Chapter 15

Performance Audit, Human Resource Valuation, Accounting

and Audit
Learning objectives

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1. Concept of performance management and its scope
2. Differences between performance appraisal and performance audit
3. Structure of performance audit
4. Steps in performance audit
5. Methods and techniques of performance audit
6. Process of human resource valuation.
7. Human resource accounting.
8. Various aspects of Human Resource Audit.
9. Relation between HR Audit and HR/personnel record keeping., and Japan.

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 Introduction
Performance management systems manage the entire work force of an organization to ensure optimum
performance. It is the process of evaluation of employees’ performance, in alignment with the organizational
strategy and business goals, benchmarking with the best practices.

Performance audit ensures development, management and retention of talent in the organization. It is a
systematic performance measurement approach to identify the best performance improvement opportunities

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within the organization.

The scope of performance management audit, among others emphasise on formal performance evaluations,
incentive assessment, career development programme assessment, succession planning programme assessment,
goal setting assessment of the organization, assessment of coaching and mentoring programme of the
organization, work environmental issues assessment, etc.

It helps the organizations to diagnose the major issues of bottleneck in employees’ performance.
Using a participative approach, performance management audit process can successfully track the issues and
areas of organizational performance improvement.

Performance audit process and its results become more credible when it makes use of questionnaire, scaled
comparison method, and when these can be reliable and valid statistically.

Successful performance audit facilitates in prudent business decision making. Using the scalable information,
performance audit can provide information in measurable terms.

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With the dashboards and the balanced score card, such audit information even become more authentic. For
example IBM’s Cognos is a performance management solution, used by organizations.

Scope of Performance Management Audit

Among other the performance management systems consider issues like;
 Performance expectations

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 Frequency of performance evaluations
 Participative goal setting
 Job-profile matching, keeping pace with the skill of people
 Promotion of team work and group activities
 Practice of performance based promotions
 Career development through succession planning
 Assessment of performance
 Introduction of fair performance appraisal process
 Practicing performance based compensation design

Differences between the performance audit and financial audit

Although procedurally, performance audit and the financial audit have many things in common, they are not
alike.

Performance audit focuses on efficiency measurements, financial audit focuses on the accuracy and correctness
of accounts. Other areas of difference between the two can be listed as under:

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  Financial audit is a routine job. It does not focus on any specific problem. Performance audit, on the
other hand focuses on problems and the process of identification of its causes.
 In financial audit, attention is more on figures, in performance audit; however, the attention is more on
people, and other resources.
 For obvious focus on specific requirements and expectations, financial audit is having a narrow focus,

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while performance audit is essentially broader and more elaborate for judgement and interpretation.
 Financial audit is conducted for a specific financial period, while performance audit is on-going and it
can even extend over a cycle of several years. However, organizations may also carry out performance
audit annually, matching with their financial year results. But such approach to performance audit is
rather narrow, and time specific.
 Unlike financial audit results, performance audit reports are more elaborate, diverse and interpretative.
 Performance audit requires more detailed preliminary surveys, for developing the actual audit plan. In
financial audit, however, this is not required.
 Financial audit is more protocol bound, while the financial audit is not.

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Checklist of Performance Audit
Performance audit checklists determine whether the employees deserve incentives, promotions, rewards, areas
of their performance improvement, quality of their work, employees’ willingness to undertake the work
assignments, errors in terms performed work duties, etc.

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Job performance checklist considers the general work performance of the employees, like; conforming to
general operating procedures, adherence to the safety measures.

The job performance checklists help the organization to assess how employees perform, and so also the degree
of compatibility of the organization with the employees’ needs and expectations.

Structure of the performance audit

Depending on the scope of performance audit in organization, it can be structured as under:
 Measuring the degree of professionalism
 Measuring the efficiency
 Measuring the economy

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Professionalism in performance audit can be understood answering the following questions:
 What is the degree of professionalism in designing the performance audit process?
 What are the deficiencies that exist in preparing the performance measures?
 With such deficiencies can the performance audit be carried out?
 Are the performance indicators adequate and auditable?

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Efficiency audit consists of audit of achievement of goal, and the audit of effects or the causality. Audit of goal
achievement can be done answering the following questions:
 Was the defined goal achieved?
 To what extent was the defined goal achieved?
 To what extent the comparison of planned results or goals with the achievement actual results or goals can
be made?

Audit of effects or causality answers the following questions:

 Can the goal be achieved with the adopted performance measures?
 To what extent performance measures are the right fit for achieving the performance goals?
 Apart from the adopted performance measures, what else could influence the circumstances that facilitated
in achieving the performance goals?
 Are there any other effects (especially the adverse one) in audited performance measures?
 What is the degree of actual effects with the planned ones?

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For better results it is always advisable to adopt multiple methods like; empirical and economic, while
conducting the performance audit. With the application of more than one method, results of performance
measurement can be correlated and subjected to statistical tests for its reliability and validity.

Economy audit evaluates the costs incurred in measuring the performance of the individual and the

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organization. Capitalised value methods like; the net present value, internal rate of return, etc. are the important
areas of consideration for economy audit in performance management.

Steps in Performance Audit

Performance audit process in any organization follow certain steps. Most commonly used steps are indicated
below:
1. Development of assessment criteria
2. Preparation schedule
3. The choice of audit tasks
4. The choice of audit objectives
5. Preparatory work
6. Performance audit planning

While developing the performance assessment criteria it is important to consider the aspects of economy,
efficiency and effectiveness.

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 Methods and Techniques of Performance Audits
Methods are the ways and procedures that lead to achieving the goals of performance audits. Techniques are
the tools used to measure the achieved performance goals.

Performance audit methods could be an analysis, synthesis, sorting, comparison or a generalisation. The
process of analysis is defined as the method of breaking down the whole performance goals and objectives

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into different parts, and then examining each part separately.

Performance Data Reliability Audit (DRA)

Data Reliability Audit (DRA) is basically performance audit to ensure accuracy and precession level of
observations.

Performance audit assesses the degree of economy, efficiency and effectiveness in the use of human,
financial and material resources at a level of organization unit, organization, or certain actions. This type of
internal audit examines processes and systems of an auditee in particular.

Using the DRA, performance audit also fulfils the requirements and the correctness of performance
measurement results.

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Human resource valuation, accounting and audit
Human Resource Accounting (HRA) is the process of identifying, measuring and communicating data about
human resources.

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HRA shows how the organization makes investment in its people and how the value of the people changes over
time. Value of the employees increases by training (the core HRD activity) and experience over a time
period. Such information on human resources facilitates effective management within an organization.

According to Likert (1971), HRA benefits organization in the following ways:

• It furnishes cost value information to facilitate the management to take effective decisions on manpower
acquisition, allocation development and retention to sustain cost effective competitiveness in the
organization.
• It ensures effective utilisation of human resources.
• It facilitates human assets control duly tracking its appreciation or depreciation.
• It helps in the development of management principles.
• This method attaches money estimates in the value of manpower of an organization. The process is
somewhat like estimating the goodwill value and can be appraised by developing a procedure to undertake
periodic measurement of certain variables.

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Different Approaches to value human resources
Different approaches to the valuation of human resources may be broadly grouped under two categories:
(a) Non-monetary measurement
(b) Monetary measurement

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Non-monetary measurement involves the classification of human resources in terms of skills (skills inventory),
performance evaluation, potentiality for development and promotion, attitude surveys and subjective value.

Monetary measurement helps in quantification human resource values. It can be done through capitalization of
historical costs (recruitment, hiring, training and other initial costs), replacement cost method (to replace an
organization’s existing human resource), opportunity cost method (value of an individual employee in an
alternative use), economic value method (contribution of employees to the organization during the period of
their employment), present value method (attributing employee’s value to the organization as an equivalent to
the present value of remaining earnings), etc.

Human Resource Information Systems (HRIS) can help in HRA, making available information on personal
profile, career profile, and benefits profile of employees. .

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HR Audit
Human Resources or HRD audit is a systematic survey and analysis of different HR functions with a
summarised statement of findings and recommendations for correction of deficiencies.

HR audit ensures that sound and cost effective policies are implemented. However, purposes and objectives of

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HR audit can be listed as follows:
1. To determine the effectiveness of management programmes, which facilitate management to develop,
allocate and monitor human resources.
2. To analyse the factors involved in HR and develop a statement of findings with recommendations for
correcting deviations, if any, on the following issues :
○ The extent of deviation from HR policies,
○ To what extent objectives are spelt out,
○ To what extent performance standards have been established
3. To seek explanations and information and answers to all such above questions as: What happened?
Why did it happen?
4. To study the extent to which line managers have complied with HR policies and as such the operational
problems in implementing the existing HR policies.
5. To study the current manpower inventory and identify shortfall or excess, if any:

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Role of HR Auditor
From the above stated objectives, the job of HR Auditor can be enumerated as follows:
1. To get the current facts.
2. To study the effectiveness of the present system by answering following issues:
(a) Why was the practice introduced?

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(b) What would be the result, if the practice is discontinued?
(c) What needs were intended to be fulfilled and have those been fulfilled or not?
(d) What could be the best possible alternative for fulfilling such needs?
(e) What changes can improve effectiveness of existing practice?
(f) Are such intended changes economically and operationally viable?
(g) Are such changes sustainable from union’s point of view?
(h) What should be the time frame for introducing the change?

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Importance of HR Audit
Reasons for periodic HR audit can be enumerated as follows :
(a) Technological changes, inter alia, are calling for renewal of knowledge and skills of existing manpower.
Training function, therefore, has assumed importance. Periodic HR audit can help to identify the changing
training needs and development of new training modules for effective utilisation of manpower.

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(b) To keep pace with the environmental changes, management philosophy and practices at the organizational
level also need to be changed, like Participative Management (through Quality Circles and Value
Engineering Team), Employee Empowerment, Total Employee, Involvement, etc. All these can be
understood only when we periodically undertake HR audit.

Similarly, changing role of Trade Unions (which is now more pro-active than reactionary), Government
(which is now more liberal than restrictive), emergence of new working class (who are more enlightened
than their predecessors), emergence of international quality system requirements (which calls for
scientific documentation of different corporate functions and infuse attitudinal changes), changing
expectations of customers (which calls for more customer orientation), new statutory
requirements(pollution control), etc., are now influencing HR functions at the corporate level,
effectiveness of which can only be understood by periodic HR audit.

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Records Used for HR Audit
HR Records and reports provide ready reference and serve as future reference and guide.
Depending upon the organization, the following records/reports are usually checked for HR Audit.
Time study records and time standards, cost records, records on scores obtained in test and other examination,
medical and accident reports, attitudinal survey reports, grievance reports, turnover reports, data on work

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stoppages, performance reports, pay roll data, labour costs data, etc.

Methods and Techniques of HR Audit

HR audit can be carried out either by attitudinal survey or by interpreting data. The following examples
illustrate the data interpretation method.

Checklists for HR Audit

T.V. Rao and Udai Pareek (1996) suggested measurement of the effectiveness of people management,
developed a set of questions mostly to suggest linking of HR to the corporate objectives, goals and
strategies, effectiveness of free flow of HR information down the ranks, application of knowledge of
behavioural science and industrial psychology for HR, etc.
For other HR sub-systems too, they have developed similar sets of questionnaire, adding responses, which can
help an organization to audit their HR activities. However, using same general checklists for all
organizations may not be very effective to audit human resources for its obvious uniqueness in functional
practices and philosophies.

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Recommendations for HR Record keeping
Some of the recommendations for HR record keeping is presented below:
 Review applicable laws with regard to required records.
 Review employment application forms, evaluation forms, and other similar documents to be sure they
are non-discriminatory.

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 Review with supervisors the kind of disciplinary documentation, which should be maintained in all
employee files.
 Know to what extent state laws mandates employee access to personnel files and establish a system for
controlling such access.
 Do not disclose information on employees except to those who have a legitimate need to know the
information.
 Do not discuss charges or complaints against individual employees with more people than absolutely
necessary.
 Get consent before disclosure where possible.
 Have one person responsible for all disclosures to ensure consistency of treatment.
 Provide "neutral" references for former employees.
 Maintain adequate security overall employment records.

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Use of Human Resource Information System (HRIS) for maintaining Personnel Records
An HRIS is a systematic procedure for collecting, storing, maintaining, retrieving and validating data needed
by an organization about its resources.

The HRIS is usually a part of the organization’s larger management information system (MIS). The HRIS need

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not be complex or even computerized. But computerization has its own advantage of providing more
accurate and timely data for decision making.

Human Resource Information Systems (HRIS) are defined as the range of computerized technology that is used
to store, record, and link, analyze and present data about the human element within the business.

Scope of HR Audit
HR audit now encompasses all the areas like review and integration of corporate mission, goals, policies and
objectives, manpower planning, career planning and development, promotion and transfer policies,
performance appraisal systems, training and development functions, recruitment and selection, etc.
The audit takes stock of the degree to which HR delivers its four key roles; audit of the functional role of HR,
audit of HRD systems and procedures, audit of training and development, and audit of organization
development (including career development).

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Purposes of HR Audit
Purposes of HR audit can be aligned with existing HR systems and procedures of an organization, keeping in
view, however, that HR systems and procedures are line manager friendly, accommodate various labour
laws and procedures, in line with the HR strategy and the entire process runs at optimal cost.
1. Human Resource Management (HRM) - HRD systems and procedures are aligned with the HRM systems

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and procedures to promote staff competence, confidence, and performance standards.
 Organization Job Design: defining how tasks, authority, and systems will be organized and integrated
across organizational units and in individual jobs.
 Human Resource Planning: determining the organization's major human resource needs strategies and
philosophies.
 Performance Management Systems: assuring individual and organization goals are linked and that what
individuals do every day supports the organizational goals.
 Selection and Staffing: matching people and their career needs and capabilities with jobs and career
paths.

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2. HR Information Systems (HIRS)
Audit whether these areas support the achievement of results in the area of HRD and HRM; audit whether HR
maintains performance indicators that help management keep track of HR costs and benefits.
 Compensation and Benefits: assuring compensation and benefits fairness and consistency.
 Employee Assistance: providing personal problem solving and counseling to individual employees.

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 Union/Labor Relations: assuring healthy union I organization relationships.
 HR Research and information Systems: assuring an HR information base is in place that provides on
time management information; assuring HR functional performance indicators are in place.

3.Audit of the Service Role OF HR

Human resource functions have traditionally played a service role to compliment their functional activities.
Therefore, any audit, to be complete needs to examine the service responsiveness of HR.

4.Audit of the Compliance Role of HR

Compliance with the labour laws is now a business imperative and this requires periodic audit to optimise the
risk of violation, which not only make employers liable for penalty (and even imprisonment in some
cases), but also affect the organizational image. This audit assesses whether the required policies,
practices, and procedures exist, and to what extent management and labour have been trained to enact
these codes of best practice.

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5. Audit of the Strategic Role of HR
This audit enables an organization to understand whether the implicit or explicit human resource strategy is
appropriate for the organization and whether the HR policies, systems, and procedures are aligned to
achieve business plan results, and workforce strategy.
6. Audit of the Financial Management Role of HR (financial ratios)

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Basic financial ratios/scorecard measures appropriate are audited to understand the efficiency of the various
functions. Such audit acts as levers to optimise employee, team and organizational performance results
over time.

Organizations can select from the following list of Customer, Financial, Business Process, and Growth and
Learning measures that will be calculated to round off the audit.

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Benefits of HR Audit
HR audit in any organization provides many benefits as follows:
 It provides the various benefits to the organization. These are:
 It helps to find out the proper contribution of the HR department towards the organization.
 Development of the professional image of the HR department of the organization.

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 Reduce the HR cost.
 Motivation of the HR personnel.
 Find out the problems and solve them smoothly.
 Provides timely legal requirement.
 Sound Performance Appraisal Systems.
 Systematic job analysis.
 Smooth adoption of the changing mindset.

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