Human Resource Audit – Introduction

An audit helps an organization to assess its current position. It is a diagnostic

tool to gauge not only the current status of things but also the gaps between the
current status and the desired status in the area that is being audited It helps
estimate what needs to be achieved to improve the function.

HR Audit process involves a systematic review of all aspects of the HR function,

typically with a checklist, in order to ensure that regulations and corporate
policies are adhered to.The aim is to learn in the process or discover, but not to
test. The basic premise is that there is always scope for improvement.

Human Resource (HR) Audit is not only a tool for evaluating the personnel
activities of an organisation, but also an important aspect of the human resource
management. It basically review the effectiveness of human resource practices.
It gives feedback about HR functions not only to operating managers, but also
the HR department about how very well operating managers are meeting their
HR duties. Therefore, audit is the key word, which control and check the Human
Resource activities in a public organisation and an evaluation of how these
activities support overall organisational strategy.

Human resources audit is the systematic assessment of an organization’s HR

service excellence.
A good HR audit helps organizations to:

i. Identify the HR programmes that are most important to achieving the

organization’s objectives.
ii. Find out how well the HR department is delivering these programmes.
iii. Benchmark HR work to ensure continuous improvement.
iv. Promote change and creativity.
v. Direct the focus of the HR staff to important issues.
vi. Bring HR closer to the line functions of the organization.

The HR audit shall include evaluating:

1. Job Analysis
2. Recruitment
3. Selection
4. Performance Management
5. Performance Appraisals
6. Performance Feedbacks
7. Competency Mapping
8. Training Process
9. Compensation
10. Rewards Management
11. Benefits Management
12. Employee Relations
13. Workplace Safety
14. Best Practices
15. Managerial performance
16. Supervisory Performance
17. Leadership at various levels
18. HR Business Partner Role
19. HR Strategic Initiatives
20. Legal HR issues.

Human Resource Audit – Objectives

HR audit is a comprehensive analysis of HR functions, systems, policies and
procedures of an organization.
The major objectives of HR audit are as follows:
1. To conduct an independent, objective, systematic and critical examination of
HR functions of an organization.
2. To assess the general environment and performance efficiency in HR
department.
3. To check for any deviations from standards and devise appropriate strategies
and corrective actions in HR related areas.
4. To check for alignment of HR functions and organization’s overall practices
and procedures.
5. To measure statutory compliances of HR activities as per law and other
relevant agencies.
6. To explore the areas for saving personnel costs and expenses.
7. To provide feedback on better areas of performance and areas that needs
improvement.
8. To identify HR areas that requires research and development inputs.
9. To recognize better performance of HR personnel through rewards.
Human Resource Audit – Nature
The nature of Human Resource Audit has been discuss in the followings:
(i) Human Resource Audit, generally, gives feedback about HR functions not only
to operating mangers, but also to HR department.
(ii) Basically, audit is an overall quality control and check the HR activities in a
public organisation.
(iii) Human Resource Audit also helps clarify organisational and management
goals.
(iv) It is used as a tool for review of the effectiveness of human resource
practices.
(v) It also helps the management of the organisation to evaluate how well its
policies are going and identifies trouble areas that require particular attention.

K. Aswathappa has explained ten benefits resulting from Human Resource audit.
These are:
(1) Clarification of the HR department duties and responsibilities.
(2) Ensuring timely compliance with legal requirements.
(3) Creation of increased acceptance of the necessary changes in the HR
department.
(4) Stimulation of uniformity of HR policies and practices.
(5) Encouragement of greater responsibility and professionalism among
members of the HR department
(6) Identification of the contributions of the HR department to the organisation.
(7) Improvement of the professional image of the HR department.
(8) Finding solution of critical personal problems.
(9) Reduction of HR costs through more effective personnel procedures.
(10) Also review of the department information system.

Human Resource Management Audit – Scope

Organizational practices regarding the subject matters of HRM audit may vary.
However, a comprehensive scope of HRM audit includes all aspects of HRM
which are as follows:
1. HR strategies and policies,
2. HRM functions,
3. HR compliance, and
4. HR climate.
1. HR Strategies and Policies:
The starting point of HRM audit should be an evaluation of HR strategies and
policies and the way these are in tune with those of the organization. For
formulating HR strategies and policies, it is essential that the objectives of HRM
functions are clearly defined. The audit may evaluate the extent to which various
HR strategies and policies have been formulated and what their qualities are.
Various HR strategies and policies may be audited by evaluating their:
i. Consistency with the organizational objectives, strategies, and policies;
ii. Consistency with the environment;
iii. Appropriateness in the light of organizational resources;
iv. Appropriateness in the light of time horizon; and
v. Workability.

2. HRM Functions:
The major thrust of HRM audit is on evaluation and review of various HRM
functions relating to acquiring and employing human resources, developing
human resources, compensation management, integration and maintenance of
human resources, and industrial relations.
The audit should measure and evaluate these functions in the following
context:
i. The type of HRM functions performed;
ii. The degree to which these functions are related to HRM objectives; and
iii. The degree to which these functions are performed effectively.

3. HR Compliance:
HR compliance refers to the adherence to various HR strategies and policies by
line managers and adherence to legal requirements.
In this context, evaluation revolves around the following:
i. The extent to which line personnel adhere to various HR policies in dealing
with personnel working under them; and
ii. The extent to which there is compliance with the legal requirements as
provided under various legal Acts relevant for management of human resources.

4. HR Climate:
Quality of HR climate has important impact on motivation, job satisfaction,
morale, and performance of human resources.
HR climate can be evaluated by various outcomes which are as follows:
i. Degree of employee turnover,
ii. Degree of employee absenteeism,
iii. Degree of accidents,
iv. Status of grievances and disciplinary actions, and
v. Findings of attitude and morale surveys.

Human Resource Audit – Process

1. Determining the Scope and Type of Audit:
Since HR is a very wide field, the company may either choose to conduct a
comprehensive review of all HR functions or it may decide to review a few
specific areas as it deems necessary. For example, a company may choose to
review only the policies and procedures related to recruitment, selection and
orientation policies.
2. Determining the Audit Method:
HR audits are usually conducted by using a questionnaire that elicits information
about the relevant HR areas. The audit may also be conducted by interviewing
managers and employees of the HR department to analyze how well they have
understood the company’s policies and how efficiently these policies are being
implemented. When using a questionnaire, care should be taken to design it in
such a way that it elicits all necessary information regarding the areas to be
audited.
3. Data Collection:
This step includes the actual process of collecting data about the organization
and its HR practices. Information is collected by using the questionnaire and by
interviewing relevant HR personnel about the HR procedures and policies being
used in the company.
4. Setting the Standards:
To assess the efficiency of HR functions, the information collected has to be
compared with some pre-determined standards. These standards have to be
pre-set and any acceptable level of discrepancies should be specified clearly.
Comparing the actual results with the standards will give an idea about the
efficiency with which the HR functions are being performed.
5. Feedback about the Results:
After collecting information and comparing the results, the audit team
summarises the findings and provides feedback to the company’s HR personnel
and senior management in the form of an audit report.
The results of the audit should be discussed with the employees of the HR
department so that they are made aware of the present condition of the HR
functions in the company. Discussion with employees will also throw up new
ideas for improving the policies and procedures in future.
6. Develop Action Plans:
Once the results of the audit are out, this information should be used for
improving the working of the HR department. The findings of the audit should
be categorised according to order of importance: high, medium and low. The
organization should examine the areas of weaknesses as revealed by the audit
and find ways to overcome them. Conducting HR audit would serve no practical
purpose if no actions are taken.

Human Resource Audit – Rationale

A very famous watch-manufacturing company ventured into eye-care business.
They needed, besides other staff, optometrists at every eye-care retail outlet,
across the nation. A good optometrist is a vital link between the company and
the customers. Many times it is the optometrist who coverts a potential to an
actual customer.
The company had a very good hiring team in place and was confident that it
would be able to hire very able personnel for their eye-care division as well.
Their primary targets would be various students graduating from different
optometrists colleges in India. They had been following these processes for quite
some time for their watch-division.
The company went ahead with its plan of expansion. Later, when the hiring team
visited the colleges to hire optometrists, to their dismay they found that most
of these graduates were not employable. They had requisite knowledge but did
not have very high level of skill that would be required in this profession.
They had hardly any time to train them now. Left with no option, they hired
optometrists from competitors at a very high market price. Obviously the
acquisition cost went-up that was least expected when the company was
expanding into a new business.
In retrospect they should have ‘audited’ their hiring process in light of the new
business and seen whether they needed to incorporate any changes. This would
have forewarned them about the real state of talent demand and supply
situation and they could have organized some pre-hiring training for the various
graduating optometrists.
This way they would have not only been able to keep their hiring cost under
control but would have also been successful in sowing a greater degree of loyalty
among their new recruits. A timely audit would have saved the company a lot
and made their process more efficient.
The rationale of the audit hence can be outlined as:
1. Audit increases the efficiency of the HR team.
2. It helps in saving a lot of cost.
3. Helps in achieving internal and external benchmarking.
4. Helps in compliance issues to various quality initiatives in the company.
5. Helps in legal compliance.
6. Improves managerial performance.
7. Improves supervision and leadership at all levels of the organization.
8. Helps to retrospect and reflect upon various practices from a practical stand-
point.
9. Audit extends HR business partner’s role and helps it make quantifiable
contributions in business.
10. Helps in making the HR department more effective and credible.

Human Resource Audit – Action Plan

The steps for improving the company’s corporate HR function effectively are:
(i) Define the role of the HR function in the context of the organization’s current
and future business plans.
(ii) Create a system for cost-effective hiring.
(iii) Develop programmes for the orientation and training of new employees.
(iv) Develop and manage employee communication.
(v) Prepare key personnel policies and make it available to employees and also
train the employees in policy adherence.
(vi) Implement and install the HR IS system.

Human Resource Audit – Approaches

There are mainly five approaches in the study of Human Resource Audit.
They are:
(i) The comparative approach,
(ii) The outside consultant approach,
(iii) The statistical approach,
(iv) The compliance approach, and
(v) The management by objectives-MBO approach
(i) Comparative Approach:
In this approach, the auditors can collect and analyze data of their own company
and also compare the data of different firm or company. After comparing the
data of different companies, then the auditors choose the best one, which, is
most suitable for the organisation. Thus, comparative approach helps the
auditors to get best data.
(ii) Consultant Approach:
The organisation performance can improve only by an outside consultant.
Consultant approach gives different types of ideas to the auditors which is most
essential for comparative purposes in the organisation.
(iii) Statistical Approach:
In the statistical approach, certain statistical measures of performance are
developed based on the company’s existing data. For examples-absenteeism
and accident rates. These data help the auditors in assessing the positive and
negative aspects of company’s performance.
(iv) Compliance Approach:
In the compliance approach, auditors review the past results and actions of the
company’s policies and procedures. The check work of the auditors to go with
the legal norms of the company’s policies and procedures.
(v) Management by Objectives (MBO) Approach:
The management by objectives approach deals with the specifications of goals
against which performance is assessed. In this approach, managers set objective
in their specific areas of responsibility.
The methods for evaluating and disseminating data take the form of:
(a) Comparison between time periods
(b) Comparison of organisations
(e) Trend lines, frequency distributions and statistical co-relations
(d) Ratio analysis voluntary turnover rate
(e) Classification of data; and
(j) Graphical or pictorial display.

Human Resource Development Audit – Methodology

For a good HRD audit it is advisable to use a combination of methods.
The interviews can be scheduled hierarchically from the CEO to the HR chiefs,
functional heads, the line managers, employees, etc. so that the auditors would
be able to obtain a macro picture at the commencement of the audit and can
subsequently relate the feedback from other constituents. Before conducting
interviews, the auditors should be introduced to the people with whom they will
be interacting.
During the process of observation, the auditors should attempt to look into
various aspects, such as the physical layout, work environment, working
conditions, amenities, and recreation facilities. During the meetings/ discussions
and transactions, the auditors should be able to select cross- functional teams,
groups/teams from whom the feedback will be authentic and open.
The auditors have to be competent in meeting and team management areas.
The auditors can cross-check various aspects, such as the preparedness of the
employees for the audit meetings, openness/receptivity to feedback, co-
ordination of the meetings, interpersonal relations, and organization conflicts.
1. Individual Interviews:
The auditors/consultants begin their evaluation by means of one-to-one
interviews with the top management and senior managers. This enables the
auditors to understand the future plans of and the opportunities available for
the company. Another reason is that these interviews help the auditors/
consultants to understand the maturity of the top and senior management and
also their style of management.
2. Group Interviews:
When undertaking an HRD audit in very large organizations, auditors may opt to
obtain feedback from various segments of employees through group interviews.
These groups may be selected on the basis of stratified sampling or random
sampling methods. In some cultures, individuals may have inhibitions in giving
feedback. In such cases, group interviews help to obtain feedback.
3. Workshops:
In certain instances, the auditors may feel the necessity of replacing the
individual and group interviews with large scale interactive processes (LSIP),
with the number of participants ranging from 30 to 300. The participants may
gather in a room to give a feedback on the HR function and systems.
The participants work in small groups around various sub-systems to make
presentations of the SWOT analysis and the auditors record the feedback. The
feedback could aid their audit process.
4. Questionnaires:
The questionnaires can address the HR processes, such as career planning, work
allocation, learning and developmental systems, and quality orientation. For the
purpose of capturing the real picture, the auditors should do some homework
before selecting various parameters in the questionnaire and assigning
weighted averages to each of the items in the questionnaire depending on the
organizational requirement.
Another caution for the auditors is to sufficiently map all the key HR practices
while designing the questionnaire. The auditors should also be conscious and
empathetic while designing each of the parameters. Typically some of the
questionnaires design the items in the questionnaire with the OCTAPAC
(openness, confrontation, trust, autonomy, pro-action, authenticity,
collaboration) parameters.
5. Observations:
Auditors make it a point to visit the workplace, including the plant machinery
room, canteen, and welfare amenities such as hospitals/schools being run by
the management. These visits help the auditors assess the environment and the
welfare orientation of the organization.
Employees will not be giving their best to the organization unless they are taken
care of by being provided with good surroundings and welfare amenities for
themselves and their dependents. These observations are recorded with the
help of a checklist.
6. Secondary Analysis:
The analysis of secondary data gives a lot of insight into the state of affairs in an
organization. For instance, an organization may have around 500 programmers
in the J2E platform with a number of projects in that area. If the number of
trained people is inadequate, it is an indication that the organization is not
focusing upon building the competencies of the people working on the projects,
leading to a possible drop in quality or standard.
The areas covered under the regulatory compliance audit include:
i. Personal files and record keeping.
ii. Job descriptions.
iii. Compliance with the statutory requirements such as the Compensation Act,
and rules regarding ESI, PF, Gratuity, etc.
Issues in HRD Audit:
The methods of an HRD audit can only be chosen based on the fundamental data
relating to the familiarity of the auditor/consultant to the organization.
Some of the issues to be addressed are:
i. Does the auditor have an idea of the business objectives of the organization?
ii. Is the auditor aware of the competitive dynamics and the relative position of
the organization?
iii. Has the auditor developed sufficient knowledge about the business
environment?
iv. Does the auditor have the competencies and skills required in understanding
tabulating, and analysing the feedback to be collected during the audit process?
v. Does the auditor have the capability of clarifying the role expectations of
various departments, executives, individuals, etc.?
Limitations of HRD Audit:
Any audit is undertaken to evaluate the effectiveness of systems and
procedures. The HRD audit is not an exception. However, if the HRD audit is held
due to the directives/fancies of the CEO, it can lead to negative results. For
instance, initially the top management may be very supportive of the HRD audit
process.
However, when the feedback is continuously negative, they may become hostile
and sometimes even aggressive with the auditors. Quite often the failure of an
HRD audit is on account of failure in the implementation of corrective action
based on the feedback. There have been instances when the HRD audit is used
for a negative purpose, such as victimizing the HR department and removing
some of the HR employees.
HR Audit should be voluntary and should be proactively undertaken by the
management. There should not be any compulsion to conduct HR Audit, in order
to facilitate a fair and objective report generation.
An HRD audit does not give an evaluation of the individuals, but it essentially
focuses upon units and systems. However, if consultants so desire, they can give
a formal feedback to the individuals.
The Challenges in Human Resource Development Audit:
An HRD audit starts with an evaluation of the HRD strategies, which either flow
from or are aligned with the corporate strategies. But in the absence of a co-
relation between the HR and corporate strategy, HRD audit lacks direction and
gets relegated to becoming a pure administrative and routine function.
The challenge in the IT and globalized era is to build and sustain world- class
organizations.
Irrespective of the specific strategy followed, organizations have to address
the following challenges:
i. Building and improving quality consciousness.
ii. Striving to recruit and retain competent, creative, and committed employees.
iii. Aligning the business processes with the technology infrastructure and
leveraging it for competitive advantage.
iv. Nurturing a creative and supportive work culture, which endanger pro-
fessionalism and motivation among the employees.
v. Improving the responsiveness of the organization to environmental demands.
vi. Retaining the flexibility and suppleness of the organization in spite of growth
and development.
vii. Training and developing the people through various interventions such as
training, mentoring, 360-degree feedback, etc.
viii. Promoting learning orientation among the employees and facilitating the
formation of informal networks to create a learning organization.
Using Audit Findings:
How does an organization use HR audit results? Since HR audit results are
classified, an important aspect is already taken care of. Critical needs should be
the first ones to be addressed.
Organizations generally have three options for dealing with audit results:
i. Use the HR audit as a blueprint or action plan for addressing HR needs.
ii. Address as many needs as possible using the organization’s internal expertise
and resources.
iii. Contract out those need areas where internal expertise and resources are not
available or do not fit in the core objectives of the organization.
An HR audit is much like an annual health checkup and performs the same
function for the organization. An audit helps an organization assess where it
currently stands and determine what it has to accomplish to improve its HR
functions. It involves systematically reviewing all aspects of human resources,
usually with a checklist, and ensuring that the government regulations and
company policies are being adhered to.
The key to an audit is to remember that it is a tool to discover and not to test.
There will always be room for improvement in every finding. A formal audit
engagement letter is prepared, containing the objectives, scope, terms and
conditions, time frame for completion, and remuneration for the auditor.
A confidentiality agreement is also made between the auditor and the
organization. This starts the formal, process of auditing.

Human Resource Audit – Report

The report should invariably be submitted, within reasonable time, after the
audit work is over It should avoid the journalistic style; be based solely on the
findings; be presented in a factual manner that is readily available for future
reference; make use of graphic techniques where appropriate; and not be any
longer than is necessary.
The following items should be contained in the report:
a. Table of Contents.
b. Summary and conclusion, in which the entire report is summarized for the top
executives (This may be the only part of the audit that some of the important
executives will read It should be short — not to exceed five to seven pages).
c. Preface giving a brief statement of the objectives.
d. The report proper, in which a major division is covered as a special section. (It
is desirable to have this so typed that any section may be removed and sent to
the persons concerned). Each section should be complete, and should contain
as many supporting data as are practical without making it too voluminous.
Other data should be included in the appendix.
e. Summary – This is more complete than summary and conclusions at the
beginning of the Report.
f. Appendix – This includes supporting data that would be too voluminous to
appear in the body of the Report.
g. It should be signed by all members making the audit.
Certain aspects of an audit report (such as a morale survey, a safety survey and
similar special items of wide general interest) may be made available to the
employees. Other phases of the audit may be appropriate to give only to top
management.
Records to be Used in a Personnel Audit:
The main records and statistics to be used in a personnel audit are:
(a) Time standards;
(b) Cost records;
(c) Test scores;
(d) Training development effects;
(e) Interview records;
(f) Work stoppages;
(g) Medical reports;
(h) Accident reports;
(i) Grievance reports;
(j) Turnover reports;
(k) Labour costs;
(I) Payroll data;
(m) Performance evaluation and rewards.
In other words, both quantitative and qualitative yardsticks should be used for
purposes of evaluation. The methods for analysing data and information are:
a. Comparison of various time periods;
b. Comparisons between departments and other companies;
c. Trend lines, frequency distributions and statistical correlations;
d. Ratio analysis; for example, labour cost per unit of output;
e. Classification of data by kinds of employees, products and departments; and
f. Graphical or pictorial displays.
Components of the Human Resource Audit Report:
After auditing the policies of the human resource management, a report has to
be prepared for consideration of the line or the top management.
The report may be presented in the following order:
(a) Table of contents
(b) Preface or introduction giving a statement of objectives, scope, research
methodology and techniques of the HR audit;
(c) A summary of the conclusions and recommendations of the HR audit;
(d) The main report with analysis of data of each section or department
concerned;
(e) A summary which is general comprehensive in nature and more in
comparison to the brief prepared at the beginning of the HR audit report;
(f) An appendix containing supporting data, which might be too voluminous to
appear in the body of the audit report.

Human Resource Audit – Advantages

(i) HR audit helps the company to identify the areas where improvement is
required.
(ii) It helps to ascertain the proper contribution of the HR department towards
the organization.
(iii) HR audit facilitates the development of HR plans for the future based on the
current performance of the HR department.
(iv) It helps to motivate the employees to perform better and boosts their
morale.
(v) HR audit keeps a check on whether the company is complying with the
required legal rules and regulations.
(vi) The weaknesses of the HR department can be pinpointed by way of HR audit
so that remedial measures may be taken.
(vii) It enables the HR manager to evaluate the job positions and the employees
in order to formulate promotion and transfer policies.
vii) Re-engineering the systems and processes, and improving the competency
and functional efficiency of HR systems.
viii) Systematic audit creates discipline in HR staff and encourages them to move
away from intuitive techniques to a more rigorous assessment
Human Resource Audit – Disadvantages
(i) HR valuation methods assume that employees would remain with their
organizations for a specified period of time. But this assumption is wrong
because in reality employees do not remain with one company for long and
often change jobs.
(ii) It is very difficult to establish standards for HRA as in case of other fields of
accounting such as financial accounting or management accounting. Every
organization uses its own standards, and thus the HRA data of no two
organizations can be compared.
(iii) HRA dehumanises the employees by evaluating them in monetary terms.
Human beings cannot be owned or used like machines.
(iv) There is no model of HRA valuation that can be said to be ideal. Each model
has many practical drawbacks.
(v) The life of a human being is uncertain. The lifespan of an employee can never
be predicted accurately, and therefore values can never be assigned to any
employee with surety.