HR Audit Meaning, Definition, Characteristics, Scope, Objectives, Types, Approaches

Table of Contents:-

  • Meaning of HR Audit
  • Definition of HR Audit
  • Characteristics of HR Audit
  • Scope of HR Audit
  • Objectives of HR Audit
  • Types of HR Audit
  • Approaches to HR Audit
  • Methods of Collecting Information for HR Audit
  • Process of HR Audit
  • Benefits of HR Audit

Meaning of HR Audit

Every organisation requires a technique by which it can check the different activities and outcomes of various individuals working in that organisation. The process of audit performs this operation. An audit is a method by which financial records of any department are assessed and verified systematically, which is done regularly by the finance department.

But in the context of the HR department, it can be defined as an activity aimed at assessing the effectiveness of all human resource policies, procedures and activities performed by the individuals working in the organisation regularly. It is a method of measuring financial records and a planning instrument.

Many functions take place in the organisation, such as recruitment, deployment, training, development, promotions, and retaining capable employees. HR audit helps to improve these functions by identifying the available prospects so that an organisation can exploit them and become more successful. HR audit also serves as a developing tool that enhances the performance of their human assets and develops the organisation.

Definition of HR Audit

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

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

According to 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”.

Stephen F. Ruffino states, “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”.

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

Characteristics of HR Audit

HR auditing possesses the following characteristics:

1) This tool investigates personnel, their adherence to organizational policies, and their performance of various functions and activities. If discrepancies exist between actual and standard performance, the HR audit identifies and addresses them.

2) The reports generated by HR audits are submitted to senior management for review, allowing for timely detection and correction of errors.

3) Typically conducted annually, HR audits are performed by internal organizational experts or external professionals specialized in human resource management, possessing a comprehensive understanding of auditing practices.

4) It serves as an analytical process to assess the proper functioning of human resources within an organization.

5) It is a measurement tool that evaluates individual performance and compliance within the HR department. The HR audit is responsible for promptly addressing any identified shortcomings.

Scope of HR Audit

The scope of HR audit should not be restricted to the HR department alone; it should extend to other departments where employee problems may arise. Thus, HR audits are essential for evaluating the activities performed by employees in all departments.

Moreover, HR audit should not be confined to employees; it should broaden its scope by assessing the managerial function of managers. HR audits cover several fields, some of which are mentioned below:

1) Audit of Human Resource Climate

The working conditions of any organisation significantly impact its employees. A proper environment increases morale and job satisfaction. The effectiveness of these conditions can be reviewed based on:

i) Employee Turnover: As the rate of employee turnover rises, so does the need to recruit new staff members. Recruitment increases the cost of training and development and affects productivity and coordination. Sometimes, it becomes challenging for management to build up morale among new employees equal to that of the previous staff.

ii) Absenteeism: Employee absence from work, called absenteeism, affects organisational functioning and reflects disloyalty towards the organisation.

iii) Safety Records: Safety records determine costs incurred due to industrial accidents. Many accidents indicate flaws in safety plans and poor working conditions, making employee safety a management priority.

iv) Attitude Surveys: Conducting employee attitude surveys helps understand perspectives towards the organisation. These surveys identify absenteeism, low productivity, dissatisfaction, and low performance, facilitating solutions and creating a friendlier work environment.

2) Audit of Human Resource Function

This audit focuses on every HR departmental activity. The auditor begins by establishing the objective of each activity, identifying the individual responsible, thoroughly reviewing employee performance, and developing an action plan to rectify any identified mistakes. Finally, a follow-up of the action plan is conducted.

3) Audit of Managerial Compliance

This audit evaluates the functioning of the administrative unit. It checks whether executives are complying with guidelines and legal procedures systematically. If any violations occur, the auditor is responsible for taking measures to correct them. Authorities must follow authorised rules and regulations to avoid offences sincerely.

4) Audit of Corporate Strategy

An HR audit can also significantly determine the corporation’s strategy. The success of an organisation depends entirely on human resources. Though human resource experts are not allowed to make decisions regarding the strategy of the organisation, if given a chance, they can help in developing specific methods by which the organisation can withstand external pressures effortlessly and grab external opportunities quickly; consequently, it helps the organisation to realise its strengths and weaknesses.

Thus, an HR audit can do wonders if applied to all the departments of an organisation. It should expand beyond the HR department and broaden its scope to other departments. 

Objectives of HR Audit

The main objectives of the HR audit are as follows:

1) The HR audit identifies and rectifies mistakes made by human resources while performing their tasks, providing suitable corrective measures as soon as possible.

2) The HR audit measures both errors and positive aspects of the HR department, ensuring compliance with policies regarding recruitment, trainingplacementpromotion, workplace environment, employee grievances, etc., as per organizational rules and regulations.

3) HR audit also prepares for potential legal action by certain problematic employees, enabling the organization to face such lawsuits in advance effectively.

4) HR audit maintains employee discipline by frequently evaluating their behaviour and actions, making them realize their responsibility towards the organization’s benefit.

5) HR audit helps quantify HR administration, making it measurable in figures rather than considering it a theoretical concept.

6) It is responsible for effectively functioning an organization’s HR department. It evaluates the systematic implementation of procedures and policies in the human resources department and the overall working environment. 

7) This assessment ensures the organization’s policies and procedures carry out HR functions.

8) It is the responsibility of the HR audit to assess all the corporation’s functions and search for those functional areas and activities that require cost-cutting. These functions include some activities such as recruitment, staffingselection, training, holding on to potential employees, managing the separation of human resources, etc.

9) It identifies areas of the HR department needing revival or improvement and takes essential steps to enhance HR employee performance. If performance improvement is observed, employees are rewarded accordingly.

Types of HR Audit

Various types of audits can be classified based on the following factors:

1) Conduct

Audits can be conducted internally or externally:

i) External Audit: External audits may occur on-site or off-site and are conducted by external professionals hired. Unlike internal audits, the evaluation outcomes from external audits are unbiased.

ii) Internal Audit: This type of audit is conducted within the organisation by internal management to assess and control the HR department’s operations.

2) Purpose

Audits can be categorised based on their purpose:

i) Job-Specific Audit: This audit focuses on specific functions performed by the HR department, such as training, recruitment, salary, promotion, etc.

ii) Strategic Audit: This audit evaluates HR practices’ contribution to achieving the organisation’s strategic objectives. It also assesses improvements in employee performance resulting from providing an appropriate working environment.

iii) Compliance Audit: A compliance audit checks whether all departments adhere to the organisation’s rules and regulations.

iv) Best Practices Organisation Audit: In this audit, the HR department’s activities are compared with other organisations’ best practices to identify improvement areas.

3) Time

Most organisations follow irregular audits, where the timing is not fixed; audits may occur once a year or once every three years. However, to adapt to changing times, audits should occur regularly and on a fixed schedule to maintain continuous checks on employee functioning.

Approaches to HR Audit

Below are some approaches that auditors can use to evaluate HR functions:

1) Outside Authority Approach

Under this approach, external experts set standards for comparison, which internal auditors then use to evaluate their work.

2) Management by Objectives (MBO) Approach

In this approach, departmental heads and operational managers set objectives for their departments. The degree to which these objectives are achieved helps determine the departmental workforce’s performance. The HR audit then utilizes this assessment to verify employee performance and compare it with the set targets.

3) Compliance Approach

This approach involves reevaluating past activities and employee performance to ensure compliance with organizational rules and regulations and to identify any violations of legal provisions.

4) Comparative Approach

This approach involves comparing the progress of one organization with that of another. The results of both organizations are matched, treating the other organization as a model to achieve similar results.

5) Statistical Approach

In some instances, a statistical approach is necessary to create performance measures using the organization’s current information. For example, arithmetic methods may measure revenue received or the absenteeism rate. This statistical technique helps auditors obtain accurate information.

Methods of Collecting Information for HR Audit

There are various methods through which HR audit can collect information:

1) Questionnaire Method

HR audits can collect employee information using questionnaires. These questionnaires help discover employee satisfaction with working conditions, adherence to HR policies, positive and negative aspects of HR staff, and interactions between senior staff and employees. Questionnaires should be designed to benefit the organization and conducted within approved time and cost constraints.

2) Workshop Method

Interactive workshops assess various human resource development systems such as potential appraisal, performance appraisal, coaching, counselling, and mentoring programs. Employees participate in SWOT analysis on different dimensions of human resource development. Each group presents their findings for further discussion and suggestions.

3) Analysis of Previous Records

HR audits analyze employees’ previous records to understand their outlook towards the organization. Employee profiles, including life history and professional reliability, help assess perspectives on HR development. Feedback from training programs is also analyzed to gain insights into human resource development.

4) Task Force Method

A task force comprises individuals responsible for investigating HR department problems and developing corrective measures. The HR auditor has the authority to establish this task force.

5) Interview Method

Face-to-face interviews with HR professionals are conducted to gather perspectives on expansion plans and the organisation’s expected growth in the future. This method allows auditors to inspect higher authorities’ readiness for working strategies and conditions changes to achieve organizational goals. Regular interviews help improve corporate traditions, planning systems, and working methods.

6) Observation Method

HR audits observe the working environment, including the cafeteria, training centres, residential areas, and surroundings. This method evaluates the presence of a healthy atmosphere within the organization.

Process of HR Audit

The steps followed by an HR audit for appropriate assessment are outlined below:

1) Identifying the Objectives of HR Audit

The first task in an organization is to set definite objectives. Before establishing the objectives, the HR audit assesses the functions and activities of the HR department, ensuring compliance with laws and regulations to guide principles and actions. This ensures that HR strategies align with corporate strategy. The organization’s goals, schedule, and HR audit planning should align for proper evaluation.

2) Developing a Rough Audit Plan

Before implementing the auditing process, the auditor needs an idea about what needs to be done, which policies to prioritize, which areas to focus on, and the best means to gather appropriate data. An assessor prepares a rough audit plan to estimate the required workforce, expected costs, and necessary tools and equipment for the entire audit procedure.

3) Collecting Background Data

The auditor gathers information about internal and external factors influencing the HR auditing process, known as background data. External factors include the organization’s competency level, legal environment, and a summary of the organization. Internal factors encompass set objectives, organizational policies for goal achievement, and human resource performance in different divisions.

4) Determining the Technique of Data Compilation

HR auditors gather information using various techniques such as interviews, questionnaires, task forces, and observation. The auditor may choose one or more techniques, and the time and cost of assessment are decided in advance for an effective auditing process.

5) Finalizing the Audit Plan

If any improvement is required in the rough audit plan, changes are made before finalizing it. Background knowledge and data gained help upgrade the pre-planned auditing plan. The assessor must clearly understand goals, techniques, areas to be covered, and the time and cost required for the entire auditing process before finalizing the audit plan.

6) Collecting Complete Audit Data

The auditor gathers significant information from various sources, analyzing the virtues, shortcomings and organization of HR department. The collected data is compared with the final audit plan to ensure a smooth auditing process.

7) Developing an Audit Report

After gathering data on HR functioning, an assessment program is conducted within different HR department areas. This includes recruitment, training, advancement, rewards, retention, transfer, retirement functions, working atmosphere, employee functioning, HR unit objectives, and policies. A detailed audit report is prepared, covering the entire valuation procedure.

8) Decision Based on the Audit Report

The organization makes suitable decisions after reviewing the final audit report. Management may seek auditor recommendations to facilitate decision making. If changes are required in HR department strategies, objectives, or employee performance, the HR auditor’s suggestions can be productive for the authority.

Benefits of HR Audit

HR audit is highly beneficial for any organization, and some of its essential roles are as follows:

1) Role Clarity of HR Functions

HR department employees must clearly understand their roles and responsibilities, aligning them with organizational interests. HR audit creates employee awareness about their roles in HRD and guides senior management in supporting HRD activities.

2) Increased Focus on Human Resources Capabilities

HR audit focuses on employees’ knowledge, experience, behaviour, and outlook. It identifies and assesses competencies such as technical, managerial, and human skills at various organizational levels, bridging competency gaps through measures like role clarity exercises and performance appraisals.

3) Analysis of HR Functions

HR audit plays a crucial role in analyzing HR department functioning, preparing them for future challenges, and guiding processes like enrollment, policy development, training, promotion, maintenance, and counselling. It evaluates performance, develops leadership qualities, and assists in redesigning HR department development systems if necessary.

4) Improving Organizational Competency

HR audit helps identify the competency level of the organization by assessing strengths and weaknesses in the administrative system. It focuses on developing techniques to increase productivity, improving HRIS, working procedures, delegation, role clarifications, and information sharing, thus enhancing organizational competency.

5) Strengthening Performance Improvement Mechanisms

HR audits adopt performance development techniques to enhance employee input, such as performance planning, sharing aspirations, documenting tasks, assigning responsibilities, and fostering a pleasant working environment.

6) Promoting Critical Business Plans

Organizations often have strategic plans to achieve their goals, and involving employees in decision making can facilitate reaching these objectives. The HR auditor’s role includes convincing management to disclose strategic plans to employees and encouraging their participation in the decision-making process.

7) ROI Analysis

HR audit determines the Return on Investment (ROI) of human resource development expenditures like compensation, recruitment, training programs, and improving working conditions. It also identifies training needs and ensures cost-effective program implementation to support organizational growth.

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