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Success Factors for post-completion audit in capital budgeting

Companies which have spent resources on the installation and implementation or post-completion audit procedures obviously want to be assured that the system is cost-beneficial. One can establish a range of factors which are central to achieving the desired objectives and benefits of post-completion audit. They are as follows:

• The support of top management for the post-completion audit process;
• development of a corporate culture which encourages the desire to learn from experience;
• the acceptance that one can learn from successes as well as failures; appreciation that every project is different. and thus every post-completion audit requires a fresh approach;
• an effective balance between impartiality of the review team and involvement of project staff in the post-completion audit process;
• fundamental decision-making issues must be pursued in-depth to identify the underlying factors which drive the decision-making process;
• the post-completion audit report must focus on critical issues and be agreed with managers who were involved in the original decision-making and in implementing the project;
• install effective feedback procedures.

Benefits of post-completion audit

• It improves the quality of decision-making, by providing a mechanism whereby past experience can be made readily available to decision-makers.
• It encourages greater realism in project appraisal by providing a mechanism whereby past inaccuracies in forecasts are made public.
• It provides a means of improving control mechanisms, by formally highlighting areas where weaknesses have caused problems
• It enables speedy modification of under-performing/over-performing projects, by identifying the reasons for the under- or over-performance.
• It increases the frequency of project termination for ‘bad projects’
• It highlights reasons for successful projects, which may be important in achieving greater benefits from future projects.

Problems with post-completion audit

There are many possible reasons why firms have been slow to adopt post-audits. An insight into these can be obtained by listing some of the problems frequently cited by executives responsible for undertaking post-audits.

• the disentanglement problem: It may be difficult to separate out the relevant costs and benefits specific to a new project from other company activities. Especially where facilities are shared and the new project requires an increase in shared overheads. Newly developed techniques of overhead cost allocation (activity-based costing) may prove helpful in this respect.
• Projects may be unique: If there is no prospect of repeating a project in the future, there may seem to be little point in post-auditing, since the lessons learned may not be applicable to any future activity. Nevertheless. useful insights into the capital budgeting system as a whole may still be obtained.
• Prohibitive cost: To introduce post-completion audit may involve interference with present management information systems in order to generate flows of suitable data. Since post-auditing every project may be very resource-intensive, firms tend to be selective in their post-audits.
• Biased selection: By definition, only accepted projects can be post-audited, and among these, it is often only under-performing ones that are singled out for detailed examination. Because of this biased selection mechanism, the forecasting and evaluation expertise of project analysts may cast in an unduly bad light-they might have been spot on in evaluating rejected and acceptably performing projects!
• Lack of co-operation. If the post-audit is conducted in too inquisitorial fashion, project sponsors are likely to offer grudging co-operation to the review team and be reluctant to accept and act upon their findings. The impartiality of the review team is paramount in this respect – for example, it would be inviting resentment to draw post-auditors from other parts of the company which may be competitors for scarce capital. Similarly, there are obvious dangers if reviews are undertaken solely by project sponsors. There is thus a need to assemble a balanced team of investigators.
• Encourages risk-aversion: If analysts’ predictive and analytical abilities are to be thoroughly scrutinized, then they may be inclined to advance only ‘safe’ projects where little can go awry and where there is less chance of being ‘caught out’ by events.
• Environmental changes: Some projects can be devastated by largely unpredictable swings in market conditions. This can make the post-audit a complex affair as the review team is obliged to adjust analysts’ forecasts to allow for the ‘moving of the goalposts’.