Postcompletion Audits of Capital Investment Decisions

There are, for example, the discounted cash flow, MAPI, and present value methods, to name a few.

Dean Joel , “Measuring the Productivity of Capital,” Harvard Business Review, Vol. 32, No. 1 (1954), p. 120.

One firm even found a “tightening up” of the estimating process in its sales department after introducing a postaudit program. See Bowman K. J. , “We Follow Up Our Capital Outlays,” N.A.A. Bulletin, Vol. 39, No. 7 (1958), p. 91.

A number of estimates must be audited in order to determine bias. No estimator will be “right” every time, but his average should not be too wide of the mark.

Mayer R. R. in “Estimating and Post-Auditing Direct Labor Savings in a Job-Shop Operation,” Engineering Economist, Vol. 3, No. 3 (1958), p. 13, gives an interesting account of the action taken by a company when a postaudit revealed that a new machine tool was not meeting the performance specifications guaranteed by its supplier.

Pflomm N. E. , Managing Capital Expenditures, Business Policy Study No. 107 (New York: The National Industrial Conference Board, 1963).

See Griffin R. W. , “How We Follow Up the Capital Expenditures We Have Made,” N.A.A. Bulletin, Vol. 39, No. 3 (1957), p. 61, for a description of how production engineers co-operate with operating personnel in making postaudits at American Brass.

There is a close parallel here to performance evaluation in the broader sense. See McGregor D. , “An Uneasy Look at Performance Appraisal,” Harvard Business Review, Vol. 35, No. 3 (1957), p. 89, for some enlightening comments.

In an unpublished doctoral dissertation, “An Analysis of Problems Associated with Post-Completion Audits of Capital Expenditure Projects” (Stanford University, 1961), J. F. Kooken reports the practice of summarizing the important aspects of postaudits for review at higher levels of some large organizations.

If a project is used for an appreciably different function from that for which it was originally intended, it is questionable whether a meaningful audit can be performed. However, the change in function should be called to the attention of the executives who authorized the expenditure.

Consideration should also be given to means of gathering qualitative information in postaudit planning. For example, if a company were interested in determining the effect of a certain project on employee morale, it would be necessary to design the experiment and measure existing morale before the employees being studied knew that new equipment was being procured.

See the N.I.C.B. report cited earlier for some examples of forms and operating procedures.