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Human Resources Audit | Definition, Types, Process, Objectives, Benefits and Limitations

Human Resources Audit
Contents :
  • Meaning and Definition of Human Resource Audit
  • Characteristics of HR Audit
  • Objectives of HR Audit
  • Types of HR Audit
  • Approaches to HR Audit
  • Process of HR Audit  
  • Benefits and Limitations of HR Audit

What is a Human Resources Audit ?


Every organisation needs a technique by which it can check the different activities and outcomes of various individuals working in that organisation. This operation is performed by process of audit. An audit is a method by which financial records of any department are assessed and verified systematically, which is done on a regular basis by the finance department. But in the context of HR department, it can be defined as an actively which is aimed at assessing the effectiveness of the all human resource policies, procedures and activities performed by the individuals working in the organisation at regular intervals. It is not only the method of measuring monetary records but it is also a planning device. There are many functions that take place in the organisation such as recruitment, deployment, training, development, promotions, retaining capable employees, etc. HR audit helps to improve these functions by identifying the available prospects so that an organisation can exploit it and become more successful. HR audit also serve as a developing tool by which it cot only enhances the performance of their human assets but also develops the organisation.

Definition of Human Resources Audit


According to Biles and Schuler :
"HR audit evaluates the HR activities in an organisation with a view to their effectiveness and efficiency".

According to Storey and Sisson :
"HR audit is concerned with the gathering, analyzing information, and then deciding what actions need to be taken to improve performance".

Characteristics of Human Resources Audit


HR audit has the following features :
  • HR audit is an analysis process to check the proper functioning of human resources working in an organisation.
  • It is an investigating tool which studies about the people working in the organisation, policies followed by them, the functions and activities performed by them. If there is any gap in the actual and standard performance, then HR audit identifies and fills it.
  • It is measuring device that not only computes the performance of the individuals of the organisation, but also checks whether there is lack of compliance on the part of HR department or not. It is the responsibility of HR audit to manage the detected fault as soon as possible.
  • HR audit is usually conducted once in a year and is carried-out either by the organisational experts, or by the external professionals specialized in human resource management, having an exact understanding of auditing.
  • The reports prepared by HR audit are forwarded to the higher authorities so that if in case there is any error in the report, it can be detected and corrected on time.

Objectives of Human Resources Audit 


Following are the main objectives of HR audit :
  • HR audit looks after the effective functioning of the HR department of the organisation. It evaluates the systematic implementation of policies and procedures in human resource department and also evaluates its working environment.
  • HR audit rectifies the mistakes done by human resource while performing their tasks and provides suitable corrective measures as soon as possible.
  • It checks whether the HR functions are carried-out as per the set policies and procedures of the organisation or not.
  • It measures the errors as well as positive aspects of the HR department. It ensures whether HR department is following the policies regarding the recruitment, training, placement, promotion, workplace environment employee grievances, etc., according to the organisational rules and regulations or not.
  • It is the responsibility of HR audit to assess all the functions of the corporation and search out for those functional areas and activities which require cost-cutting. These functions include staffing of new employees, selection, training, holding-on of potential employees, separation of human resource etc.
  • HR audit also helps in maintaining discipline among the employees by evaluating their behavior and actions frequently and making them realize their responsibility towards the benefit of the organisation.
  • It also identifies those areas of HR department which need revival or improvement. Thus the steps are taken to improve the performance of the HR employees. As a result, if improvement in performance is observed, they are rewarded accordingly.
  • It helps in making HR administration a computable concept, i.e., which can be calculated in figures rather than considering it as a theoretical concept.
  • Certain problematic employees may take legal actions against the organisation; HR audit also prepare for such lawsuits in advance to face such people effectively.

Types of Human Resources Audit 


There are various types of audits which can be classified on the basis of following factors :

1) Time Period : 
Most of the organisations follow an irregular audit, i.e., the time period is not fixed for auditing; it can take place once in a year or may be once in three years. But as per the changing time audits should take place on fixed time-period and regularly so that constant check can be kept on the functioning of the employees.

2) Conduct : 
In this type of auditing, assessment can be carried out by any of the following :

i) Internal Audit : 
This type of audit takes place within the organisation and is performed by internal management in order to assess and control the working of the HR department.

ii) External Audit : 
The external audit may take place within the organisation premises or even outside it. It is carried-out by external professionals who are specially hired for this purpose. Unlike internal audit, the outcome of evaluation from the external audit is always unbiased.

3) Purpose : 
As per the purpose required, audits can be divided into the following :

i) Compliance Audit : 
A compliance audit checks whether all the departments are following the rules and regulations of the organisation or not.

ii) Best Practices Organisation Audit : 
In this audit, he tasks executed by HR department are compared with the 'best practices' of the other organisation Efforts should be made to make their practices to be the "best practices among all other similar organisations.

iii) Strategic Audit : 
Strategic audit evaluates the contribution of HR practices in achieving strategic goals of the organisation. It also checks the improvements made in the performance of the employees by providing them proper working condition.

iv) Job Specific Audit : 
This audit focuses on specific function performed by the HR department. These functions include recruitment, raining, salary, promotion, etc.

Approaches to Human Resources Audit 


Given below are various approaches that can be used by the auditors to evaluate HR functions :

1) Comparative Approach : 
In this approach, the progress of one organisation is compared with the progress of other organisation. Results of both the organisations are matched. In this case, other organisation is treated as a model organisation and the target is to achieve the same result as that of the model organisation.

2) Outside Authority Approach : 
Under this approach, standards for comparison are set by external experts and these yardsticks are used by the internal auditors of the organisation to evaluate their work.

3) Statistical Approach : 
In certain cases, statistical approach has to be followed in order to create statistical performance measures with the help of organisation's current information. For example, to measure the rate of absenteeism, the amount of revenue received, etc., certain arithmetical methods are required to evaluate the performance. Thus, this statistical technique helps the auditors to get the information accordingly.

4) Compliance Approach : 
In this approach, past performance and activities of the employees are reconsidered to check their conformity with the organisational rules and regulations and whether there was any violation of legal provisions or not.

5) Management by Objectives (MBO) Approach : 
In this approach, the auditor asks the departmental heads and operational managers to set certain objectives for their departments. The degree with which these objectives are achieved can easily determine the performance of the departmental manpower. This assessment is then utilized by the HR audit to verify the genuine performance of the employee and compare it with the set targets.

Process of Human Resources Audit 


The steps that are followed by HR audit for appropriate assessment are as follows :

1) Identifying the Objectives of HR Audit : 
Setting up of definite objectives is the first task carried-out in an organisation. But before setting up the objectives, HR audit assesses the functions and activities to be carried-out under the HR department, compliance of law and order undertaken to guide their principles and actions and ensuring that these HR strategies are in line with the, corporate strategies. For the proper evaluation, it is necessary that the organisation's aim, schedule and the planning made by HR audit should move on the same track.

2) Developing a Rough Audit Plan : 
An auditor before implementing auditing process should have an idea about the following things : 
what he has to do, which policies should be preferred, which areas are to be focused more, what are the best means by which relevant information can be gathered, etc. Thus. an assessor prepares framework of his audit plan so that he can have a rough idea about the manpower required, expected cost incurred and the tools and equipment required for the entire audit procedure.

3) Collecting Background Data : 
An auditor must have appropriate information about the internal as well as the external factors that may influence the HR auditing process. This information is known as background data. External factors include the competency level of the particular organisation, the legal environment and the entire summary of the organisation. Internal factors include the set objectives, the policies followed by the organisation for achievement of these objectives and the performance of the human resource in different divisions of the organisation.

4) Determining the Technique of Data Compilation :
In this step, information is gathered by HR auditors from various sources using different techniques. Some of the techniques used for data collection are interview method, questionnaire method, task force method, observation method, etc. Auditor can opt for one or more than one technique at a time. Besides this, time required and cost of assessment is also decided in advance so that auditing process can take place effortlessly and effectively.

5) Finalizing the Audit Plan : 
In case there is a requirement of any improvement in.the rough audit plan prepared by the auditor, changes can be made at Dis stage before finalizing it. Background data and knowledge gained can also be useful in upgrading he pre-planned auditing plan. It is the sole responsibility of the assessor to have a clear cut understanding about e goals to be achieved, techniques to be used, areas to he covered and time and cost required for entire auditing process and then finalizing the audit Plan.

6) Collecting Complete Audit Data :
In this process the assessor gather all the significant information from various sources and combines them together to analyse the virtues as well as the shortcomings of the HR department. Once HR auditor receives all the data regarding the working of the human resource management, this data is then compared with the final audit plan. The assessor should keep in his mind that till this stage, he should have to collect complete data in order to perform auditing function smoothly.

7) Developing an Audit Report : 
After gathering entire data regarding the HR functioning, an assessment programme is conducted within different areas of HR department. These areas cover the, recruitment training, advancement, rewards, retention, transfers and retirement functions of the HR department. Along with this, working atmosphere, functioning of employees, the objectives of the HR unit, policies and strategies undertaken by HR audit and HRIS are also included during the evaluation. After this, a detailed audit report is prepared by the auditor after covering the entire valuation procedure.

8) Decision Based on the Audit Report :
This is the concluding stage in which the organisation makes appropriate decisions after seeing the final audit report. Management even asks for auditors recommendations so that decision making process becomes easier for them. In case some changes are required in setting the objectives of HR department or in the strategies or in the performance of the employees, HR auditor's suggestions can prove to be very constructive for the authority.

Benefits / Importance of Human Resources Audit 


HR audit is very beneficial for any organisation. Some of its noteworthy roles are as follows :

1) Promoting Critical Business Plans : 
Every organisation follows certain strategic plans in order to achieve organisational goals. The path of reaching these objectives becomes easier if the employees also contribute their point of view about these plans and involve themselves complete!y to achieve these objectives. Thus, this is the responsibility of HR auditor to convince the management to disclose these strategic plans to the employees of the organisation so that they can participate comfortably in the decision-making process of the organisation.

2) Role Clarity of HR Functions : 
People working in HR department must be very clear about their roles and responsibilities in the department. They should have a clear understanding that their priority should be in the interest of the organisation. This role transparency function is performed by HR audit HR audit not only creates awareness among the employees about their role in HRD but also directs the senior management to provide support in the activities of HRD.

3) Improving Organisational Competency :
Another benefit of HR audit is that it helps in identifying the competency level of the particular organisation. For this. it tries to search out for the strength as well as weakness of the present administrative system. In case there is any drawback in the functioning of the system, HR audit tries to develop those techniques by which the productivity can be increased. Enhancing strengths and removing weaknesses have a positive impact on the performance of the employees. These positive impacts are also visible on HRIS, working procedures, delegation and clarifications of roles and responsibilities, information sharing, etc. This in turn will ultimately help in improving the competency level of the organisation.

4) Analysis of HR Functions : 
HR audit plays a very crucial role in analyzing the functioning of HR department. It provides a platform to the HR department to face various competitions and prepare themselves for future oppositions. It also guides the HR department in the processes of environment, policy development, training. promotion, maintenance, counseling, etc. It helps in evaluating the performance of the employees and developing their leadership qualities. If necessary HR audit also helps in re-designing the development system of HR department.

5) ROI Analysis : 
Every organisation makes a lot of expenses on the development of human resources in the form of recruitment, training programmes, compensation, improvising working conditions, etc., so that they can obtain a greater Return on Investment (ROI). Thus, HR audit determines ROI. It also determines the need for various training courses and how these can be best utilized for the growth of human resource as well as for the corporation. Making these programmes cost effective also prepares the management to carry-out these functions effortlessly.

6) Increased Focus on Human Resourced Capabilities :
HR audit is a tool which focuses on the knowledge, experience behavior and outlook of the employees. Competencies (managerial, technical and human) of the employees at different levels of the organisation are identified and assessed. If there is any gap found between the competencies possessed by the employees and that which are required by the organisation, then appropriate measures can be taken to fill the gap. The techniques which can be used for this are performance appraisal, role clarity exercise etc.

7) Strengthening Performance Improvement Mechanisms : 
HR audit can adopt performance development techniques in order to increase the input given by the employees. The methods may include performance planning of the employees, sharing the aspirations with the employees, documenting the tasks assigned to them, by giving them responsibilities and congenial working environment, etc.

Limitations of Human Resources Audit 


Limitations of HR audit are as follows :

1) Audits are Perceived as a Threat to Managers :
In some organisations, the managers may have a feeling of fear about the HR audit. The reason behind this is that managers think that they will be caught for any wrong acts, if they have done any, and would definitely be punished for the wrong acts. HR audit is used by some unethical managers to induce obedience in employees.
Organisations can reduce this fear of HR audit by not considering audit scores for the direct assessment of any manager's performance. Manager's assessment should be done considering the execution of corrective measures to reduce the wrong acts found during the HR audit. No punishment should be given, in any case, as the consequence of HR audit. But exposing some major unethical conduct of criminal nature cannot be avoided and should be dealt with.

2) Absence of Established Metrics : 
In most organisations, the established metrics and other performance standards used for assessing the effectiveness of the HR audit process are lacking. This is one of the major problems for the organisation. Therefore, senior managers are advised not to conduct audit without appropriate metrics and performance standards. Measures and performance standards can be established by framing a meaningful audit process.

3) Lack of Objectivity : 
Objectivity and other necessary skills are essential for the managers, who are doing audit, so that the interpretation of the data collected can be done properly. The absence of objectivity hampers the audit. In contrast, many organisations outsource auditors who possess experience and expertise in conducting HR audits. Generally, experts themselves conduct audit of the HR function. While auditing the senior audit expert should be familiars with some of the common errors of interpretation, which may crop up while analyzing the outcome of employee opinion. These include the following :
  • Making a single observation on the basis of the report.
  • Assuming agreement on the basis of opinions given by a small group of people.
  • Rejecting the observations without doing any investigation.
  • Interpreting the reports to be valuable without considering the meaning.
  • Making conclusions on the basis of majority opinions and not considering minority opinions, e.g. performance appraisal form is used by only 51%; this means that the majority uses the from but almost half does not use it.

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