HR Audit

Definition: The HR Audit is the process of evaluating the performance of Human

Resource Department and its activities undertaken, and the policies followed
towards the accomplishment of organizational goals.

HR audit is an important management control device. It is a tool to judge organisations

performance and effectiveness of HR management. According to Dale Yoder, “Personnel
audit refers to an examination and evaluation of policies, procedures and practices to
determine the effectiveness of personnel management.”

It is an analytical, investigative and comparative process. It gives feedback about HR

functions to operating managers and HR specialists. It enables to know about the
effectiveness of personnel programmes. It further provides feedback about how well
managers are meeting their HR duties. It provides quality control check on HR
activities. It refers to determine the effectiveness and efficiency of HRM.

Steps in HR Audit

1. Determine the scope: The first step of conducting an HR audit is to determine the scope
of the audit. If an HR audit has never been conducted, a comprehensive review of
all policies and procedures is recommended. Going forward, businesses may choose to
conduct audits that focus on specific HR functions, such as payroll or record keeping.

2. Develop a plan: The next step is to develop a plan for conducting the audit. Identify the
goals of the audit, assemble the audit team and create a timeline for completing the audit.

3. Gather and analyze the data: Once the audit begins, the audit team should gather all the
applicable documents and forms under the scope of the audit. The audit team should also
review current and potential legal actions.

4. Produce a report: After all of the necessary information has been analyzed, the next step
is to create a report with the findings of the audit. This report should identify any
strengths and weaknesses found during the audit, as well as offer recommendations to
correct any instances of noncompliance.

5. Create an action plan: Once the audit is complete, company executives should meet
with the audit team to discuss the findings and formulate a plan to address each problem
or area of concern identified in the report. Action items may include changes to policy,
procedures and/or training practices. Organizations should also consider their available
resources when setting a timeline for correcting noncompliance issues, and ensure any
corrective actions are realistic and achievable. In addition, organizations should take

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 measures to ensure the audit information is kept confidential and protected from
unintentional disclosure.

6. Evaluate the progress: Once corrective measures have been implemented,

organizations should continuously monitor and periodically review the new processes or
procedures to ensure the organization stays compliant.

Approaches in HR Audit
These are briefly outlined as under:
(1) Comparative Approach:
Under this approach auditors identify one model company and the results obtained of
the organisation under audit are compared with it.

(2) Statistical Approach:
Under statistical approach the statistical information maintained by the company in
respect of absenteeism, employee turnover etc. is used as the measures for evaluating
performance.

(3) Compliance Approach:
Under compliance approach the auditors make a review of past actions to determine to
see whether those activities are in compliance with the legal provisions and in
accordance with the policies and procedures of the company.

(4) MBO Approach:
Under MBO approach specific targets are fixed. The performance is measured against
these targets. The auditors conduct the survey of actual performance and compare with
the goals set.

Human Resource Information system

A HRIS, which is also known as a human resource information system or human resource
management system (HRMS), is basically an intersection of human resources and information technology
through HR software. This allows HR activities and processes to occur electronically.
To put it another way, a HRIS may be viewed as a way, through software, for businesses big and small to
take care of a number of activities, including those related to human resources, accounting, management,
and payroll. A HRIS allows a company to plan its HR costs more effectively, as well as to manage them
and control them without needing to allocate too many resources toward them.

In most situations, a HRIS will also lead to increases in efficiency when it comes to making decisions in
HR. The decisions made should also increase in quality—and as a result, the productivity of both
employees and managers should increase and become more effective.

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Application of HRIS

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 Human Resource Accounting
Human resource accounting is the process of identifying and reporting investments made in
thehuman resources of an organization that are presently unaccounted for in the
conventionalaccounting practices. It is an extension of standard accounting principles.

Approaches of HRIS
1. Historical Cost Approach 
 
This approach was developed by William C. Pyle (and assisted by R. Lee Brummet &
Eric G. Flamholtz) and R.G. Barry corporation, a leisure footwear manufacturer based
on Columbus, Ohio (USA) in 1967. In this approach, actual cost incurred on recruiting,
hiring, training and development the human resources of the organisation are
capitalised and amortised over the expected useful life of the human resources. Thus a
proper recording of the expenditure made on hiring, selecting, training and developing
the employees is maintained and a proportion of it is written off to the income of the next
few years during which human resources will provide service. If the human assets are
liquidated prematurely the whole of the amount not written off is charged to the income
of the year in which such liquidation takes place. If the useful life is recongnised to be
longer than originally expected, revisions are effected in the amortisation schedule. The
historical cost of human resources is very similar to the book value of the other physical
assets. When an employee is recruited by a firm, he is employed with the obvious
expectation that the returns from him will far exceed the cost involved in selecting,
developing and training in the same manner as the value of fixed assets is increased by
making additions to them. Such additional costs incurred in training and developing is
also capitalised and are amortised over the remaining life. The unexpired value is

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investment in human assets. 

This method is simple to understand and easy to work out. It meets the traditional
accounting concept of matching cost with revenue. It can provide a basis of evaluating a
company’s return on its investment in human resources. 

2. Replacement Cost Approach – 

This approach was first suggested by Rensis Likert, and was developed by Eric G.
Flamholtz on the basis of concept of replacement cost. Human resources of an
organisation are to be valued on the assumption that a new similar organisation has to
be created from scratch and what would be the cost to the firm if the existing resources
were required to be replaced with other persons of equivalent talents and experience. It
takes into consideration all cost involved in recruiting, hiring, training and developing the
replacement to the present level of proficiency and familiarity with the organisation. 

This approach is more realistic as it incorporates the current value of company’s human
resources in its financial statements prepared at the end of the year. It is more
representative and logical. But it suffers from the following limitations:

 This method is at variance with the conventional accounting practice of valuing

assets.

 There may be no similar replacement for a similar certain existing asset. It is

really difficult to find identical replacement of the existing human resource in
actual practice.

3. Opportunity Cost – 
This method was first advocated by Hc Kiman and Jones for a company with several
divisional heads bidding for the services of various people they need among themselves
and then include the bid price in the investment cost. Opportunity cost is the value of an
asset when there is an alternative use of it. There is no opportunity cost for those
employees that are not scarce and also those at the top will not be available for auction.
As such, only scarce people should comprise the value of human resources. 

This method can work for some of the people at shop floor and middle order
management. Moreover, the authors of this approach believe that a bidding process
such as this is a promising approach towards more optional allocation or personnel and
a quantitative base for planning, evaluating and developing human assets of the firm

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