CHAPTER 25

Human Resources Audit

CHAPTER OBJECTIVES

After reading this chapter, you should be able to:

1. Discuss the objectives and scope of human resources audit
2. Enumerate the levels of a human resources audit
3. Explain the steps in a human resources audit process
4. Explain the various approaches to human resources audit
5. Discuss the essential conditions for an effective human resources audit

Hewitt Associates is a US-based international HR outsourcing and consulting organization. Its primary focus is on assisting business organizations in solving their HR bottlenecks, thereby maximizing their HR investment. Since 1997, it has been conducting a region-wise survey, Best Employers, which seeks to discover the link between human resource practices and business results.

The primary role of Hewitt Associates in the survey is the gathering of exhaustive data about each of the participating organizations in the survey through three diagnostic tools—(i) Employee Opinion Surveys (EOS), (ii) a People Practices Inventory (PPI), and (iii) a CEO Questionnaire. Besides collecting data through diagnostic tools, Hewitt audits up to 20 per cent of the participating organizations randomly to ensure the accuracy of the provided data and preserve the thoroughness of the study methodology. The HR audit verifies information about the philosophies, policies, programmes and practices affecting people in the organizations. The collected and verified data is then forwarded to the region-wise independent judging panel, which gets a complete view of an organization’s employee perspectives, leader perspectives, and HR practices. After carefully auditing all the relevant information, the panel chooses the Hewitt Best Employers for its region. The top three of the 25 companies selected by the judges as the Hewitt Best Employers in India for 2009 were HCL, Hindustan Zinc, and Taj Hotels, Resorts and Palaces.

The HR-audit-based survey of Hewitt Associates vividly shows how the best employers could outperform the rest in terms of productivity and profitability with the help of the best HR policies and practices. Keeping this context in mind, we shall now discuss the various facets of HR auditing in this chapter.

Introduction

A human resource audit aims at ascertaining the effectiveness of the HR department and its functions. The basic goal of an HR audit is to find out the HR interventions that will increase the firm’s competitive advantage. An HR audit also ensures the compliance of the HR department with the goals, plans and policies of the organization. Similarly, it makes sure that the statutory provisions and other regulations of the government are followed properly without any deviations. It also makes certain that the HR policies are followed uniformly across the entire organization. In fact, it helps in determining not only the efficiency of the HR policies and practices but also their cost to the organization. The audit also helps in assessing the role and contributions of the HR functions in the overall strategic planning of the organization. It facilitates the development of the benchmarks with which the actual HR performance can be compared to identify any performance deficiency. In fact, the HR audit assists the organization in the effective formulation of HR strategies which will align well with the overall corporate strategy.

HR auditing is similar to traditional auditing except that the latter focuses on financial functions while the former focuses on the HR functions of the organization. Like a traditional audit, it involves the logical gathering and investigation of the relevant information at periodic intervals. The HR information in an HR audit relates to the people, structures and HR philosophy of an organization. The HR audit normally covers HR functions like employee staffing, training and development, compensation, maintenance, including motivation, communication and leadership, safety and health, and industrial relations. It also focuses on the HR information system, HR research and record keeping, returns on HR investment and policies, procedure, and regulatory compliances.

Measuring the effectiveness of the HR activities of an organization is the essence of the definitions of HR audit. We shall now see some of these definitions in Box 25.1.

We may define an HR audit as a systematic inquiry into the efficacy of the philosophy, policies and practices concerning HR management in terms of organizational performance and its level of alignment with the overall organizational strategies.

Features of an HR Audit

The primary goal of an HR audit is to assess how efficiently the HR functions were performed by the HR department. As such, it provides baseline information to the top management to determine the efficacy of its HR strategies and HR department. Benchmarking HR policies and practices is a basic feature of an HR audit as it facilitates purposeful comparisons. A few other features can also be made out from these definitions:

• An HR audit is an independent, objective and critical examination of the HR functions of an organization.
• It gathers data about the people, process, structure and policies of an organization as part of investigation.
• It establishes a benchmark for measuring the actual performance of the HR department so as to identify the performance and efficiency gaps.
• It detects non-compliance by the HR department on matters concerning statutory provisions, corporate goals and HR policies while performing HR functions.
• An HR audit is done by the internal employees or the external consultants with expertise in HR management and basic knowledge in law and auditing.
• The HR audit report is normally sent to the senior management for necessary action in order to ensure better regulative and other compliances by the HR department.
• The HR audit is normally carried out at regular intervals in the organization. It may be conducted once in a year.

Objectives of an HR audit

The basic objective of an HR audit is to evaluate the current HR policies, procedure and practices of an organization so as to determine the extent of their contribution to the accomplishment of corporate objectives. The evaluation is usually done in terms of completeness, accuracy and effectiveness of the HR policies and practices.⁵ HR audit serves several other purposes. These are:

• to identify the degree of efficiency in the performance of the HR department in implementing the HR policies and practices of the organization and assess the general environment prevailing in HR department
• to propose appropriate strategies and corrective action, in case of performance and efficiency gaps
• to determine whether the HR functions are performed according to the established practices and procedure of the organization
• to measure the HR department’s record of compliance with the statutory provisions regarding hiring, compensation, safety and health, dispute settlement, etc.
• to discover the areas where cost savings could be achieved in HR activities like recruitment, development, retention and separation of human resources
• to have an improved control over and check on all internal operations of the organization
• to create a sense of accountability and discipline among the employees by investigating their past actions periodically
• to provide feedback to the employees about the areas of good performance and areas where improvements are required⁶
• to convert HR management from an abstract concept into a measurable and quantifiable activity
• to determine the HR areas and functions which require further research and development⁷
• to recognize the good work done by the HR people and reward them appropriately
• to prepare the organization for countering the possible legal actions from the aggrieved employees effectively

Scope of an HR Audit

Ineffective and misaligned HR policies and practices can cause damages to the sensitive industrial relations and bring employee-related liabilities in the form of legal suits against the organization. Hence, organizations are increasingly subjecting almost all their HR policies, procedures and practices to auditing to ensure their legal compliance and general effectiveness. The HR audit normally covers activities like benchmarking the best ways of performing the HR functions, assessing the flaws and weak spots in the existing HR policies and practices, scrutinizing the management actions concerning human resources and, finally, sharing the audit information with all the stakeholders like management, employees and others to help them enhance the quality of their work.

The scope of an HR audit is normally confined to the activities connected with the HR department of an organization. Certainly, the HR audit would also cover the managerial activities pertaining to human resource management. We shall now see the HR-related activities which are typically within the scope of an HR audit.

• All application forms including recruitment forms, internal communication, and promotion forms
• Job description and job specification statements
• All files and records maintained by the HR department and all HR-related files and records maintained by other departments
• Hiring policies, practices and procedures
• Compensation policies and practices and computation and payment procedures, including information about competitive pay
• Training and orientation policies, practices and programmes
• Separation schemes, practices and policies
• Records relating to legal reporting and legal compliance
• Records relating to promotion and transfer practice and policies
• Grievance resolution and disciplinary action procedure and records
• Policies and performance relating to safety and health
• Details about welfare activities undertaken
• Information relating to workers’ participation in management
• Details about exit and other interviews
• Industrial relations policies and practices

• Performance evaluation procedure and reports
• Reports relating to accidents, labour turnover, absenteeism and leaves
• Information relating to harassment and discrimination
• Reports relating to regulatory compliance
• Information relating to return on HR investment
• Information about corporate strategies, mission, and vision covering HR aspects
• Reports on organizational climate surveys and employee satisfaction surveys.

Box 25.2 outlines the HR audit initiatives of Indian organizations.

Levels of an HR audit

The primary purpose of an HR audit is to ensure that the human resource management processes are effectively aligned with the corporate strategies so that the firm gets a competitive advantage out of its human resources. The HR audit per se attempts to identify the degree of alignment and also the causes of misalignment, if any. Since the success of HR activities depends on the involvement and commitment of the different levels of management, HR audit needs to be done at various levels of organization. These levels are corporate level, managerial level and functional level.⁸

Corporate Level (Board Level)

Since the directives for the HR department are issued by the people at the corporate or top level of the management, it is essential to include corporate-level activities within the ambit of an HR audit. The HR auditor must ascertain the relevance, completeness and accuracy of the corporate strategies, mission, vision and other directives which provide a broad framework and directions for the HR activities of an organization. HR audit at corporate level usually focuses on issues relating to the designing of organizational structure, institution of reporting and accountability structure among the various levels of management. In addition to the information available through policies, documents and other reports of the organization, the HR auditor can also collect supplementary information through interviews with the top managers. The focus of such interviews should be on ascertaining the present and future plans of the top management for the organization.⁹

Managerial Level (Line Managers)

Line managers play a crucial role in the implementation of HR policies of an organization. For instance, HR-related activities like performance evaluation, on-the-job training, and grievance identification and resolution are done mostly at the departments where employees are engaged. Therefore, the line managers should also be brought under the purview of an HR audit. The HR auditor should examine and evaluate critically the extent to which line managers apply the HR policies and practices while dealing with the employees. As a matter of fact, the rate of labour turnover is affected more by what line managers do in their own department than what anyone at the HR department is doing.¹⁰ The line managers can be interviewed as part of the HR audit process to gather their views about the HR policies, practices and programmes of the organization. They may also be encouraged to share their views about the performance of the HR department, especially in the areas of recruitment and selection, training and so on. An HR audit at this level may focus on issues concerned with the identification and description of authority and responsibilities of employees of various departments, preparation of job profile of staff members, and identification of possible HR cost-saving areas. Besides, the line managers’ opinions about the role they foresee for the HR department and the HR activities in their department should also be obtained.

Functional Level (HR Department)

In reality, the main focus of the HR audit would be on the HR department, which performs all the HR activities of the organization. The HR audit is primarily concerned with the way the HR department is carrying out the activities assigned to it. It also assesses the competency levels of the staff of the HR department by assessing how well or how badly they performed theirs tasks and the net result of their actions. The HR audit examines the contribution of the HR department to the accomplishment of the overall organizational goals in detail. An HR audit at this level generally focuses on the design and development of various human resource policies and procedures and proper functioning of the human resource department. The HR audit may specifically focus on the levels of employee commitment, involvement and morale in the HR department. The HR auditor may make use of exhaustive questionnaires to gather information about the employees’ roles, activities, and dissensions in order to assess the internal strengths and weaknesses of the HR department.¹¹

Steps in an HR audit

Today, an HR audit is viewed as a creative and capable instrument for effective human resource management. It finds better use in organizations which depend more on human assets than physical assets, for example, the organizations in the service sector. The HR audit can be done by an internal or external auditor who enjoys good subject knowledge and high credibility. Since auditing is a sensitive job, organizations may prefer external audit just to keep the process free from the charges of personal bias and victimization. Normally, in the initial stages of its existence, an organization may prefer external audit and as the organization grows in size, it may develop its own team of HR auditors to perform HR audit at periodic intervals. In addition to periodic HR auditing, organizations may also carry out HR audit at the time of mergers and acquisitions, restructuring, and downsizing.

As there is no statutory requirement, each organization can have its own system for conducting HR auditing, depending upon its size, objectives, situation and end users. For instance, the HR department may conduct an HR audit for multiple purposes like ascertaining regulatory compliance, measuring the efficiency of its staff and quickly reviewing its general health. The top management might also require an audit report just to find the level of alignment between the corporate strategy and the HR strategy. Further, it may require an HR audit for exceptional purposes like mergers and restructuring. Thus, factors such as the situation or purpose of an HR audit can greatly influence the HR audit process. The HR audit system mentioned in Figure 25.1 can be employed by any organization with due modification to suit its specific needs. The steps involved in an HR audit process are: (i) determining the objectives of the HR audit; (ii) developing a rough audit plan and process; (iii) gathering background data; (iv) determining the criteria and techniques of data collection; (v) firming up the audit plan; (vi) gathering complete audit data; (vii) developing audit report; and (viii) action based on report.¹² We shall now see the steps of an HR audit in detail.

Determining the Objectives of the HR Audit

The first step in an HR audit process involves making a decision regarding the objectives of the HR audit. The HR audit may attempt to know the efficacy of the HR policies, procedures and practices, the regulatory compliance by the HR department, or the degree of alignment between the corporate strategy and the HR strategy. Further, it may also focus on identifying and solving specific problems like high industrial disputes, labour turnover, and absenteeism. An unambiguous objective can keep the HR auditor focused and help him choose relevant information from the numerous reports and personnel files. At this stage, the organization can also decide whether to entrust the task of HR audit to internal HR specialists or to external consultants. When it decides to assign the job to the external auditor, the organization should set the terms and conditions in writing. In case the organization prefers internal persons for the job, it should ensure that the person enjoys high integrity and objectivity and is not high on hierarchy.¹³

Developing a Rough Audit Plan and its Process

At this stage, the HR auditor prepares a rough sketch about where he should begin, how he should proceed, which areas must be focused on and which sources must be used. A rough audit plan would help the auditor foresee the likely hurdles in the audit process. This kind of a rough audit also facilitates the determination of men, money and material required for the entire audit exercise. The auditor can also identify tentatively the sources to be tapped for gathering relevant information.

Gathering the Background Data

At this stage, the auditor gathers general information about external and internal factors. Regarding the external environment, the HR auditor may seek information on the competitive positions of the organization, an industry overview and the regulatory environment within which the organization normally functions. The auditor may also gather specific information about the present competitive strategy of the organization, the labour market conditions and shifts, the intensity of competition, the long-term threats and opportunities for the industry and the organization, the environmental constraints in the form of statutory regulation, the political factors, the socio-cultural factors and their impact on staffing and other HR functions.

As regards the internal environment, the auditor may gather information about the corporate strategy, mission and vision, HR policies, and procedures. Similarly, information about and from the stakeholders of the organization, the key decision makers and the employees engaged in the HR department must be obtained. The purpose of gathering background information is to assess the general environment prevailing both within and outside the organization. The HR auditor may review the objectives and the rough HR audit plan on the basis of the background information collected and analysed.

Determining the Criteria and Technique of Data Collection

The background data may help the auditor understand the organizational environment and decide who and what should be audited. Based on the background data, the auditor finalizes the nature of data to be collected and the time and duration of such collection. Most importantly, the organization decides on the criteria for evaluating the data. It is nothing but the benchmark for each HR activity which is to be measured. The criteria used to evaluate the company’s personnel and their action must reveal both its value and performance.¹⁴

At this stage, the organization also finalizes the instruments of data collection like the interview schedule, questionnaire, document reviews, focus groups and observation. Depending upon the nature, intensity and size of the data required, the auditor may choose a single or multiple tools for effective data collection. The selected tool should facilitate:

• the accurate identification of performance gaps and impeding practices
• the recognition of good practices which need to be strengthened
• the detection of legal obligations and the organization’s risk of non-compliance with relevant workplace legislation
• the identification of misalignment between corporate strategy and HR strategy.

In short, the data collection tool must enable the auditor to gain a deep insight and credible perspective about the prevailing HR system and make a well-informed assessment of the strengths and weaknesses of the system.

Regarding the data-collection tool, an organization may internally develop its own tool or may buy a tailor-made tool kit from outside for gathering data. In any case, it is necessary to test the relevance, validity and reliability of the tool ahead of its actual usage to ensure that the tool serves the intended purpose.

Finalizing the Audit Plan

Based on the background information gathered and the experienced gained, the HR auditor may make final changes in the rough audit plan. This may include changes in the audit goals, sources of data, and techniques of data collection. After thoroughly revising the rough draft, the auditor should now firm up the tentative plan as the final audit plan. The final audit plan must have complete clarity on the audit objectives, the timeframe for auditing, the target departments and the people, the type of data needed, the data collection technique to be used for each source and the cost of the intended exercise. After finalizing the audit plan, the HR auditor would now proceed with the data collection process.

Gathering the Complete Audit Data

The crucial phase of any audit process is data gathering. Guided by the audit objectives and plan, the HR auditor must compile all relevant information from different sources. The data collection process is influenced by the scope and focus of audit, the end-user requirements and the ultimate application of results.¹⁵ The HR auditor may conduct interviews with the senior management to gather the relevant information. The interview mode permits the auditor to interact with the management so that he can gain an insight into their thoughts and opinions about the various aspects of the HR management in the organization. As regards the line manager, the auditor may employ questionnaires and interviews both to assemble the necessary data. For instance, the auditor may first collect information from all the line managers through questionnaires, and then if he desires more information from a few line managers, he can conduct personal interviews with only those managers. Finally, the HR auditor may use comprehensive questionnaires for gathering necessary data from the employees of HR and other pertinent departments.

The document reviews can also furnish a large volume of information to the HR auditor. In this regard, the auditor may examine personnel files, internal memos, training manuals, recruitment brochures, health and safety instruction manuals, employee handbooks and any other relevant documents. At this stage, the auditor would look for specific information on each of the HR functions he is investigating. For instance, in the case of staffing, the auditor might seek information on questions like whether the organization is adequately staffed or overstaffed or understaffed, whether there is adequate job rotation and job sharing among the staff, how recruitment is done, how objectively selection, retention, promotion, and termination were handled in the organization and how effectively job descriptions and job specifications are followed in hiring.

In case of training, the HR auditor must get the information on the following questions: How effective was the training and orientation process? Were there adequate training and development opportunities for the employees? Was there any impact on productivity due to employee training? What was the actual cost of training in terms of manpower, money, time, and infrastructure usage? How useful were the training manual, instructor notes and software packages in the training programme? How convenient was the time and duration of the training for the participants?

In case of wages and salary administration, the HR auditor would look for information to know how effective and competitive the compensation is, whether the compensation package is linked to merit, seniority or union agreement, whether there is any link between compensation and productivity, and how often the compensation package is revised. In case of performance evaluation, the HR audit may focus on questions like how effective the performance evaluation was, how often it is done, how happy the employees are about the evaluation process, and how effectively the wages and incentives are linked to the outcome of the evaluation process.

In case of separation, the HR auditor may like to have information about how smooth the employee separation process is, whether there was any complaint about the violation of the statutory regulation, and how prompt the organization is in contributing the employer’s share of the provident fund to the appropriate authorities. In case of industrial relations, the auditor must find out whether there are unions in the organization, how cooperative they were, how peaceful the organization in the past was and how far the union attitude affects the productivity of the organization.

Once the auditor gathers all relevant information about the various aspects of the HR management, he must now analyse those information on the basis of the final audit plan. The primary purpose of such an analysis is to identify the strengths and weaknesses of the existing system.

Developing an Audit Report

After completing the review of relevant documents and personnel interviews at various levels, the auditor would begin the task of developing a comprehensive audit report. The audit report usually covers all the key areas of HR operation like hiring, training, compensation, performance evaluation and industrial relations. In addition to the above-mentioned areas, it may also deal with other HR-related factors like regulatory environment, global HR strategy, functional utilization of HR, strategic HR planning and management, work environment, legal environment, socio-technical integration, job designs, internal and external relations, decision-making style, communication style, the degree of decentralization, and the human resource information system(HRIS).

Usually, the audit report provides information on three broad headings, namely the strengths of the existing HR system, the areas of concern to be addressed by the authorities, and the areas where more information is required for an effective audit in the future. While writing the report, the auditor may classify the information under a few broad categories as follows:

• Urgent and important needs (UI)
• Not urgent but important needs (NUI)
• Neither urgent nor important needs (NUNI)
• Important opportunities needs (IO)¹⁶

It is desirable if the auditor employs the SWOT (strengths, weaknesses, opportunities, and threats) technique for the analysis and presentation of information for a better exposition of facts and figures.

Act Based on the Audit Report

This is the final stage in the audit report, and the entire purpose of the audit report would be served only through action taken on its basis. The organizational response to the audit report would depend on the HR auditor’s recommendations. The actions may emerge in different forms like changing the HR policies and practices, resetting the priorities of the HR department and HR activities, realigning the corporate and HR strategies and initiating necessary action against the people for lapses and performance gaps.

Approaches to HR Auditing

Though the HR audit is a recent concept, it has emerged as an invaluable technique for improving the efficiency of the HR management of an organization. Due to the growth of service sector in the economy, the importance of human resources has increased enormously in the organizations, and this has hastened the process of the introduction of HR audit in those organizations. The role of the HR audit in these firms is to streamline the managerial control over HR activities. Based on the role and utility of the HR audit, two major approaches have been developed: (i) internal approach and (ii) external approach.¹⁷ We shall now see the various approaches.

Internal Approach

In this approach, the HR audit focuses on examining the effectiveness of the contribution of the HR department to the internal operations of the organization. From this perspective, the emphasis of the HR audit is on the cost–benefit of the HR activities measured in terms of organizational productivity and overall cost. When the HR department is able to provide its services to the organization at the lowest cost, it is said to have achieved the required efficiency in its activities. Quantity, quality, cost, speed and reliability are some of the criteria used in measuring the performance of the HR department in this method.¹⁸

External Approach

In this approach, the emphasis of the HR audit is on measuring the contribution of the HR activities to the external performance of the organization. For instance, the organization may obtain competitive advantage in the market through the efficiency of the HR department. When the HR department is able to reduce the cost of hiring, training and compensation, it provides the organization the opportunities to vary the prices of the goods or services to its advantage. Certainly, the ultimate benefit of efficiency of any operation must come only from outside the organization. In this method, the criteria would include external performance of the organization.

In addition to these approaches, an HR audit can be also be classified on the basis of the people behind the HR audit operations. In this way, there are three approaches to the study of HR audit. These are (a) the self-directed team approach, (b) the task force approach and (c) the external consultant approach. We shall now see these approaches in detail.

The Self-directed Team Approach

A self-directed team is a team of employees who combine themselves to work towards common goals without any external supervision. In this approach, a self-directed team is formed within an organization to audit its HR activities. The advantage of a self-directed team is that its members take all the decisions on their own and enjoy complete autonomy. Further, their decisions are time-bound and superior. In an internal HR audit, the self-directed team members’ actions are influenced more by principles and values, and less by departmental rules, supervisory direction, and management edict.¹⁹

The Task Force Approach

In this approach, a task force with members drawn from various departments of the organization with different expertise is formed to carry out an HR audit in the organization. Usually, an HR task force is formed by including line managers as members with an internal HR expert as chairman or supervisor. This task force is a temporary group formed exclusively for the purpose of auditing the HR functions and HR department. Unlike a self-directed team, the task force functions in a supervisor-led environment. It is more formal than a self-directed team. The members of the task force gather and analyse data relating to the HR activities and evaluate the human resources of the organization. The task force makes recommendations which help the organization in getting rid of the weaknesses and building on the strengths of the HR activities.

The External Consultant Approach

The two approaches mentioned are internal approaches to HR auditing since the auditors are basically the employees of the organization. In external consultant approach, the auditors are external HR experts appointed by the organization for the specific purpose of auditing its HR activities. Generally, the external auditors function more objectively and impartially as they are not connected with the organization in any way. The external HR auditors with their vast experience are able to locate the strengths and weaknesses of the system with ease. Their findings and recommendations usually meet less resistance from the employees as the latter cannot adduce motives to the actions of an external person.

Besides these approaches, the HR auditors may also approach their task of auditing through a traditional method called legal approach. We shall now see the legal approach.

The Legal Approach

Since an HR audit is derived from a financial audit, which is statutory in nature, the HR auditors may also follow the same legal approach to the task of HR audit. The focus of the legal approach is on ensuring whether the statutory provisions concerning human resource management are strictly complied with. The HR auditor, in this approach, verifies the implementation of relevant labour laws in different HR functions like hiring, compensation, dispute settlement, disciplinary actions and separation. The purpose of the legal approach is to prevent any form of discrimination and unfair practices so that the organization is protected from legal problems at a later stage.

Essential Conditions for an Effective HR Audit

Many organizations now realize that their most important and expensive assets are their human resources. They recognize the need to exercise better control over these assets so that they make an optimum return on the HR investment. In this regard, the HR audit is seen by the organizations as an invaluable tool to inculcate discipline and accountability among the HR people. However, only effective HR audit practices can produce the desired results for the organization. An effective HR audit requires a few essential preconditions, which are explained as follows:

Top Management’s Commitment

The support of the top management is essential for the success of an HR audit. The management must exhibit its commitment to the HR audit through its mission, vision and other statements and policies. Similarly, it must follow up the recommendations of the HR auditors sincerely; otherwise the employees would lose confidence in the HR audit practice.

Clarity in HR Audit Objectives

The next essential requirement is clarity in the objectives of HR auditing. The HR audit objectives alone guide the HR audit plan and process. The organization must decide in advance whether it wants to have a comprehensive or programmatic or restrictive objective for the audit function.²⁰ A comprehensive HR objective focuses on all HR activities, while a programmatic HR objective focuses on select HR functions like training, compensation and recruitment. A restrictive HR objective deals with a specific HR problem like an increase in industrial accidents. Thus, when the objectives are clear, the audit process would be smooth and effortless.

Auditor’s Integrity and Efficiency

The HR auditors must be persons of high integrity, value and knowledge, especially in the case of internal auditors. Their recommendations must be highly objective and impartial in nature, otherwise they may not find acceptance among the employees. The organization may make use of the services of external consultants to pre-empt the accusations of bias and prejudice in the audit process and report.

Well-defined Authority, Responsibility and Accountability for the Employees

The employees must know in advance what is to be performed as part of their job and how it is to be performed. Similarly, they must know in unambiguous terms the accountability for their acts of omission and commission. When the employees are not aware of their responsibilities in the job, they cannot be held accountable for their lapses. Thus, an effective audit requires clarity in the authority, responsibility and accountability of the employees.

Effective Communication

The management must ensure that there is an effective flow of information at all levels of the organization. All information about rules, regulations, statutory provisions and policies concerning HR functions must be circulated widely among all the staff members connected with those activities. When the employees are not aware of the existence of laws and practices, they cannot be held accountable for non-compliance with those policies and regulations.

Feedback

The results of an HR audit must be shared with the employees as feedback to them. Obviously, this would help the employees in knowing their areas of strength and weakness. The feedback would facilitate the employees in building on their strengths and working on their weaknesses.

Regularity and Continuity

The HR audit should not be viewed as a one-time activity; rather, it must be done on a regular basis with prior information to the employees. Only when it is done routinely would it force the employees to observe self-discipline, otherwise, their actions are sure to be criticized by the HR auditor.

Summary

1. An HR audit is defined as a systematic inquiry into the efficacy of the philosophy, policies and practices concerning human resource management in terms of the organizational performance and its level of alignment with the overall organizational strategies.
2. The three levels of HR audit are the corporate level, managerial level and functional level.
3. The steps in an audit process are: (i) determining the objectives of the HR audit; (ii) developing a rough audit plan and process; (iii) gathering the background data; (iv) determining the criteria and techniques of data collection; (v) firming up the audit plan; (vi) gathering the complete audit data; (vii) developing an audit report; and (viii) action based on the report.
4. There are several approaches to the study of the HR audit. These are: (i) the internal approach; (ii) the external approach; (iii) the self-directed team approach; (iv) the task force approach; (v) the external consultant approach; and (vi) the legal approach.
5. The conditions essential for an effective HR audit are the top management’s commitment, clarity in HR audit objectives, the auditor’s integrity and efficiency, well-defined authority, responsibility and accountability for the employees, effective communication, feedback, and regularity and continuity.

Review Questions

Essay-type questions

1. Evaluate critically the steps in an HR audit process using relevant examples.
2. What are the different levels covered by the HR audit in an organization? What information should be collected and how?
3. Enumerate critically the various approaches to the study of an HR audit using appropriate examples.
4. Illustrate the conditions essential for an effective HR audit using examples.
5. “An HR audit is not statutory but still a necessity.” Discuss.
6. Evaluate the meaning, objectives, scope and features of HR audit critically.

Skill-development Exercise

Objective – The objective of this exercise is to let you know how to conduct an HR audit in an organization in an effective manner through role-playing.

Procedure Note – The class is divided into groups. Each group has (1) an HR manager, (2) an HR audit task force comprising three line managers, (3) two union representatives, (4) an external expert, and (5) two observers of the meetings. The role of the observer is to observe the various aspects of the role-playing sessions and report them.

Situation

Twinkle Shoes is one of the leading manufacturers of footwear in western India. It also has the largest retailer network in the country. It has a strength of 4,200, which includes the employees placed in retail shops. It has been facing a troubled time for the past few months, especially on the market front. It has been losing customers continuously. The management was puzzled since there was no new competitor in the market, the general market trend was positive, and the products range sufficient. A customer-satisfaction survey conducted by the company cited some disturbing trends in the employee attitude and behaviour. The management sensed some serious problems in the HR philosophy and policies of the organization and in the functioning of the HR department.

Consequently, the company formed a task force under the leadership of the GM (Marketing) and with the production manager and the finance manager as members to look into the efficacy of the HR functions of the company. The task force was given blanket powers to inspect the necessary documents, interview the HR and other employees to prepare a report about what has gone wrong and what needs to be done. It was also given authority to seek the help of external experts.

Steps in the exercise

Step 1: The task force meets the HR manager and interviews him about the functioning of his department after inspecting the relevant personnel files and documents.

Step 2: It interviews the two senior unionized staff of the HR department to seek their views on the problems of the company.

Step 3: It consults external HR experts for developing solutions to the issues and finally prepares the HR audit report according to the recommendations. The report would be sent to the top management for necessary action.

Step 4: The observers analyse the performance of the members in the role-playing session and give their feedback.

Case Study

Hi-Tech Engineering Services Ltd is a company engaged in the business of offering a broad spectrum of engineering, design and consultancy services ranging from concept to commissioning of all types of engineering projects. It has over 3,200 design engineers and technical personnel employed in various engineering disciplines. It offers the best of the industry compensation packages to its employees, and employee satisfaction is quite high with labour turnover under complete control.

A few months back, the management of Hi-Tech Engineering Services approved a major expansion plan of the company. The General Manager (HR), Mr Mukesh, assured the management that the entire hiring process would be completed within three months. However, the General Manager of Marketing, Mr Ganesh, insisted on an HR audit of all the HR policies and practices of the company before embarking on a major recruitment drive of this nature. Mr Mukesh opposed the idea of HR audit on the ground that the existing parameters like labour turnover, industrial dispute and profitability showed no abnormality and, as such, the HR department and its practices were, according to him, up to the mark. But, Mr Ganesh stood his ground and insisted that the company must first benchmark the HR practices through an HR audit before determining the level of HR efficiency. The top management finally decided in favour of an HR audit and also decided to hire external consultants to conduct it. Accordingly, Maxweb Consultants were appointed to carry out the HR audit of the company and the necessary instructions were issued to the HR department to cooperate with them.

The consultants found the HR practices of their client as fairly effective except in the areas of employee hiring and performance evaluation. The recruitment and selection processes, systems and procedures were identified as ineffective. The consultants observed that though the company offered compensation packages that were the best in the industry, the company was not so successful in attracting the best talents due to a few limiting factors in the HR policies and practices.

The HR audit report included a number of recommendations to improve the ability of the company to attract the best talents. For example, one recommendation was to revise the hiring philosophy of the company. One of the most immediate tasks set for the HR department was to redraft the job specification statement with increased emphasis on the multi-skills of the prospective applicants. The other major recommendation of the consultants was regarding the need to introduce modern techniques for evaluating the performance of the employees. In this regard, the consultants recommended the introduction of the 360-degree or even 720-degree evaluation for all the employees.

The top management next sought the views of the HR department about the lapses identified by the external HR auditors. In a detailed response, the General Manager (HR) still defended the hiring and performance evaluation practices of the company and insisted on continuing with them, citing the positive results in traditional indicators like labour turnover ratio, productivity, and satisfactory corporate performance. The HR department also maintained that the whole HR audit was an exercise in futility. Though the top management resents the views of the HR people, it does not want to antagonize them. It is taking its own time to make its final views known to one and all.

Questions for discussion

1. How do you view the entire development at Hi-Tech Engineering Services Ltd?
2. If you were to be the GM (HR) of Hi-Tech, how would you have acted in this situation?
3. How should the top management proceed in the present situation?
4. Is there any need for an HR audit in the company since it is not only a non-statutory requirement but also a fee-based service?

Notes

1. Jack J. Phillips, Ron D. Stone and Patricia Pulliam Phillips, The Human Resources Scorecard: Measuring the Return on Investment (Boston, MA: Butterworth-Heinemann, 2001), p. 5.
2. David Campbell, George Stonehouse and Bill Houston, Business Strategy: An Introduction (Boston, MA: Butterworth-Heinemann, 2002), pp. 48–49.
3. Rosemary Harrison, Employee Development (New Delhi: University Press, 2003), p. 215.
4. Eric G. Flamholtz, and Yvonne Randle, The Inner Game of Management: How to Make the Transition to a Managerial Role (New York: AMACOM, 1987).
5. Jack J. Phillips, Ron D. Stone and Patricia Pulliam Phillips, The Human Resources Scorecard: Measuring the Return on Investment (Boston, MA: Butterworth-Heinemann, 2001), p. 14.
6. Paul Banfield and Rebecca Kay, Introduction to Human Resource Management (New York: Oxford University Press, 2008), p. 182.
7. Rosemary Harrison, Employee Development (New Delhi: University Press, 2003), p. 218.
8. Rosemary Harrison, Employee Development (New Delhi: University Press, 2003), p. 216.
9. C. J. Fombrun, M. A. Devanna and N. M. Tichy (eds), Strategic Human Resource Management (New York: John Wiley & Sons, 1984), pp. 238–239.
10. William J. Rothwell and H. C. Kazanas, Planning and Managing Human Resources: Strategic Planning for Human Resource Management (Amherst, MA: HRD Press, 2003), p. 144.
11. Rosemary Harrison, Employee Development (New Delhi: University Press, 2003), p. 217.
12. William J. Rothwell and H. C. Kazanas, Planning and Managing Human Resources: Strategic Planning for Human Resource Management (Amherst, MA: HRD Press, 2003), p. 138 and Rosemary Harrison, Employee Development (New Delhi: University Press, 2003), p. 217.
13. E. J. Sarma, “HR Audit Ensures Compliance of Healthy Practices,” IT People Evolve, Express Computer, available at http://www.itpeopleindia.com/20020311/management1.shtml.
14. M. G. Brown, “Human Capital’s Measure for Measure,” The Journal for Quality & Participation, 22, no. 5 (2000): 28–31.
15. William J. Rothwell and H. C. Kazanas, Planning and Managing Human Resources: Strategic Planning for Human Resource Management (Amherst, MA: HRD Press, 2003), p. 150.
16. E. J. Sarma, “HR Audit Ensures Compliance of Healthy Practices,” IT People Evolve, Express Computer; available at http://www.itpeopleindia.com/20020311/management1.shtml.
17. J. W. Walker, “Are We Using the Right Human Resource Measures?” Human Resource Planning, 21, no. 2 (1998): 7–8.
18. Marta Fossas Olalla and Miguel Angel Sastre Castillo, “Human Resources Audit,” International Advances in Economic Research, February 2002, available at http://www.entrepreneur.com/tradejournals/article/84303177_1.html.
19. Janet H. Zelenka, “Self-directed Audit Teams,” Internal Auditor, 1 April 1996, available at http://www.allbusiness.com/accounting-reporting/auditing/564660-1.html.
20. William J. Rothwell and H. C. Kazanas, Planning and Managing Human Resources: Strategic Planning for Human Resource Management (Amherst, MA: HRD Press, 2003), p. 139.