Human Resources Auditing is a process of examining decisions and actions of the HR department in relation to policies, procedures and practices with the aim to improving the efficiency in the deployment of people in the organization. It involves a comprehensive review of the HR policies, procedures and documentations to identify areas that needed improvements. It also assesses an organization’s compliance with local labor and national legislations. It is also used as a diagnostic tool to gauge the current status of things and also establish the gaps if any, between the current status and the desired status in the HR function. This is to make the function responsive to the changing dynamics of the business world.
Auditing has been a routine exercise in the area of finance, especially because it is a statutory obligation. However, in the case of Human Resource, there is no binding legal requirement to undertake an audit of the function. However, some business organizations undertake periodic Human Resource audits to enable them map out their human resources architecture and analyze and determine the best fit for people in the organization.
Like any audit, the Human Resource Audit examines the strategies, policies, procedures, documentation, structure, systems and practices of an organization’s human resource management. HR audit also assesses the strengths, limitations, and developmental needs of the existing human resources and make projections for the future human resource needs.
Human resource auditing is premised on the assumption that human resource processes are dynamic and must continually be redirected and revitalized to remain responsive to the changing needs of business organizations. Human Resource Audits are not routine practices aimed at problem solving. Instead of directly solving problems, HR audits, like financial audits, provides insights into possible causes HR policy and procedures deviations that can result in problems such as high staff turnovers.
What is Human Resource Auditing?
The American Accounting Association’s Committee on Human Resource Accounting (1973) 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 development of employees, but also quantifies the economic value of the people in an organization.
The purpose of HR audit is to reveal the strengths and weaknesses in the HR systems of organizations and any other employee issues needing resolution. An HR audit goes beyond looking at the hiring process into areas like employee retention, budgeting, training, employee compensation, management/employee relations and any other processes or practices within the company that affect its people. It assesses the Returns on Investments made into the HR function, the effectiveness of the policies, procedures and other systems in place. It also looks into compliance to national and local legislation on labor and organizational policies and regulations.
Human Resource audits may accomplish a variety of objectives, such as ensuring legal compliance; maintaining or improving competitive advantage; establishing efficient documentation and technology practices; and identifying strengths and weaknesses in training, communications and other employment practices. The process of human resources auditing allows a company to get a general idea of where it stands in respect of its human capital so it can better correct any potential problems and plan for the future.
Companies must undertake human resources auditing just as they audit their financials and other operations. This gives them an accounting of their workforce and the efficiency with which the organization deals with its people, from recruiting to laying off.
Human Resource Audit involves 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. The intended outcomes of the audit include minimizing the liability exposure of the business organization and introducing or enhancing human resource best practices.
There are several associated benefits to Human Resources auditing. It reminds the HR department to create a more professional image of the department and with other line managers that interact with them. HR audit streamlines the role of the department in helping the organization achieve its strategic objectives. It unearths problems that might militate against achieving compliance with national and local labor legislations. It makes the HR function more responsive to the needs of the human capital in the organization. In all essence an HR audit evaluates and through its recommendations improves HR practices in areas of staffing, compensation and benefits, performance management, employee development through external and internal learnings and training, employee relations, reporting lines and record keeping.
Why the Need for Human Resource Auditing?
The commonly known audits are the 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 progressive managements have voluntarily accepted its usefulness in making employees more responsive. According to Dave Ulrich (1997) globalization and the changing business dynamics require the HR department to achieve efficiency and effectiveness in order to become competitive. This challenges the HR manager to building the organizational capabilities by reviewing existing and potential staff capabilities to be able to properly align them to the strategies of the organization.
Another challenge that the HR function faces that make HR auditing essential is the ability of the human resources department to manage the inevitable business changes. This involves exposing the HR personnel to new skills and attitude by preparing people in the organization to unlearn some of their existing skills and attitudes and also learn new and emerging ones.
There is also the need for retaining employees with core skills with incentives and so undertaking an HR audit would enable the organization identify staff with these critical core competencies to retain and develop further.
Approaches to HR Audit
Just as in financial auditing there are several approaches or methodologies to HR audits. The following are some of the approaches applied for purpose of evaluating the Human Resources:
In this approach the auditors identify a highly successful competitor company as the model. The results from their organization are compared with what pertains in that company/industry.
External authority approach
In this the auditors use standards set by an external consultant or authority as benchmark for comparison of their own results.
This involves the use of statistical and empirical measures of performance indicators developed evaluate the company’s existing HR policies and procedure.
In this, auditors review past actions to calculate whether those activities comply with legal requirements and industry policies and procedures. If not, then recommendations are made in the manner HR policies are implemented in the organization.
Management by objectives (MBO) approach
This approach creates specific goals, against which employee performance are measured, to arrive at final decision about organization’s actual performance.
Processes of HR Auditing
The processes involved in conducting an HR audit include interviewing key staff about their appreciation and knowledge of the key policies and procedures of the organization and how these affect their deliveries. The interview should also include questionnaires about their relationship with other personnel and management in the reporting structure.
All relevant HR policy documentations including operational manuals, organograms among others must be scrutinized or conformity. The auditors then complete and prepare a comprehensive written report outlining specific recommendations to correct the gaps identified to achieve efficiency and enhanced performance. The recommendations must take into consideration what is contained in the written policy and procedures manuals and what actually is practiced.
The audit processes must include compensations and benefits policies and promotions and advancements. This is highlighted as some business organizations do to feel comfortable subjecting it to auditing due to confidentiality issues. However, it is important to pay particular attention to this area as a lot of staff discontent emanates from what they perceive as some management showing favoritism to people by placing them on scales or awarding them with benefits they are not qualified for. Auditors must ensure management establishes a well-documented and credible system of compensation and benefits packages and promotions and advancement systems.
Benefits of Human Resource Audit
HR audit identifies the gaps between the existing state of the HR function and the industry standards. This helps to streamline the functions of the HR and its processes. It also helps stimulate the uniformity of the policies and practices of HR and ensures timely compliance with appropriate legislations and requirements.
A comprehensive HR audit ensures the best fit and flexibility in the deployment of employees in an organization. The audit ensures employees are deployed in a manner that ensure best fit for achieving strategic objectives.
HR audit enables the organization to establish a fit between the HR and strategy by focusing on ensuring flexibility and agility when the business environ changes. In creating a best fit for the HR capital HR audit help in aligning the HR to the strategic objectives of the organization.
Underlying a firm’s competencies is a portfolio of employees with unique skills. These skills could be categorized into core knowledge (skilled workers or experts) job based employees such as contract labor. Audit helps the HR function to map out the extent of the core skills available to be to deployed and also identify which ones are in short supply for corrective measures to be taken
Author: Francis Enimil Ashun (B.Com M.A. (HRM)) has over 16 years’ banking experience in Credit Administration and Banking Operations. He is a researcher in current trends in Human Resources Management and Development.
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