Need and
Value of a Human Resources Audit:
The HR department of an organization has multiple
responsibilities. It is responsible for employee
selection, development, evaluation, compensation
and employee relations. The role of HR 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 HR 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 HR 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 HR managers and
the organization as to how well the HR department
is meeting its duties and responsibilities. In
short, the audit is a quality control check on
the HR activities in a division or company and
as to how well the activities support the organization’s
overall strategy.
(Biles & Schuler, 1986)
While we are all likely to look upon the concept
of audit as something to be dreaded, the HR audit
has many benefits. On a positive note, it can
serve to remind members of the HR department of
their roles and contributions to the organization.
As such it serves to create a more professional
image of the department in the eyes of both management
and the employees. It can help clarify the department’s
role and lead to greater uniformity in practices
across geographically scattered and decentralized
HR 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.
Typically speaking, the scope of the HR audit
extends beyond the activities of the HR department.
The success of the workings of the HR department
depend 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 HR department only.
The reason employees are disgruntled can exist
due to some management lapse, oversight or perceived
favoritism. Often HR is the last to know of such
a problem, as it is brought to the attention of
the HR department in the form of an employee grievance,
legal action or on the reasons for resignation
in an Exit Interview. This being the case, HR
is faced with the responsibility of playing a
more pro-active role in finding the causes of
employee dissatisfaction and mismanagement.
Scope of the HR Audit:
The best option, therefore, is to widen the scope
of the HR audit so that it covers the corporate
strategy, the human resource function, managerial
compliance and employee satisfaction. (Werther
& Davis, 2000)
HR has a definite role in meeting the organization’s
corporate strategy. Organizations are composed
of people, and HR 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 HR activities. HR is effective only
when it contributes to the firm’s strategic
goals. The HR 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, Catanello &Murray, 1987)
The HR audit is a logical review of the workings
of the HR department. For the audit to be comprehensive,
it must review all the major areas, such as HR
Planning, Job Analysis, Compensation Administration,
Affirmative Action, Recruiting, Selection, Training
& Orientation, Career Development, Performance
Appraisals and Labor Management Relations. Larger
organizations perform HR 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 start the HR 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 through the audit. (Berry,
1967)
The focus on managerial compliance is to find
out how well the managers in other departments
comply with HR 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 HR department improves
its image, value and contribution to the company.
Conversely, the HR department will earn the respect
of operating managers if it seeks their views
relating to HR 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 HR
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 HR department can be
judged by its ability to meet the employees needs
while at the same time, serving the interests
of the organization.
Common Research Approaches to the HR
Audit:
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 HR activities.
This falls in the realm of applied research.
A.Comparative Approach: In this 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.
B.Outside Authority Approach: In this 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.
C.Statistical Approach: This 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 HR 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.
D.Compliance Approach: This approach 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.
E. MBO Approach: In this ‘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)
In actual practice, audit teams commonly use several
of the above strategies, depending on the specific
activities under consideration. 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 HR department.
Tools of the HR Audit:
The audit team uses a combination of several
information-gathering tools to collect data about
the firm’s HR 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
HR activities. (Werther & Davis, 2000)
Interviews of employees and managers often provide
audit teams with a powerful tool for collecting
information about HR 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 HR 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
HR 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 HR departments to use questionnaires to
broaden the scope of their research. Questionnaires
my lead to more candid answers than face to face
interviews. Attitude survey feedback can find
answers to concerns. Trends revealed through the
questionnaires can then be addressed, in order
of importance to those surveyed.
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 HR 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 HR 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.
The HR audits of international organizations
are more complex. Such complexity is due to differences
in laws, languages, cultures, traditional practices,
and expectations. There is a tendency for the
audit team to use the standards and experiences
from their home countries as a benchmark against
which the evaluation is conducted. The auditors
must make allowances for variations in standards
and laws followed in the host country. Discrimination
by sex, race, social status, caste or religion
may be allowed and even encouraged in the lesser-developed
nations, as a matter of national practice. This
often will make it difficult for the auditors
to distinguish and identify areas of variation
from company practice that are not justified by
the foreign context. Variations should be noted
however, so that the policy makers can determine
whether such differences may be allowed to continue.
It is the probing into the reasons for the variations
that can uncover either appropriate justification
or poor management practices. Unless the necessities
of business justify differences, the goal should
be uniformity in policies, practices, and procedures
throughout the organization. Such uniformity will
facilitate ease of administration and re-assignment
of personnel. It also makes research into intra-company
comparisons easier and more accurate.
The Result of an HR Audit: the Audit
Report
Once the audit has been concluded, the HR audit
team leader will compile the findings, concerns
and recommendations of the audit team into an
HR Audit Report. This report is a comprehensive
definition of the HR 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 HR audit report may address separately the
concerns of the line managers, the functional
managers and the overall HR head. For line managers,
the report summarizes the HR objectives, responsibilities
and duties. People problems are also highlighted,
and poor management practices revealed.
For the HR 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 HR 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 HR 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, HR problems and their implications, recommendations
for needed changes and the priority for their
implementation.
From the information contained in the Audit Report,
the HR 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.
Example of the Audit of the Local HR
Department of a Multinational Bank:
The bank to which this audit relates is a well-known
multinational organization with offices in many
countries. Under the present operating principles,
the HR department is audited once every two years.
As it is an international organization, the practice
usually followed is that an Audit Team is compiled
from one or more countries, on the basis of the
auditor’s previous experience in a functional
area, as well as the overall understanding of
the workings of the HR department.
However since it was a small local office with
not many transactions, the audit team consisted
of myself and one supervisor who was serving as
lead auditor. I was chosen on the basis of my
considerable experience in auditing, as well as
my interest and knowledge about the workings of
a typical human resources department.
The Country Business Manager and the head of
the HR department were given one month’s
advance notice of the upcoming audit. They got
back to us, welcoming us for the audit and also
stating that proper arrangements had been made
for our travel and stay. My supervisor had asked
them for a pre-audit report, to be formulated
by the HR department, 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 report was compiled and
sent to my supervisor in advance, two weeks before
the start date of the audit, so that he could
identify areas to focus upon, share the information
with me as the other member of his team, and formulate
a more accurate audit plan. My supervisor had
considerable experience in setting overall audit
goals, management and training of audit teams,
following up on the status of the audit plan,
an understanding of the business areas and dynamics
of the country in question. Upon arrival, my supervisor
as lead auditor met with the Country Business
Manager and the HR Head, as well as Senior Executives
of the various business lines. 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. These
could then be translated into what should be the
focus of the audit (Compliance and Risk Review
vs. Functional Competence, for example). It also
gave the local HR head an idea of the scope and
depth of the audit to be conducted. Our management
had decided that our audit was to cover all three
aspects: functional competence, compliance and
risk review.
The HR head then met with the key personnel in
the HR department and discussed the audit deliverables
and records that were needed on hand or to be
submitted to us for our review. The Deputy HR
head was appointed as the Liaison Person for the
duration of the audit, acting as a bridge between
us and the HR department- in relation to our needs,
to explain the objectives, policies and procedures
of the HR department and to answer queries and
make clarifications of the questions that may
be brought up. However it was also made clear
that we were to have a free hand in contacting
the area specialists regarding a particular function
or responsibility for explanation, clarification
or query. This would strengthen the understanding
and perspective of the functional area executives
and broaden their horizons from a management and
audit point of view.
The pre-audit report received by my supervisor
showed that the HR department was divided into
the following functional areas:
1. Hiring & Recruitment
2. Policies, Procedures & Staff Legal Aspects
3. Training
4. Compensation & Benefits
5. Management of the Human Resources Information
System (HRIS) and Data Feeds
6. Employee Loans
Thus there were six functional managers, each
reporting to the HR head. The HR head in turn
reported to the Country Business Manager, with
dotted line reporting to the Regional and Divisional
HR heads.
I will now give examples of what was covered
in the audit of each functional area:
1. Hiring & Recruitment:
As auditor, my first step was to study the hiring
and recruitment policy of the bank. The hiring
and recruitment policies and procedures would
serve me as a guide to performing the audit of
this function. I carefully checked to see if the
hiring policy was within the overall global guidelines
of the bank, and for any evidence of discriminatory
practices in hiring. According to the global guidelines,
the bank was to support the policy of promotion
from within. All jobs were to be posted on the
internal bulletin or electronic e-mail system
of the bank, 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. I also checked to see
that filing of the records of the short-listed
candidates had been maintained, as well as their
interview evaluations. 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 provident fund, gratuity fund,
medical and life insurance cover and other benefits
were to be on file. 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.
I took a representative sample of the employees’
personnel files, and check for the procedures
that were followed in hiring and placement of
the employees. I was guided in this task by a
checklist developed for the process by the hiring
and recruitment area specialist.
My findings in this area were that a few documents
were missing from the personnel files like previous
employers reference letters and in some cases
the confirmation letters HR copy. In one or two
cases the record of transfers and salary increments
were missing. However some information could be
taken from the HRIS so the employees were asked
to write to their former employers for the missing
reference letters, and copies of the missing increment
and transfer letters were reprinted by HR and
filed.
2. Policies, Procedures & Staff Legal Aspects:
The HR policies were to follow established global
guidelines, so my first responsibility in this
area was to look at this aspect. I was guided
by my supervisor, who directed that proper explanation
and justification should be called for in case
of differences from the global guidelines. In
case of deviation from global practices, I would
also look for the justification of the HR policies
and practices in place. Since according to the
global practices, the policy decisions were to
be properly discussed and approved by the management
committee, CEO and HR head before implementation,
therefore the track record for policy approvals
was also checked on random basis.
Procedures followed in the HR 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 were checked on file,
to provide credence to the deviation in policy
being followed in the light of local laws.
My next action in this area was to review the
personnel policies in place, concentrate on areas
of interest as advised by my supervisor, and sample
check the process/procedures followed in detail
for a random sample of cases.
As regards staff legal aspects, this involved
all cases of employee grievances and complaints.
It 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.
My supervisor had directed that as an auditor
I should be specifically interested in ascertaining
whether or not the employees were given a fair
trial, a proper unbiased investigation was made
into the incident, and the action taken by HR
in consultation with line management was justified.
In cases where the employees made use of the whistleblower
system to bring attention to a problem, I was
directed to cover a full re-investigation of the
case based on the timeline of events. Cases of
in-discipline had been directed to the bank’s
disciplinary committee comprising a cross section
of higher management. I was asked to check the
record of cases submitted and decisions taken.
I asked for and reviewed 100% of the cases in
this area, was satisfied with the procedures followed
and the decisions taken by management.
3. Training:
My first concern here was to see that the HR
training expenses were within the training budget.
I was also interested in looking at the kinds
and numbers of training programs conducted, the
adequacy of training facilities and staff, the
comparisons of local and foreign training. Foreign
training would only be justified in a specialist
area where local staff expertise is not available.
As training should flow from the needs of the
enterprise and its employees, I had 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. I also made
a cursory study of the employee satisfaction surveys
on hand, indicating the level of satisfaction
with the in-house training programs.
The training expenses were within the budget
estimates, however I felt that in some cases,
local expertise if developed would reduce the
amount spent on training abroad.
4. Compensation & Benefits:
This was by far the most encompassing of all
the functions of the HR department. Compensation
covered the entire breakup of the salary package
to the employee, so as auditor I had to review
the payroll records, policies and rules for overtime,
principles and procedures for tax deduction, calculation
and placement of funds in the local provident
fund and gratuity accounts, adequacy of life and
medical insurance of those provided for. With
respect to the employee benefits, as auditor I
had to look for 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. The administration
of benefits was to be strictly according to policy.
I also checked for management approval of salary
and benefits changes was also checked by me on
a random basis.
It was possible to only make a random check of
this area. In one or two cases tax deduction was
not as per policy as the unit was alerted to this
fact.
5. Management of HRIS and Data Feeds:
The function of the HRIS 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 HRIS 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. As the auditor, I first checked to see
whether there was a proper security system for
the HRIS and the proper hierarchy of passwords
were in place. At the lower level, the input of
employee initial joining and confirmation data
was authorized only to the HR hiring and recruitment
specialist, the payroll and taxation data only
to the payroll unit etc. Emergency overrides available
to HR head were also checked, as well as their
frequency of use. It was also checked to see that
data feeds and inputs or changes to system information
were properly authorized and tracked. Also whether
a record of inputs and changes was maintained,
to track the responsibility and authenticity of
changes made. The use of the HRIS 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.
My findings here were that the passwords were
not remembered by some of the staff and there
were errors. Staff were directed to give proper
attention to this fact.
6. Employee Loans:
Since the Compensation and Benefits Unit of the
HR department was the one dealing with their salaries,
the issue and recovery of staff loans was also
entrusted to the HR department. Request for employee
loans are made via mail. The employee loans administrator
would then calculate their loan eligibility based
on their position, salary and number of years
of service in the bank. 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
HRIS, so deduction calculations were made automatically
through the system and reflected on the employee’s
payslip.
While auditing this area, I checked out the loan
policies and procedures to determine eligibility
conditions. 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. The approval for deviations
from policy were also checked in detail by me.
My findings in this area were that a few e-mail
loan requests were not on file. However all forms
were in place carrying the proper authorization
signatures. A full check was made on the deviation
approval aspect, with 100% of the documents found
complete and in place.
After I had checked and reviewed all the above
elements, I send discussed my findings with my
supervisor. It was recommended for the Hiring
and Recruitment area to have tighter control so
see all documents were in place on file. The payroll
area was asked to train its inputters 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 less errors in accessing the system. It was
also suggested that some line staff be sent abroad
for training in important operational areas so
that once their had completed this, expenses on
foreign training could be curtailed.
As lead auditor, my supervisor then coordinated
the findings and recommendations into an Audit
Report. He also discussed the findings and recommendations
for corrective action with the HR head and the
Country Business Manager. The purpose of this
was to create an understanding for changes needed
rather than level any criticism. A follow up report
was then prepared and submitted to the auditors
by the HR department when the deficiencies had
been corrected and rectified.
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