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.
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