Budgeting Basics and Beyond

20.12. Postaudit Project Review

The postaudit (postcompletion) project review is a second aspect of reviewing the performance of the project. A comparison is made of the actual cash flow from operations of the project with the estimated cash flow used to justify the project.

The postaudit project review is helpful for several reasons. First, managers who propose projects will be more careful before recommending a project. Second, it will identify managers who are repeatedly optimistic or pessimistic regarding cash flow estimates. How reliable are the proposals submitted and approved? (Perhaps additional investments can be made that result in even greater returns.) Top management will be better able to appraise the bias that may be expected when a certain manager proposes a project.

The postaudit review also gives an opportunity to:

• Reinforce successful projects.

• Strengthen or salvage problem projects.

• Stop unsuccessful projects before excessive losses occur.

• Enhance the overall quality of future investment proposals.

In conducting a postaudit, the same technique should be employed that was used in the initial approval process, to maintain consistency in evaluation. For example, if a project was approved using present value analysis, the identical procedures should be implemented in the postaudit review.

According to the management-by-exception principle, the managers responsible for the original estimates should be asked to furnish a complete explanation of any significant differences ...