common procedures is indeed arduous because management performance is by and large a function of factors peculiar to each firm.

Nevertheless, the question of evolving a set of criteria for appraising the performance can be analyzed. This set can be formulated for each industry because the norms can be different for different industries. For example, profitability per rupee of capital invested can be relevant for the consumer industry while capacity utilization would be more relevant for the cement industry.

The development of these norms can be entrusted to institutes and other professional bodies/management associations. Unless, such a basis is provided and the working of the basis are reviewed, we cannot think of making management audit mandatory. But it will be a highly desirable practice if the management bodies volunteer to submit themselves to an audit of this kind.

For whom the bell tolls?

Beneath the kid-glove of the published financial statements, there may be a red claw of inefficiency. Generally, published financial statements are said to be "optical illusions" by the experienced financial analysts. This is where management audit can come into play. Though a management audit report, expressing an opinion on management, will aid the stockholders and third parties in assessing the management performance, its practicality has been questioned on the basis of the following problems. i) nature and wording of the report; ii) content and structure of the report; iii) lack of an established body of generally accepted auditing standards and procedures; iv) the kind of financial and other information to be covered by such audits; v) the lack of standards for evaluating managerial abilities and performance; vi) competence of the auditor to conduct and report on such audits; vii) resistance by management for making the audit mandatory; vii) auditors’ independence and objectivity; and ix) legal liability for opinion expressed on such audits. However, in the Indian context, where only the operations audit is more popular, the reports faithfully serve the purpose for which they are issued because any progressive management will be interested in improving the operational efficiency.

Though, by the same logic, management should submit their decisions to an objective audit; somehow this concept has no gained roots in our country.

Conclusion

It is greatly disturbing to note that discussions on management audit today sounds exactly as they did a decade ago. All our systems have accelerated so drastically that those concerned must now refocus their attention.