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Auditing HR Function

Dimensions of HR Audit

Human Resource

HR Auditing
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Human Resource Information System (HRIS)

A method by which an Organization

collects, analyses, and reports information about people and jobs. An integration between IT System and HRM process. Offers an adequate, comprehensive and on-going information system about people and jobs.
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HRIS: System Workflow

HR Accounting
First developed by Rensis Likert , and he pointed

out that the expenses on human resource are fixed in nature and do not offer any immediate return.
According to Flamhotiz, HRA is accounting for

people as an organizational resource. It involves measuring the costs incurred by organization to recruit , select , hire, train and develop human assets. It also involves the measuring economic value of people to the organization.
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Objectives of HR Accounting
Provide cost value information about acquiring,

developing , allocating and maintaining human resources. Enable management to effectively monitor the use of human resources. Find whether human assets are appreciating or depreciating over a period of time. Assist in development of effective management practices on the basis of financial consequences.
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Approaches of HRA

Monetary Measures Non Monetary Measures

Monetary Methods
Historical cost method Replacement cost method Opportunity cost method Economic value method Assets multiplier method Discounted present value of future earnings method

Non-monetary Measures
Expected realizable value method
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Vr=

How to Calculate the value of Manpower?

Lev and Schwartz model

Vr=
Where,
Vr = the value of an Individual r year old. I(t)= the individuals annual earnings up to retirement t = retirement age r= a discount rate specific to the cost of capital to the company

 Historical cost method

= Recruitment cost + selection cost + Orientation Costs + Training Costs + Development Costs
Where,
RC= Advertising, travel exp., consultants fee, incidental exp. SC= Form costs, testing and interview exp. and other Adm. exp. TC= Trainers salary, Facilities cost, trainee's time spent in the program measured financially, low productivity during training. DC= Costs incurred in enhancing employee skills and expertise.
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Controlling Cost of Manpower

Ratio Analysis Cost per hire=
Recruitment Cycle time= Total time taken to recruit new employee Turnover Rate=
Cost of Training=
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 Personnel Productivity

=
Management By Objectives

Finally Personnel budgets and Audit

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Auditing HR Functions

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What is AUDIT ?
Latin verb-audire-means-to listen
Listening implies an attempt to know the

state of the affairs as they exist & as they are expected to exist

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AUDIT
An audit is an evaluation of a person,

organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control.

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What is HR audit?
An HR audit is a process to review implementation of policies, strategies, structure and procedures with respect to the organization's HRM, ensure compliance with employment law, eliminate liabilities (gap) , and educate the managers (feedback).

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Why Auditing HR Function?

To reveal the strengths and weaknesses in the human

resources system, and any issues needing resolution. To know the extent of HR as CSF, HR can be a CSF if employees are have unique skills To find out current manpower inventory and shortfall or excess, if any for new project. To evolve its HR function to a level where its full potential to support the organizations mission and objectives can be realized. To find out the effectiveness of various personnel policies and practices.
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Approaches of HR Audit

Legal Approach

Functional Approach
Strategic Approach

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Approaches of HR Audit
This concept is centered on the verification that the current labor laws are being fulfilled. Legal Approach The audit should verify if the firms policies, practices, and documents Functional Approach regarding employee hiring, retention, discipline, termination, and post Strategic Approach employment are both fair and legal HR practices and policies must not discrimination on: equal employment opportunities; basis of age and sex; reasonable accommodations for disabled workers; minimum wages etc.
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Approaches of HR Audit
Observing the procedures applied are the adequate ones and they function correctly in the most cost effective manner. The function of this level of the HR audit is to study and analyze each one of the specific areas of HRM. Area of HR Audit:
Description of companys staff Job analysis HR planning Recruiting and personnel selection Training Development of professionals Retribution Performance evaluation Work condition
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Legal Approach
Functional Approach

Strategic Approach

Approaches of HR Audit

The evaluation of the adaptation of the HR policies and practices in their support Functional Approach of the companys general strategy.. Strategic approach has been developed as a means of determining if the HR function Strategic Approach is a source of competitive advantage for the company. Supplies information about the knowledge, abilities, values, managing experience, or other factors of each employee to meet new strategy.
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Legal Approach

Process of HR Audit
Step 1:Defining Auditing Statement
Step 2:Accessing Current Practices Step 3:Analyzing the Result

Step 4:Preparing the Audit Report

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Before beginning the audit process

1. Determine who will conduct the audit.
Internal vs. External 2. Secure senior management commitment.

a. Are they ready to fix whats broken, even if it costs $$$$?

b. Do they agree with the methodology? c. Will they allow access to all departments/information? d. Will they publicly support the process?
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3. Define the parameters.

3. Who will be audited?

4. What do you want to audit?

5. What audit tools will you use? 6. How will the process be rolled out? 7. How will results get reported? 8. Who will get the results?
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4. Introduce the audit process to your managers.

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Step 1: Defining Audit Statements

Determine whether legal, functional or

strategic audit. Determine the area of the HR audit where auditor wants to audit. Determining the every aspects of the each area (detailed) Areas like quality of lifecycle, team based work system and other contemporary issues on HR are should be considered 26

Step 2: Accessing Current Practices

It is much objective in nature
Collection of data and information from

current policies and procedures, employee surveys, interviews with key customers, Human Resource Information System, reports issued to regulatory departments, statistics, etc. But how to conduct ?
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Step 3: Analysis of Results

The purpose of analysis is to sort through the areas

of strength and opportunities for improvement in order to take positive action steps to improve the effectiveness of the HR function Examining different indices, ratios Finding out strength and weakness point and opportunity for improvements.

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Ratios that should be analyzed

Turnover Rate
Rate Personnel functions to examine Quit rate Salary and benefits package Supervisory practices Termination rate Job design Layoff rate Retirement plan Retirement rate Length of service rate
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Job Attendance Rate

Rate
Absence rate
Tardiness rate

Personnel functions to examine

Exit interviews Discipline Convenience of lunchroom

and rest room Sick-pay policy

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Overtime Rate
Rate Overtime rate Personnel functions to examine Employee planning and scheduling Shortage of staff Selection and training process

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Position/Vacancy Rate
Rate Position Vacancy Rate Personnel functions to examine Recruitment and selection process Salary and benefit package Company image in community

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Error/Scrap Rate
Rate Personnel functions to examine Error/scrap rate Recruitment selection and placement Training and development Job satisfaction

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Training and Development Rate

Rate
Training and

Personnel functions to examine

Recruitment and selection Training and development

development rate

Grievance Rate
Rate Personnel functions to examine

Grievance rate

Supervisory practices Job dissatisfaction

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Step 4: Preparing Audit Report

Table of contents Preface Statement of objectives, methodology, scope and techniques

used. Summary, conclusion and recommendation of the audit that has been carried out. A clear and in-depth analysis of the data and information, furnished area-wise. Evaluation, discussion, and analysis. Appendix Bibliography
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Frequency of Audit
Generally top mgmt thinks of HR audit only when

serious crisis occurs like strikes, increases in the no of grievance or conflict, legal issues etc. This types of audit is just reactive approach. Management has to arrange for regular annual audit of almost all the personnel policies and practices. Certain indicators like absenteeism and employees grievances should be audited at the end of every month/quarter depending upon the magnitude of the issues.

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Problems in Auditing HR Functions

No any fixed rules, systems, and regulation for auditing.
It compares past ratios, rates of turnover, expenditure etc.,

with those of other departments and organizations. Organization cannot be taken as standard for comparison and a decision arrived at. Tendency to turn the HR audit into a fault-finding Process. If not done properly, may create more troubles than solutions. Employee may try to pass the buck.
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Prepared By:
Tola Kanta Neupane MBA , 2nd semester, IB&MS

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