What is HR audit in HRM?

Meaning of HR Audit

An audit is an examination and verification of financial accounts and records. Auditing has been a routine exercise in the area of finance, primarily due to its obligatory nature as mandated by law. However, in the case of human resources, an audit is a systematic and comprehensive analysis of all activities and results of a personnel programme. It assures a complete review, at regular intervals, of the effectiveness and utility of the various personnel functions and activities, policies and procedures.

A human resources audit functions as a strategic planning tool to help an organisation evaluate the effectiveness of its human resources function. A comprehensive audit report provides not only key measurements, strengths and areas of enhancement but also points out opportunities that a business or organisation can leverage to become an employer of choice and meet its long-range goal of attracting, recruiting, deploying, developing, rewarding, leading, and retaining talented employees.

Definition of HR Audit

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

As per Biles and Schuler, “HR audit evaluates the HR activities in an organisation with a view to their effectiveness and efficiency”.

According to Schwind, Das and Wagar, “HR audit is an examination of the human resources policies, practices, and systems of a firm (or division) to eliminate deficiencies and improve ways to achieve goals”.

As per Flamholtz, “HR audit is a systematic assessment of the strengths, limitations, and developmental needs of its existing human resources in the context of organisational performance”.

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

Characteristics of HR Audit

HR audit has the following characteristics:

1) It establishes a benchmark for measuring the actual performance of the HR department to identify the performance and efficiency gaps.

2) HR audits involve the participation of internal staff or external consultants who specialize in HR and possess legal and auditing knowledge.

3) It gathers data about the people, processes, structures, and policies of an organization as part of the investigation.

4) The HR audit report typically reaches senior management, prompting them to take essential steps to improve regulatory and other compliance within the HR department.

5) it detects non-compliance by the HR department on matters concerning statutory provisions, corporate goals, and HR policies while performing HR functions.

6) The organization typically conducts the HR audit at regular intervals. Companies usually conduct it once a year.

7) An HR audit is an independent, objective and critical examination of the HR functions of an organisation.

Related Articles:

Need for HR Audit

Most employers will conduct HR audits no more often than once every two years or so. However, several events may signal the need for an HR audit. These include:

1) When the business grows to the point where line managers can no longer make their staffing, promotion, and other decisions without HR management’s assistance.

2) When employee morale, turnover, attendance, or excessive discipline problems seem to signal the need to evaluate HR practices.

3) When the employer creates or modifies an employee handbook.

4) When a business reaches various milestones such as 15 employees, 20 employees, 50 employees, and 106 employees. These are threshold employee numbers at which point various state, and local regulations and laws become applicable.

5) When a new head of human resource management arrives discipline.

Scope of HR Audit

The HR audit needs to address both departmental activities and those beyond, considering that people’s concerns go beyond the HR department. Thus, the scope of HR audit should be comprehensive. It must evaluate the personnel function, and the use of its procedures by the managers and analyze the impact of these activities on the employees. Specifically, an HRM audit covers the following areas:

1) Audit of Human Resource Function

This involves an audit of all HR activities. For each activity, the auditors must:

i) Determine who is responsible for its performance,

ii) Develop an action plan to correct deviations, if any, between results and goals, and

iii) Determine the objective of each activity,

iv) Follow up on the action plan.

v) Review the performance,

2) Audit of Managerial Compliance

This involves an audit of managerial compliance with personnel policies procedures and legal provisions. It is the responsibility of the audit to expose the level of compliance with these practices, thus enabling the implementation of vital corrective measures. Adhering to legal provisions is important because any violation can result in holding the management accountable for an offence.

3) Audit of Human Resource Climate

The HRM climate has a major impact on employee morale, motivation, and job satisfaction. Measuring the quality of this climate involves examining the following:

i) Absenteeism: Absenteeism is when employees fail to report to work as scheduled. In other words, unauthorised absence constitutes absenteeism. Absenteeism is quantified and presented as a percentage. Absenteeism costs money to the organisation, besides reflecting employee dissatisfaction with the company.

ii) Safety Records: Organisations maintain records relating to accidents. Accidents do cost money to the organisation. They also reflect the prevailing organisational climate. The management must have a safety plan, implement it and evaluate its effectiveness.

iii) Attitude Surveys: Attitude surveys are probably the most powerful indicators of organisational climate. Attitudes determine an employee’s feelings towards the organisation, supervisor, peers and activities. Attitude surveys may be conducted through face-to-face interviews but are usually done through anonymous questionnaires. The resulting information from the survey provides an insight into what employees are feeling and thinking it can also be used to specifically address problems associated with productivity, turnover, absenteeism, tardiness, work-group effectiveness, and industrial relations.

iv) Employee Turnover: Employee turnover encompasses employees leaving the organization and the requirement for replacements. High turnover involves increased costs on selection, recruitment, and training. In addition, high labour turnover may lead to production disruptions, problems in quality control, and difficulty in building teamwork and morale.

4) Audit of Corporate Strategy

Besides functions, observation, and satisfaction, audits may expand to corporate strategy. HR professionals do not set corporate strategy, but they strongly determine its success, Corporate strategy helps the organisation gain competitive advantage. By assessing the company’s internal strengths and weaknesses and its external threats and opportunities, the senior management develops ways of gaining an advantage. Whether the company stresses superior marketing channels, low-cost production, service¬†innovation, or some other approach, HRM is affected. Understanding the strategy has strong implications for human resource planning, industrial relations, staffing, remuneration, and other HR activities.

Objectives of HR Audit

Objectives of HR audit are as follows:

1) To propose appropriate strategies and corrective action, in case of performance and efficiency gaps.

2) To measure the HR department’s record of compliance with the statutory provisions regarding dispute settlement, hiring, compensation, safety and health, etc.

3) To identify the degree of efficiency in the performance of the HR department in implementing the HR policies and practices of the organisation and assess the general environment prevailing in the HR department.

4) To have an improved control and check on all internal operations of the organisation.

5) To determine whether the HR functions are performed according to the established practice and disciplinary procedure of an organisation.

6) To provide feedback to the employees about the areas of good performance and areas where improvements are required.

7) To discover the areas where saving costs could be achieved in HR activities like recruitment, development, retention, and employee separation of human resources.

8) To determine the HR areas and functions which require further research and development.

9) To create a sense of accountability and discipline among the employees by investigating their past actions periodically.

10) To prepare the organisation for countering the possible legal actions from the aggrieved employees effectively.

11) To convert HR management from an abstract concept into a measurable and quantifiable activity.

12) To recognise the good work done by the HR people and reward them appropriately.

Types of HR Audit

An HR audit can be of the following types:

i) Best Practices Audit: In this audit, an organisation compares its HR practices to those of “best practices” companies.

ii) Strategic Audit: In this audit, an organisation checks whether its HR practices help achieve organisational strategic goals by fostering the required employee behaviours.

iii) Function-Specific Audit: Audits here concentrate on one or more specific human resource management areas, such as compensation, training, and development.

iv) Compliance Audit: A compliance audit focuses on how well the organisation is complying with the relevant laws and regulations.

Types of HR Audit

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top
Nature of Financial Management