Human Resources Audit

A Human Resources Audit (or HR Audit) is a comprehensive method (or means) to review current human
resources policies, procedures, documentation and systems to identify needs for improvement and enhancement
of the HR function as well as to assess compliance with ever-changing rules and regulations. An Audit involves
systematically reviewing all aspects of human resources, usually in a checklist fashion.
Sections of review include:
 Hiring and Onboarding
 Benefits
 Compensation
 Performance evaluation process
 Termination process and exit interviews
 Job descriptions
 Form review
 Personnel file review
ROLE of HR Audit
The purpose of an HR Audit is to recognize strengths and identify any needs for improvement in the human
resources function. A properly executed Audit will reveal problem areas and provide recommendations and
suggestions for the remedy of these problems. Some of the reasons to conduct such a review include:
 Ensuring the effective utilization of the organization’s human resources
 Reviewing compliance in relation to administration of the organization
 Instilling a sense of confidence in management and the human resources function
 Maintaining or enhancing the organization and the department’s reputation in the community
 Performing “due diligence” review for shareholders or potential investors/owners
 Establishing a baseline for future improvement for the function
Because of the multitude of laws affecting each stage of the employment process, it is extremely important for
an employer to regularly conduct an HR analysis of their policies and practices. This helps to identify regulatory
compliance issues if they exist and avoids potentially costly fines and/or lawsuits
Components of HRD Audit
Conducting a human resource department audit helps a company to know how well its human resource
department functions, whether it complies with the requirements set by governmental laws and identifies areas
that need improvement. An audit may also review HR policies and procedures and determine which policies
require removal, updating or further elucidation.
Legal Compliance
Because of the many regulations a company faces in today’s marketplace regarding how it deals with its
employees, a major element of an HR audit must focus on its legal compliance. Companies must have policies
and procedures in place that parallel laws regarding human resource functions. An effective HR audit includes
this element in its overview of the HR department’s compliance with internal policy and external laws.
Performance Measures
Evaluating the HR department includes setting performance measures in relationship to the company’s overall
business strategy. Performance measures will differ from company to company, but provide a means to assess
the value of the HR department’s activities in relationship to the company’s overall business goals.
People Management
Another main element of conducting an HR audit needs to include the effectiveness of the HR department’s
people management activities. Areas for auditing under people management include staff performance and
employee morale, department organization, responsiveness to employees, day-to-day HR operations, the
department’s HR strategies and more.
Communications
How effective the HR department is in communicating the company’s mission statement, goals and strategies to
the employee workforce is another area for review. Without an effective communication system, employees
may not receive the information they need to complete their jobs in line with the company’s goals and
strategies. An HR audit needs to include a review of the HR department’s communications.
Employee Retention
An important aspect of a company’s capability to remain successful in the marketplace is in its direct
relationship to its ability to retain valued employees. One of the first aspects of retaining employees involves
providing equitable compensation and benefits. The HR department plays a part in ensuring employee retention
by continually updating job descriptions and ensuring employee pay is commensurate with the salaries available
in the marketplace. Auditing the HR department’s effectiveness in employee retention is a good measure of how
well the HR department does its job.
HR scorecard
The HR scorecard is a method for Human Resources to position itself as a strategic planning partner with line
managers and executives within an organization.
The premise for an HR scorecard is that HR can and should develop metrics to demonstrate how HR activities
impact profitability. The process we recommend is:
Identify the critical deliverables for Human Resources.
Identify HR’s customers (for the deliverables).
Define HR activities that provide the critical deliverables (such as high-talent staffing or a retention initiative).
Conduct a cost-benefit analyses of activities that provide deliverables.
Lastly, it’s important to ask the right questions to determine if HR is providing the appropriate deliverables.
Examples of these questions are:
How many exceptional candidates do we recruit and retain for each strategic job opening?
How many hours of results-oriented training do new employees receive annually?
What is the differential in merit pay between high-performers and low-performers?
METHODOLOGY OF HRD AUDIT
A team of auditors visit the corporation and using a variety of methodologies assess the appropriateness and
adequacy of the various HRD systems, strategies, structures, competencies, culture, processes etc. The
methodology used includes: l Interviews; l Questionnaires; l Observation; l Secondary data analysis; and l
Examination of documents and communications.
The audit starts with a brief by the CEO and the Chief of HR who may set an agenda and focal areas of
evaluation. The interview with the top management starts with finding out details of the future plans of the
organizations and uses it as a base for outlining the competency requirements of the organization. The current
competencies, structures, HRD systems etc. are assessed in terms of their capability to prepare the organization
for the future. Suggestions are made to improve for achieving the future business goals and plans. The HRD
audit is contextual and at the same time uses the available knowledge of the potential of the HRD systems in
helping the corporation achieve its goals
In order to arrive at answers to the above types of questions the auditors use a number of methods. These are
described in some detail below.
1) Individual Interviews: The auditors normally make it a point to interview the top level management and
senior managers individually. Such individual interviews are a must for capturing their thinking about the future
plans and opportunities available for the company. Also by virtue of occupying strategic positions the top
management 9 provides a perspective required for a good HRD audit. Thus a good HRD audit HRD Audit
begins with individual interviews of top management. Individual interviews also are essential when sensitive
matters and sensitive information has to be obtained. Such information is available particularly about the styles
and culture through individual interviews. Union leaders, departmental heads, some strategic clients and
informal leaders are all interviewed individually. In addition if the organization is small and is manned by
largely professionals an attempt is made to enlarge the coverage and randomly selected representative sample of
employees from different levels and different functions could be interviewed.
2) Group Interviews: Normally for the audit of companies having thousands of employees, it is not feasible to
meet everyone individually. It is the experience of the author that group discussions and interviews is a good
mechanism of collecting information about the effectiveness of existing systems. Group interviews are
conducted normally for groups of four to eight individuals. It is preferable to have employees drawn from same
or similar levels. This is because in Asian cultures there is likely to be inhibition on the part of junior employees
to freely express their views in the presence of their seniors. However, it is quite common to give cross
functional representation of employees in the same group. If the organisation is large, an attempt is made to
conduct group interviews for each function separately to keep the levels homogenous. In the individual and
group interviews for HRD audit normally the following open ended questions are asked: 1) What do you see as
the future growth opportunities and business directions of the company? 2) What skills and competencies does
the company have which you are proud of? 3) What skills and competencies do you need to run your business
or to perform your role more effectively at present? 4) What are the strengths of your HRD function? 5) What
are the areas where your HRD function can do better? 6) What is good about your HRD sub-systems like
performance appraisal, career planning, job rotation, training, quality circles, induction training, recruitment
policies, performance counselling, worker development programmes, HRD departments, etc? 7) What is weak
about them? What can be improved? 8) What changes do you suggest to strengthen HRD in your company? 9)
What do you think are the ways in which line managers can perform more development roles, etc?
3) Workshop: In some cases the individual and group interviews are substituted by large-scale workshops. In
the workshop a large number of participants ranging from 30 to about 300 could be gathered in a room and
could be asked to do the HRD audit. Normally in the workshop the participants work in small groups either
around various sub-systems of HRD or around different dimensions of HRD, do a SWOT analysis and make a
presentation. The workshops also can be used focusing specifically on individual HRD systems like
performance appraisal. The HRD audit if conducted through participatory methods in itself may initiate the
change process. Even if it does not, it is a potential diagnostic tool and can provide a lot of information to the
top management on human processes and help them plan further interventions. 10 HRD Issues and Experiences
4) Questionnaire Method: TVRLS has developed a comprehensive questionnaire which has to be administered
to the executives of a company. This questionnaire has over 250 items and requires about 90 minutes to
complete. This questionnaire can be administered individually or in a group. It was found useful to call groups
of respondents selected randomly to a room and explain the objectives and the process of HRD audit and
administer the questionnaire then and there itself. This ensures uninterrupted answering of the questionnaire and
provides scope for getting more credible data due to the personal explanations given by the auditors. A number
of other questionnaires have been developed since the time the first comprehensive HRD audit questionnaires
were prepared by Rao and Pareek. These questionnaires attempt to assess various dimensions of HRD including
the competency base of HRD staff, the styles of line managers, the implementation of various HRD systems etc.
The utility of the questionnaire is that it helps in benchmarking. TVRLS a consulting firm specialising in HRD
audit over the last several years have bench marking data from several organisations.
5) Observation: In addition to the above the auditors should physically visit the workplace including the plant,
the machinery, the canteen, the toilets, the training rooms, the hostels, the hospital, school, living colony, etc.
These visits and observations are meant to assess the extent to which a congenial and supportive human welfare
oriented climate exists in the company. This is essential because employees are not likely to give their best if
they do not live in good surroundings, their health and education are not taken care of, they do not have good
communication and other facilities and their work conditions are poor. The observations can be conducted using
a check list of questions.
6) Analysis of Secondary Data: Analysis of secondary data can give lot of insights into the HRD assets and
liabilities of the company. For example, in a company that had about 50 HR people only two were found to
have the required technical training in HRD area. When an analysis of the training programmes attended by
others was carried out, it was found that a large number of them did not attend any HRD programme in the last
five years. Such analysis of secondary data can throw up many insights. Analysis of age profiles of the
employees, analysis of the training attended, analysis of the minutes of the meetings held etc., help in
determining the assets and liabilities. Such an analysis should also pay attention to the costs incurred by the
company in terms of maintaining the HRD infrastructure, etc.
7) Analysis of Reports, Records, Manuals and other Published Literature: Published literature of the company
including annual reports, marked hand-outs, training calendar, personnel manual, and various circulars issued
from time to time are also likely to help immensely in assessing the strengths and weaknesses of HRD.
HRD audit in business improvements
HRD audit is cost-effective and can give many insights into a company's affairs. The auditors come for one to
two weeks, camp at the organization and give a report in a month's time. They normally make a preliminary
presentation at the end of their visit. HRD audit can lead to several benefits:
1. Getting the top management to think in terms of strategic and long-term business plans
It may sound ironical that the HRD audit should begin with such strategic plans, but in some cases it has
compelled the top management to think about such plans. while some companies started thinking about them, a
few others started sharing these plans with a larger number of persons. Since the employees cannot participate
in an HRD audit without some sharing of these plans, the audit has forced the top management to share their
plans which has resulted in increased employee involvement. In a few cases a new system of annual planning
and sharing of business plans with the management staff have been initiated to enablethem plan their own
activities and competency development programmes.
2. Clarifying the role of the HRD department and line managers in HRD
In almost all cases the HRD audit has been found to draw the attention of employees at various levels to the
important role of the HRD departmentÑcurrent as well as the future. Enhanced role clarity of HRD department
and HRD function and increased understanding of line managers about their HRD role have been the uniform
results of HRD audit. The degree may vary from organization to organization depending on other factors.
3. Streamlining of other management practices
Most often HRD audit identifies the strengths and weaknesses in the some of the management systems existing
in the organization. It also points out to the absence of systems that can enhance human productivity and
utilisation of the existing competency base; for example, the MIS, rules and procedures, etc. which may have an
effect on the functioning of the employees. In a few cases anHRD audit has helped the management look at
some of these sub-systems and work procedures. Preparation of a manual of delegation of powers, clarification
of roles and responsibilities, developing or streamlining the manuals of financial and accounting procedures and
systems, strengthening the information systems, and sharing of information are some of the resultant activities
in this direction.
4. Better recruitment policies and more professional staff
An HRD audit points out to the competence base required. It sets the stage and gives direction for the
competency requirements of employees at various levels and thus provides a base for recruitment policies and
procedures. In some companies, it has resulted in strengthening the recruitment policies and procedures. As a
result of HRD audit, new recruitment and retention strategies have been worked out.
5. Changes in the styles of top management
One of the objectives of HRD is to also create a learning organization. A learning culture canbe created only if
the top managers of the company exhibit an HRD style of management. Such a style requires an empowering
attitude, participative style of management, and an ability to convert and use mistakes, conflicts and problems
as learning opportunities. Some of the top-level managers in India have been found to block employee
motivation and learning through coercive, autocratic and even paternalistic styles of management. In such cases
the HRD audit has pointed out the difficulties in developing and preparing the employees for the future. This
has helped to provide subtle feedback to the top management and to initiate a change process.
6. Improvements in HRD systems
The HRD audit has helped most of the organisations in taking stock of the effectiveness of their HRD systems
and in designing or re-designing the HRD systems. The most frequently changed or renewed systems include
performance appraisal, induction training, job-rotation, career planning and promotion policies,
mentoring,communication, and training.
7. More planning and more cost-effective training
HRD audits have been found to raise questions about the returns on training. One of the aspects emphasised in
the HRD audit is to calculate the investments made in training and ask questions about he returns. The process
of identifying training needs and utilisation of training inputs and learning for organisation growth and
development are assessed. As direct investments are made in training, any cost-benefit analysis draws the
attention of the top management and HRD managers to review the training function with relative ease. One
organization strengthened its training function by introducing a new system of post-training follow-up and
dissemination of knowledge to others through seminars and action plans. many organisations have developed
training policies and systematised their training function. Assessment of training needs has also become more
scientific in these organisations.
8. Increased focus on humanresources and human competencies
One of the results of an HRD audit is to focus on new knowledge, attitudes and skills required by the employees
in the organization. Comments are made about the technical, managerial, human and conceptual competencies
of the staff at various levels. This differentiation has been found to help organisations identify and focus sharply
on the competency requirements and gaps. The audit establishes a system of role clarity and fixing of
accountabilities. This can take place through separate role clarity exercises or through the development of an
appropriate performance appraisal system. In any case the attention of the organization gets focussed on
developing the competency base of the organization. More sensitivities are developed to the missing aspects of
competencies. For example, one organization has been found to neglect human relations competencies of their
staff, resulting in a large number of human Problems leading to wastage of time. Some of these got
streamlinedand various HRD policies also got strengthened.
9. Strengthening accountabilities through appraisal systems and other mechanisms
An HRD audit can give significant inputs about the existing state of the accountabilities of employees. This gets
assessed through performance appraisals as well as through the work culture and other cultural dimensions. A
number of organisations have introduced systems of performance planning, sharing of expectations and
documenting the accountabilities of staff.
10. TQM interventions
Quality improvements and establishing TQM systems require a high degree of employee involvement. In a
number of cases the HRD audit has pointed out to the linkages between TQM and other developmental
programmes and helped in strengthening the same. Due to improvements in the training system, group work and
appraisal systems, TQM programmes have also improved. In a few organisations the performance appraisals
have been so changed as to integrate quality aspects and internalcustomer satisfaction dimensionsinto the
appraisal system. Thus, an HRD audit leads to the strengthening of the quality systems.