HR audit process

Introduction

A common practice of any company is to routinely conduct an audit of their financial

books and records to ensure there is no irregularity that would compromise their financial
system. Additionally, accounting audits help a business owner improve their financial
status and point out areas that need an adjustment or a major revision to make the
organization more viable and competitive. Unfortunately, most small business owners
even medium to large business never audit their human resource policies, practices or
results to see if they need similar changes that add value or to be more legally defensible.
Neglecting professional HR oversight from an internal HR professional or an external HR
consultant often results in costly mistakes easily prevented.

Common HR Mistakes Made by the Small Business Owner

Not understanding employment-at-will. The small business owner may believe that he
or she can fire when they want. After all, it's their business and they have control over
who does and who doesn't work for the company. Unfortunately, case laws that override
employment-at-will don't necessarily work in their favor and the Equal Employment
Opportunity Commission (EEOC) may contact you to advise that an ex-employee has
filed a complaint alleging wrongful termination.

Inadequate employee handbook. Small business owners identify the need to have
written rules and expectations in a handbook as a tool to enforce policies and procedures
but often do not have one or are using one that is outdated and not in compliance with
current state and federal employment law.

Poor or no documentation practices. Effective documentation is an absolute necessity

to the employment process. Any employment activity can be the basis for a
discrimination charge whether it was from an interview, the actual hire, a performance
appraisal, or when an employee is terminated. Effective documentation must be accurate,
consistent, complete and evaluated for any liability.

Little or no knowledge of employment laws. Not including state and local laws, a
company with as few as 15 employees are subject to 15 federal labor laws. At 50 or more
employees the company is subjected to 20 federal labor laws. The danger for small
employers is they may believe that most laws only pertain to larger organizations, or are
simply unaware of current employment law requirements. One common pitfall for small
business owners is the lack of awareness that Federal I-9 forms must be completed by all
new hires.
Misclassification of exempt and nonexempt jobs. Almost every company has jobs that
have been misclassified as exempt from overtime requirements. Wage and hour
regulations are complex and it is easy to classify a job as exempt, creating a company
liability for past overtime. Conducting an HR audit of these areas allow the company to
identify weaknesses in its employment systems and identify practices that need to be
updated, comply with new laws and regulations, or to be more comprehensive. Although
not all inclusive, these HR practice areas tend to be the most problematic for the small
business owner.

When to Audit

A full-scale audit can be time-consuming, and most companies should go through this
process at least once a year much like an accounting or financial audit. A mini-audit
following some course correction can be completed without too much effort every six
months. In addition to the annual check-up it would be a good idea to audit when the
following occurs:

• A Merger, acquisition, or sale of the business

• Following major regulation or legal changes
• When the business reaches employee thresholds of 15, 20, 50 and 100 employees
• An employee handbook is created or modified.
• Employee morale, turnover, attendance or excessive discipline problems become
apparent
• A company becomes a government contractor or subcontractor

Conclusion

The unique component of any organization is its employees. They can help it grow and
be successful as well as fail and die. The investment in effective HR practices, functions
and professional advice is as critical to an organization as having the right equipment,
materials, products and processes. Small and mid-sized business owners and
entrepreneurs need to realize the full potential of an effective HR audit because basing
employee-related decisions and actions on misinformation, half-truths and assumptions
can lead to financial losses, unrealized gain in profits and productivity, and unfortunately
business failures. Planning, executing and then regularly conducting an HR audit are a
vital component to a company's overall success.