HUMAN RESOURCE AUDIT

DEFINITION:
Human Resource Audit is a systematic assessment of the strengths, limitations, and
developmental needs of its existing human resources in the context of organizational
performance – (Flamholtz, 1987)

NEED FOR H.R. AUDIT:

Top Management saw solutions to their problems, issues and
challenges in HRD to face business competition and to achieve
organizational goals.

PURPOSE OF H.R. AUDIT:

1. To examine and pinpoint strength and weaknesses related
to H.R. areas and Skills and Competencies to enable an organization to achieve its long-
term and short-term goals.
2. To increase the effectiveness of the design and implementation of human resource
policies, planning and programs.
3. To help human resource planners develop and update employment and program plans.

SCOPE OF HUMAN RESOURCE AUDIT

Whenever the H.R. Audit it taken up, the scope is decided. Audit need not be exhaustive,
but should be focused on particular function of H.R.M. such as Training and
Development, Performance Appraisal, Compensation, etc.. However, the objective and
approach of H.R. Audit, more or less, remains the same, regardless of scope.

APPROACH TO H.R. AUDIT

1. Self – directed surveys.
2. Task Forces within the organisation.
3. Out side Consultants.

AUDITING PROCESS: STEPS IN H.R. AUDIT

Auditing process varies from organizations to organizations.
Generally involves following STEPS:

STEP ONE: Briefing and Orientation:

Key Staff Members meet:
i. To discuss particular issues considered to be important.
ii. To chart out audit procedures, and
iii. To develop plans and program of audit.

STEP TWO: Scanning material information:

Scrutiny of all available information pertaining
to personnel, personnel handbooks and manuals,
guides, appraisal forms, computer capabilities and
any other related information.

STEP THREE: Surveying employees:

a. Interview with key managers, functional executives,
Top functionaries in the organisation and employees
Representatives, if necessary.
b. The purpose is to pinpoint issues of concern,
Present strengths, anticipated needs and managerial
views on human resources.

STEP FOUR: Conducting interviews:

I. What questions to be asked, are developed during

scanning of information.
II. It is better for H.R. Audit, if clarity about the key
factors of H.R.M. selected for audit and the related
questions that need to be examined.

STEP FIVE: Synthesising:

The data gathered is synthesized to present the

a. Current Situation.
b. Priorities.
c. Staff pattern, and
d. Issues identified.

STEP SIX; Reporting:

1. The results of the audit are discussed with

Managers and Staff Specialists, in several
rounds.
2. Important issues are identified for
inclusion in the formal Report.

Human Resource Accounting

Human resource accounting is not a new issue in economics.
Economists consider human capital as a production factor, and they
explore different ways of measuring its investment in education,
health, and other areas. Accountants have recognized the value of
human assets for at least 70 years. Research into true human resource
accounting began in the 1960s by Rensis Likert [Bowers, 1973]. Likert
defends long-term planning by strong pressure on human resources'
qualitative variables, resulting in greater benefits in the long run.
The American Accounting Association [1970] defines human resource
accounting as "the human resources identification and measuring
process and also its communication to the interested parties." There
are two reasons for including human resources in accounting [Ripoll
and Labatut, 1994]. First, people are a valuable resource to a firm so
long as they perform services that can be quantified. The firm need not
own a person for him to be considered a resource. Second, the value of
a person as a resource depends on how he is employed. So
management style will also influence the human resource value.
The following are the reasons why Human Resources Accounting has
been receiving so much attention in the recent years.
 Firstly, there is genuine need for reliable and complete
management of
human resources.
 Secondly, a traditional framework of Accounting is in the process
to
include a much broader set of measurement than was possible in the
past.
 The people are the most important assets of an organization but
the value
of this asset yet to appear in financial statements. It does not get
included in
management information systems too. Conventional accounting of
human
resources took note of all expenses of Human capital formation which
does not
seem to be correct or meeting the actual needs.
 Human Resource Accounting is the measurement of the cost and
value
of people to the organization. It involves measuring costs incurred by
the
organizations to recruit, select, hire, train and develop employees and judge their
economic value to the organization.

“Human Resource Accounting is an attempt to identify and report

investments made in human resources of an organization that are
presently not
accounted for in conventional accounting practice. Basically it is an
information
system that tells the management what changes over time are
occurring to the
human resources of the business.”
Importance of Human Resource Accounting:

Human Resource Accounting provides useful information to the

management, financial analysts and employees as stated below:
1. Human Resource Accounting helps the management in the
Employment,
locating and utilization of human resources.
2. It helps in deciding the transfers, promotion, training and
retrenchment
of human resources.
MBA –H4020 Human Resource Accounting
9
3. It provides a basis for planning of physical assets vis-à-vis human
resources.
4. It assists in evaluating the expenditure incurred for imparting further
education and training in employees in terms of the benefits derived
by the firm.
5. It helps to identify the causes of high labour turnover at various
levels
and taking preventive measures to contain it.
6. It helps in locating the real cause for low return on investment, like
improper or under-utilization of physical assets or human resource or
both.
7. It helps in understanding and assessing the inner strength of an
organization and helps the management to steer the company well
through most
adverse and unfavourable circumstances.
8. It provides valuable information for persons interested in making
long
term investment in the firm.
9. It helps employees in improving their performance and bargaining
power. It makes each of them to understand his contribution towards
the
betterment of the firm vis-à-vis the expenditure incurred by the firm on
him.

Limitations of Human Resource Accounting:

Human Resource Accounting is the term used to describe the

accounting
methods, system and techniques, which coupled with special
knowledge and
ability, assist personnel management in the valuation of personnel in
financial
terms. It presumes that there is great difference among the personnel
in their
knowledge, ability and motivation in the same organization as well as
from
organization to organization. It means that some become liability too
instead of
being human assets.