More measures: (performance measurement & cost reduction).

• Author: Witt, Herbert
• Position: Auditing

As regulators increase emphasis on a top-down approach to auditing, auditors are being asked to provide additional performance measurement services that focus on obtaining information on the business as a whole as a basis for evaluating management representations.

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While it may seem difficult to incorporate these changes into the conventional audit without significantly increasing the scope and cost, there is practical guidance on reviewing strategic management in an organization, evaluating performance measurement techniques and examining for potential cost reductions that can ease that difficulty.

REVIEWING STRATEGIC MANAGEMENT

Generally, best business practices related to strategic management include executives developing a mission statement based on vision; establishing objectives; looking for environmental threats and opportunities; reviewing organizational strengths and weaknesses; selecting and implementing strategies; and evaluating results.

When auditors review a company's strategic management their examination includes such probes as:

* Is there a mission statement that describes the company's product and functions?

* Do the objectives reflect the company's mission? Are they specific and measurable? Does each objective contribute to overall goals?

* Has the company identified potential opportunities and threats, including socio-economic, technological, regulatory and competitive?

* Do executives recognize the organization's strengths and weaknesses, including in the areas of production and operations; resources; engineering and research; accounting and finance; marketing; and information technology?

Auditors are especially interested in the effect of environmental threats, such as economic changes and organizational weaknesses.

For example, if management devotes little effort to marketing while the company's competitors have aggressive marketing campaigns, the company will likely experience a drop in sales.

If the client has an effective strategic management program, the auditor can review the results of the external and internal analyses and determine the effect on the financial statements and performance. If there is no program, the auditor can collaborate with management to perform the analyses.

The strategic management program may be formal, in written form, or the auditor may obtain information by discussion with management. The development of a strategic management program is the responsibility of...