source: Brink-Modern Internal Auditing
ATTRIBUTES OF MANAGEMENT
While many organizations in the past were often isolated, with their markets
local or restrained by limitations in communications and transportation, the typical
organization today operates in a more complicated and often global environment.
However, those organizations in the past “good old days” were affected
by many similar attributes even though things traveled at a much slower pace.
For example, as early as the 1880s, the price of grain in Kansas was influenced by
grain prices in the Ukraine and in Argentina. It took a few days for that price
information to travel to the market in Kansas and much longer for grain to actually
be transported to these other markets, but they each were influencing factors.
Similar examples can be found going at least back to Roman times. Today,
speed of communications and such factors as the Internet have just increased
this environmental complexity.
Modern environmental factors include economic, competitive, technological,
political, and social matters. They should be in the mind of an internal auditor
when attempting to understand why management does or does not take
some action. For example, economic factors, including dimensions of the state of
world, national, and regional economies, can have a major influence on an organization.
When thinking about an organization and its business processes, an
internal auditor might raise a series of questions such as: Who uses these products
and why? How strong is that demand in terms of other needs? Where are
the users of the product? Are there other, competitive products or services?
There are also factors relating to the supply of the product or service. Where do
the materials come from that are needed to produce the aforementioned products,
and what is their availability? What kinds of facilities are needed and what
kind of production processes are involved? What are the requirements in terms
of capital, specialized knowledge, and marketing? Finally, factors relating to
demand and supply must be considered in terms of whether there are acceptable
profit potentials.
Economic factors have an impact on all organizations, whether a privatesector
industrial corporation, a not-for-profit service organization, or a governmental
unit. For example, United Parcel Service (UPS) in the United States has
largely taken over small parcel delivery from the U.S. Postal Service due to
UPS’s ability to provide better service at a lower cost structure. The U.S. Postal
Service, once a virtual monopoly, could not effectively compete when faced with
these economic factors. An internal auditor should always consider the role of
economic, competitive, technical, and even political factors when performing
internal audits in an organization. That understanding will be valuable for a better
understanding of management needs.
This discussion of environmental factors has been from the standpoint of the
entire organization. However, management entities also exist at lower levels,
including subsidiaries, divisions, departments, and the like. The environmental
factors previously discussed also include the authority and controls of the
higher organizational levels, to which lower-level management entities are
accountable. Also included are the resources available from upper-level management
that augment and better define the environmental factors as well as constraints
of various kinds that may be imposed by the senior-level management.
In addition to these environmental factors, an internal auditor also needs to
understand other key attributes that help to define the overall process of management.
Some of the more important of these include:
• Dependence on People. People are the most important resources the effective
manager must utilize. They are important in terms of their knowledge,
skills, and experience, and have a unique importance that goes far
beyond those considerations. An effective manager is directly dependent
on people to implement plans through their definitive actions. Thus, an
internal auditor must understand how people, or the human resources of
an organization, can operate in an effective manner to provide a maximum
contribution toward the achievement of managerial goals and
objectives. As part of understanding an organization’s human resources,
management has a continuing challenge to find the best possible fit and
integration of individuals within overall organizational goals. These
human resources range from senior management to the support staff in
an organization. Each has its own general interests, motivations, and
needs; management needs to understand these factors to best utilize
human resources.
• Focus on Decision Making. Managerial action is based on various types of
decisions with some at a very high level, such as a major new line of business,
while others are at relatively lower levels. All have common elements
in their decision-making process with respect to decision principles
and methodology. The problem must be identified, alternatives explored
using all information available, and a decision made on the action to be
made. This decision-making process is similar for managers at all levels,
and only differs due to the magnitude of the problem, the extent to which
information is available, the available decision alternatives, and the
potential risks associated with the decision outcomes. The factors of time,
risk levels, and costs all affect this management process. The effective
manager should survey these issues, identify the most significant issues,
and then attempt to make the best decisions. Internal auditors should follow
this decision-making process to help assemble the correct supporting
data when making a recommendation. This will also help the internal
auditor to better understand how management reacts to audit report findings
and recommendations.
• Effect of Risk Level. There are risks associated with every management
decision. If a wrong decision is made, there may be the risk of increased
costs associated with that wrong decision, including wasted resources,
diminished future performance, or even legal liability for the organization
or the responsible manager. To a considerable extent, risk can be
reduced by better management information about operational and environmental
factors. Of course, every decision would be risk-free if the
manager had what is hypothetically called perfect information. There are
costs associated with obtaining the various types and levels of information
desired, and probability factors will affect the desired results. As a
result, total certainty is impossible because of both practical and absolute
MANAGEMENT NEEDS: INTERNAL AUDIT’S OPERATIONAL APPROACH
16
limitations. This means that management decisions reflect the levels of
risk deemed to be acceptable to the particular responsible manager. Managers
and their overall organization have varying appetites for risk, and
each manager must make evaluations within the parameters of decision
authority and risk preferences. The effective internal auditor should have
a good understanding of this risk assessment process. Chapter 5, “Understanding
and Assessing Risks: Enterprise Risk Management,” discusses
the entire process of evaluating risk in the context of the COSO Enterprise
Risk Management (ERM) framework. In order to understand management’s
needs, an internal auditor also needs to understand management’s
willingness to accept or avoid risks.
• Management Is Judged by Results. Virtually everything a manager does is
judged by how those actions further the achievement of established organization
goals and objectives. Managers should be primarily interested in
results as opposed to letting an intermediate process be an end in itself.
This attribute of judging overall management effectiveness has been a
rationale for some hostile management takeovers. Corporate raiders have
taken over many otherwise successful companies with the argument that
they could achieve better short-term financial results by selling off underperforming
assets and undertaking other restructuring actions. Although
an organization might have been considered otherwise successful, these
raiders promised better results and often took over the organization and
then reported improved short-term results. There are always decision
variables that cannot be fully predicted or adequately evaluated. As a
result, the merits of some managerial decisions may be controversial, and
managerial excellence is measured by the quality of its results. Internal
auditors should be aware of these issues when attempting to understand
management’s needs. If management wishes to achieve the best results
for the overall organization, the auditor should attempt to support and
corroborate those decisions.
• Time Span for Appraising Results. Judging management by its results
raises questions as to the time frame in which those results are to be evaluated.
A manager often can achieve short-term results such as improved
profitability even though those decisions will undermine longer-run
profits. For example, quality can be temporarily sacrificed with resulting
short-term profits, but this action can be so damaging to customer satisfaction
that future products are no longer purchased. Good managers
should think in terms of the longer term and resist the often-tempting
shortcuts that endanger longer-term potentials. When management
understands this, the correct decision should be clear. However, the evaluation
may be complicated by how long of a time span should be allowed
for decisions made today and how willing stockholders are willing to
wait for longer-run rewards. A further complicating factor is the difficulty
of measuring long-term effects. Managers often innocently make
bad estimates in these areas or are victims of wishful thinking. In other
cases, lower-level managers ignore long-term consequences because they
ATTRIBUTES OF MANAGEMENT
While many organizations in the past were often isolated, with their markets
local or restrained by limitations in communications and transportation, the typical
organization today operates in a more complicated and often global environment.
However, those organizations in the past “good old days” were affected
by many similar attributes even though things traveled at a much slower pace.
For example, as early as the 1880s, the price of grain in Kansas was influenced by
grain prices in the Ukraine and in Argentina. It took a few days for that price
information to travel to the market in Kansas and much longer for grain to actually
be transported to these other markets, but they each were influencing factors.
Similar examples can be found going at least back to Roman times. Today,
speed of communications and such factors as the Internet have just increased
this environmental complexity.
Modern environmental factors include economic, competitive, technological,
political, and social matters. They should be in the mind of an internal auditor
when attempting to understand why management does or does not take
some action. For example, economic factors, including dimensions of the state of
world, national, and regional economies, can have a major influence on an organization.
When thinking about an organization and its business processes, an
internal auditor might raise a series of questions such as: Who uses these products
and why? How strong is that demand in terms of other needs? Where are
the users of the product? Are there other, competitive products or services?
There are also factors relating to the supply of the product or service. Where do
the materials come from that are needed to produce the aforementioned products,
and what is their availability? What kinds of facilities are needed and what
kind of production processes are involved? What are the requirements in terms
of capital, specialized knowledge, and marketing? Finally, factors relating to
demand and supply must be considered in terms of whether there are acceptable
profit potentials.
Economic factors have an impact on all organizations, whether a privatesector
industrial corporation, a not-for-profit service organization, or a governmental
unit. For example, United Parcel Service (UPS) in the United States has
largely taken over small parcel delivery from the U.S. Postal Service due to
UPS’s ability to provide better service at a lower cost structure. The U.S. Postal
Service, once a virtual monopoly, could not effectively compete when faced with
these economic factors. An internal auditor should always consider the role of
economic, competitive, technical, and even political factors when performing
internal audits in an organization. That understanding will be valuable for a better
understanding of management needs.
This discussion of environmental factors has been from the standpoint of the
entire organization. However, management entities also exist at lower levels,
including subsidiaries, divisions, departments, and the like. The environmental
factors previously discussed also include the authority and controls of the
higher organizational levels, to which lower-level management entities are
accountable. Also included are the resources available from upper-level management
that augment and better define the environmental factors as well as constraints
of various kinds that may be imposed by the senior-level management.
In addition to these environmental factors, an internal auditor also needs to
understand other key attributes that help to define the overall process of management.
Some of the more important of these include:
• Dependence on People. People are the most important resources the effective
manager must utilize. They are important in terms of their knowledge,
skills, and experience, and have a unique importance that goes far
beyond those considerations. An effective manager is directly dependent
on people to implement plans through their definitive actions. Thus, an
internal auditor must understand how people, or the human resources of
an organization, can operate in an effective manner to provide a maximum
contribution toward the achievement of managerial goals and
objectives. As part of understanding an organization’s human resources,
management has a continuing challenge to find the best possible fit and
integration of individuals within overall organizational goals. These
human resources range from senior management to the support staff in
an organization. Each has its own general interests, motivations, and
needs; management needs to understand these factors to best utilize
human resources.
• Focus on Decision Making. Managerial action is based on various types of
decisions with some at a very high level, such as a major new line of business,
while others are at relatively lower levels. All have common elements
in their decision-making process with respect to decision principles
and methodology. The problem must be identified, alternatives explored
using all information available, and a decision made on the action to be
made. This decision-making process is similar for managers at all levels,
and only differs due to the magnitude of the problem, the extent to which
information is available, the available decision alternatives, and the
potential risks associated with the decision outcomes. The factors of time,
risk levels, and costs all affect this management process. The effective
manager should survey these issues, identify the most significant issues,
and then attempt to make the best decisions. Internal auditors should follow
this decision-making process to help assemble the correct supporting
data when making a recommendation. This will also help the internal
auditor to better understand how management reacts to audit report findings
and recommendations.
• Effect of Risk Level. There are risks associated with every management
decision. If a wrong decision is made, there may be the risk of increased
costs associated with that wrong decision, including wasted resources,
diminished future performance, or even legal liability for the organization
or the responsible manager. To a considerable extent, risk can be
reduced by better management information about operational and environmental
factors. Of course, every decision would be risk-free if the
manager had what is hypothetically called perfect information. There are
costs associated with obtaining the various types and levels of information
desired, and probability factors will affect the desired results. As a
result, total certainty is impossible because of both practical and absolute
MANAGEMENT NEEDS: INTERNAL AUDIT’S OPERATIONAL APPROACH
16
limitations. This means that management decisions reflect the levels of
risk deemed to be acceptable to the particular responsible manager. Managers
and their overall organization have varying appetites for risk, and
each manager must make evaluations within the parameters of decision
authority and risk preferences. The effective internal auditor should have
a good understanding of this risk assessment process. Chapter 5, “Understanding
and Assessing Risks: Enterprise Risk Management,” discusses
the entire process of evaluating risk in the context of the COSO Enterprise
Risk Management (ERM) framework. In order to understand management’s
needs, an internal auditor also needs to understand management’s
willingness to accept or avoid risks.
• Management Is Judged by Results. Virtually everything a manager does is
judged by how those actions further the achievement of established organization
goals and objectives. Managers should be primarily interested in
results as opposed to letting an intermediate process be an end in itself.
This attribute of judging overall management effectiveness has been a
rationale for some hostile management takeovers. Corporate raiders have
taken over many otherwise successful companies with the argument that
they could achieve better short-term financial results by selling off underperforming
assets and undertaking other restructuring actions. Although
an organization might have been considered otherwise successful, these
raiders promised better results and often took over the organization and
then reported improved short-term results. There are always decision
variables that cannot be fully predicted or adequately evaluated. As a
result, the merits of some managerial decisions may be controversial, and
managerial excellence is measured by the quality of its results. Internal
auditors should be aware of these issues when attempting to understand
management’s needs. If management wishes to achieve the best results
for the overall organization, the auditor should attempt to support and
corroborate those decisions.
• Time Span for Appraising Results. Judging management by its results
raises questions as to the time frame in which those results are to be evaluated.
A manager often can achieve short-term results such as improved
profitability even though those decisions will undermine longer-run
profits. For example, quality can be temporarily sacrificed with resulting
short-term profits, but this action can be so damaging to customer satisfaction
that future products are no longer purchased. Good managers
should think in terms of the longer term and resist the often-tempting
shortcuts that endanger longer-term potentials. When management
understands this, the correct decision should be clear. However, the evaluation
may be complicated by how long of a time span should be allowed
for decisions made today and how willing stockholders are willing to
wait for longer-run rewards. A further complicating factor is the difficulty
of measuring long-term effects. Managers often innocently make
bad estimates in these areas or are victims of wishful thinking. In other
cases, lower-level managers ignore long-term consequences because they
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