Postaudit

To assure that an optimal capital budget has indeed been determined, the methods and data employed must often be carefully reexamined at the end of the capital budgeting process. The postaudit postaudit is a careful examination of actual and predicted results, coupled with a detailed

Careful reconciliation reconciliation of any differences.

of actual and predated q^ of the most important advantages of the postaudit is that managerial forecasts of rev-results enues and costs tend to improve when decision makers systematically compare projections to actual outcomes. Conscious or subconscious biases can be observed and eliminated, and new forecasting methods can be sought as their need becomes apparent. People simply tend to work better if they know that their actions are being monitored. It is important to remember that businesses are run by people, and people can perform at higher or lower levels of efficiency. When a divisional team has made a forecast in a capital budgeting proposal, it is putting its reputation on the line. Because of the postaudit, these managers have every incentive to make good on their projections. If costs rise above predicted levels or sales fall below expectations, managers in production, sales, and related areas have incentives to strive to bring results into line with earlier forecasts.

Of course, it must be recognized that each element of the cash flow forecast is subject to uncertainty, so a percentage of all projects undertaken by a reasonably aggressive firm will prove to be unsuccessful. This must be considered when appraising the performances of managers who submit capital expenditure requests. Projects also sometimes fail to meet expectations for reasons that no one could realistically have anticipated. For example, wild fluctuations in both oil prices and interest rates during recent years have made long-term forecasts of any sort very difficult. It is also sometimes hard to separate the operating results of one investment from those of contemporaneous projects. If the postaudit process is not used carefully, managers may be reluctant to suggest potentially profitable but risky projects. Because of these difficulties, some firms tend to play down the importance of the postaudit. However, the best-run and most successful organizations in business and government are those that put the greatest emphasis on postaudits. Accordingly, the postaudit process is one of the most important elements in an effective capital budgeting system.

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