Human resource

audit

SUBMITTED BY

YUVRAJ SINGH F-32

ABHISHEK ANAND F-
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DEFINITION

H
R 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 healthy HR function in an organization is as important as the

physical and mental well being of a human body. Typically the
basic reason why organizations prefer to conduct an HR audit is to
get a clear judgment about the overall status of the organization
and also to find out whether certain systems put in place are
yielding any results. HR audit also helps companies to figure out
any gaps or lapses and the reason for the same. Since every
company plans certain systems and targets, an HR audit compares
the plans to actual implementation.

The concept of HR audit has emerged from the practice of yearly

finance and accounting audit, which is mandatory for every
company, to be done by external statutory auditors.

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This audit serves as an examination on a sample basis of practices
and systems for identifying problems and ensuring that sound
accounting principles are followed. Similarly, an HR audit serves

as a means through which an organization can measure the health

of its human resource function.

An audit is a systematic process, which examines the important

aspects of the function and its management, and is a means to
identify strengths, weaknesses and areas where rectification may
be warranted. An audit is done on sampling basis. And in
sampling, not every instance or situation can be examined.

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The audit process

The HR audit process is conducted in different phases. Each phase

is designed to build upon the preceding phase so that the
organization will have a very strong overview of the health of the
HR function, at the conclusion of the audit. These phases include:

Pre-Audit Information: This phase involves the acquiring and

review of relevant HR manuals, handbooks, forms, reports and
other information. A pre-audit information request is forwarded to
the client who compiles the necessary information for review by
auditors.

Pre-Audit Self-Assessment: In order to maximize the time

spent during subsequent portions of the audit, a pre-audit self-
assessment form, if sent to the client can be of use. The self-
administered yes/no questionnaire asks a number of questions
about current HR policies and practices.

The completion of this self-administered questionnaire allows

auditors to identify key areas for focus during the HR audit.

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On-site Review: This phase involves an on-site visit at the
client's facility interviewing staff regarding HR policies and
practices. A very in-depth HR audit checklist is completed.

Records Review: During the on-site visit, a separate review is

conducted of HR records and postings. Employee personnel files
are randomly examined as well as compensation, employee claims,
disciplinary actions, grievances and other relevant HR related
information are checked.

Audit Report: The information gathered is used to develop an

HR audit report. The audit report categorizes action needs into
three separate areas. The areas that are urgent and important (UI),
not urgent needs but important (NUI), not urgent but not important
needs (NNI)), and important opportunities needs (IO). As a result
of this scheme of classification, managements can prioritize their
steps.

The critical areas

The comprehensive HR audit covers all areas of HR management
like recruitment practices, training and development, compensation
and benefits, employee and union relations, health, safety and
security, miscellaneous HR policies and practices-welfare, strategic
HR issues, manpower planning/budgeting.

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Besides classifying needs in each of the above areas, the HR audit
also cites relevant laws, cases and research to support the
recommendations.

Approaches to HR Audit:

There are five approaches for the purpose of evaluation of HR in

any organization:

• Comparative approach
• Outside authority
• Statistical
• Compliance approach and
• Management By Objectives(MBO)

What should we include in an HR audit?

HR audits are used to evaluate HR policies and practices. An audit

can help to evaluate how effective the programs and services are;
how well HR delivers on the programs and services; or where there
are opportunities to either enhance, change, or remove programs
and processes.

Before conducting an audit, you should determine what aspects of

the function need to be evaluated. The overall function can be
evaluated, followed by a more in-depth consideration of each of
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the functional areas, as well as each of the programs and services
offered so you make sure the company is in compliance and is
meeting customer demands. For example, it may be that a certain
benefit program is no longer effective. This ineffectiveness may
prompt an audit of that particular benefit program. Individual and
company needs dictate whether the audit should be conducted at
the departmental or organizational level.

Preparation for an audit

Auditor engagement: If external firm carrying out the audit, it

is preferable to set terms in writing defining and agreeing on
scope .If using internal resource it is better to appoint them
formally with clarity on scope and select persons who are non
political or those who are not high on hierarchy. Also, if internal
persons are auditing there must be training in auditing.

Documents, manuals, handbooks, forms and reports auditor must

have access to relevant information contained in employee files
and other confidential documents of the organization. Auditors
must be given unrestricted access to records, once they sign
agreement for confidentiality.

Data gathering: Completion of a self-assessment questionnaire

significantly expedites the audit process and allows for better audit
planning.

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On-site access: The on-site portion of the audit is the most
critical.

Using audit findings

How does an organization use HR audit results? Since the HR

audit results are classified, an important aspect is already taken
care of. Critical needs should be the first ones to be addressed.
Organizations generally have three options for dealing with audit
results.

* Use the HR audit as a blueprint or action plan for addressing HR

needs.

* Address as many needs as possible using the organization's

internal expertise and resources.

* Contract out those need areas where internal expertise and

resources are not available or do not fit in the core competencies of
the organization.

An HR audit is much like an annual health check. It can perform

the same function for the organization. An audit is a means by
which an organization can measure where it currently stands and
determine what it has to accomplish to improve its HR functions. It
involves systematically reviewing all aspects of human resources,
usually in a checklist fashion, ensuring that the government
regulations and company policies are being adhered to. The key to

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an audit is to remember that it is a tool to discover and not to test.
There will always be room for improvement in every organization.

Scope of Audit:

Generally, no one can measure the attitude of human being and

also their problems are not confined to the HR department alone.
So it is very much broad in nature. It covers the following HR
areas:

• Audit of all the HR function.

• Audit of managerial compliance of personnel policies,
procedures and legal provisions.
• Audit of corporate strategy regarding HR planning, staffing,
IRs, remuneration and other HR activities.
• Audit of the HR climate on employee motivation, morale and
job satisfaction.

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Benefits of HR Audit:

It provides the various benefits to the organization. These are:

• It helps to find out the proper contribution of the HR

department towards the organization.
• Development of the professional image of the HR department
of the organization.
• Reduce the HR cost.
• Motivation of the HR personnel.
• Find out the problems and solve them smoothly.
• Provides timely legal requirement.
• Sound Performance Appraisal Systems.
• Systematic job analysis.
• Smooth adoption of the changing mindset.

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An HR audit can be used by an organization for multiple purposes.
Some of the more common reasons are:

• To identify and address HR-related problems.

• To seek out HR-related opportunities.
• To conduct due diligence for mergers and acquisitions.
• To support initial public offerings.

How an audit is conducted is very often determined by its intended

use. For instance, the type of audit used to ascertain HR practices
may be significantly different from the type of audit used to
support an initial public offering. Although the areas examined
may be similar, the process used and the depth of inquiry will vary
from the intended outcome.

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HR Audit
Questionnaire

These elaborative questions fully capture the performance of HR in

all HR functions: recruitment, selection, training & development,
performance management, labour relations, career management,
and organization development.

It investigates the alignment between HR and business

strategy:

1. What was total revenue for the business unit for the most
recently completed fiscal year?

2. What is the company business strategy?

3. Does the company business strategy link to Human Resources

(HR)? Please describe.

4. What is your company's HR Strategy? Is the HR strategy aligned

with the company's strategy?

5. Who develop the HR Strategy? Do you assemble a cross-

functional team to develop the HR strategy?

6. What does HR do in supporting the implementation of

organization's strategy?

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7. Determine how the human resources department will support
strategic goal and impact organization performance?

8. Do you perform a gap analysis of current versus desired

organizational behavior and performance, and develop strategy to
close the gap?

Sample Audit

Organization and Structure

1. Is there an organizational chart?

2. Does the chart include both employees’ names and position

titles?

3. Does the chart show reporting relationships?

4. Is the chart updated as changes occur?

5. As the needs of the organization change, does its structure

change?

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HR Department Organization

1. Is the department sufficiently staffed for the industry and the

size of organization?

2. Is the budget in line with other organizations of similar size and

industry?

3. Has the company been involved in any employment lawsuits?

4. If there have been suits, what were the outcomes?

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

6. To what position does the top HR position report?

7. Does the HR Department have a mission statement?

8. Is the HR mission statement consistent with the vision and

mission of the organization?

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Functions of the HR Department

1. For what functions is the HR Department responsible?

Payroll Recruitment Safety

Benefits Training Strategic planning
Salary Labor relations Others
administration

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?

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Conclusion:

The auditors always prepare and submit an audit report to authority

of the organization, which may be clean or qualified. The clean
report indicates the appreciative of the department's function, but
the latter one represents the gaps in performance and therefore
contains remarks and remedial measures. HR Audit is very much
helpful to face the challenges and to increase the potentiality of the
HR personnel in the organization.

Organizations undertake HR audits for many reasons:

1 To ensure effective utilization of human resources.

2 To review compliance with tons of laws and regulations.

3 To instill a sense of confidence in the human resource

department that it is well-managed and prepared to meet potential
challenges and opportunities.

4 To maintain or enhance the organization's reputation in a

community

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