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The Operational Audit: An Exercise in Process Improvement

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We often take great care in preparing backward-looking documents that detail what happened and why, but the future is thought about only in terms of next year’s budget, which is why we sometimes don’t see looming issues.

Welcome to the operational audit, an independent, systematic review of the effectiveness, efficiency, and economy of a company’s activities. Because an operational audit is forward-looking, its findings can be used to identify areas of potential improvement and avoid areas of potential risk—like that hole in the sand. In this way, exposures don’t become problems.

Don’t be confused by the word “audit,” which many business managers automatically associate with finances. An operational audit is really about how your company does things, although identifying areas for process improvement may ultimately have a beneficial financial impact. And mitigating risk both streamlines your operations and strengthens your bottom line.

But an operational audit is much more in-depth than a financial audit is, too. It views each part of your business as a piece of an interconnected whole, not as a discrete entity. Those connections, where one business operation transitions to the next, often reveal areas for potential improvement. The goal of the audit is to determine if your company is operating at the optimum level. Anything less costs you money in terms of lost opportunities or excessive costs.

To be performed properly, however, an operational audit requires a fresh perspective. That is why it is best conducted by an outsider. You may know your company’s operations better than anyone, but that familiarity may be exactly what makes you less likely to question them. A third party, perhaps even a member of your professional network, can bring an objective approach to the same information and spot potential problems or areas for improvement.

The operational audit typically involves five steps:

  1. Meet with operational managers to explain the process, which will require their full attention and take time away from their regular work.
  2. Determine the specific operations to be studied, noting which may be the most risk-oriented.
  3. Gather data and observe those operations, questioning the reasons behind how they are performed at every level.
  4. Assemble the findings, looking especially for patterns of inefficiency or exposure, where the greatest improvements can be gained the most quickly.
  5. Prepare a report for management with recommendations for improvement and proposed 30-, 60- and 90-day action plans, as applicable.

With an operational audit, it is not a case of one-size-fits-all. The complexity of the process, and its recommendations, will depend heavily on the size and the nature of your business. The outside auditor will help you customize the audit to best serve your company. That customization will, in turn, result in specific recommendations for improvement that will reduce your risk and give you the fastest beneficial impact.

To learn more about developing an internal audit process for your business, check out “Checklist for an Internal Audit of a Company,” “Audit Strategy for Small Business,” and “Internal Controls for Small Business.”

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This information is general in nature and is provided for educational purposes only. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation.