The Human Resource
department of an organization has multiple responsibilities.
It is responsible for employee selection, development,
evaluation, compensation and employee relations.
The role of Human Resource management is being
increasingly affected and reshaped by the growing
diversity of the workforce, global and domestic
compensation, and complex legal and ethical issues.
In short, the Human Resource department of an
organization is faced with balancing its responsibilities
towards the organization it serves as well as
the society in which it operates.
A Human Resources audit evaluates the Human Resource
activities in an organization with a view to their
effectiveness and efficiency. It is done with
a view to improve those activities, uncover shortcomings
and address the deficiencies. The value of the
audit is that it provides feedback both to the
Human Resource managers and the organization about
how well the Human Resource department is meeting
its duties and responsibilities. Essentially,
the audit is a quality control check on the Human
Resource activities within a division or company
and as to how well the activities support the
organization’s overall strategy. (Biles
& Schuler, 1986)1
The Human Resource audit has many benefits. It
can serve to remind members of the Human Resource
department of their roles and contributions to
the organization. It serves to create a more professional
image of the department in the eyes of both management
and the employees. The Human Resource audit can
help clarify the department’s role and lead
to greater uniformity in practices across geographically
scattered and decentralized Human Resource functions
typical of large firms. Its most important contribution
to the organization and its employees is that
it can correct problems and ensure compliance
with a variety of local laws and the strategic
plans of the organization concerned.
The scope of the Human Resource audit extends
beyond the activities of the Human Resource department.
The success of the workings of the Human Resource
department depends both on how well it performs
and how well its programs are carried out by others
in the organization. The reality is that people
problems are seldom confined to the Human Resource
department. The reason employees are disgruntled
can be some management lapse, oversight or perceived
favoritism. Often Human Resources is the last
to know of such a problem since the problem is
frequently not expressed until brought to the
attention of the Human Resource department in
the form of an employee grievance, legal action
or an Exit Interview following a resignation.
Human Resources is faced with the responsibility
of playing a more pro-active role in finding the
causes of employee dissatisfaction and mismanagement.
The best option, therefore, is to widen the scope
of the Human Resource audit so that it covers
the corporate strategy, the Human Resource function,
managerial compliance and employee satisfaction.
(Werther & Davis, 2000)2
Human Resources has a definite role in meeting
the organization’s corporate strategy. Organizations
are composed of people, and Human Resource is
entrusted with the responsibility of finding the
best people for the jobs so that the organization
can gain a competitive advantage in the marketplace.
Understanding the firm’s corporate strategy
has strong implications for planning, staffing,
compensation, employee relations and other Human
Resource activities. Human Resources is effective
only when it contributes to the firm’s strategic
goals. The Human Resource department can learn
about the firm’s overall strategy through
interviews with key executives, review of long
range business plans, and systematic scanning
of the environment to uncover changing trends.
(Hooper, Catalenello &Murray, 1987)3
The Human Resource audit is a logical review of
the workings of the Human Resource department.
For the audit to be comprehensive, it must review
all the major areas, including Human Resource
Planning, Job Analysis, Compensation Administration,
Affirmative Action, Recruiting, Selection, Training
& Orientation, Career Development, Performance
Appraisals and Labor Management Relations (Werther
& Davis, 2000)4. Larger organizations perform
Human Resource Audits much in the same manner
as financial audits, designating a team of experts
who are likely to have the requisite functional
experience in one or more specific areas, although
based in another location. The best place to begin
the Human Resource audit is on the basis of past
audit reports, or on the basis of functions carried
out by the department, the controls in place and
the policies and procedures followed in each case.
The audit team will seek to identify who is responsible
for each activity, determine the objectives of
each activity, review the policies and procedures
used, sample the available records to find if
the policies and procedures are being followed,
prepare an audit report commending proper objectives,
policies and procedures, develop an action plan
to correct errors in objectives, policies and
procedures, and follow up on the action plan at
a later stage, to see if it solved the problems
found. (Berry, 1967)5
The focus on managerial compliance is to find
out how well the managers in other departments
comply with Human Resource policies and procedures.
The audit should preferably uncover instances
where managers have ignored or abused policies
and violated laws. Compliance with laws is especially
important, as the Government would hold the company
responsible. In ensuring compliance, the Human
Resource department improves its image, value
and contribution to the company. Conversely, the
Human Resource department will earn the respect
of operating managers if it seeks their views
relating to Human Resource needs in their respective
areas. Acting on these discussions will increase
its contribution to the organizational objectives,
while also being seen as being more responsive
to departmental needs.
The audit team will, in the process of the Human
Resource audit, gather data from workers to find
out how well their needs are being met. Employee
feedback and information is collected on wages,
benefits, supervision, career planning, and performance
appraisals. Employee actions like turnover, absenteeism
and unionism are more likely to occur when their
needs are not being met. The effectiveness of
the Human Resource department can be judged by
its ability to meet the employee’s needs
while at the same time, serving the interests
of the organization.
Just as there is some value to scanning the environment
in making note of trends and changing business
practices, there is also some value in using a
research based approach to evaluating Human Resource
activities. In a Comparative Approach, another
division or company that has better practices
or results is chosen as the model. The audit team
audits and compares the audited firm’s results
with the best practices of the model organization.
This approach is commonly used to compare the
results of specific activities or programs. This
‘best practices’ approach is often
used with turnover, absence, salary data and staffing
levels. It helps detect areas where improvement
is needed. It also makes sense to compare where
a procedure is being used for the first time.(Werther
& Davis, 2000)6
In the Outside Authority Approach, standards
set by a consultant or taken from published research
findings serve as the benchmark for the audit
team. The consultant or research findings may
help diagnose the cause of problems.
The Statistical Approach relies on performance
measures drawn from the company’s existing
information system. From existing records, the
audit team generates
statistical standards against which activities
and programs are evaluated. With the mathematical
standards as a base, the team may uncover errors
while they are still minor. For example, by tracking
and managing turnover and absenteeism rates from
one period to another, the team can compare and
analyze the data to see how well Human Resource
and operating managers control these problem areas.
Often this approach is supplemented with comparative
data from external sources such as other firms,
or industry association surveys. The information
is usually expressed in ratios or formulas that
are easy to compute and use.
With the Compliance Approach, the auditor reviews
past practices, to determine if actions taken
followed legal requirements and company policies
and procedures. The audit team here often examines
a sample of employment, compensation, discipline
and employee appraisal forms. The purpose of the
review is to ensure that the field offices and
the operating managers have complied with internal
rules and legal regulations, such as minimum wages
and equal employment opportunity laws. By sampling
elements of the Human Resources information system,
the audit team looks for deviations from laws
and company policies and procedures. The team
can then determine the degree of compliance achieved.
In the MBO (Management by Objectives) Approach,
managers and specialists set objectives in their
area of responsibility. Then they create specific
goals against which this performance can be measured.
The audit team researches actual performance and
compares it with the previously set objectives.
They can then evaluate the trends in this area.
(Werther & Davis, 2000)7
In actual practice, audit teams commonly use several
of the above strategies, depending on the specific
activities under consideration (Werther &
Davis, 2000)8 Feedback is then given to senior
management, the operating managers and the employees.
Unfavorable feedback leads to corrective action
and improvement in the contribution of the Human
Resource department.
The audit team uses a combination of several information-gathering
tools to collect data about the firm’s Human
Resource activities. These tools include interviews,
surveys, historical analysis, external information,
Human Resource experiments and international audits.
Each tool provides partial insights into the firm’s
activities. By using these tools skillfully, the
audit team can get an insight into the effectiveness
of the organization’s Human Resource activities.
(Werther & Davis, 2000)9
Interviews of employees and managers often provide
audit teams with a powerful tool for collecting
information about Human Resource activities and
identifying areas that need improvement. Interviews
can be conducted on both sides to determine the
reasons for problems like turnover or absenteeism.
Comments and criticisms from interviewees can
help pinpoint perceptions and causes that will
then form the basis for corrective action. Suggestions
by interviewees may reveal ways of better dealing
with the issues. Where criticisms are valid, changes
should be made. Where the Human Resource department
is correct however, employees may have to be educated
and trained by explaining the reasons for the
procedures in place that are a cause for concern.
Exit interviews are conducted with departing employees
to learn their views and experiences with the
organization. Questions asked along these lines
are reviewed later to find out if there is a major
cause for turnover, absenteeism, dissatisfaction
etc. The Human Resource department must take an
active interest in exit interviews. Some employees
may be reluctant to criticize and speak their
mind. Reasons must be studied to determine if
trends exist among divisions, departments or managers.
The scope for taking interviews is however time
consuming and limited, therefore there is a trend
among Human Resource departments to use questionnaires
to broaden the scope of their research. Survey
Questionnaires may lead to more candid answers
than face to face interviews. Attitude survey
feedback can find answers to concerns.
An analysis of historical records can also reveal
important trends. Compliance with laws and company
policies and procedures can also be determined,
as well as the success of action plans to remove
points of concern. Specific areas that may be
covered include employee safety and health, grievances,
compensation, affirmative action, programs and
policies. There may be a conflict between these
laws and the organization’s practices, however
a proper study and analysis is helpful to iron
out these inconsistencies and meet the organizational
goals.
External information can also be helpful in giving
the audit team a perspective against which the
firm’s activities can be judged. Such information
can be available from various public and private
agencies and government departments. Examples
include wages and salary surveys, employee turnover
rates, workforce projections, future employment
opportunities, and accident rates by professions
that can serve as benchmarks for comparison purposes.
Workforce demographics such as age, sex, education
and racial composition are useful in evaluation
of affirmative action programs. Some information
may also be provided from consultant studies and
research bureaus.
Another tool available to the Human Resource audit
team, especially in evaluating new programs and
trends on which there is no available data for
comparison purposes, is to themselves conduct
a field experiment. In using the field experiment,
the Human Resource audit team compares an experimental
group with a control group, under realistic conditions.
Such experimentation is usually employed in researching
absenteeism, turnover, compensation, job satisfaction
and safety activities. For example, in checking
the effectiveness of a job safety program, the
audit team may implement a safety-training program
to half the supervisors (the experimental group).
The other group (control group) contains supervisors
that have not been given this training. The accident
rates and safety records of both groups can be
compared at a later stage, some months after the
safety program has been concluded. If results
reveal that the experimental group has a considerably
lower accident rate and better safety record,
there is evidence that the safety program was
effective. A cost benefit analysis will also be
conducted to compare the costs of the training
program with the benefits to the workers and the
company. However the field experiment method can
have some drawbacks. Managers may be reluctant
to experiment with workers because of morale problems
and potential dissatisfaction among those who
were not selected. On the other hand, employees
involved in the experiment may feel manipulated.
The experiment itself may be confounded by changes
in the work environment or simply by the two groups
talking to each other about the experiment.
Once the audit has been concluded, the Human Resource
audit team leader will compile the findings, concerns
and recommendations of the audit team into a Human
Resource Audit Report. This report is a comprehensive
definition of the Human Resource activities and
includes both commendations for effective practices
and recommendations for improving practices that
are less effective. Recognition of both good and
bad practices is more balanced and makes room
for wider acceptance of the report.
The Human Resource audit report may address separately
the concerns of the line managers, the functional
managers and the overall Human Resource head.
For line managers, the report summarizes the Human
Resource objectives, responsibilities and duties.
People problems are also highlighted, and poor
management practices revealed. For the Human Resource
function specialists handling training, compensation
and other activities, the audit report identifies
good and bad performance within these functional
areas. Attitudes of employees about certain functions
may also be highlighted.
The Human Resource head will get an overall view
of the performance of his/ her department and
its standing in the organization. It contains
a summary of all the information given to the
operating managers and staff specialists. The
Human Resource head will also get a feedback about
the attitudes of operating managers and employees
about the department’s benefits and services,
review of the departmental objectives and plans
to achieve them, Human Resource problems and their
implications, recommendations for needed changes
and the priority for their implementation.
From the information contained in the Audit Report,
the Human Resource head can take a broad view
of the function. The priority of changes needed
helps him focus on those that have the greatest
impact for improvement in the department’s
contribution to the firm. The audit report can
serve as a map for future efforts and a reference
point for future audits. Knowledge of the department’s
current performance can aid the manager in preparing
long range plans to upgrade crucial activities.
These plans identify new goals for the department,
in turn serving as standards for future audit
teams.
Human Resources Audit – November 2004
The organization audited for the audit project
is a well-known construction organization. Under
the present operating principles, the Human Resource
department is audited once every two years. Since
the organization is large, the practice usually
followed is that an Audit Team is compiled on
the basis of the auditor’s previous experience
in a functional area, as well as the overall understanding
of the workings of the Human Resource department.(Source:
Company Audit Procedure Manual). However, for
the purposes of this audit, the audit team consisted
of one auditor and one supervisor.
The Business Manager and the head of the Human
Resource department were given one week’s
advance notice of the upcoming audit. The auditor
requested a previously performed audit report,
consisting of the overall structure of the department,
the functional responsibilities of the members,
the number of years of experience and background
of the personnel in terms of education and training
etc. This follows the survey questionnaire and
historical analysis approaches discussed above.
This report was compiled and sent before the start
date of the audit. The areas of focus could be
identified using the earlier report allowing for
a more accurate audit plan could be formulated
The auditor met with the Business Manager and
the Human Resource Head, as well as Senior Foremen
of the various projects. The purpose of this meeting
was to gain a familiarization with the state and
goals of the business and its key personnel, as
well as their expectations.(Source: Company Audit
Procedure Manual) These business expectations
could then be translated into what should be the
focus of the audit (Compliance and Risk Review
vs. Functional Competence, for example). It was
decided that this audit was to cover the three
Human Resource aspects of functional competence,
compliance and risk review. This was because the
focus of the audit was on reviewing the department’s
compliance with local laws and governmental regulations,
as well as the company’s standards and procedures.
The purpose of the audit was to establish that
the department was not open to risk of being penalized
by the local and government authorities due to
failure to comply with the various procedures
and regulations in place.
The Human Resource head then met with the key
personnel in the Human Resource department and
discussed the records that were to be submitted
for review. A Liaison Person, from the Human Resource
department was set up to explain the objectives,
policies and procedures of the Human Resource
department and to answer questions and make clarifications
of the questions that may be brought up.
The previous audit report received showed that
the Human Resource department maintained the following
functional areas:
1. Hiring and Recruitment
2. Policies, Procedures & Staff Legal Aspects
3. Training
4. Compensation & Benefits
5. Management of the Human Resources Information
System (Human Resource IS) and Data Feeds
6. Employee Loans
There were six area managers, each reporting to
the Human Resource head. The Human Resource head
in turn reported to the Business Manager, with
final reporting to the Owner of the organization.
1. Hiring & Recruitment:
The first step of the audit was to study the hiring
and recruitment policy of the organization. The
auditor has to familiarize himself with the policies
and procedures of the department to see if the
department is following them properly, or whether
there are any loopholes and it is being abused
in some manner. The hiring and recruitment policies
and procedures would serve as a guide to performing
the audit of the Hiring and Recruitment function.
This function was carefully checked and compared
with the Organization’s Overall Guidelines
for Hiring and Recruitment to ensure that the
hiring policy was within the overall guidelines
of the organization. Any differences between standard
and local procedures were questioned and clarified.
This would also help bring out any discriminatory
practices in hiring. According to the guidelines,
the organization was to support the policy of
promotion from within. All jobs were to be posted
on the internal newsletters stating the job functions,
responsibilities, and a personal profile in terms
of education and training desired in the candidate
wanting to apply for the open positions. The audit
also analyzed the filing of the records of the
short-listed candidates had been maintained, as
well as, their interview evaluations (Source:
Hiring & Recruitment Policy & Procedure
Manual). Records of the final selected candidates
for the position were checked from their personnel
folder. The personnel folder was also reviewed
for the completion of personnel data form, references
of previous employers, offer and acceptance letter,
medical evaluations, date of joining and confirmation.
Proper records of nominations for medical and
life insurance coverage and other benefits were
to be on file (Source: Hiring & Recruitment
Procedure Checklist). The proper audit of the
recruitment area was to cover all these aspects.
Subsequent records of interdepartmental transfers,
bonuses and increments should also be on file.
Hiring of a candidate should follow the approved
and established processes.
The auditor took a representative sample of the
employees’ personnel files, and checked
for the procedures that were followed in hiring
and placement of the employees. The findings in
this area were that a few documents were missing
from the personnel files like previous employers
reference letters. In one or two cases, the record
of transfers and salary increments were missing.
However, some information could be taken from
the Human Resource IS enabling the files to become
completed.
2. Policies, Procedures & Staff Legal Aspect:
The Human Resource policies were to follow established
global guidelines. The first responsibility in
this area was to examine this aspect. The auditor
was directed that proper explanation and justification
should be called for in case of differences from
the project guidelines. In case of deviation from
standard practices, it was necessary to also look
for the justification of the Human Resource policies
and practices in place. According to the standard
practices, the policy decisions were to be properly
discussed and approved by the Business Manager
and Human Resource head before implementation.
Therefore the track record for policy approvals
was also checked on random basis. (Source: Human
Resources Policy Approval Procedure Guidelines).
Procedures followed in the Human Resource department
were carefully reviewed to see that no part was
unnecessary or redundant. At the same time it
was seen that they should provide for speedy resolution
of the employees problems or needs. The record
of consultations from legal advisors taken was
checked on file, to provide credence to the deviation
in policy being followed in the light of local
laws.
The next action in this area was to review the
personnel policies in place, concentrate on areas
of interest, and sample check the process/procedures
followed in detail for a random sample of cases.
This audited the functionality aspect of the policies
and procedures in place in the HR department.
Regarding the staff legal aspects, all cases of
employee grievances and complaints were examined.
The examination of grievances and complaints also
involved those cases where an employee was suspended,
terminated or asked to resign because of intended
or actual fraud, misappropriation, misrepresentation,
excess absenteeism and the like. Cases of sexual
harassment and other such in-discipline were also
covered.
The auditor specifically was interested in whether
or not the employees were given a fair hearing,
a proper unbiased investigation was made into
the incident, and the action taken by Human Resource
in consultation with project management was justified.
In cases where the employees made use of the whistleblower
system to bring attention to a problem, a full
re-investigation of the case based on the timeline
of events was examined. Cases of in-discipline
had been directed to the organization’s
disciplinary committee comprising a cross section
of higher management. The auditor asked for and
reviewed the cases in this area, and was satisfied
with the procedures followed and the decisions
taken by management. The cases were properly documented,
with the local procedure guidelines followed,
in the light of local laws. Where necessary, approval
from local legal counsel had been taken as well.
3. Training:
In the training function, the first concern was
to see that the Human Resource training expenses
were within the training budget. Training like
stationary and miscellaneous expenses, is an expense
area often misused. The source for this was the
training budget and the training program plans
for the year. Also of interest was looking at
the kinds and numbers of training programs conducted,
the adequacy of training facilities and staff,
and the comparisons of local and state training.
Training should flow from the needs of the enterprise
and its employees. Consequently, it was necessary
to check the effectiveness of training based on
training needs identified in the local employee’s
talent appraisal form whether indicated by his
supervisor or himself. Efficiency would relate
to the time lapsed between the identification
of needs and the induction of the training course.
An identified need for training is a problem that
must be addressed in the shortest possible time.
It highlights the fact that the performance of
the employee, his department and the organization
is suffering and need help. Training not given
at the proper time affects the employee’s
morale, performance and expectations. A cursory
study of the employee satisfaction surveys on
hand, indicating the level of satisfaction with
the in-house training programs was also reviewed.
The training expenses were within the budget estimates.
However in some cases, it was determined that
local expertise if developed would reduce the
amount spent on outside training. This was ascertained
looking at the cost and level of training, availability
of local people who could be trained as Master
Trainers, and the number of people needing to
be trained.
4. Compensation and Benefits:
Compensation and Benefits was by far the most
encompassing of all the functions of the Human
Resource department. Compensation covered the
components of the salary package to the employee.
During the audit it was necessary to review the
payroll records, policies and rules for overtime,
principles and procedures for tax deduction, and
adequacy of life and medical insurance of employees
(Source: Company Audit Procedure Manual). In the
area of employee benefits, the audit examined
employee eligibility to receive the benefits as
per policy, whether they were given uniformly,
and whether the quantum and nature of the benefit
was justified. This checked the compliance aspect.
(Source: Company Audit Procedure Manual). The
administration of benefits was to be strictly
according to policy. Management approval of salary
and benefits changes was also checked on a random
basis. Time constraints, allowed only a random
check of this area. In one or two cases tax deduction
were not as per policy and the unit was alerted
to this fact.
5. Management of the Human Resources Information
System & Data Feeds:
The function of the Human Resource IS in place
was to provide a means of computerized records
of the most important personnel information required
by the department and the enterprise. These data
or information could then be retrieved on-screen
or in printed report form for use and analysis
by management. The Human Resource IS should in
effect cover most of the important information
in the employee’s personnel file and even
go beyond it by means of analytical ability. The
audit investigated whether there was a proper
security system for the Human Resource IS and
the proper hierarchy of passwords was in place.
Criteria used for each of these two aspects were
as per guidelines of the Company Audit Procedure
Manual. Physical security of the IS area, availability
of backup records in secure storage and location,
and protection of access to records through password
allocation to authorized personnel were checked.(Source:
Company Audit Procedure Manual). At the lower
level, the input of employee initial joining and
confirmation data was authorized only to the Human
Resource hiring and recruitment specialist, the
payroll and taxation data only to the payroll
unit etc. Emergency overrides available to Human
Resource head were also checked, as well as their
frequency of use. The audit also checked data
feeds and inputs or changes to system information
to determine if they were properly authorized
and tracked, and whether a record of inputs and
changes was maintained, to track the responsibility
and authenticity of changes made (Source: Previous
findings in Audit Report). The use of the Human
Resource IS system was to provide adequate means
of management reports on which decisions can be
taken. Capability of the system to produce MIS
reports and capability for further updating and
development of reporting needs was also ascertained.
(Source: Previous findings in Audit Report).
The findings here were that the passwords were
not remembered by some of the staff and there
were errors. Staff was directed to give proper
attention to this fact.
6. Employee Loans:
Since the Compensation and Benefits Unit of the
Human Resource department was the one dealing
with their salaries, the issue and recovery of
staff loans was also entrusted to this department.
Request for employee loans are made via mail or
written requests submitted via inter-departmental
mailers. The employee loans administrator would
then calculate their loan eligibility based on
their position, salary and number of years of
service. Eligible employees were informed of the
amount of loan they can avail, the limits of which
have been set up the employee loans policy. Types
of loans that could be taken included Housing
Loan, Vehicle Loan, and Staff Emergency Loan.
The repayment period and monthly deductions are
also dictated by policy. Deviations from the policy
in terms of time element or amount taken could
also be accommodated, subject to approval of senior
management. A proper record was kept of all loans
given to the employees, as well as, the deviations
approved by the management. The loans and the
payroll system both exist on the Human Resource
IS, so deduction calculations were made automatically
through the system and reflected on the employee’s
pay slip.
While auditing employee loans, loan policies and
procedures to determine eligibility conditions
were checked. The next step was to check a random
sample of the loan documents on file, to see that
the proper procedure was followed and all necessary
approvals were in place.
Findings in this area were that a few inter-departmental
mail loan requests were not on file. However,
all forms were in place carrying the proper authorization
signatures.
After all the above elements were checked and
reviewed, with the Business Manager and the Human
Resource Department head. It was recommended for
the Hiring and Recruitment area to have tighter
control to see that all documents were in place
on file. The payroll area was asked to train its
input clerks as to the proper calculation of tax,
and the data feeds manager was entrusted with
the task of asking all the staff to remember their
passwords and make fewer errors in accessing the
system. It was also suggested that some line staff
be sent for training in important operational
areas. Once they had completed training in operations,
expenses for contract training could be curtailed.
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