Definition:

HR Audit means the systematic verification of job analysis and design, recruitment
and selection, orientation and placement, training and development, performance
appraisal and job evaluation, employee and executive remuneration, motivation and

morale, participative management, communication, welfare and social security,

safety and health, industrial relations, trade unionism, and disputes and their
resolution. HR audit is very much useful to achieve the organizational goal and also
is a vital tool which helps to assess the effectiveness of HR functions of an
organization.

Scope of Audit:

Generally, no one can measure the attitude of human being and also their problems
are not confined to the HR department alone. So it is very much broad in nature. It
covers the following HR areas:

• Audit of all the HR function.

• Audit of managerial compliance of personnel policies, procedures and legal

provisions.

• Audit of corporate strategy regarding HR planning, staffing, IRs, remuneration

and other HR activities.

• Audit of the HR climate on employee motivation, morale and job satisfaction.

Benefits of HR Audit:

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.

• 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.

Approaches to HR Audit:

There are five approaches for the purpose of evaluation of HR in any organization:

• Comparative approach

• Outside authority

• Statistical

• Compliance approach and

• Management By Objectives(MBO)

Conclusion:

The auditors always prepare and submit an audit report to authority of the
organization, which may be clean or qualified. The clean report indicates the
appreciative of the department's function, but the latter one represents the gaps in
performance and therefore contains remarks and remedial measures. HR Audit is
very much helpful to face the challenges and to increase the potentiality of the HR
personnel in the organization.

HUMAN RESOURCE AUDIT

An audit is a review and verification of completed transaction to see whether they

represent a true state of affairs of the business or not. Thus, an audit is an
examination and verification of accounts and records. Human Resource (HR) audit
refers to an examination and evaluation of policies, procedures and practices to
determine the effectiveness and efficiency of HRM. In essence, HR audit refers to:

I. The measurement of the effectiveness of the human resource management’s

mission, objectives, strategies, policies, procedures, programmes and
activities; and

II. The determination of what should or should not be done in the future as a
result of such measurement.

HR AUDIT PROCESS

Every organization regardless to its size and number of employees follows some
particular HR policies according to which an annual human resource audit is a
mandatory requirement to measure the current stand of the organization and inquire
about the required improvements. This audit encompasses a methodical evaluation
of different aspects of human resource to find out whether the company’s policies
are adhered to government rules so that the organization seldom faces an expensive
lawsuit or fines.
A human resource audit may be carried out by the organizations HR staff, an
external consultant or by an employment law attorney. Whoever is in charge of the
audit must have ample knowledge about corporate HR policies and should maintain
a checklist to tally the company’s existing policies with its current requirements. An
audit conducted by an external consultant adds an extra piping to the cake apart
from bringing the details of all pertinent laws to the desk. HR policies, HR audits and
employment law advices provided by an independent source are always considered
to be better than self-audit. However, self audit is at least better than having no
audits at all.

Generally audits involves a series of questions framed based on some particular

functional areas. An audit may not be a single day ball game. It touches the hr
policies, may need to investigate about some documents, interviewing managers
and HR staffs depending upon the type and size of the organization.

HR audits generally include some targeted areas like staff recruitment,

administration, employee relationships, compensation and employee classifications.

An audit of staffing can help in identifying the turnover probabilities, deficit in

achieving the goals and predict the possibilities of future job openings.

An audit can also review compensations, employee classifications and time records.
It also examines the policies to prevent the organization from facing legal sues or
fines for not adhering to the federal, state or local laws.

HR auditing in the arena of administration and employee relationship comprises

verifying HR duties, administration procedures, attendance record handling,
communication procedures and performance measurements.

Regular audits of HR policies and functions help tone down the risk factors. If you
have major compliance concern for your organization you may decide upon an audit
carried out either by an employment attorney or by an independent entity that have a
reputation for providing extensive services that includes HR audits, framing suitable
HR policies and offering valuable employment law advices. By leaving the auditing
job to an external source you can find out the correct problems and get yourself
prepared to face the government investigator if required.

Every organization, whether it has one employee or 500 employees, should have an
annual Human Resources Audit. An HR audit is similar to an annual health check. It
is a means by which an organization can measure where it currently stands and
determine what it has to accomplish to improve its HR functions. An audit involves
systematically reviewing all aspects of the human resources functions. It also
ensures that government regulations and company policies are being adhered to and
your organization is not at risk for fines and penalties. An audit is not only a "check
up" - you should be prepared to make the necessary changes identified by the audit.
A Human Resource audit can help prevent costly lawsuits and fines by identifying
weaknesses and correcting them.

What is an HR audit and what should we include in HR audit ?

A human resource audit is a procedure to measure the degree of compliance an

organization has with the existing legal obligations and labor laws. It also suggests
corrective actions which may be necessary.

The Human resource audit ensures that the organization is aware of the existing
laws and rules and whether it is implementing them effectively. This creates an
atmosphere of transparency and goes a long way in avoiding legal confrontation
later. The audit also helps build trust in the minds of the employees who are
confident that things pertaining to their wellbeing are being taken care of. It also
makes the HR employees familiar with the current laws. Besides, the audit adds
credibility to the company in the eyes of the investors, who may look favorably.

Should the organization opt for an Employment Practices Liability Insurance, the
insurance will scrutinize the report of the HR audit to check for compliance and the
presence of appropriate employment procedures.

To conduct an HR audit, we need to have an elementary knowledge of the laws

involved. Some of the critical areas are those involved in hiring, termination,
discrimination etc. Knowledge about laws pertaining to these areas would be ideal. It
would be ideal to engage service providers and other professionals while conducting
an audit. It is however, vital to protect the confidentiality of the audit, as knowledge
about non-compliance can be used as evidence against the organization. Hence, it
would be wise to involve the organization’s employment lawyer.

The employment practices and the related policies should be examined if they are in
conformity with the existing laws. Laws such as those pertaining to discrimination,
sexual harassment, overtime etc should be particularly looked into. Even seemingly
minor things such as the employment application should be studied if it solicits
inappropriate information.

The next step is extremely critical. Now that the audit has been carried out and the
report is available. The organization can either implement the recommendations in
the report or do nothing. Ideally, the recommendations should be implemented and
the deficiencies and shortcoming should be corrected for the audit to be a
productive. If the findings are not taken seriously, the report can be used as
extremely damaging evidence in a future lawsuit against the company.

The possible actions that are taken upon receiving the report of the Human
resources audit are modifications in the employee handbook, changes in the policy
statement or training the HR personnel in the interview and recruitment procedures.
A Human resource audit can be beneficial not only in terms of the recommendations
that come out of it but also in terms of the added credibility it gives. Employees may
be motivated that the company is genuinely interested in the employees’ welfare. It
brings awareness of the existing legislation to everybody associated with the
organization. The audit ensures that the organization is on the right side of the law
and prevents damaging lawsuits and legal action.

Who Should Conduct the Audit?

An HR audit can be conducted by your HR staff, an outside consultant or an

employment law attorney. This individual must have significant HR experience and
should use a checklist or structured method to assess a company's risks and needs.
In addition to bringing key advice and knowledge of all pertinent laws to the table, an
audit conducted by an outside consultant can add an extra layer of credibility to the
findings of the audit. Records from a self-audit do not have the same credibility as
audits done by independent sources; however it is better to do a self-audit than not
audit at all.

What is reviewed during an audit?

Most audits are comprised of a series of questions separated by topic or functional

area. A compliance audit is not a one-day project. It will touch all areas of HR, and
may require looking at documents and policies and interviewing HR staff as well as
selected employees and managers in other areas of the company. The amount of
effort required depends on the size and type of company.

Most audits start with a review of existing employee handbooks and policy and
procedures. This provides a starting point to assess needs and risks, identify
conflicts or outdated policies and procedures and delete them, and fill gaps where
policies are missing. Some of the other areas to target in an HR audit include:

Staffing: An audit of recruiting and hiring practices can quantify turnover trends,
reveal gaps in meeting needs and help the organization predict future openings. It
can also identify potential issues with discrimination or diversity.

Compensation/Employee Classification: An audit of these areas includes reviewing

compensation, overtime, employee classifications (exempt/non-exempt), and time
records.

Federal, State and Local Regulations: An effective audit examines compliance with
applicable federal, state and local laws -- and can prevent lawsuits and fines.
Incomplete or missing I-9 forms can result in an employer being fined between $100
and $1000 for each failure to accurately complete an I-9 form.

Administration: An audit of this area examines regular HR duties, such as benefits

administration and attendance tracking, and checks the handling of personnel
records and confidential files.
Employee relations: An audit of employee relations issues includes review of
communication processes, discipline procedures, and performance measurements.

By regularly auditing your Human Resource functions you will mitigate your risk. If
you have significant compliance concerns for your company, you may want to
consider an audit structured as an attorney-client privileged investigation. By having
an attorney conduct the audit, you can identify and correct problems and protect
certain information that may otherwise be accessible to government investigators.

Significance and Necessity of Human Resource Audits

As the importance of the human resource has increased to a great extent in today's
date, therefore the significance and necessity of the audit to be conducted also
cannot be denied at any cost. It is essential on part of every company to see that all
the details of the companies are kept updated. Since the management level is huge
it is not so easy to keep everything regular and updated. Therefore one of the best
ways of doing so is to conduct an audit. There are many functions that are done
through the audit and it is only because of the auditing processes that the company
continues to grow and develop prosperously.

The main function of the human resource audit is to conduct a thorough review of the
several different HR policies and practices. At the same time, it also views the
different strategies used by the company in the effective organization and the
running of the organization. It dutifully reviews the different essential documents of
the company. If necessary the various people involved in this particular department
are interviewed to acquire necessary information that might prove to be effective for
the company as a whole.

The audit can of course be performed in various different ways. The human resource
audit can be either conducted through the auditor directly in the office. On the other
hand, if the need arises, it can also be conducted by hiring an outside lawyer or
attorney. The auditor hired to conduct the audit should also be effectively skilled so
that all the discrepancies in the company are found out. In fact, it is on the basis of
the reports from the auditors that the company would take the necessary action in
favour or in against of any case. Naturally the department as a whole has to
cooperate to a great extent in this context.

What is HR audit?
A healthy HR function in an organization is as important as the physical and
mental well being of a human body. Typically the basic reason why
organizations prefer to conduct an HR audit is to get a clear judgment about
the overall status of the organization and also to find out whether certain
systems put in place are yielding any results. HR audit also helps companies
 to figure out any gaps or lapses and the reason for the same. Since every
company plans certain systems and targets, an HR audit compares the plans
to actual implementation.

The concept of HR audit has emerged from the practice of yearly finance and
accounting audit, which is mandatory for every company, to be done by
external statutory auditors.

This audit serves as an examination on a sample basis of practices and

systems for identifying problems and ensuring that sound accounting
principles are followed. Similarly, an HR audit serves as a means through
which an organization can measure the health of its human resource function.

Organizations undertake HR audits for many reasons:

1 To ensure effective utilization of human resources.

2 To review compliance with tons of laws and regulations.

3 To instill a sense of confidence in the human resource department that it is

well-managed and prepared to meet potential challenges and opportunities.

4 To maintain or enhance the organization's reputation in a community.

An audit is a systematic process, which examines the important aspects of the

function and its management, and is a means to identify strengths,
weaknesses and areas where rectification may be warranted. An audit is done
on sampling basis. And in sampling, not every instance or situation can be
examined.

An HR audit can be used by an organization for multiple purposes. Some of

the more common reasons are:

• To identify and address HR-related problems.

• To seek out HR-related opportunities.

• To conduct due diligence for mergers and acquisitions.

• To support initial public offerings.

How an audit is conducted is very often determined by its intended use. For
instance, the type of audit used to ascertain HR practices may be significantly
different from the type of audit used to support an initial public offering.
Although the areas examined may be similar, the process used and the depth
of inquiry will vary from the intended outcome.

The audit process

The HR audit process is conducted in different phases. Each phase is
designed to build upon the preceding phase so that the organization will have
a very strong overview of the health of the HR function, at the conclusion of
the audit. These phases include:

Pre-Audit Information: This phase involves the acquiring and review of

relevant HR manuals, handbooks, forms, reports and other information. A pre-
audit information request is forwarded to the client who compiles the
necessary information for review by auditors.

Pre-Audit Self-Assessment: In order to maximize the time spent during

subsequent portions of the audit, a pre-audit self-assessment form, if sent to
the client can be of use. The self-administered yes/no questionnaire asks a
number of questions about current HR policies and practices.

The completion of this self-administered questionnaire allows auditors to

identify key areas for focus during the HR audit.

On-site Review: This phase involves an on-site visit at the client's facility
interviewing staff regarding HR policies and practices. A very in-depth HR
audit checklist is completed.

Records Review: During the on-site visit, a separate review is conducted of

HR records and postings. Employee personnel files are randomly examined
as well as compensation, employee claims, disciplinary actions, grievances
and other relevant HR related information are checked.

Audit Report: The information gathered is used to develop an HR audit

report. The audit report categorizes action needs into three separate areas.
The areas that are urgent and important (UI), not urgent needs but important
(NUI), not urgent but not important needs (NNI)), and important opportunities
needs (IO). As a result of this scheme of classification, managements can
prioritize their steps.

The critical areas

The comprehensive HR audit covers all areas of HR management like

recruitment practices, training and development, compensation and benefits,
employee and union relations, health, safety and security, miscellaneous HR
policies and practices-welfare, strategic HR issues, manpower
planning/budgeting.

Besides classifying needs in each of the above areas, the HR audit also cites
relevant laws, cases and research to support the recommendations.

Preparation for an audit

 Auditor engagement: If external firm carrying out the audit, it is preferable to
set terms in writing defining and agreeing on scope .If using internal resource
it is better to appoint them formally with clarity on scope and select persons
who are non political or those who are not high on hierarchy. Also, if internal
persons are auditing there must be training in auditing.

Documents, manuals, handbooks, forms and reports auditor must have

access to relevant information contained in employee files and other
confidential documents of the organization. Auditors must be given
unrestricted access to records, once they sign agreement for confidentiality.

Data gathering: Completion of a self-assessment questionnaire significantly

expedites the audit process and allows for better audit planning.

On-site access: The on-site portion of the audit is the most critical.

Using audit findings

How does an organization use HR audit results? Since the HR audit results
are classified, an important aspect is already taken care of. Critical needs
should be the first ones to be addressed. Organizations generally have three
options for dealing with audit results.

* Use the HR audit as a blueprint or action plan for addressing HR needs.

* Address as many needs as possible using the organization's internal

expertise and resources.

* Contract out those need areas where internal expertise and resources are
not available or do not fit in the core competencies of the organization.

An HR audit is much like an annual health check. It can perform the same
function for the organization. An audit is a means by which an organization
can measure where it currently stands and determine what it has to
accomplish to improve its HR functions. It involves systematically reviewing all
aspects of human resources, usually in a checklist fashion, ensuring that the
government regulations and company policies are being adhered to. The key
to an audit is to remember that it is a tool to discover and not to test. There
will always be room for improvement in every organization.

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