Module 1 – Definition and Characteristics

Learning Outcomes:

• Identify and understand the differences between internal audits then and now
• Understand the definition of operational audit
• Differentiate the various stakeholders and their effects to the company
• Identify the key characteristics to be an effective operational auditor
• Understand the importance of integrated auditing and their difference from operational and financial audits

Core Value/Biblical Principles:

Shareholders’ equity of a corporation consists of the investments of the shareholders. It is the obligation of the
management to protect this wealth in order to build trust between the investors. In line with this, here is a bible
verse that you can reflect on regarding this lesson:

Proverbs 13:11

Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

(Stop and Think):

✓ What benefits do shareholders get other than profits? Companies provide additional incentives to
shareholders like pre-emptive right. This can be used at the option of the shareholders. Also, as discussed in
the previous module, the Company is required to protect the shareholders’ wealth. In effect, if the Company
suffers losses and encounters bankruptcy, they cannot simply close the operations without exhausting other
solutions to continue the operations.
Introduction:
Corporations are characterized by absentee ownership and limited liability. They have a separate personality
from its owners. Meeting financial needs of a corporation involves generating funds from public investors. Protecting
the interest of these investors is the primary reason why corporations are subjected to government regulation and
control. The Company must improve their operations to gain more profit and build shareholders’ wealth in order to
protect their interests.

Body:

Internal Audit Then vs Now

Internal audit before is characterized by standardization which means implementing standardized approaches to
audit their clients in those organizations. This focused on assessing an organization’s control or operational effectiveness.
This limited the auditor’s ability to be creative and think outside the box. Moreover, internal audit before was considered
a redundant function since it repeats the process performed by external auditing and focuses on accounting transactions
and process of preparing financial statements.

Internal audit nowadays achieves a healthier balance among operational, reporting, compliance, information
technology, fraud, and strategic topics ‒ making it a holistic audit and not only focuses on internal controls. It is looking
beyond the immediate fiscal year and taking a closer look at longer term trends and the future implications of current
changes. It identifies a wider set of skills, and finding a connection with the management and board to be an effective
and trusted consultant.

Definition

Operational auditing is defined as “A future-oriented, systematic, and independent evaluation of organizational

activities. Financial data may be used, but primary sources of evidence are the operational policies and achievements
related to the Company’s objectives. Internal controls and efficiencies may be evaluated during this type of review.”

There are 6 important questions that should be asked to understand the control or process: who, what, when
where, how and why. The first 5 questions aim to describe the process and understand how the process behaves, while
the last question aims to answer the purpose of the activities performed.

According to IIA, Internal auditing is an independent, objective assurance and consulting activity designed
to add value and improve an organization’s operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control and governance processes.

Characteristics

According to IIA, the following characteristics are important:

1. Independence
2. Objectivity (conflict of interest)
3. Assurance
4. Consulting
5. Designed to add value
6. Improve an organization’s operations
7. Help an organization accomplish its objectives
 8. By bringing a systematic, disciplined approach
9. To evaluate and improve the effectiveness
- Risk Management
- Control
- Governance Processes

Risk-Based Audit vs Controls-Based Audit

Controls-Based audit focuses on identifying and evaluating internal controls without enough regard to their value
to the process. In contrast, Risk-Based audit focuses on evaluating value-adding internal controls. Internal auditing before
are controls-based because the auditors use a preexisting work program without researching the effects of the present
scope of the audit. Internal-audit now is a risk-based audit because it focuses only on the internal controls which are value-
adding in relation to achieving the company’s objectives.

Primary(economic) VS Secondary(noneconomic) Stakeholders

Since auditors promote the efficient and effective use of resources, various stakeholders should benefit from their
outputs. These stakeholders are categorized into two ‒ Primary (Economic) stakeholders and Secondary (Noneconomic)
stakeholders.

Primary stakeholders are characterized by having a monetary exchange between them. They engage in
transactions with the company and are critical to the company’s existence and activities. An example of this are the
investors. Since they have a share in the company’s capital, they expect a satisfactory return and appreciation of value. If
the company fails to improve their internal controls, they might lose investors and eventually close its business.

On the other hand, secondary stakeholders have an indirect economic exchange with the firm. They are affected
by or can affect its primary activities and decisions. For example, the company has an annual liability to the government
for its taxes. If the government noted ineffective controls for its computation/filing of its taxes, the Company may face
legal consequences and worse, close its business.

Operational Threats and Vulnerabilities

Since internal audits now are future-oriented, they focus on future events and future implications of present events
since it would add more value to the company than reporting on past events. The issues that internal auditors encounter
may be characterized to four:

1. Operational
2. Technological
3. Strategic
4. Environmental
Skills Required for Effective Operational Audits

1. Communication skills
2. Problem identification and solution skills
3. Ability to promote the value of internal audit
4. Knowledge of industry, regulatory and standards changes
5. Organization skills
6. Conflict resolution/negotiation skills
7. Staff training and development
8. Accounting frameworks, tools and techniques
9. Change Management Skills
10. IT/CT framework, tools, techniques
11. Cultural fluency and foreign language skills

The three common core competencies identified in the report are communication skills, problem identification and
solution skills, and keeping up to date with industry and regulatory changes and professional standards. These skills can
be acquired on an individual level and the other at the internal audit level.

Integrated Auditing

Since business changes, resources change, and risks change so both operations and IT must adapt and continually
improve to support the business and mitigate risks to acceptable levels.

Integrated auditing is a combination of the financial, operational, and IT auditors. This is more efficient instead of
performing these separately. Integrated auditing provides a more comprehensive review that linked process, finance and
IT in one audit report. Furthermore, financial controls are continuously being dependent to computer systems to reduce
error. Assessing financial controls without assessing IT systems may negatively affect the assurance they are supposed to
provide to the board and management.
 Module 2 – Objectives and Phases

Learning Outcomes:

• Identify and understand the objectives of operational audits

• Differentiate the different phases of audits
• Identify various types of evidence and how they are obtained
• Understand professional skepticism
• Understand the importance of workpapers and its right conditions

Core Value/Biblical Principles:

As auditors, have a wisdom to know where you can make a difference. Also, when performing audits, have
integrity to uphold what is right or wrong despite the external or internal pressures around you. In line with this,
here is a bible verse that you can reflect on regarding this lesson:

Leviticus 19:11- ”You shall not steal, neither deal falsely, neither lie one to another”

(Stop and Think):

✓ When do audit start? Does it start at the moment that the audit team and management meet for the first
time? What evidence should be obtained to support claims and provide recommendations? In this module,
objectives, risk factors, phases and types of evidence will be discussed. This will provide you and overview
on how audits are performed.
Introduction:
Operational audits have similar goals and phases with other audits. Despite this, operational audits must not
replicate the procedures done and render ineffective and non-value adding reports. Operational auditors must bear
in mind their objectives and follow the different phases of the audit.

Body:

OBJECTIVES OF OPERATIONAL AUDITS

Objectives of operational audits should be clearly defined, communicated and understood by the audit team as
well as the management. These objectives or goals will drive the phases of the audits and may increase the effectivity of
the procedures that will be done. Unclear objectives may bring the audit team the risk of losing track during the
engagement. It may be similar when you are in a locked dark room without any plans of getting out of it or looking for
the light switch.

Management should be involved in setting the objectives to let them know of the implications of the audit to the
business. This will help the audit to be realistic and grounded by making sure that the business can provide the necessary
information to satisfy the objectives.

The objectives of operational audits may be driven by:

1. New Rules

As discussed in the previous chapter, auditors should have knowledge of industry, regulatory and standards
changes. These changes will affect the objectives set for the audit. For example, new rules for corporate social
responsibility are being implemented, the audit should be directed to address the effect of these new rules to the
business. Also, auditors should be aware if the business is unable to comply with the new rules and make
recommendations to the management on how they can conform to them.

2. Poor Performance

Poor performance is a major concern of the management. This may be related to ineffective operations or
workforce. Poor performance will directly affect the efficiency of the operations as well as the mental position of the
workforce. As an example, having ineffective quality control on the products will instill a bad reputation for the
business. This may lead to loss of profits, and worse, bankruptcy. This is usually investigated by internal auditors
and look for and address the root cause.

3. Compliance Issues

This is related to internal control compliance. Management have put controls within the business which are also
tested during operational audits. This is done check for any non-compliance and report suggestions to the
management. This may be critical to the business operations especially when there is collusion between employees
to violate the rules/controls set by the management.
 4. Anomalous Revenues or Expenses

Per initial risk assessment by the audit team, they may notice unusual transactions. These transactions are
common especially when performance is based on the sales/income objectives. For example, bonuses provided to key
executives are directly related with the profit generated per year. The executives have the incentive or motivation to drive
the sales up and may be involved in fraudulent transactions.

Other factors may affect the objectives of the operational audits. These factors will be discovered once the auditors
understand the organization’s structure ‒ technology, policies, separation of powers, accountabilities, business risks,
internal and external changes. Focus of operational audits is reporting on the efficiency, effectiveness and economy of
operations, activities and programs. This focus is sometimes referred to as value for money or performance auditing.

PHASES OF OPERATIONAL AUDIT

Once the audit team is engaged by the management to perform an audit, they will start on planning the scope and
objectives of the audit. This will be communicated to the management and will proceed with the procedures/testing to be
performed. After testing the relevant controls, the audit team will report on the issues noted and recommendations to the
management. In summary, operational audits follows the flow of traditional audits ‒ planning, fieldwork, and reporting.
Note that these phases may overlap as the need arises and will be discussed in the next sections.

A. Planning

In this phase, auditors perform initial risk assessments. This is usually done with the management and
board of directors. Risk assessments are done at the company level and not at the transaction level. Risk
assessments should generate two outputs: (1) strategic plan and (2) audit plan.

Moreover, scope of the audit is also finalized and discussed with the management. This is based on the
available resources and the needs and priorities of the business. As discussed earlier, objectives of operational
audits should be achievable. Audit budget and timeline is also discussed and agreed with the management.

Usually, interviews with the process controllers are done in this phase. This is done by the auditors to
understand the controls in place, identify what could go wrong (risk) for each control and identify opportunities for
the business as well.

There are several risk factors during the planning phase of audit. Some of these are competence of
employees, extent of judgement, and number of transactions. Employees’ competence and their job description
should match, otherwise, the process may be ineffective and detrimental to the organization. Judgment is common
in organizations especially on estimates (allowance for doubtful accounts, depreciation, etc.). The higher the extent
of judgment, the higher the risk identified by the audit team. This is the same instance for the voluminous
transactions since there is a higher possibility that fraudulent transactions are covered between valid transactions.
 B. Fieldwork

After setting the goals and scope of the audit, the audit team will start on going to the client’s office for
data gathering to perform the audit. This phase is when the most of the testing is performed and it includes
interviewing, documenting, applying testing methodologies, managing fieldwork and providing status updates. It
consists primarily of two things:

1. Determining process is designed effectively so that the related goals and objectives are likely to be achieved
2. Verify that controls in place are performing as defined by management

As mentioned earlier, phases of auditing may overlap. Auditors, when performing (1) may find that their risk
assessments during the planning phase are understated, will update it to perform procedures to comply with the
updated risk assessments.

C. Reporting

In this phase, results and recommendations are communicated to the management and board of directors.
Internal auditors should quantify their findings by including amounts, values, time since when the condition has
been occurring, how many individuals or organizations are affected, etc. This will help the management to
understand the extent of the issues noted or the effects of the recommendations presented by the auditors.
Usually, deficiencies are focused during reporting. There are 2 types of deficiencies:

1. Design – Process or control structure in place is insufficient to avoid the risks (what could go wrong?).
Controls are set by the management in line with their objectives. As discussed in the previous chapter,
operational audits focus on control deficiencies that affects the company’s objectives.

2. Operation – Controls designed by the management are not implemented as expected by the
management.

Findings should be reported in the following manner:

1. Criteria – What is expected?

2. Condition – What actually exists?
3. Cause – Why is there a difference between the criteria and condition?
4. Effect – Impact of the condition
5. Recommendation – Action point from the management to match the criteria with the condition

Though it is suggested that auditors make recommendations, they must not spoon-feed the management,
otherwise, it may result to:

• Dependency
• Lack of ownership

After reporting the findings, the audit team should perform follow-up if the recommendations/action points are
being performed by the management, otherwise, the audit will be rendered useless and risks identified will recur in the
next audit period.
TYPES OF AUDIT EVIDENCE

During the audit teams’ fieldwork, they will gather various sets of evidence to verify whether conditions are such
that the operations or program under review is likely to achieve its objectives and procedures in place are working as
designed. In other words, auditors gather evidence to support their work and persuade others that conditions are
satisfactory or not.

The following types of evidence are usually encountered during audits:

1. Testimonial

Testimonials may be verbal (interviews) or written (email or questionnaire). Nowadays, auditors prefer having an
interview with the process owner to save time and ask the appropriate questions. Even though the person where
the information obtained is reliable, this evidence is not the most persuasive one. This should still be corroborated
with another evidence, usually by performing walkthrough, to confirm whether the testimonial is reliable or not.

2. Recalculation/Reperformance

Auditors usually perform walkthrough of the process that they think needs to be verified. Walkthrough is a process
where the auditor reperforms a transaction from its initiation to reporting. This is done to verify and corroborate
other evidence obtained and check if controls are in place and correctly implemented.

As for recalculation, this is usually done for processes that involves estimation. Usually, the auditors understand
and make estimates using the expectations used by the management and check if the estimates by the
management are within their expectations.

3. Observation

In general, auditors visually examine physical facilities, conditions and practices to verify they exist, their condition,
valuation and protection. This may be done in 2 ways:

- Auditee knows that the auditor is observing

- Auditee does not know that the auditor is observing.

Evidence is more reliable when the observation is done using the first way because individuals tend to modify their
behaviors when they know that they are being observed and their actions may affect the results of the audit. This
is related to social desirability bias where the survey participants answer the questions in a manner that it will be
viewed favorably by others.

4. Document Inspection

Documents that are checked may be internal or external, financial or non-financial documents. Example of internal
documents are company newsletter, minutes of the board meetings, and invoices while external documents may
be third party confirmation, external reports by established and accredited organizations.

The main focus of auditors here is choosing the correct population and selecting appropriate samples by using the
appropriate sampling method.
PROFESSIONAL SKEPTICISM

Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may
indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. Auditors should
display healthy professional skepticism and verify the quality and reliability of the information gathered and used.
Auditors must be careful when being skeptic towards a client because too much skepticism may imply that they
do not trust the management and may be detrimental to the engagement.

Auditors do not rely on one type of evidence. Auditors always corroborate if they are unsatisfied with the
information gathered. Corroboration involves obtaining supporting documentation to substantiate claims made or
finding others to verify the accuracy of statements received.

WORKPAPERS

“It is not done if it is not documented.” This is the most common saying when performing audits. All
procedures performed should be documented in workpapers. Workpapers should consist of objective of the
procedure, procedures performed and conclusion. It should be neat, easy to read, review and appearance should
be uniform. Readers of that workpaper should be able to fully understand and can reperform the procedures
performed and arrive at the same result. Accessibility of these workpapers should limited to the members of the
audit team.

In operations audit, since the focus is internal controls, most documentations are in narrative format. This
may provide full detail of the process under review and is simple to prepare. However, this can be too detailed and
may be irrelevant if the process or control is too complex, difficult to visualize and confuse the reader if it is too
long. To resolve this, flowcharts are being widely used when auditing controls.

Flowchart is a diagram of the sequence of movements or actions of people or things involved in a process
or activity. They are easy to understand since the shapes used are simple.
 Module 3 – Risk Assessments

Learning Outcomes:

• Understand the importance of risk assessments

• Identify the phases of risk assessment and their risks
• Understand the importance of CSAs
• Identify existing business activities and related risks
• Identify future challenges to the businesses

Core Value/Biblical Principles:

In life, precautions should always be in place to mitigate the harmful effects of our vulnerabilities. As auditors,
we should identify and measure the magnitude the effect of those risks to our lives. In line with this, here is a
bible verse that you can reflect on regarding this lesson:

Proverbs 22:3 – “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and
suffers the consequences.”

(Stop and Think):

✓ How are risks measured? Do all risks need to be addressed and removed? Or it is enough that controls are in
place and operating effectively? What are the existing business practices and the related risks for each? In
our current situation, what are the challenges that the businesses encounter? In this module, these questions
will be answered and will provide you a better understanding why risk assessments are important. Even a
minute risk in one department may have a significant effect to the business in its entirety.
Introduction:
Since business risk is present in all organizations, auditors should identify risks and provide the management
awareness regarding their likelihood of happening and their impact to the business. This will help the management
to prepare for it and have action plans once the risk caused issues.

Body:

Risk Assessments

Risk assessments is the process of identifying, measuring, and analyzing risks relevant to a program or process.
This is systematic, iterative and subject to both quantitative and qualitative inputs and factors. Risk assessments can be
broken down to two phases, namely, identification and measurement of risks.

Identification of Risks

After auditors understand the business structure, they will be able to identify various risks in each process.
However, some auditors fail to identify the risks due to lack of in-depth knowledge about the process being audited. This
is the case especially because operational audits are external engagements. Auditors may be newly assigned to the
engagement and transition from the previous auditor was not done properly. This is why some clients want the same
auditors from the previous years since they have the extensive knowledge and experience of the process that needs to
be analyzed.

Another issue encountered by auditors during identification of risks is the bias that some may have as a result of
the common training many have in accounting. If the auditor, has been educated in accountancy, has had experience in
accounting, and has focused primarily on accounting and compliance audits, the auditor is more likely to view most
matters from an accounting and compliance prism. Some firms mitigate this risk by involving other auditors with various
experience (IT auditor, Fraud auditor, Environmental auditor, etc.).

Auditors should consider internal and external constraints ‒ equipment, people and policies. In addition, internal
auditors should be concerned about the slowest operation in a process, the synchronization of activities within or between
processes, and robbing materials and other resources within or between processes or units.

Measurement of Risks

Once the risks are identified, auditors should measure their likelihood to impact to each control. This may be
subjective or quantitative, either driven by facts or not and will vary per organization.
 Assessing Risks and Control Types

Auditors should look for weaknesses or vulnerabilities that would make an asset susceptible to damage or loss
from a hazard. Identifying relevant events will be driven by the scope definition of the review and can be done by following
any of the following approaches:
- Objectives based
- Scenario based (may be external or internal)
- Common-risk checking
- Risk charting

If the impact of the risk is significant, the business must consider a mitigation strategy. Otherwise, control activities
addressing such risk are often enough. Hazards are relevant to the extent that there are assets that can be negatively
impacted by these hazards.

Organizations must be resilient, so as much as anticipating to adverse outcomes is key to success, the lack of
flexibility to embrace new technologies, understand, and capitalize on new technologies, financial products, emerging
markets, and social dynamics can be the cause of ruin.

Importance of CSAs

As discussed in your other business courses, the management is in charge of designing and implementing controls.
However, this is not known by many executives and they have been reliant to the recommendations provided by the
auditors at the end of the engagement. This is addressed by Control Self-Assessment (CSA).

CSA are answered by process owners and identify the major activities in their processes, objectives, risks and
controls, individuals that perform key tasks and controls, and the major challenges affecting these programs and processes.
CSAs require managers to think about the design and condition of their areas of responsibility, and assess the presence
and quality of the related controls. Effective CSA programs require communication, linkage to internal audit results,
providing feedback on the gap analysis, and reinforcement.

Business Activities and Their Risk Implications

The following are some of the common activities that result to various risks to the business. Note that a risk to a
business may not be a risk to another business. Always consider the applicability of each risk and its impact to the company
being audited.

- Assemble to order - Consignment

- Make to order - Cycle time

- Make to stock - Distribution center bypass or drop ship

- Bottleneck - Electronic Data Interchange

- Collaborative inventory management - Inventory

Future Challenges and Risk Implications

Due to the dynamic changes in the business environment, businesses explored various ways to improved its operations at
the following methods:

1. Increased outsourcing
2. Global Sourcing
3. Margin compression
4. Techonology
5. Growth in Asia and other developing countries
6. Improved customer analytics
7. Data Capture and transfer capabilities
8. Environmental initiatives
9. Government involvement
10. Geo-political rules
11. Corruption
 Module 4
Business Management Techniques and Impact on Control

Learning Outcomes:

• Understand the different business approaches

• Identify the advantages and disadvantages of different business approaches
• Identify and understand the impact on internal audit

Core Value/Biblical Principles:

Businesses have implemented various business management techniques which are based on their situations.
Management evaluates various factors before implementing such. This may involve suggestions from external
auditors. In line with this, here is a bible verse that you can reflect on regarding this lesson:

Proverbs 18:13 “To answer before listening — that is folly and shame.”
 Introduction:
Since business risk is present in all organizations, auditors should identify risks and provide the management
awareness regarding their likelihood of happening and their impact to the business. This will help the management
to prepare for it and have action plans once the risk caused issues.

BUSINESS PROCESS RE-ENGINEERING (BPR)

Business processes re-engineering is the re-engineering of business systems. It is a radical change program
which is designed to:

• Reduce costs significantly

• Make operations significantly more efficient
• Find a competitive advantage.

Management implements business process re-engineering due to unfavorable business circumstances, but even
without these, a proactive management will consider the competitive advantages which may be brought by BPR. BPR is a
high-risk technique as the aim is to achieve high levels of improvement in a short timescale. After the BPR, the business
is more “customer-focused” than before BPR. Staff and management are likely to benefit from increased empowerment.

Implications for Internal Audit

However, staff are more process or project oriented and less functionally oriented: this reduces the extent to which
internal control is achieved through segregation of functions and duties‒ and so alternative ways of achieving satisfactory
control must be implemented. Internal auditors must understand the BPR process in order to advise on the control quality
of the new systems and advise whether the processes have effective controls built into it. Internal auditors should be alert
to the risk that established controls may not be operated effectively during the BPR project as management and staff
resources are diverted to the BPR project itself.

TOTAL QUALITY MANAGEMENT (TQM)

This is a way of managing to improve the effectiveness, flexibility and competitiveness of a business as a whole.
It is a management philosophy embracing all the activities through which the needs and expectations of the customer, the
community, and the objectives of the organization are satisfied in the most efficient and cost-effective way by maximizing
the potential of all employees in a continuing drive for improvement.

Quality Systems

Quality assurance systems are systems which set out to demonstrate to customers that a business is committed
to quality and able to supply its customers’ quality needs. One criticism of the quality assurance systems movement is that
the business seeking registration determines what its own systems will be and what standards of performance will be
achieved ‒ these are not externally imposed ‒ they may not be impressive in terms of quality.

Cost of Quality

Managers will need to identify quality costs in a number of categories if they are to be in position to quantify the
possible improvement and prioritize their improvement efforts in areas which are likely to achieve significant savings. The
last category should be of special concern as the reputation and image of the organization can be adversely affected and
future trading relationships in jeopardy.
 Quality Audits

Quality audit process seeks to establish and maintain high standards of TWM and/or quality systems. Quality
auditing is not the same as internal auditing. The internal audit approach ideally should:

• to reassure management and the board that quality auditing is being done effectively,
and therefore to conduct internal audits of the quality auditing processes.
If internal audit are conducting the quality audits itself, this will have to be done
by others.
• to assess the extent to which internal audit can rely on work done by quality
audit where it overlaps with the scope of internal audit, thereby avoiding
unnecessary duplication.

DELAYERING

Delayering means removing one or more levels of management from the enterprise, or from a part or parts
of it. The number of levels of management and staff will vary according to the historical evolution of the business and also
according to the type of business it is. Some enterprises, or parts of enterprises, are appropriately very flat. An implication
of being flat is that each manager supervises a larger number of subordinates. This is called “the span of control” of the
manager. Managers resort to various devices handle information overload, which occurs because our minds are unable to
process rationally all the information that needs to be processed in order to make optimal decisions. The risk is that
supervision becomes nominal ‒ that delegation becomes abdication.

Removing a layer of management and staff broadens the span of control of the managers involved. It generally
therefore leads to greater empowerment of those being supervised. Generally, it should be associated with the
development of modern IT-based systems which make it easier for managers to supervise more subordinates, perhaps
through IT-generated reporting by exception.

Delayering has a dramatic impact on lowering staffing costs. It can be one way of achieving productivity gains. Yet
its other advantages may be even greater. Greater empowerment is inherited by the level of management or staff beneath
the level which has been removed. This should lead to greater job satisfaction and to greater work motivation.

EMPOWERMENT

The delegation of responsibility to and trust of staff for making business decisions, without the need for close,
detailed review and approval of those decisions. This approach is based on the premise that employees, at all levels, are
responsible for their own actions and should be given the authority to make decisions about work. Empowerment is also
an objective in its own right as it is perceived to have many positive outcomes. Herzberg’s bipolar analysis of job satisfaction
factors divided into two groups. The hygiene factors are to do with the surroundings of the job whereas the motivators are
more closely to do with the job itself. Herzberg maintained that if management attended well to the hygiene factors which
related to their staff, then this would only remove negative feelings of dissatisfaction: in themselves the hygiene factors
would not positively motivate staff. For positive motivation, the motivators had to be in place. And if staff were motivated
to perform well, then outputs would improve—in effect the business would be buying-in to the potential of its people.
 Maslow’s 5 view of satisfaction was not bipolar: it was uni-polar. He perceived of a hierarchy of needs. At the
lowest level people have (a) physiological needs (for food, water, warmth, etc.). At progressively higher levels are (b)
security needs, (c) social needs, (d) esteem needs, (e) autonomy needs and (f) self-actualization (or self-fulfillment) needs.
Maslow found that most people display some degree of dissatisfaction with the extent to which their needs are satisfied.
He found that an acute level of dissatisfaction with the extent to which a lower level need was satisfied would often lead
to a major preoccupation by the individual designed to alter things and meanwhile the higher-level needs would signify
little in that person’s consciousness. For instance, a starving person will be preoccupied with the need to find food and will
not indulge in concern about their level of self-actualization. Maslow found that most occupational groups in the developed
world have achieved levels of satisfaction which mean that most or all of Maslow’s needs are a matter of concern to them.
Autonomy is the need that most closely corresponds to the concept of “empowerment”. Autonomy means taking decisions
and being able to see the results which follow from those decisions.

OUTSOURCING

Outsourcing is also called as “contracting out”, and occurs when services previously provided by in-house
personnel are supplied by an outside contractor. This often takes place after due process of market testing, which requires
that a fully specified tender document is prepared and potential outside contractors are invited to tender for the work
against the specification.

Impact on In-house Personnel

The drawback for those whose contract of employment transfers in this way from the business to the outside
contractor is that their terms and conditions of service and their job security are often not so good with the outside
contractor as they were previously, when perhaps they had been insulated from the effect of market forces.

Cost-Benefit Issues

Outsourcing is believed to lead lower costs of public services as well as higher quality. It also has the effect of
reducing the size of the public sector in a national economy, which is perceived as having certain macroeconomic
advantages.

Impact on Human Resource Inventory

Outsourced activities provide outside contractors with learning experience on the job. This may be a potential
competitive threat, as in effect the business is developing outsiders who may set up in competition or take their resultant
know-how to a rival business for which they also provide outsourced services. Outsourcing may also represent security
risk. For example, most businesses take incredible risks with their contract cleaners who may have virtually unrestricted
access to premises out of hours.

JUST-IN-TIME MANAGEMENT (JIT)

The driving objectives of JIT are to eliminate wasteful or non value-added activities, and by doing so achieve
improvements (such as increased quality, reduced work in-progress stock levels, improved productivity and reduced costs).
It is important to understand that JIT manufacturing systems are driven by the principle of being “demand-pulled” through
the production process, i.e. production activities are governed (or “pulled”) by downstream processes requiring
subassemblies from upstream processes. This is the reverse of more traditional production systems where the flow is
“pushed” through the production chain.