Human Resource Accounting Mid Term Chapter 1 2 4
Human Resource Accounting Mid Term Chapter 1 2 4
Human Resource Accounting Mid Term Chapter 1 2 4
Chapter-1
Introduction
The concept of human resource accounting can be better understood if one goes through some of
the important definitions given by the competent authors in the accounting field.
1. The American Accounting Society Committee on Human Resource Accounting defines it as
follows:
“Human Resource Accounting is the process of identifying and measuring data about human
resources and communicating this information to interested parties.” In simple terms, it is an
extension of the accounting principles of matching costs and revenues and of organizing data to
communicate relevant information in financial terms.
“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.”
"Human resource accounting is the term applied by the accountancy profession to quantify the
cost and value of employees to their employing organization"
Thus, human resources accounting may be defined as, “a process of accounting which identifies,
quantifies and measures human resources for the use of management to cope up with the changes
in its quantum and quality so that equilibrium could be achieved in between the required
resources and the provided human resources”
In short, human resource accounting is the art of valuing, recording and presenting
systematically the worth of human resources in the books of account of an organization. This
definition brings out the following important characteristic features of human resource
accounting:
The traces of a rudimentary HRA can be found in the Medieval European practice of calculating
the cost of keeping a prisoner versus the expected future earnings from him. The prisoners in
those days were seen to be the general property of the capturing side. Consequently, after the
victory a quick decision regarding whether to capture a prisoner or to kill him had to be taken
based on the costs involved in keeping him and the benefits accruing from killing him. However,
these represented very rough measurements with limited use. The development of HRA as a
systematic and detailed academic activity, according to Eric G Falmholtz (1999) began in sixties.
He divides the development into five stages. These are:
First stage (1960-66): This marks the beginning of academic interest in the area of HRA.
However, the focus was primarily on deriving HRA concepts from other studies like the
economic theory of capital, psychological theories of leadership- effectiveness, the emerging
concepts of human resource as different from personnel or human relations; as well as the
measurement of corporate goodwill.
Second stage (1966-71): The focus here was more on developing and validating different
models for HRA. These models covered both costs and the monetary and non-monetary value of
HR. The aim was to develop some tools that would help the organizations in assessing and
managing their human resource/asset in a more realistic manner. One of the earliest studies here
was that of Roger Herman son, who as part of his Ph.D. studied the problem of measuring the
value of human assets as an element of goodwill. Inspired by his work, a number of research
projects were undertaken by the researchers to develop the concepts and methods of accounting
for human resource.
Third Stage (1971-76): This period was marked by a widespread interest in the field of HRA
leading to a rapid growth of research in the area. The focus in most cases was on the issues of
application of HRA in business organizations. R.G. Barry experiments contributed substantially
during this stage. (R.G. Barry Corporation: 1971)
Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because
the complex issues that needed to be explored required much deeper empirical research than was
needed for the earlier simple models. The organizations, however, were not prepared to sponsor
such research. They found the idea of HRA interesting but did not find much use in pumping in
large sums or investing lot of time and energy in supporting the research.
Stage Five (1980 onwards): There was a sudden renewal of interest in the field of HRA partly
because most of the developed economies had shifted from manufacturing to service economies
and realized the criticality of human asset for their organizations. Since the survival, growth and
profits of the organizations were perceived to be dependent more on the intellectual assets of the
companies than on the physical assets, the need was felt to have more accurate measures for HR
costs, investments and value.
An important outcome of this renewed interest was that unlike the previous decades, when the
interests were mainly academic with some practical applications, from mid 90s the focus has
been on greater application of HRA to business management. Different types of models to suit
the specific requirements of the organizations have been developed incorporating both the
tangible and the intangible aspects. Also, larger number of organizations actually began to use
HRA as part of their managerial and financial accounting practice.
Today, human and intellectual capital is perceived to be the strategic resources and therefore,
clear estimation of their value has gained significant importance. The increased pressures for
corporate governance and the corporate code of conduct demanding transparency in accounting
have further supported the need for developing methods of measuring human value.
In India, human resource valuation has not yet been institutionalized though, as mentioned
above, many public as well as private have adopted HRA.
1. To furnish cost value information for making proper and effective management decisions
about acquiring, allocating, developing and maintaining human resources in order to
achieve cost effective organizational objectives.
2. To allow management personnel to monitor effectively the use of human resources by the
management.
3. To have an analysis of the human asset i.e. , whether such assets are conserved, depleted or
appreciated.
4. To aid in the development of management principles, and proper decision making for the
future by classifying financial consequences, of various practices.
5. To facilitate the effective and efficient management of human resources.
6. To make external financial reporting more informatiove by including HR Value.
7. In all, it facilitates valuation of human resources, recording the valuation in the books of
account and disclosure of the information in the financial statement.
8. Further, it is to help the organization in decision making in the following areas:
a) Direct Recruitment Vs promotion.
b) Transfer Vs. Retention.
c) Retrenchment Vs. Retention
d) Impact on budgetary controls of human relations and organizational behaviour.
e) Decision on reallocation of plants, closing down existing units and developing overseas
subsidiaries etc.
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.
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.
# Benefits of Human Resource Accounting
The concept of human resource accounting covers the people who constitute a valuable resource
of an enterprise and information on the investment and value of such resources is useful for
internal and external decision-making. Such accounting is of permanent importance to the nation
and also to individual organizations. The following are the main benefits of Human Resource
Accounting:
The human resource accounting will disclose the value of human resources. This will help in
proper interpretation of return on capital employed. Such information will give long-term
perspective of the business performance which could be more reliable than the return on capital
employed based on net profit only.
3. Serves social purpose. It will serve social purpose by identification of human resource as a
valuable asset which will help in prevention of misuse and under use due to thoughtless or rather
reckless transfers, demotions, lay offs and day to day maltreatment by supervisors and other
superiors in the administrative hierarchy; efficient allocation of resources in the economy;
effecting economy and efficiency in the use of human resources and proper understanding of the
evil effects of avoidable labor unrest/disputes on the quality of the internal human resources.
4. Increases productivity. It will have the way for increasing productivity of the human
resources because, the fact that a monetary value is attached to human resources, and that human
talent, devotion and skill are considered as valuable assets and allotted a place in the financial
statements of the organization, would boost the morale, loyalty and initiative of the employees,
creating in their mind a sense of belonging towards the organization and would act as a great
incentive, giving rise to increased productivity.
6. Essential where the human element is the prime factor. HRA is absolutely essential in such
organizations where human element is the prime factor, e.g., a professional accounting firm, a
drama company, a solicitor and attorney firm, an educational institution etc.
7. Helps in investment decisions. The value of a firm’s human resources is helpful to potential
investors and other users in making long-term investment decisions.
8. Completes MIS. Human resource data would create a more complete management
information system as it can provide information of vital importance for both short-term and
long-term decision-making as well as performance measurement. It will provide adequate basis
for decision on allocation of resources e.g. budgeting, capital expenditure decisions and better
measurement of resources of an organization. Performance measurement helps in assessing the
strengths and shortcomings of an organization and helps in making better promotion policies.
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. HRA facilitates decision making about the personnel i.e., either to keep or dispense with
their services or to provide training. There are many limitations which make the management
reluctant to introduce HRA. Some of the attributes are:
1. There is no proper clear-cut and specific procedure or guidelines for finding cost and value
of human resources of an organization. The systems which are being adopted have certain
drawbacks.
2. The period of existence of human resource is uncertain and hence valuing them under
uncertainty in future seems to be unrealistic.
3. There is a fear that HRA may dehumanise and manipulate employees.
4. For e.g., an employee with a comparatively low value may feel discouraged and develop a
complex which itself will affect his competency to work.
5. The much needed empirical evidence is yet to be found to support the hypothesis that HRA
as a tool of the management facilitates better and effective management of human
resources.
6. In what form and manner, their value to be included in the financial statement is the
question yet to be classified on which there is no consensus in the accounting profession.
7. As human resources are not capable of being owned, retained and utilized, unlike the
physical assets, there is problem for the management to treat them as assets in the strict
sense.
8. There is constant fear of opposition from the trade unions as placing a value on employees
would make them claim rewards and compensations based on such valuation.
9. Another question is, on value being placed on human resources how should it be amortized.
Is the rate of amortization to be decreasing, constant or increasing? Should it be the same or
different for different categories of personnel?
10. In spite of all its significance and necessity, tax laws do not recognize human beings as
assets.
11. There is no universally accepted method of human asset valuation.
12. As far as our country is concerned human resource accounting is still at the developmental
stage. Much additional research is necessary for its effective application.
13. There is still no specific IAS on HRA.
As an important branch of accounting, the following are the assumptions of Human Resource
Accounting:
Therefore, due to above all advantages derived from HRA, I disagree with the given statement
that HRA is unnecessary for an organization.
# “HRA reminds the slavery system of the past.” Do you agree? Explain.
Answer: No, I do not agree with the given statement. This is one of the common objections
against HRA. Although the fact that valuation of human resources and their treatment in HRA is
look like the slavery system of the past, but there is no reason to accept the statement. The
following are the differences between the past slavery system and the present concept of HRA:
a) Slaves in the past were traded and were owned just like other commodity and they have no
rights of their own. Though the employees are ‘legally owned’ to some extent by accepting
the terms of employment but they have some rights legally given to them. They cannot be
treated as like as slaves of the past.
b) HR has the right to get Casual Leave, Salaries, Bonuses, incentives, etc.
c) Slaves were traded against their will/desire, but employees are free to accept the terms of the
employment or terminate it. They, in some cases, are even happy and proud of being an
employee of certain organizations.
d) Treatment to slaves in the past, in most cases, was inhuman to some extent. Treatments to
employees, however, depend on the employer and in most cases, are guided by law. The
employers cannot violate the rights of the employees if they want.
e) HRA is still at its developing stage and there are many methods that have and are still being
developed to evaluate the human resources of an organization. However, there were no such
methods to determine the price or value of the slaves in the past.
For all of the above reasons, it can be said that ‘HRA reminds the slavery system of the past’ is
merely a weak arguments against HRA and it has no logic.
a) HRA discloses the human value as assets in the financial statements making them more
accurate and thus, helps to calculate more accurate accounting ratios.
b) HRA evaluates not only the cost incurred for human resources, but also the benefits derived
from them, thus, more accurately present the operating results of an organization.
c) HRA improves the Management Information System (MIS) of an organization by including
more information and more accurate data about human resources. Long-term investment
decision might be beneficial from this information.
d) Without HRA, the expenses incurred for training and development of HR is shown as
revenue expense, and thus have the impact only on the short period but not future
accounting period, whereas HR benefits the organization for a longer period of time like
other capital asset. This impact on financial statements may influence the long-term
investment decision of the investors.
e) HR value may be used as the basis of determination of the future profitability of an
organization because more value of HR indicates more experienced and more qualified
employees of an organization.
For the above reasons, I believe that HRA is helpful for potential investors in making long-
term decision.
There are three tests for determination of HR as assets. The tests are as follows:
The Human Resources appear to meet tests 1 and 3. Test-1: There can be little doubt that human
resources are, in fact, a source of economic benefits. Because HR serve the organization for
generating benefits in general. Test-3: There is no reason to assume that these benefits cannot
ultimately be measured in some useful manner.
But Test-2: It presents somewhat more difficulty. This right typically considered by accountants
to attach to the legal ownership of an asset. Since human resources cannot be owned except
under conditions of slavery, it seems that they do not meet this test. But Hermanson proposed
that legal ownership is too narrow an interpretation of the right to receive benefits. He argued
that the appropriate criterion is not legal ownership but rather the operational right to receive the
benefits like lease contract.
Therefore, HR expenditures are expenses as and when the expenditures are incurred in
return for their services in the conventional accounting practices.
1. Emphasis on more disclosure, more broadening of the information base for the manager
and the decision maker.
2. Legal ownership of resources is not important to an economic entity but rather the right
to control such resources and receive benefits from them.
3. Quantifying the aggregate of the contribution/ value of human resources of the firm; and
4. Positioning the macro figure (economic value) in the final accounting profile of the
firm—in the balance sheet in practical rather than as an appendix to the annual report for
communication.
Thus, HRA is primarily an information system which informs the management about the changes
that are taking place in the human resources of an organization.
i) Human beings cannot be owned and are incapable of giving enduring benefits like other
material assets, and so they cannot be treated as assets.
ii) The valuation will be largely subjective (no verifiable evidence being available).
iii) It reminds the slavery system of the past.
iv) There is a lack of unanimity regarding the valuation of human resources and problems of
their accounting.
v) It is said that cost of evaluating human resources will be much more than the utility
derived from this type of study.
vi) Tax laws do not recognize human resources as assets.
The HR Executive/Manager:
The HR executive/manager has primary responsibility for all HR activities. This person must
integrate the HRD programs with the goals and strategies of the organization, and normally
assumes a leadership role in the executive development program, if one exists. The outputs of
this role include long-range plans and strategies, policies, and budget allocation schedules.
One of the important tasks of the HR executive is to promote the value of HRD as means of
ensuring that organizational members have the competencies to meet current and future job
demands. If senior managers do not understand the value of HRD, it will be difficult for the
HRD executive to get their commitment to HRD efforts and to justify the expenditure of funds
during tough times. Historically during financial difficulties, HRD programs and HRM has been
a major target of cost-cutting efforts. Unless the HR executive establishes a clear relationship
between HRD expenditures and organizational effectiveness (including profits), HRD programs
will not receive the support they need.
The role of the HR executive has become more important and visible as organization make the
necessary transition to a global economy. The immediate challenge to HR executives is to
redefine a new role for HRD during this period of unprecedented change.
According to Jack Bowsher, former director of education for IBM, when HRD executives "delve
deeply into reengineering, quality improvement, and strategic planning, they grasp the link
between workforce learning and performance on the one hand, and company performance and
profitability on the other." The HRD executive is in an excellent position to establish credibility
of HRD programs and processes as tools for managing in today’s challenging business
environment.
1. The HR strategic adviser consults strategic decision makers on HRD issues that directly
affect the articulation of organization strategies and performance goals. Output includes
HR strategic plans and strategic planning education and training programs.
2. The HR systems designer and developer assist HR management in the design and
development of HR systems that affect organization performance. Outputs include HR
program designs, intervention strategies, and implementation of HR Programs.
3. The organization change agent advises management in the design and implementation
of change strategies used in transforming organizations. The outputs include more
efficient work teams, quality management, intervention strategies, implementation, and
change reports.
4. The organization design consultant advises management on work systems design and
the efficient use of human resources. Outputs include intervention strategies, alternative
work designs, and implementation.
5. The learning program specialist (or instructional designer) identifies needs of the
learner, develops and designs appropriate learning programs, and prepares materials and
other learning aids. Outputs include program objectives, lesson plans, and intervention
strategies.
6. The instructor/facilitator presents materials and leads and facilitates structured learning
experiences. Outputs include the selection of appropriate instructional methods and
techniques and the actual HRD program itself.
7. The individual development and career counselor assists individual employees in
assessing their competencies and goals in order to develop a realistic career plan. Outputs
include individual assessment sessions, workshop facilitation, and career guidance.
Many challenges face organizations as a new century unfolds before us. Michael Hitt and his
colleagues have identified increasing globalization and the technological revolution, in
particular, the internet has a two primary factor that make for a new competitive landscape they
suggest a number of actions that organizations can take to address the uncertainty and turbulence
in the external environments. These actions include developing employee’s skills, effectively
using new technology, developing new organizational structures and building cultures that
fosters learning and innovation. These obviously have a great deal to do with human resource
development. We will add to and build upon that list to present five challenges currently facing
the field of HRD.
Though HRA has had its inception in the 1960s, it is an evolving concept, which is still at
nascent stage. Nonetheless, its relevance to organizations is immensely gaining ground. Armed
with various measures and figures, managers and firms can focus on decisions regarding
investments in areas of intellectual capital that will have the greatest payoff for the firm.
Internally and externally, HRA would provide information to investors and other staff, of the
value of human resources, the returns on investments in training and development and also the
link between HR interventions and financial results.
As a way to assess human capital, HRA represents a new way of thinking strategically.
Boudreau has noted that measures of HRA and benefits can serve a variety of purposes. It acts as
a catalyst for change. It tends to enhance the credibility of the HR functioning for it was not long
back that this function was looked down disdainfully as only a department to organize picnics for
its staff.
HRA also helps persuade others to support investment in HR and also to improve the quality of
HR decisions.
Change is taking place at the tremendous rate. To make it effective and in order to make the
team, HR professionals need to develop the business skills of strategic planning and process
technology. And the first step towards the sustainable growth is accounting HR in financial
terms.
Chapter-2
HR Planning and Organizational Performance
Objectives are translated into the need of the work force to attain through human resource
planning. Without such plan the requirement estimation is not systematic, rather a mere
guesswork.
According to Dale S. Beach. “Human resource planning is a process of determining and
assuring that the organization will have an adequate number of qualified persons, available at
proper times, performing jobs which meet the needs of the enterprise and which provide
satisfaction for the individuals involved.”
Manpower planning is a continuous process. It cannot be rigid or static.
It is amenable to modifications, review and adjustments, in accordance with the needs of the
organization or the changing circumstances. In the words of
Coleman, “Manpower planning is the process of determining manpower requirements and the
means for meeting those requirements in order to carry out the integrated plan of the
organization.”
Cope with changes: HR planning is required to cope with changes in market conditions,
technology, products and government regulations in an effective way. These changes may often
require the services of people with the requisite technical knowledge and training. In the absence
of an HR plan, we may not be in a position to enlist their services in time.
Benefits of HRP
Effective manpower planning provides adequate lead time for the procurement and training of
employees. It is all the more crucial because the lead time for procuring personnel is a time
consuming process and in certain cases, one may not always get the requisite type of personnel
needed for the job. Nonavailability of suitable manpower may result in postponement of delays
in executing new projects and expansion programmes, which ultimately lead to lower efficiency
and productivity. To overcome this, an organization must plan out its manpower requirements
well in advance, so that it can compete effectively with its competitors in the market.
Purposes of QWL:
Integrating the socio-psychological needs of people in the organization, the unique requirements
of a particular technology, the structure and processes of the organization and socio-cultural
milieu are the purposes of QWL. From the shop floor, the concept of quality of work life spread
to other parts of the organization covering white-collar employees and even managerial
personnel.
2. Autonomous Work Group. Creation of autonomous work group helps in creating positive
feelings among employees. They may be given freedom to choose their own teams; there should
be freedom of decision making regarding the choice of methods for work distribution of tasks
among group members and designing of work schedules.
3. Job Enrichment. Job enrichment attempts to design a job in such a way that it becomes more
interesting and challenging so that the worker makes meaning out of that. The degree of job
enrichment determines the degree of QWL.
4. Opportunity for Growth. An employee, particularly the achievement oriented one, seeks
growth through his work. If the work provides him opportunity for personal growth and to
develop his personality, he will feel committed to the-job and the organization.
5. Providing stability of employment: Good pay and different alternative ways of providing
better wages and stability of employment will help the work force to function better.
7. Recognition: Awarding and rewarding for their achievement, job enrichment, providing well
furnished and decent work places, offering membership in associations and in clubs, offering
vacation trips etc., are the ways to recognize the employees.
9. Grievance procedure: when the organization allows the employees to express their
grievances and represent their problems, their confidence in the management improves.
10. Occupational stress: Stress is a condition of strain on one's emotion. It adversely affects
employee's productivity. The HR manager has to identify and minimize the stress.
11. Organizational health programme: These programmes educate the employees about health
problems, means to maintain and improve health. This programme should also suggest physical
exercise, diet control etc. Effective implementation of these programmes result in reduction of
hospitalization, absenteeism, excessive job turnover, disability etc.
12. Adequacy of resources: The enterprise must see that sufficient resources are allocated
towards achieving the objectives of QWL.
13. Seniority and merit promotion Seniority is to be taken for promotion for operating
employees and merit is to be considered for advancement of managerial personnel. The
promotional policies and activities should be fair and Just for maintaining high order of QWL.
14. Communication. To make QWL effective two-way communication is necessary. Through
the downward communication employees would receive information about the various aspects of
the organization, instructions about job performance and other specific communication which
may be relevant for them.
Through upward communication, employees can share their views, grievances and how to
overcome these and suggestions for improving the work performance.
At this juncture, it is necessary to make a mention about the Quality Circle and Task Force which
are sometimes used interchangeably by mistake in place of QWL. The following few lines
highlight the demarcation of these terms.
Quality Circles
A quality circle is defined as a "self-governing group of workers with or without their
supervisors who voluntarily meet regularly to identify, analyze and solve problems of their work
field". This is not the same as "task force".
Quality circles are formed for specific objectives, which are:
i) To develop, enhance and utilize human resources effectively.
ii) To improve quality of product, productivity and reduce cost of production.
iii) To satisfy the worker's psychological needs for proper motivation.
iv) To improve supervisory skill.
v) To make use of one's creative and innovative skill through participation for effective
achievement of objectives.
Task force:
A task force is a group of most skilled employees selected and appointed by management,
engaged in various functions, with an orientation to problem solving.
Performance
There is a general relationship between quality of work force and performance. Greater the
quality of work force, higher is the performance. What is performance then? It is the process of
functioning in a stipulated predetermined manner and achieving the expected results within its
framework.
In simple terms, performance refers to the degree of accomplishment of the tasks that makes up
an individual's job. It indicates how well an individual is fulfilling the job demands. It is always
measured in terms of results. For e.g., a student may exert himself a great deal but score poor
marks or grade which reflects that his performance is poor.
But to understand really whether the performance is good or bad or whether it is positive or
negative, it needs to be measured. The performance is to be appraised to know how the employee
has taken up his job or work. One's performance is measured on the basis of his achievement. It
is a qualitative consideration and when we say the employees are performing well, it means they
are productive.
It can be generally measured based on the productivity. Productivity implies both effectiveness
and efficiency. The effectiveness refers to the goal accomplishment and efficiency evaluates the
ratio of inputs consumed to output achieved. The greater the output for a lower input used to get
that output, results in greater efficiency. In addition to productivity, as measured in terms of
effectiveness and efficiency, performance also includes personal data such as measures of
accidents, turnover, absence and tardiness. So, a good employee not only performs well but also
minimizes problems for the organization by going to work on time, not absenting himself and
minimizing the number of work related accidents. The employee does not cause any disruption
apart from doing his job efficiently.
HR Audit
Let us first try to trace out the origin of the term ‘audit’. The word 'audit is derived from the
Latin word 'audire', which means to hear. In the olden days, whenever the proprietors of a
business concern suspected fraud, they appointed a person to check the accounts and to hear the
explanations given by the persons responsible for keeping the accounts. The audit during those
days was interested in ascertaining whether the persons responsible for maintaining accounts had
properly accounted for all receipts and payments to his principal and to locate frauds and errors.
Then, it was merely a cash audit. The object of modern audit is not confined to cash verification
but to report on financial position of the undertaking as disclosed by its Balance Sheet and the
Profit and Loss Account.
Now, auditing has been used as a part of control function. It can be defined as the examination
and evaluation of policies, procedures and practices in all phases of a business to achieve the
most effective administration of the organization''. Let us define personnel audit.
Meaning and Objectives
Human resources or HRD audit is a systematic survey and analysis of different HRD functions
with a summarized statement of findings and recommendations for correction of deficiencies. It
examines and evaluates policies, procedures and practices to determine the effectiveness of HRD
function in an organization. HRD audit ensures that sound and cost-effective policies are
implemented
Human resource audit refers to the checking of the performance of the enterprise in its
management of human resources. Human resource audit reveals how the management is doing in
getting things done through the efforts of its people. It undertakes a systematic research of the
effectiveness of the human resource programme. It evaluates personnel activities of an
organization. It acts as an overall quality control, check on human resource function. During the
conduct of audit if any deficiency is discovered, steps are taken to remove it. It reviews the
effectiveness of management relating to the –
1. Measurement of the effectiveness of human resource programmes and activities, and
2. The determination of what should or should not be done in the future as a result of such
measurement.
Human resource audit is one, which checks the performance of its enterprise as to the
management of its human resources. Its aim is to determine how effectively the human resource
programme has been implemented. It measures the performance of human resource functions,
compares with the standard and discovers the variance and takes corrective action to remove
them also. In short, it acts as a control mechanism as far as human resource function is
concerned.
Seybord G. in his work "Studies in Personnel Policies” says "Human resource auditing refers to
an examination and evaluation of policies, procedures and practices to determine the
effectiveness of human resource management. It helps the personnel department to determine
what should be done and what should not be done in future".
"Extending the general meaning of auditing to the field of human resource management, human
resource auditing may be defined as the analysis and evaluation of personnel policies, procedures
and practices to determine the effectiveness of personnel/human resource management in an
organization. In other words, human resource audit is a periodic review to measure the
effectiveness of personnel management and to determine the steps required for more effective
utilization of human resources.
According to Gray, "the primary objective of personnel audit is to know how the various units
are functioning and how they have been able to meet the policies and guidelines which were
agreed upon; and to assist the rest of the organization by identifying the gaps between objectives
and results, for the end product of an evaluation should be to formulate plans for corrections of
adjustments.”
Objectives of HR Audit
The important objectives of human resource audit are as follows:
1. To review the whole organizational system of human resource practices, i.e., acquiring,
developing, allocating and utilizing human resources in the organization.
2. To analyze the factors involved in HRD and develop a statement of findings with
recommendations for correcting deviations, if any, on the following issues:
a. The extent of deviation from HRD policies
b. To what extent objectives are spelt out
c. To what extent performance standards have been established
3. To seek explanations and information and answers to all such above questions as: What
happened? Why did it happen?
4. To evaluate the effectiveness of various personnel policies and practices.
5. To evaluate the extent of implementation of policies by line managers and the operational
problems faced by them in implementing HRD policies.
6. Evaluating the personnel staff and employees.
5. Knowing how the various units are functioning and how they have been able to meet the
policies and guidelines, which were agreed upon.
6. To study the current manpower inventory and identify shortfall or excess, if any.
7. To modify the existing human resource practices to meet the challenges of personnel/human
resource management.
8. To assist the rest of the organization by identifying the gap between objectives and results.
9. To formulate plans for correcting deviations if any.
Scope of HR Audit
Every time the scope is to be decided. The scope of human resource audit is very wide. It
represents the encompassing approach. It assumes that the management of human resources
involves much more than the practice of recruiting, hiring, retaining and firing employees. In
other words, human resource audit is interested in all the prograrnmes relating to employees
regardless of where they originate. In this way, the areas personnel audit includes are
recruitment, selection, job analysis, training, management development, promotions and
transfers, labor relations, morale development, employee benefits, wage and salary
administration, collective bargaining, industrial relations and communication. Further, the areas
like leadership, grievances, and performance appraisal and employee mobility are also included
within the scope of human resource audit.
For integration of personnel management with HRD functions, HRD audit now encompasses all
the areas like review and integration of corporate mission, goals, policies and objectives,
manpower planning, career planning and development, and transfer policies, performance
appraisal systems, training and development functions, recruitment and selection, etc.
Role of HR Auditor
From the above stated objectives, the job of the HRD Auditor can be enumerated as follows:
1. To get the current facts.
2. To study the effectiveness of the present system by answering the following issues:
a. Why was the practice introduced?
b. What would be the result, if the practice is discontinued?
c. What needs were intended to be fulfilled and have those been fulfilled or not?
d. What could be the best possible alternative for fulfilling such needs?
e. What changes can improve effectiveness of the existing practice?
f. Are such intended changes economically and operationally viable?
g. Are such changes sustainable from the union's point of view?
h. What should be the time-frame for introducing the change?
Importance of HR Audit
To keep pace with the changing environment, the importance of periodic HRD audit has
increased in recent years. The recent economic restructuring programme of the Government of
India, as discussed earlier, prompted the need for restructuring of the organization, which, inter
alia, calls for restructuring of production, manpower, strategies, management practices and
philosophies, etc.
All such possible reasons for periodic HRD audit can be enumerated as follows:
a. Technological changes, inter alia, are calling for renewal of knowledge and skills of existing
manpower. Training function, therefore, has assumed importance. Periodic HRD audit can help
to identify the changing training needs and development of new training modules for effective
utilization of manpower.
b. To keep pace with the environmental changes, management philosophy and practices at the
organizational level also need to be changed, like participative management (through quality
circles and value engineering team), employee empowerment, total employee, involvement, etc.
Need for all these can be understood only when we periodically undertake HRD audit.
Similarly, changing role of trade unions (which are now more proactive), Government (which is
now more liberal), emergence of new working class (who are more enlightened), emergence of
international quality system requirements (which call for scientific documentation of different
corporate functions and infuse attitudinal changes), changing expectations of customers (which
call for more customer orientation), new statutory requirements (pollution control), etc., are now
influencing HRD functions at the corporate level, the effectiveness of which can only be
understood by conducting periodic HR audit.
5. Synthesis:
The information gathered from the above step is synthesized to
find out the present situation, priorities, and issues identified.