Category: HUMAN RESOURCE MANAGEMENT (Page 2 of 2)

Human Resource Audit (HR AUDIT)

May 24, 2022 / anurooba1999anura@gmail.com

Meaning and Definition of HR Audit

Every organisation need a method for monitoring the varied activities and consequences of the numerous persons that work there. This operation is carried out through the auditing process. A Human Resource audit is a way of systematically assessing and verifying financial records of any department, which is done on a regular basis by the finance department.

However, in the context of the HR department, it can be characterised as an activity that is carried out on a regular basis to review the efficiency of all human resource policies, procedures, and activities carried out by personnel working in the organisation. It serves as a planning tool as well as a technique of measuring monetary records.

Recruitment, deployment, training, development, promotions, and keeping talented personnel are just a few of the operations that take place in the organisation.

HR auditing aids in the improvement of these operations by finding potential opportunities for an organisation to capitalise on and become more successful. HR audits also act as a development tool, enhancing not only the performance of their human assets but also the organization’s development.

Biles and Schuler claim that “HR audit assesses HR activities in a company to see how successful and efficient they are.”

“HR audit is concerned with gathering, analysing, and deciding what actions need to be taken to improve performance,” according to Storey and Sisson.

Flamholtz claims that “In the context of organisational performance, an HR audit is a systematic assessment of the strengths, weaknesses, and development needs of existing human resources.”

“HR audit is a tool to measure an employer’s compliance with its obligations in managing its personnel and document any corrective actions that might be needed,” says Stephen F. Ruffino.

“HR audit is an assessment of a company’s (or division’s) human resources policies, practises, and systems to eliminate deficiencies and enhance approaches to achieve goals,” according to Schwind, Das, and Wagar.

Characteristics of HR Audit

The following are the characteristics of an HR audit:

1) An HR audit is a procedure for examining the proper operation of human resources in a company.

2) It is a research instrument that looks into the people who work for the company, the policies they follow, and the functions and activities they execute. If there is a discrepancy between actual and expected performance, HR audit finds it and closes it.

3) It is a measuring instrument that not only computes the performance of the organization’s individuals but also determines whether or not the HR department is in compliance. An HR audit is in charge of resolving the observed flaw as soon as possible.

4) An HR audit is normally performed once a year and is carried out by either internal specialists or external professionals who specialise in human resource management and have a thorough understanding of the auditing process.

5) HR audit reports are given to higher authorities so that any errors in the report can be recognised and remedied in a timely manner.

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Scope of HR Audit

HR audits should not be limited to HR departments; they should be applicable to all departments in an organisation where employee-related issues may develop. As a result, an HR audit must assess the activities of personnel from all departments.

Aside from that, HR auditing should not be limited to employees; it should broaden its reach to include evaluating managers’ personal functions. HR auditing is divided into seven categories. The following are a few of them:

1) Audit of Human Resource Function: This audit focuses on the activities of every HR department. In this audit, the auditor first specifies the goal of the activity to be performed, then identifies the person responsible for that activity, reviews employee performance, creates an action plan to correct faults, and finally follows up on the action plan devised.

2) Audit of Managerial Compliance: This audit examines the administrative department’s operations. The audit determines whether or not the executives follow legal procedures and principles in a systematic manner.

If there is a violation of the law or order in the organisation, the audit is in charge of correcting it. Officially, the authority should truly observe authorised laws and regulations because violations of these requirements might be objectionable.

3) Audit of Human Resource Climate: The working circumstances of any organisation have a significant impact on the employees that work there. Individual morale is boosted and job satisfaction is maximised in a positive setting. The following criteria can be used to assess the effectiveness of certain working conditions:

i) Employee Turnover: When the number of people leaving a job rises, the number of new employees who must be hired rises as well. Recruiting new employees not only raises the expense of training them. Aside from that, it can be difficult for management to raise the morale of new employees to the same level as prior employees.

ii) Absenteeism: Absenteeism is the absence of employees from their jobs. Employees that take unofficial breaks on a regular basis not only disrupt the organization’s operations, but also demonstrate disrespect to the company.

iii) Safety Records: Safety records are those that show the costs incurred by the company as a result of industrial accidents. A higher number of industrial accidents indicates flaws in safety plans, which in turn reflects the organization’s bad working conditions. As a result, management’s top focus should be employee safety.

iv) Attitude Surveys: It’s the most effective technique to learn about employees’ attitudes regarding the company. These surveys can be conducted in the form of a questionnaire or a direct interview, allowing authorities to quickly assess an employee’s emotions toward many aspects of the company.

Absenteeism, low productivity, unhappiness, and poor performance can all be readily solved once the cause is identified. It is one of the most effective tools an organisation can use to make its workplace more pleasant so that workers can work more comfortably and efficiently.

4) Audit of Corporate Strategy: HR auditing can also be useful in determining a company’s overall strategy. An organization’s success is entirely dependent on its people resources.

Though human resource experts are not permitted to make decisions about the organization’s strategies, if, given the opportunity, they can assist in the development of methods by which the organisation can easily withstand external pressures and seize external opportunities, allowing the organisation to better understand its strengths and weaknesses.

In other words, if applied to all areas of a company, HR audit can work miracles. It should not be limited to the HR department, but should also include other departments. The following are the major goals of an HR audit:

Objectives of HR Audit

1) HR audit is concerned with the organization’s HR department’s proper operation. It assesses the human resource department’s systematic application of policies and procedures, as well as the working environment.

2) An HR audit corrects errors made by human resources while executing their duties and implements appropriate corrective measures as soon as possible.

3) It determines if HR functions are carried out in accordance with the organization’s rules and procedures.

4) It assesses the HR department’s faults as well as its favourable elements. It checks if the HR department is following the policies in place for recruitment, training, placement, promotion, workplace environment, employee grievances, and so on, in accordance with the company’s rules and regulations.

5) It is the role of HR audit to analyse all of the corporation’s operations and look for cost-cutting opportunities in certain functional areas and activities. Staffing of new employees, selection, training, retention of potential employees, human resource separation, and so on are examples of these functions.

6) HR audits also assist in preserving employee discipline by reviewing their behaviour and actions on a regular basis and making them aware of their duty to the organization’s benefit.

7) It also indicates areas of the HR department that require revitalization or enhancement. As a result, initiatives are being done to improve the HR personnel’s performance. As a result, if they enhance their performance, they are rewarded appropriately.

8) It contributes to making HR management a calculable notion, rather than a theoretical concept, by allowing it to be calculated in numbers.

9) Some problematic employees may file lawsuits against the company; HR audits plan for such lawsuits in advance so that such persons may be dealt with appropriately.

Types of HR Audit

1) Time Period: Most organisations conduct audits on an irregular basis, meaning that the time period for auditing is not set; it may occur once a year or once every three years. However, as time passes, audits should be conducted on a set schedule and on a frequent basis to ensure that employees’ performance is constantly monitored.

2) Conduct Assessment can be done in this form of auditing by any of the following methods:

i) Internal Audit: Internal audits are conducted within an organisation by internal management in order to assess and control the HR department’s operations.

i) External Audit: The external audit may take place on the grounds of the organisation or even outside of it. It is carried out by outside professionals who have been contracted specifically for this reason. Unlike internal audit, the outcome of an external audit’s review is always neutral.

3) Purpose: Audits can be classified into the following categories, depending on the purpose:

i) Compliance Audit: A compliance audit determines whether or not all departments are adhering to the organization’s rules and regulations.

ii) Best Practices Organisation Audit: The duties completed by the HR department are compared to the ‘best practices’ of the other organization in this audit. Efforts should be made to make their practices the ‘best practices’ among all other organizations of a similar nature.

iii) Strategic Audit: A strategic audit assesses the role of HR practices in attaining the organization’s strategic objectives. It also monitors the progress made by employees in terms of their performance by providing them with adequate working conditions.

iv) Job Specific Audit: This audit focuses on the HR department’s unique functions. Recruitment, training, pay, and promotion are examples of these functions.

Approaches to HR Audit

1) Comparative Approach: In this technique, one organization’s success is compared to that of other organisations. The outcomes of both organisations are compared. In this situation, another company is viewed as a model company, and the goal is to obtain the same results as the ‘model’ company.

2) Outside Authority Approach: In this strategy, external experts establish comparison criteria, which are then used by the organization’s internal auditors to assess their performance.

3) Statistical Approach: In some circumstances, a statistical technique must be used to establish statistical performance metrics using current information from the organisation.

To evaluate the performance, certain arithmetical procedures are required, for example, to measure the rate of absenteeism, the quantity of revenue received, and so on. As a result, this statistical technique aids auditors in obtaining the necessary information.

4) Compliance Approach: In this strategy, past employee performance and activities are reviewed to see if they are in compliance with the organization’s rules and regulations, as well as whether any legal provisions were broken.

5)Management by Objectives (MBO) Approach: In this technique, the auditor asks department heads and operational managers to define specific departmental goals.

The degree to which these objectives are met can simply define the department’s workforce performance. The HR audit then uses this assessment to check the employee’s true performance and cooperation.

Methods of Collecting Information for HR Audit

1) Interview Method: To understand the opinions of various authorities on the organization’s expansion plans and predicted growth, HR auditors conduct face-to-face interviews with HR experts in the future.

The interview method is one of the most effective ways for auditors to inspect people working at higher levels of government. It also assesses whether the human resource is prepared to adapt to particular changes in working tactics and conditions in order to meet organisational objectives.

Conducting such interviews on a regular basis aids in the improvement of the organization’s traditions, working techniques, and planning system.

2) Questionnaire Approach: Another easy way for HR audit to gather information from employees is to use the questionnaire method.

The auditor can use this method to learn about various aspects of the organisation, such as whether employees are satisfied with their working conditions, whether human resource policies are being followed consistently, what are the positive and negative aspects of HR department personnel, how does the senior staff interact with employees, and so on.

However, while constructing this questionnaire, keep in mind that it must be valuable to the organisation and must be completed within the time and budget constraints set by the organisation.

3) Observation Method: In order for any organisation to function properly, it must have a supportive environment. As a result, an HR audit should include a look at the working environment.

It comprises a cafeteria, training facilities, a residential space, and even the organization’s surrounds. HR audit assesses the degree to which a healthy environment exists in the organisation using observational methods.

4)Analysis of Previous Records: An HR audit can look at previous records of employees to see how they feel about the company. Aside from that, examining the employees’ perspective on HR growth can be aided by their profile, which includes their life history and professional reliability.

Various training programmes can also be undertaken to establish the number of employees that participated, the feedback received from the employees, and so on. As a result, these training programmes can be used as assessment tools to gather data on human resource development.

5) Workshop Method: Within the organisation, interactive programmes and workshops can be used to examine various human resource development systems such as prospective assessment, performance appraisal, coaching, counselling, mentorship programmes, and so on.

A large group of employees is taken and then divided into small groups in order to conduct a SWOT analysis on various aspects of human resource development systems using the workshop approach. Every group is required to provide a presentation on a specific topic. Each group’s representative makes a presentation in front of all of the other groups for further debate and suggestions.

6) Task Force Method: A task force is a group of people tasked with investigating difficulties and concerns in the human resources department. The major goal of this strategy is to come up with solutions to difficulties that are obstructing HR development. The HR auditor has the authority to form this task force.

Process of HR Audit

1) Identifying the Objectives of HR Audit: The first duty carried out in an organisation is the establishment of specific objectives.

However, before establishing the goals, an HR audit evaluates the functions and activities that will be carried out under the HR department, as well as the legal and regulatory compliances that will be used to guide their principles and actions, and to ensure that these HR strategies are in line with the corporate strategies.

In order to conduct a proper evaluation, the organization’s goal, schedule, and HR audit strategy must all be on the same page.

2) Developing a Rough Audit Plan: Before beginning the auditing process, an auditor should have a general notion of what he needs to do, which policies should be prioritised, which areas should be given greater attention, and what the best methods are for gathering pertinent data.

As a result, an assessor creates a framework for his audit plan so that he can get a good sense of how many people he’ll need, how much money he’ll spend, and what tools and equipment he’ll need for the full audit process.

3) Collecting Background Data: An auditor must have sufficient knowledge of both internal and external elements that could affect the HR auditing process. Background data is the term for this information.

External influences include the organization’s competency level, the defined objectives, the policies followed by the organisation to attain these objectives, the legal environment, and the organization’s overall summary. The performance of human resources in various divisions of the organisation is an internal aspect.

4) Determining the Technique of Data Compilation: In this step, the HR auditor gathers information from numerous sources using various methodologies. The interview method, questionnaire method, task force method, observation method, and others are some of the data collection strategies employed.

At any given time, the auditor can use one or more techniques. Aside from that, the time and cost of the examination are planned ahead of time to ensure that the auditing process runs smoothly and efficiently.

5) Finalising the Audit Plan: If the auditor’s draught audit plan needs to be improved, revisions can be made at this point before it is finalised. Background information and knowledge gathered can also be used to improve the auditing plan that was previously developed.

The assessor is solely responsible for having a comprehensive grasp of the objectives to be reached, the procedures to be utilised, the areas to be covered, and the time and expense required for the complete auditing process before finalising the audit plan.

6) Collecting Complete Audit Data: During this step, the assessor gathers all relevant data from multiple sources and combines it to analyse the HR department’s strengths and weaknesses.

When the HR auditor receives all of the information on how the human resource management department operates, the information is compared to the final audit plan. The assessor should keep in mind that he must collect all data up to this point in order to fulfil the auditing role properly.

7) Developing an Audit Report: Following the collection of all data on HR operations, and assessment programme is carried out in various areas of the HR department. These categories include the HR department’s recruitment, training, advancement, rewards, retention, transfers, and retirement functions.

In addition, the working environment, employee performance, HR unit objectives, HR audit and HRIS policies and initiatives are all considered throughout the review. After that, the auditor prepares a complete audit report that covers the full valuation method.

8) Decision Based on the Audit Report: This is the final step, during which the organisation makes appropriate decisions in light of the final audit report. Management even requests auditors’ advice in order to make their decision-making process smoother.

If any modifications are needed in the HR department’s objectives, plans, or personnel performance, HR auditor’s recommendations can be highly beneficial to the authority.

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Benefits of HR Audit

1) Promoting Critical Business Plans: In order to attain organisational goals, every organisation follows a set of strategic plans. If employees share their perspectives on these plans and fully engage themselves in achieving these goals, the path to achieving these goals becomes easier.

As a result, it is the role of the HR auditor to persuade management to disclose these strategic goals to the organization’s employees so that they can participate comfortably in the decision-making process.

2) Role Clarity of HR Functions: Employees in the HR department must understand their roles and duties inside the department. They should understand that the organization’s best interests should be their top priority.

An HR audit is in charge of this role transparency function. HR audits not only raise employee knowledge of their participation in HRD, but they also direct upper management to provide support for HRD efforts.

3) Improving Organisational Competency: Another advantage of HR audit is that it aids in determining an organization’s capability level. It does so by attempting to identify the strengths and weaknesses of the current administrative structure.

If there is a flaw in the system’s operation, HR audit seeks to propose strategies to improve productivity. Enhancing strengths and reducing shortcomings have a favourable impact on the performance of the workforce.

These good effects can be seen in HRIS, work practises, delegation and clarification of roles and duties, information exchange, and other areas. This, in turn, will aid in the improvement of the organization’s competency level.

4) Analysis of HR Functions: When it comes to analysing the department, HR audit is really important. It gives the HR department a platform to compete in various competitions and prepare for future challenges.

It also assists the HR department with enrolment, policy formulation, training, promotion, maintenance, counselling, and other HR processes. It aids in the evaluation of employee performance and the development of leadership traits. HR audits can also assist in re-designing the HR department’s development system if necessary.

5) ROI Analysis: Every organisation spends a lot of money on human resource development, such as recruitment, training programmes, pay, improving working conditions, and so on, in order to get a better Return on Investment (ROI). As a result, an HR audit determines ROI.

It also evaluates the requirement for various training courses and how they can be used to best benefit human resource development as well as the organisation. Making these programmes cost-effective also prepares management to perform these tasks without difficulty.

6) Increased Focus on Human Resources Capabilities: An HR audit is a technique that examines an employee’s knowledge, experience, behaviour, and viewpoint. Employee competencies (managerial, technical, and human) are recognised and measured at various levels of the organisation.

If there is a discrepancy between the competences that individuals possess and those that the organisation requires, appropriate measures can be made to close the gap. Performance appraisal, role clarification exercises, and other strategies can be utilised to accomplish this. a

7) Strengthening Performance Improvement Mechanisms: Improving Performance Improvement Mechanisms: HR audits can use performance development approaches to encourage employees to contribute more. Employee performance planning, discussing aspirations with employees, documenting duties assigned to them, giving them responsibility, and providing a pleasant working environment are some of the strategies that can be used.

Human Resource Accounting (HRA)

May 24, 2022 / anurooba1999anura@gmail.com

Meaning and Definition of HR Accounting

Human resource accounting is described as an accounting system that treats human resources as an asset and records all financial expenditures on them, such as wages, salaries, training, and so on, in the books of accounts. Human resources, like other physical assets, have a value that is documented in the books of accounts.

Human resource cost assessment, planning, and reporting assists the organisation in correctly recording its assets and is thus an important aspect of every business association. Any organization’s financial report is entirely dependent on the cost of labour employed by that organisation.

“Human resource accounting is the measuring of expenses and value of people for the organisation,” says Flamholtz.

“Human resource accounting is the assessment and quantification of human organisational inputs such as recruiting, training experience, and commitment,” according to Stephen Knauf.

According to the Committee of the American Accounting Association, “Human resource accounting is defined as “the process of identifying, measuring, and presenting data on human resources to interested parties.”

“Human resource accounting is an attempt to identify and report investments made in an organization’s human resource that are currently not accounted for in traditional accounting practise,” writes R. L. Woodruff.

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Objectives of HR Accounting

1) Human resource accounting is one of the most effective methods for determining an organization’s human resource expenditures and the actual worth of these resources. The HRA is the foundation for all choices about the people employed by a company.

2) It enables the organisation to create an expected budget for human resource expenses, such as acquisition costs, training costs, costs for expanding human assets, salaries and wages, and so on, well in advance.

3) To determine the worth of human resources, an organisation must adhere to particular rules and procedures established by the human resource department.

4) It assists the administration in determining if existing human resources are being used to their full potential, i.e., the workforce should be utilised to its full potential. There should be no labour exploitation in the company.

5) In the event that the value of the human assets working in an organisation is about to change, HRA notifies the authorities ahead of time so that suitable actions may be made to safeguard the organization’s most valuable human assets.

6) The HRA system assists any organization’s management in evaluating employees based on their performance and standards and providing appropriate incentives.

7) Once management obtains complete quantitative knowledge on the organization’s human assets, they begin to consider it in all of their choices. As the organisation becomes more aware of the economic implications of human resources, the management philosophy improves even more.

Process of HR Accounting

Step 1: HR Accounting Objectives: Every organisation must achieve a set of objectives. The foundation for determining the objectives of the human resource accounting system is these aims and organisational needs. The HRA system’s goals include a problem-free budgeting system that defines the cost of human resources and provides precise information about their worth to management for optimal use.

This data is gathered from many divisions inside the company. All departments involved with human resource management are responsible for clearly describing the responsibilities they perform, the numerous judgments they make, and the reason for these decisions. It becomes easier to establish the HRA system’s objectives after this information is provided by various departments inside the organisation.

Step 2: HRA Measurement Development: Human resource accounting measures can be done using one of two ways. The following are the details:

1) Management can choose one measuring technique or a combination of methodologies for the measurements, and

2) Monetary or non-monetary approaches can be used to determine the cost or value of human resources, or both.Any of these methods’ validity and consistency must be validated before they are implemented.

Step 3: Create an HR Accounting Database: The human resource accounting system is based on a number of criteria, including time management sheets, the cost of each person working for the company, and numerous psychological aspects. These variables make up the HRA system’s database.

In some cases, reorganising the whole organization’s accounting system to categorise human resources costs separately becomes necessary; otherwise, the costs will be classified under administration and general expenditures. This classification should be based on monetary factors including staffing, training, and development, among others.

In this method, the costs associated with the various tasks listed above may be determined independently, making the HRA’s operation considerably easier. Aside from looking after the monetary issues, the accounting department must also keep an eye on non-monetary components such as employee behaviour and assess the worth and character of employees in order to determine how helpful they may be to the organisation.

Step 4: System Pilot Testing: The next phase is the pilot testing of the accounting process when the preceding three steps have been completed in a systematic manner, i.e., the objectives have been established, dimensions have been designed, and a sufficient database for the HRA system has been established.

Pilot testing referred to the process of pre-testing a system before incorporating it into an organisation. The effectiveness of pilon testing depends on management’s coordination and collaboration throughout the procedure.

Step 5: Putting the Human Resource Accounting System into Practice: This is the final phase in the HRA process, in which the organisation exposes the new accounting system to the whole workforce and employees. Employees are educated on the importance of HRA and the many techniques for achieving it so that they are familiar with the notion and enthusiastically welcome it.

It should be stated plainly how this HRA would benefit them. Deserving applicants are assigned the responsibility of managing the HRA system. HRA may simply carry out any type of alteration by making a few tweaks and enhancements in the system. For the HRA system to run smoothly, periodic reviewing is necessary, as it will prepare the system to adapt to the changing needs of the organisation.

Methods of HR Accounting

A variety of strategies contribute to the human resource accounting system. These techniques may be divided into two groups.

1. Monetary Measurement Methods: Monetary measurement methods are used to determine the monetary worth of individuals as organisational resources. Employee performance, the number of promotions and transfers, worker productivity, and profits generated by an employee for the company are some of the ways in which an employee’s worth may be quantified in monetary terms.

2. Non-Monetary Measurement Approaches: These methods encompass those aspects of human resource that cannot be measured monetarily yet have a financial impact on the organisation. For example, employee behaviour, performance, attendance, growth, devotion, and capacity to achieve organisational goals are all factors to consider.

All of these characteristics are significant in determining the worth of personnel, and they can also be used to predict the monetary advantages that the company will get in the future.

Monetary Measurement Methods

1) Historical Cost Technique: The historical cost method was created by Brummet, Flamholtz, and Pyle. Historical cost refers to the costs incurred through time in the purchase and development of human resources, which are then integrated to determine the real cost of HR as an asset and estimate depreciated cost of human resources.

Human resources are regarded similarly to physical resources in this manner. When any component of a physical property expires, the value of that physical asset is lowered by the cost of that expired element. Similarly, every year, a portion of the worth of an employee is depreciated as an expenditure against the profits earned.

The costs of recruiting, training, development, promotion, and other HR activities are considered an investment in HR and are lowered every year until the person leaves the company.

2) Replacement Cost Approach: This method was developed by Rensis Likert and Eric G. Flamholtz to calculate the worth of workers working in an organisation by analysing the cost of replacing current employees with new employees.

If present employees are to be replaced by another suitable and competent person, management predetermines the expenditures expended using this strategy. Aside from that, the costs of recruiting, training, selection, and development are all calculated. It is based on the workers’ development expenditures rather than their past worth, unlike the historical cost method.

3) Opportunity Cost Strategy: Hekimian and Jones came up with this method after seeing various managerial workers’ willingness to hire a big number of individuals and bring their worth to the investment base.

Because it is founded on the opportunity un idea of economics, the opportunity cost method prioritises human resources. The opportunity cost and the scarcity of human resources are inextricably linked. There is no opportunity cost for excess personnel or top-level staff. The method of opportunity cost may not apply to all human resources.

4) Lev and Schwartz’s Capitalization of Salary Approach: This method was created in 1971 by Lev and Schwartz.The present value of the future earning model is also known as 11. According to them, there was a strong link between an employee’s wage and his or her value to the organisation.

This strategy is based on two assumptions: the first is that an employee’s future earnings may be used as a substitute for his current worth, and the second is that the person will stay with the company until he retires. The steps in this approach are as follows:

1) Employees are divided into groups based on their age, experience, and talents.

ii) After that, each group of employees’ annual income is determined, and

iii) Finally, the present value of each group over future income is calculated using the appropriate discount rate.

5) Economic Valuation Way: Another method for determining the cost of human treenkees operating in an organisation is the economic valuation method. Future revenues that can be earned by the employees in his service are calculated using this strategy.

This cost is deducted from the current cost of different functions such as recruiting, selection, training, and so on. The economic cost of the employees is calculated as a result of this computation.

6) Return on Investment Employed Method: The benefit or return of an organisation is entirely dependent on the work of its employees. The gains delivered by employees to the organisation in terms of profitability, productivity, and other factors are measured using this technique. Designation, experience, talents, and other characteristics are taken into account during this type of appraisal.

7) Method of Adjusted Discounted Future Wages: Hermanson proposed a technique in which an employee’s remuneration is adjusted to the worth of that individual inside the organisation.

An efficiency factor is used to the discounted future earnings to measure the relative efficacy of the organization’s human resources. The stages involved in determining the value of human resources using this technique are as follows:

i) First, over the next five years, all employees’ earnings and salaries at various hierarchical levels are determined.

ii) The present value of the wage and salary payments is then determined at the rate of return.

iii) The average efficiency ratio for a certain period is calculated. The time span is usually greater than five years.

iv) Finally, the present value of the organization’s human capital’s future services is computed. This is accomplished by multiplying the discount amount (step ii) by the efficiency ratio of the organisation (step iii).

The following formula may be used to compute the efficiency ratio:

Efficiency data = ACTUAL AVERAGE EARNINGS OF THE ORGANISATIONS / NORMAL EARNING OF ALL ORGANISATIONS

If Efficiency Ratio = 1: the organization’s average rate of return is the same as the economy’s rate of return. It signifies that the value of HR is the same as the value of the industry.

If Efficiency Ratio > 1: The profits of the company are higher than the average earnings of the company. This indicates that the human resource is worth more than the industry average.

If Efficiency Ratio < 1:The organization’s profit margin is lower than average. Human resource is worth less than the average in the industry.

8) Reward Valuation Method: Flamholtz introduced the reward valuation approach, which is an improved version of the salary capitalization method. This strategy takes into account the fact that an employee may leave his or her employment before retirement or death, and that his or her role may vary throughout his or her professional lifetime.

The expected realisable value of an employee, according to this method, is the sum of the present and actual value of the employee. The assumption underpinning this predicted realisable value is that there is no relationship between an employee’s overall cost and his value in the organisation at any given time.

The current value of the services that an employee can supply in the future throughout his employment in the organisation can be used to determine an employee’s worth.

Non-Monetary Measurement Methods

The following are examples of non-monetary measurement methods:

1) Skills Inventory: A skill inventory is a list of a person’s talents. It categorises employees based on their abilities. Employees’ behaviour and skills are the most straightforward ways to assess them.

Employees’ qualifications, training, experience, and other supplementary talents are used to evaluate these abilities. The estimate of how much longer their services can be optimally utilised is done based on their potentiality.

2) Performance Evaluation Methods: Human resources can also be evaluated based on their performance. The following are the two ways of performance evaluation that can be used:

i) Rating: In this method, a scale is used to evaluate a worker’s performance. Employees are rated based on their level of intelligence, professional knowledge and interpersonal skills, capacity to judge situations, and so on.

ii) Ranking: In this strategy, people are ranked according to one or more factors. Rankings are seen as a different type of rating. When an assessor is required to rate workers based on their leadership skills, for example, ranking can be done.

There are several different types of ranking procedures that can be used.

a) Simple Ranking: This is the most basic technique, in which the evaluator evaluates the employees based on specified parameters and ranks them from higher to lower. In the case of punctuality, for example, the person who is the most punctual is given the highest rank, while the person who is late the most is given the lowest rank.

b) Alternative Ranking: In this technique, the person with the highest value is chosen, and the person with the lowest value is chosen. For the rest of the people, the method is the same. As a result, the ranking mechanism is easy and trustworthy.

c) Paired Comparison: In this procedure, each employee is ranked after being compared to other employees. As a result, the best one may be easily distinguished from the others.

3) Potential Assessment: As the name implies, potential assessment is the examination of an organization’s human resource capability for the future. The trait approach is the most common method for evaluating potential.

This technique focuses on finding the attributes that workers possess that are essential for a specific job role, as well as determining the degree to which they are present in the workers. Because an individual’s development is determined by his potential, potential evaluation is crucial in determining the non-monetary value of human resources.

4) Attitude Assessment: An individual’s attitude is a reflection of their personality. Organizations that use attitude measuring techniques may readily grasp their employees’ perspectives, such as whether they are satisfied with their job, the working circumstances, whether they desire a raise in their compensation, or whether they are satisfied with the organisation as a whole, and so on.

These are some questions that can be simply answered by assessing the employees’ attitudes. Management can learn about the feelings of the employees who work for them by studying their attitudes. The questionnaire approach, in which numerous questions are presented and the employee responds from a list of answers, is one of the most prevalent ways to determine an employee’s perspective.For example, i) Excellent ii) Good (iii) Average iv) Below Average

5) Subjective Expected Utility: The term “subjective expected utility” refers to a combination of the terms “utility” and “subjectivity.” To begin, utility refers to the worth or usefulness of a resource to its user. Second, subjectivity refers to an individual’s personal viewpoint on the potential of any given event. Utility and subjective probability can be calculated using a variety of psychophysical approaches.

Paired comparison, ranking methods, and magnitude estimation are some of these methods. The magnitude estimation method deals with allocating numbers to represent the magnitude of an attribute. If a property is given a zero value, it means that it has no value, but if the number allocated is large, it means that the property has a lot of value.

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Importance of HR Accounting

HRA has become increasingly important in almost all organisations as time has passed. Its significance is explained below:

1) Facilitates Scheduling and Implementing HR Policies: An organization’s HR rules cover things like training, promotions, demotions, and transfers, among other things. Every organization’s seamless operation depends on the proper scheduling and implementation of these policies. An organization’s HRA system is in charge of this function.

2) Helps in Calculating ROI: HRA is an accounting system that records an organization’s human resource expenditures. An organisation may simply determine the actual Return on Investment (ROI) by computing the profits earned by the organisation once the investment has been computed.

3) Motivates Employees: When employees see their true worth in the eyes of the organization’s HRA system, they are driven to develop themselves. The amount of money spent on them will motivate them to boost their output in proportion to the amount of money spent on them by the company.

4) Sign of Good Health of the Organisation: HRA is a reliable indication of an organization’s health. The amount of money spent on a company’s human resources can be used to estimate how much money it will make in the future.

5) Improves Process of Decision-Making: HRA serves as a clearinghouse for data on the actual worth of human resources employed by a company. This information aids management in making informed decisions on organisational issues.

6) Helps in Determining the Need of Recruitment: HRA reports on the likelihood of obtaining returns and the amount of money that should be spent on the organization’s manpower. When profits are high, demand for new staff rises, and when profits are low, no additional recruitment takes place. The HRA’s information is totally used to make these decisions.

7) Ascertains Negative Effects of the Programmes: The HRA system also aids management in determining the negative effects of various programmes in operation.

Issues / Problems / Limitations of HR Accounting

HRA has a lot of benefits, but it also has some drawbacks.Some of them are as follows:

1. Non-Availability of Standards: The organization’s fundamental issue is the lack of appropriate standards for evaluating the cost of human resources. The Institute of Chartered Accountants of India (ICAI) must develop guidelines for determining the value of human capital.

2. Trade Union Resistance: Estimating the value of human resources may lead to labour unrest and pushback from union leaders. The biases of management when measuring the worth of human assets could be the source of this opposition. As a result, before implementing HRA in a company, all employees and management must be educated on the value of HRA and how it might benefit them.

3) Expensive: When implementing HRA in an organisation, the first thing to keep in mind is that it must be cost effective. This system is worthless if its adoption has a negative impact on the organization’s profits. As a result, the investment in this system should be prudent; otherwise, the organisation may pay additional costs.

4) Variety of Methods Create Confusion: There are a variety of ways that can be used to calculate the cost of human resources. This leads to misunderstandings, so management should use a specific method to assess HR costs in order to avoid any uncertainty.

5) If the human asset assessment is not done appropriately, the employees may be exploited. The HRA’s evaluation should be beneficial to the organisation, but not at the expense of employee impartiality.

6)Uncertainty about Continuance of Employees: Unlike machinery, it is unrealistic to expect employees to stay with a company for the rest of their lives. Employees may be forced to leave their jobs due to unforeseen circumstances. As a result, an employee’s stability in any organisation cannot be guaranteed. However, this uncertainty increases the number of vacancies in the organisation, making it difficult to estimate human resource accounting, which further disrupts the organization’s operations.

7) Lack of Perfect Knowledge about Future Receiving of HR: The future is unpredictably unpredictable and full of unknowns. Nobody knows whether or not a particular venture will be profitable. As a result, occasionally evaluating on a hypothetical basis causes a major challenge for the HRA system. As a result, one could argue that perfect knowledge of an organization’s future earnings is lacking.