Human Resource Audit

Concept of Human Resource Audit

The word “audit” comes from the Latin verb audire , which means, to listen.
Listening implies an attempt to know the state of the affairs as they exist and as
they are expected/ promised to exist. Auditing as a formal process is rooted in
this feature of listening. Consequently, it is a diagnostic tool to gauge not only the
current status of things but also the gaps between the current status and the
desired status in the area that is being audited.

Auditing has been a routine exercise in the area of finance, especially because it is
a statutory obligation. However, in case of Human Resource, there is no legal
binding to adopt auditing. Some of the companies nevertheless prefer to have
Human Resource audits.

Like any audit, the Human Resource Audit is also a systematic formal process,
which is designed to examine the strategies, policies, procedures, documentation,
structure, systems and practices with respect to the organization’s human
resource management. It systematically and scientifically assesses the strengths,
limitations, and developmental needs of the existing human resources from the
larger point of view of enhancing organizational performance.

The human resource audit is based on the premise that human resource
processes are dynamic and must continually be redirected and revitalized to
remain responsive to the ever changing needs. Human Resource Audits are not
routine practices aimed at problem solving. Instead of directly solving problems,
HR audits, like financial audits, help in providing insights into possible causes for
current and future problems.

The findings of these audits aid decision making in the organisation and are
usually internal documents that need not necessarily be shared with the public.
Moreover, unlike Financial Audits that are routine, regulated and standardised,
Human Resource Audits are non-routine and may be designed to cater to the
unique needs of the organisation at a particular point in time. These are in fact,
studies of an unusual nature. The manner in which the Audit is conducted could
vary from self-directed surveys to interventions by outside consultants.

An HR Audit is like an annual health check-up, it plays a vital role in instilling a

sense of confidence in the Management and the HR functions of an organisation.

HUMAN RESOURCE (HR) AUDIT

Human resources are the people in an organization, so a human resources audit is

a look at those people and the processes that put them in place to make sure the
system is working efficiently. An HR audit also goes beyond looking at the hiring
process into areas like employee retention, budgeting, training, employee
compensation, management/employee relations and virtually any process or
practice within the company that affects its people.

A periodic Human Resource audit can qualify its effectiveness within an

organization. Human Resource audits may accomplish a variety of objectives, such
as ensuring legal compliance; helping maintain or improve a competitive
advantage; establishing efficient documentation and technology practices; and
identifying strengths and weaknesses in training, communications and other
employment practices.

Human Resource auditing is something that many companies do annually, just as

they audit their financial information. This gives them an accounting of their
workforce and the efficiency with which the organization as an entity deals with
its people, from recruiting to firing. Human Resource auditing can be likened to a
person going to the doctor for a general check-up to stay well. The process allows
a company to get a general idea of where it stands so it can better correct any
potential problems and plan for the future.

When it comes to physical health, prevention of problems is far better than

waiting until a problem arises and trying to cure it. The same holds true for
human resources auditing. Preventing problems is much easier than trying to fix
them after the fact. Good Human Resource planning and auditing can help
prevent those problems, and save companies money and difficulties.

Human Resource Accounting benefits the company ascertain how much

Investment it has made on its Employees and how much return it can expect from
this Investment.

Definition:

Human Resource Audit means the systematic verification of job analysis and
design, recruitment and selection, orientation and placement, training and
development, performance appraisal and job evaluation, employee and executive
remuneration, motivation and morale, participative management,
communication, welfare and social security, safety and health, industrial relations,
trade unionism, and disputes and their resolution. HR audit is very much useful to
achieve the organizational goal and also is a vital tool which helps to assess the
effectiveness of HR functions of an organization.

A complete Human Resources Checkup, including administration, employee files,

compliance, handbook, orientation, training, performance management, and
termination procedures. The intended outcomes include minimizing your liability
exposure and introduction or enhancement of human resource best practices.

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What is Human Resource Auditing?

The American Accounting Association’s Committee on Human Resource

Accounting (1973) has defined Human Resource Accounting as

“the process of identifying and measuring data about human resources and
communicating this information to interested parties”.

HRA, thus, not only involves measurement of all the costs/ investments
associated with the recruitment, placement, training and develop ent of
employees, but also the quantification of the economic value of the people in an
organisation.

Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as
“the measurement and reporting of the cost and value of people in organizational
resources”.
Who should conduct the audit?

The team that is responsible for the audit should represent a cross-section of the
organization’s staff, including line staff, middle and upper management, and
those responsible for HR functions.

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Need and Purpose of Human Resource Auditing

The commonly understood audits are the established and regular accounting
audits carried out in accordance with specific statutory regulations. However, in
the case of human resource audits, there is no legal obligation, but enlightened
managements have voluntarily accepted its usefulness depending upon the
circumstances. The following circumstances may be cited as examples:

• felt concern by top management,

• compulsions of the external forces necessitating a situational audit,

• business changing significantly influenced by international business

decisions affecting human resource management, and

• an urge on the part of human resource management professionals towards

advancement of the practices and systems.

It is necessary to take a look at these and other questions. Human Resource audit
is highly useful for the purpose

• Does the organisation regularly forecast the supply of and demand for
employees in various categories?

• Do job analyses exist for all positions in the organisation?

• Are all potential sources of recruitment identified and evaluated?

• Are measurable selection criteria developed and used while filling up jobs?

• Do effective training and development programmes exist?

• Is there a performance evaluation system that helps assess past and

potential performance?

• Is the remuneration programme designed to motivate employees?

• Is the plant unionised?

• Does a grievance procedure exist?

• Does the organisation have high quality of work life?

• Does the HRM practice contribute to organisational effectiveness?

• Does the management underestimate the capacity of HRM to contribute to

organizational effectiveness?

Approaches to Human Resources Audit

The following approaches are adopted for purpose of evaluation:

1. Comparative approach

2. Outside authority approach

3. Statistical approach

4. Compliance approach

5. Management by objectives (MBO) approach

Comparative approach

In this, the auditors identify Competitor Company as the model. The results of
their organization are compared with that Company/ industry.
Outside authority approach

In this, the auditors use standards set by an outside consultant as benchmark for
comparison of own results.

Statistical approach

In this, Statistical measures are performance is developed considering the

company’s existing information.

Compliance approach

In this, auditors review past actions to calculate whether those activities comply
with legal requirements and industry policies and procedures.

Management by objectives (MBO) approach

This approach creates specific goals, against which performance can be

measured, to arrive at final decision about organization’s actual performance with
the set objectives.

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Sample Human Resource Audit question

1. How effective is the selection process in ensuring that people are placed in
appropriate positions? Explain.

2. How effective is the appraisal process in accurately assessing performance?

Explain.
3. How effective are rewards (financial and non-financial) in driving
performance? Explain.

4. How effective are the training, development, and career planning activities
in driving performance? Explain.

5. How effective is the appraisal process in differentiating performance levels

for justifying reward allocation decisions? Explain.

6. How effective is the appraisal process in identifying developmental needs

of individuals to guide training, development, and career planning? Explain.

7. How effective are the training, development, and career planning activities
in preparing people for selection and placement into new positions in the
organization? Explain.

8. Overall, how effectively are the five components integrated and mutually
supportive? Explain.

Organization and Structure

• Is there an organizational chart?

• Does the chart include both employees’ names and position titles?

• Does the chart show reporting relationships?

• Is the chart updated as changes occur?

• As the needs of the organization change, does its structure change?

HR Department Organization

• Is the department sufficiently staffed for the industry and the size of
organization?

• Is the budget in line with other organizations of similar size and industry?

• Has the company been involved in any employment lawsuits?

• If there have been suits, what were the outcomes?

• Is there a job description for each position in the department?

• To what position does the top HR position report?

• Does the HR Department have a mission statement?

• Is the HR mission statement consistent with the vision and mission of the
organization?

Functions of the Human Resource Department

1. For what functions is the HR Department responsible?

Payroll Recruitment Safety

Benefits Training Strategic planning

Salary administration Labor relations Others

2. Should the HR Department be responsible for all of the functions listed above?

3. Should the HR Department be responsible for functions that are not listed
above?