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.
The local HR department is usually given notice
in advance of the upcoming audit. Proper arrangements
are made for the travel and stay of the auditors.
A pre-audit report is also formulated by the HR
department, which consists 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 is sent to the leader
of the audit team in advance, usually two weeks
before the start date of the audit, so that he/
she can identify areas to focus upon, share the
information with the area specialist in his team,
and formulate a more accurate audit plan. The
team leader will have considerable experience
in setting overall
audit goals, management and training of the audit
team, following up on the status of the audit
plan, an understanding of the business areas and
dynamics of the country in question. Upon arrival,
the team leader will meet with the Country Business
Manager and the HR Head, as well as Senior Executives
of the various business lines. This is to gain
a familiarization with the state and goals of
the business and its key personnel, as well as
their expectations. These can then be translated
into what should be the focus of the audit (Compliance
and Risk Review vs. Functional Competence, for
example). It also gives the HR head an idea of
the scope and depth of the audit to be conducted.
The HR head will then meet with the key personnel
in the HR department and discuss the audit deliverables
and records that will need to be on hand or submitted
to the auditors for their review. Usually the
Deputy HR head is appointed as the Liaison Person
for the duration of the audit, acting as a bridge
between the auditors and the HR department- in
relation to the needs of the auditors, explaining
the objectives, policies and procedures of the
HR department and answering queries and making
clarifications of the questions that may be brought
up. However the auditors should have a free hand
in contacting the area specialists regarding a
particular function or responsibility for explanation,
clarification or query. It will strengthen the
understanding and perspective of the functional
area executives and broaden their horizons from
a management and audit point of view.
The HR department in question has been 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 are six functional managers, each
reporting to the HR head. The HR head in turn
reports to the Country Business Manager, with
dotted line reporting to the Regional and Divisional
HR heads.
Let us now take the examples of what would be
covered in the audit of each functional area:
1. Hiring & Recruitment:
The auditor here would be guided by the hiring
and recruitment policy of the bank. The hiring
and recruitment policies and procedures would
serve as a guide to performing the audit of this
function. The auditor should carefully check to
see if the hiring policy is within the overall
global guidelines of the bank. There should be
no discriminatory practices in hiring. Ordinarily
the bank should also support the policy of promotion
from within. All jobs should 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. Filing
of the records of the short-listed candidates
should be maintained, as well as their interview
evaluations. Records of the final selected candidates
for the position should be in their personnel
folder. The personnel folder would also be 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 should be on file. The proper
audit of the recruitment area should 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 would take a representative sample
of the employees’ personnel files, and check
for the procedures that were followed in hiring
and placement of the employees. He would be guided
in this by a checklist developed for the process.
2. Policies, Procedures & Staff Legal Aspects:
HR policies should usually follow established
global guidelines, so the auditor’s first
responsibility would be to look at this aspect.
Proper explanation and justification may be called
for in case of differences from the global guidelines.
The HR auditor in this area would look for the
justification of the HR policies and practices
in place. The policy decisions should also be
properly discussed and approved by the management
committee, CEO and HR head before implementation,
therefore the track record for policy approvals
should also be readily available.
Procedures followed in the HR department should
be carefully reviewed to see that no part is unnecessary
or redundant. At the same time they should provide
for speedy resolution of the employees problems
or needs. Where needed, consultations from legal
advisors taken should be filed to provide credence
to the deviation in policy being followed in the
light of local laws.
The auditor would review the personnel policies
in place, concentrate on areas of interest as
advised by the team leader, and sample check the
process/procedures followed in detail for a random
sample of cases.
As regards staff legal aspects, this involves
all cases of employee grievances and complaints.
It also involves 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 are also covered.
The auditor would 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 make use
of the whistleblower system to bring attention
to a problem, the auditors may be directed to
cover a full re-investigation of the case. Cases
of in-discipline are usually directed to the bank’s
disciplinary committee comprising a cross section
of higher management. The auditor would want to
check the record of cases submitted and decisions
taken.
3. Training:
The auditor’s first concern here would
be to see that the HR training expenses were within
the training budget. The auditor would also be
concerned with 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
is only 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, the auditor will 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. Employee satisfaction
surveys can also indicate the level of satisfaction
with the in-house training programs, and these
documents should also be reviewed by the auditor.
4. Compensation & Benefits:
This is by far the most encompassing of all the
functions of the HR department. Compensation would
cover the entire breakup of the salary package
to the employee, so the auditor would have 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,
the auditor would be looking at employee eligibility
to receive the benefits, whether
they were given uniformly, and whether the quantum
and nature of the benefit is justified. The administration
of benefits should be strictly according to policy.
Management approval of salary and benefits changes
would also most likely be checked by the auditor
on a random basis.
5. Management of HRIS and Data Feeds:
The function of the HRIS is to provide a means
of computerized records of the most important
personnel information required by the department
and the enterprise. These data or information
can then be retrieved on-screen or in printed
report form for use and analysis by management.
The HRIS would in effect cover most of the important
information in the employee’s personnel
file, and even go beyond it by means of analytical
ability. All data feeds and inputs or changes
to system information should be properly authorized
and tracked. A record of inputs and changes should
be maintained, to track the responsibility and
authenticity of changes made. The use of the HRIS
system should be to provide adequate means of
management reports on which decisions can be taken.
Capability of the system to produce such reports
would depend on the skill of the programmers and
the understanding of the reporting needs of the
enterprise.
6. Employee Loans:
Since the Compensation and Benefits Unit of the
HR department is the one dealing with their salaries,
the issue and recovery of staff loans is also
entrusted to the HR department. Request for employee
loans are made via mail. The employee loans administrator
will then calculate their
loan eligibility based on their position, salary
and number of years of service in the bank. Eligible
employees are 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
can be taken include 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 can be accommodated, subject to
approval of senior management. A proper record
is 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 are made automatically
through the system and reflected on the employee’s
payslip.
While auditing this area, the auditor would check
out the loan policies and procedures to determine
eligibility conditions. The next step would be
to check a random sample of the loan documents
on file, to see that the proper procedure was
followed and all necessary approvals are in place.
The approval for deviations from policy would
also be checked in detail by the auditor.
After the auditors have checked and reviewed
all the above elements, they would send in their
findings to the lead auditor. The team leader
would then coordinate the findings and recommendation
into an Audit Report. He would also discuss the
findings and recommendations
for corrective action with the HR head and the
Country Business Manager. The purpose of this
is to create an understanding for changes needed
rather than level any criticism. A follow up report
can then be prepared and submitted to the auditors
by the HR department when the deficiencies have
been corrected and rectified.