Human Resource Audit

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Human resource management audit is the systematic examination and evaluation of policies, procedures, and practices to determine the effectiveness of human resource management.

The meaning of audit in accounting term is well known where it is defined as the verification of accounting data for determining the accuracy and reliability of accounting statements and reports. From accounting, this concept has been used in management audit and social audit.

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1. Introduction to Human Resource Audit 2. Definition of Human Resource Audit 3. Scopes 4. Objectives 5. Methods 6. Components 7. Processes 8. Reasons 9. Benefits.

What is HR Audit: Definition, Scope, Objectives, Methods, Components, Process, Reasons, Benefits and Other Details


Human Resource Audit – Introduction to HRA

Human resource management (HRM) has experienced a strong evolution. In order to provide useful information to managers, it is necessary to evaluate the results generated by the design and implementation of personnel policies.

The goal of the Human resource audit that includes two different analyses and valuations- the Human Resource policies and the level of their matching with the strategy of the company, and the characteristics of human capital. Several criteria have been used to assess different Human Resource policies. Nevertheless, the measurement of the value that human capital brings to the company is a very complex. Consequently, different models are being presented that aim to properly solve this challenge.

Human resource audit is a powerful tool which helps an organization evaluates the effectiveness of its Human Resource management practices. Human resource performance is one of the most difficult aspects of organizational performance to measure. One valuable tool which helps to assess the effectiveness of human resource functions within an organization is Human Resource audit.

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Human resource audit provides for the systematic verification of an organization’s recruitment and selection practices, job design and-analysis, training and development, orientation and placement, performance assessment and job evaluation, employee and executive compensation, employee motivation and morale, participative management, inter-department communication, safety and health, welfare and social security, industrial relations, trade unionism, as well as disputes and their resolution.

Human resource audit covers a broad range of organizational functions, such as – policy and regulation compliance; corporate strategies in relation to human resource planning, staffing, and compensation; “Human Resource Climate” on employee morale, motivation, and job satisfaction; etc.

Human resource audit provides key information on the actual contribution of the human resource department towards the organization. It helps improve human resource personnel motivation and reduce total human resource costs, as well as provides timely legal requirement. Another benefit of a systematic human resource audit is the quick adoption of the changing employee mindset.

Human resource evaluation activities may differ depending on the purpose of human resource audit. Various approaches to human resource audit includes: comparative and statistical approach, regulatory and policy compliance, and management by objectives (MBO). Human resource audit represents the gaps in performance and helps create various remedial measures. It helps an organization to face the challenges and increase the potentiality of its human resource personnel.

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In general the functions, responsibilities and activities are related to HR department. In addition to this, management philosophy and other systems and procedures are required to achieve the objectives of the organisation covered under HR audit plan. Basically HR department is the core center for HR audit.


Human Resource Audit Definition of HRA

The term ‘audit’ has been derived from Latin word ‘auditus’, meaning a hearing. Thus, audit is a hearing of review resulting in a systematic evaluation. The meaning of audit in accounting term is well known where it is defined as the verification of accounting data for determining the accuracy and reliability of accounting statements and reports. From accounting, this concept has been used in management audit and social audit.

In management audit, it is divided in two parts- (a) one is the management function audit covering planning, organizing, staffing, directing, and controlling; (b) the other is a management decision audit dealing with the quality of decisions in the areas of long-range and company-wide planning covering various functions — marketing, production, human resource, accounting, and finance.

As per view of Seybold, HR audit refers to, an examinations and evaluation of policies, practices, and procedures to determine the effectiveness and efficiency of human resource management and to verify whether the mission, objectives and programmes have been followed and expected results achieved. It also suggested that for future improvement, if needed in all those activities.

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In the context of human resource management, it may be defined as follows:

Human resource management audit is the systematic examination and evaluation of policies, procedures, and practices to determine the effectiveness of human resource management.

Thus, HRM audit is concerned with the evaluation of effectiveness of various HRM activities with the view to identify what should be (or should not be) done in future in the light of such an evaluation.

The importance of audit in accounting is so important that it has been made mandatory for certain types of organizations (company form of organizations), and the audit is conducted by outsider, independent qualified person. Besides the external audit, companies undertake auditing on their own.

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In the case of management audit including HRM audit, there is no such compulsion but various companies undertake such an audit on their own because it provides various information which is quite useful in developing better systems for managing human resources.


Human Resource Audit Scope of Human Resource Audit

1. Policies and Procedure:

i. The scope of HR auditor compasses HR polices and procedure. (Encompassed).

ii. Mission statement pertaining to HRM.

iii. Relevance of policies and procedures to the needs of ‘ organization.

iv. Verification of all HR related transactions in conformity with HR policies and procedures.

v. Periodical review of HR policies and procedure.

2. HR Planning:

i. Period of HR plan.

ii. Linkage between HR plan and business plan.

iii. Examination of forces determining HR planning.

3. Recruitment, Selection and Placement:

i. The extent of observance of HR policies in recruitment.

ii. The verification of procedures pursued in the matter of selection.

iii. Procedures followed in placement of employees selected.

iv. Examination of irregularities, if any, in the entire process of employee hiring exercise.

4. Training:

i. Examining the adequacy of in-service training of employees.

ii. Probing the modalities of ascertaining training needs.

iii. Looking into the method of identification of employees for training.

iv. Cost benefit analysis of training.

v. Ascertaining the training effectiveness in the post training period.

5. Promotion and Transfer:

i. Adherence to promotion policies.

ii. Basis of promotion policy.

iii. Examining transfer policies.

iv. Observance of rules prescribed for transfer.

v. Analysing the grievance of employees in the matter of transfer.

6. Performance Management:

i. Examining the methods of merit rating.

ii. Finding out the discrimination practised in performance rating.

iii. Communication of results of appraisal to employees.

iv. Methods of motivation of high performing employees.

v. Measures initiated to tone up the performance of slow and under performers.

7. Compensation Administration:

i. Verifying any irregularity in pay fixation.

ii. Wage disbursal practices.

iii. Violation, if any, in legal provisions in the matter of pay fixation and salary disbursement.

iv. Authorised deductions.

8. Communication System:

i. Measuring the knowledge of the employees with regard to organizational policies, procedure, vision, mission, goals, etc.

ii. Proper flow of communication in all directions.

iii. Methods in place for communication of important matters to employees.

iv. Measures in place to update the knowledge of employees.

v. Organization’s communication with outsiders.

vi. Functioning of various fora in employees’ communication.

9. Motivation and Morale:

i. Monetary and non-monetary motivations practised.

ii. Positive and negative motivations applied.

iii. Measures in place to cater to higher level needs of employees.

iv. Measurement of level of morale.

v. Measures adopted to upgrade morale of employees.

10. Job Satisfaction:

i. Measuring the level of job satisfaction.

ii. Examining the functioning of grievance system.

iii. Initiatives taken to heighten job satisfaction.

11. Stress Management:

i. Analysing the factors causing stress.

ii. Initiatives taken to identify stress.

iii. Appraisal of management of organizational stress by employees.

12. Attrition:

i. Measuring the level of attrition.

ii. Steps taken to control attrition.

Some more scopes of human resource audit are:

HR audit should cover all aspects of the working of the HR department. Audit should start with the objective prescribed for manpower management.

It can, for example, be broken up into five main areas:

(a) Manpower planning

(b) Organising the manpower resource

(c) Staffing

(d) Motivating the personnel, and

(e) Controlling.

In planning manpower requirements, audit can be made by the effectiveness of past forecasting and scheduling to ascertain how the needs were identified in time. If forecasting was not accurate, ways should be found to improve them in future.

Job description usually needs a revision in the light of changed conditions. New sources of recruitment have to be found, hi finding and training manpower, the HR department may gauge its performance. Need may be felt to make the personnel department itself more aware of the requirements of line departments. Psychological tests may be evaluated from time-to-time to check their usefulness.

Staffing is one area where the working of HR department is given the responsibility of selection; much depends on its expertise which can make the selection. Motivation is the most important aspect of management. HR department will have to test moral on all counts that go into high motivation, compare them with previous records and records in the industry. Facilities such as – lighting, ventilation, sanitation, recreation, maintenance of canteens, etc., must be evaluated in terms of their effectiveness.


Human Resource Audit – 10 Important Objectives of HRA

The important objectives of human resource audit are as follows:

1. To review the whole organisational system of human resource practices, i.e., acquiring, developing, allocating and utilizing human resources in the organisation.

2. To analyse the factors involved in HRD and develop a statement of findings with recommendations for correcting deviations, if any, on the following issues –

i. The extent of deviation from HRD policies

ii. To what extent objectives are spelt out

iii. To what extent performance standards have been established.

3. To seek explanations and information and answers to all such 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. Knowing how the various units are functioning and how they have been able to meet the policies and guidelines, which were agreed upon.

7. To study the current manpower inventory and identify shortfall or excess, if any.

8. To modify the existing human resource practices to meet the challenges of personnel/human resource management.

9. To assist the rest of the organization by identifying the gap between objectives and results.

10. To formulate plans for correcting deviations if any.

The specific objectives of HR Audit are:

i. To assess the effectiveness of various HR policies and programmes;

ii. To review the efficiency of HR subsystem in attracting, maintaining, developing and motivating the required HR;

iii. To analyse the functioning of the HR subsystem in assisting in the achievement of the organisational objectives, and knowing how various functioning units are implementing various personnel/HR policies;

iv. To provide information on deviations from plans for the continuity or modification of the plans.

When the organisation has specific goals, norms or basis for comparison with other firm, it can use goal oriented, normative or comparative audit systems.

Compliance audit can also be used to know how and to what extent the organisation is complying with the legal requirements, union agreements and with policies, principles, etc.


Human Resource Audit – Top 3 Methods of Valuation for Human Resources

The proponents of HRA have suggested several methods of valuation for human resources.

They are as under:

1. Cost-Based Approaches:

i. Historical Cost

ii. Replacement. Cost

iii. Opportunity Cost

2. Monetary Value-Based Approaches:

i. The Hermanson Model

ii. The Lev and Schwartz Model

iii. The Eric Flamholtz Model

iv. The Myers and Flowers Model

v. The Sadan and Auersach Model

vi. The Jaggi and Lace Model

3. Non-Monetary Value-Based:

i. The Likert Model

ii. The Flamholtz Model

iii. The Pekin organ Model

Method # 1. Cost-Based Approaches:

(Brummet, Flamholtz and Pyle)

i. Historical Cost Method:

The cost of acquisition, training and development of individuals capitalized with subsequent amortization over the years to reflect the value of the individuals and the organisation. It is based on the Historic cost approach. This may not truly represent the HR value of an organisation. Capitalisation of cost contrary to its expense nature in traditional accounting practices may not be acceptable. Accumulated cost of HR acquisition and development may not reflect their value. Cost amortization inappropriate due to performance rating of individuals.

However, this cannot fulfil the requirement of developing a system of HRA based on systematic valuation of internal as well as external human resources, which may improve the quality and utility of accounting reports from the viewpoint of National decision making.

ii. Replacement Cost Method – Flamholtz Method:

The cost of replacing individuals and rebuilding cost of human organisation to reflect the HR asset value. The replacement cost may be relevant only for key individuals. Human resource is not traded in the market; hence replacement cost may not exist. Replacement alternatives may be many and assessment of correct alternative may be subjective.

It is difficult to find identical replacement of the existing human resources in actual practice due to the absence of arriving at proper replacement cost of an employer, this model is not useful.

iii. Opportunity Cost-Based Approaches (Competitive Bidding Model-Hekimian and Jones):

It is based on competitive bidding amongst the investment centre managers to win the individual employees for use based on the highest bid price to be included as value of human asset along with investment in physical assets while assessing the return on investment by individual investment centres. More and more individuals may be out of the bidding process and may have no value in the organisation. It requires assessing the likely contribution from each individual for future assignments.

It is more subjective and may not be uniform across the company. The assessment may be based on the perception of the individuals involved in the bidding. It is more subjective and hence cannot be used effectively.

Method # 2. Monetary Value-Based Approaches or Economic Models:

i. Hermanson Model:

a. Goodwill Method:

Extra profits earned by organisation as compared to industry average rate, i.e., HR value = Goodwill, Investment in HR/Total investments. The rate of earnings may be influenced by other external factors also and cannot be purely linked to HR. Goodwill may be attributable to investment in suppliers, the customers, the public image etc.

This model cannot be implemented if the rate of earnings of the company is less than the industry average. This model is more subjective and unless relationship of various factors to the company’s goodwill is established, this model is debatable.

b. Adjusted Discounted Future Wages Method – Hermanson Model:

Present value of future wages payable for next five years discounted at the adjusted rate of return is the HR value. The adjusted rate of return refers to average rate of return on owned assets of all firms in the economy multiplied by the efficiency ratio in the organisation during the last five years on a weighted average basis.

Rate of return of a specific organisation may not be comparable with other firms in the economy. The model is subjective with respect to Pv being restricted for five years, efficiency ratio calculated for past five years, and assignment of weightless for past rate of return, it is too subjective, and hence cannot be used.

ii. Lev and Schwartz Model (Capitalisation of Salary Method):

The estimation of wages, consequently HR value on a group basis. Wages are calculated as a function of age alone. Possibility of employee leaving the organisation is not considered. It has to be seen with the Pv of future contribution receivable from the employees.

This is easy to implement and use. Also it is the most widely used model as it can be easily adopted.

iii. The Eric Flamholtz Model – Replacement Cost of Human Resources:

Replacement cost of human resources as a valuation model has been suggested as an alternative to, and sometimes in addition to, historical cost. The model involves measurement of a cost to replace a firm’s existing human resources, i.e. costs to the firm to recruit, hire, train and develop replacements to the level of proficiency and familiarity with the organisation and its operations currently experienced with existing employees.

Flamholtz, who used this model, has referred to two different concepts of replacement cost, viz., “individual replacement cost” and “positional replacement cost’. The model is considered to be useful in different phases of the Manpower Planning and Control Process as measures of the cost of people per se. It may also be potentially useful in developing valid and reliable surrogate measures of the value of people to formal organisations.

The applicability of the replacement cost concept in the valuation of physical assets has been questioned on the ground that changes in technology may not permit replacing one asset with an identical one. This problem becomes more serious in the variation of human resources because individuals, especially higher level managers of an organisation, are unique in their talents and capabilities. Even otherwise, the applicability of this model is limited because it demands considerable amount of estimation.

iv. The Myers and Flowers Model:

An employee’s attitude governs his productive behaviour on the job. The employee’s attitude inlet multiplied by the wages payable could reflect the likely benefits to the organisation and hence the HR asset. Individual’s attitude matters more than the group’s attitude. High ratings based on job grade level and tenure of service may not be appropriate.

Attitude is not the only parameter to influence employee behaviour. It is difficult to assess the attitudes of the individual employees and the model is more subjective.

v. The Jaggi and Lau Model:

HR value depends on rank and performance rating. Assuming the past trend to continue in future estimation on retirement, death and service movements need to be arrived at. The Pv of likely services from employees relevant to different service states considered as HR value.

Past trend is not an indication for the future. The model does not recommend any method to evaluate the extent of services that may be available from the employees. It is based on the past trend. In a technology intensive industry like software, past trends may not be representative of the future.

Method # 3. Non-Monetary Value-Based Methods – Behavioural Models:

i. The Likert Model:

The model aims to establish through psychological test results, how a set of causal variables reflecting the management systems adopted by an organisation determine the depreciating or appreciating of human asset.

Establishing valid relationships between organisational health and performance is difficult. In the absence of valid relationships, the condition of HR may not be a true reflector of the HR Performance. Hence, it is mere difficult to implement and is more subjective.

ii. The Flamholtz Model:

Flamholtz has specifically underlined the primary role of human resource accounting as that of providing information essential for management to perform the functions of acquiring, developing, allocating, conserving, utility, evaluating and rewarding human resources. The first step in human resource acquisition is to forecast manpower requirements; the management then must translate the manpower forecast into a manpower acquisition budget, which is essentially a process of cost estimation.

HRA can provide measurements of the standard cost of recruiting, selecting and hiring people, for estimates of amounts to be incorporated in the manpower acquisition budget. Again, in selection decisions, managers need measurements of the value of the candidates for particular jobs, so that the person selected is one who possesses the greatest future value to the organisation. Instead of using non-monetary measures of potential abilities derived through qualitative tests, the potential economic value of candidates may be a better criterion for selection.

In the absence of arriving at proper replacement cost of an employee, this model is not useful.

iii. The Pekin Organ Model:

Pekin organ’s model presents a new concept of determination of certainty – equivalent net benefits stream for each employee in an organisation, which consists of two elements – (a) his-or her net benefits and total cross; and (b) a certainty factor which is comprised of the employee’s probability of continued employment and probability of survival.

The model presented by Pekin organ is certainly an improvement over other models. It also makes use of the ‘certainty factor’ designed to measure the probability of continued employment and probability of survival.

Limitations/Deficiencies:

A major shortcoming of this model is that it can be applied only in these organisations where costs and benefits of employees can be traced fairly objectively.


Human Resource Audit – 3 Main Components of HRA (With Tasks of Auditors)

The audit of the human resource function is determined with the following components:

(i) Human Resource Information System:

The Human Resource Information System requires the following information from the organi­zation:

(a) Human Resource Plans – Supply and demand estimates; skill inventories; replacement charts and summaries

(b) Job Analysis Information – Job standards, Job descriptions, Job specifications

(c) Compensation Management – Wage, salary, and incentive levels; Fringe benefit package; Employer-provided services

(ii) Staffing and Development:

The staffing and development is basically depends upon the following parameters:

(a) Recruiting – Sources of recruits, availability of recruits, employ­ment applications

(b) Selection – Selection ratios, selection procedures, and equal op­portunity.

(c) Training and development – Orientation program, training ob­jectives and procedures, learning rates

(d) Career development- Internal placement, career planning pro­gram, human resource development efforts

(iii) Organization Control and Evaluation:

(a) Performance appraisals – standards and measures of performance, performance appraisal techniques, and evaluation interview.

(b) Labour-Management Relations – Legal compliance, management rights, dispute resolution problems.

(c) Human Resource Controls – employee communications, disci­pline procedures, change and development procedures.

Audit of Managerial Compliance – Reviews how well man­agers comply with human resource policies and Procedures. Compliance with laws is especially important. When safety, compensation, or labour laws are vio­lated, the government holds the company responsible. If managers ignore policies or violate employee relation’s laws, the audit should uncover these errors so that corrective action can be started.

Tasks of Auditors:

(a) Identify who is responsible for each activity.

(b) Determine the objectives sought by each activity.

(c) Review the policies and procedures used to achieve these activi­ties.

(d) Prepare a report commending proper objectives, policies, and pro­cedures.

(e) Develop an action plan to correct errors in each activity.

(f) Follow up the action plan to see if it solved the problems found through the audit.

Audit of Employee Satisfaction – To learn how well employee needs are met. Employee satisfaction refers to an employee’s general attitude toward his or her job. When employee needs are unmet, turnover, absenteeism, and union activity are more likely. To learn how well employee needs are met, the audit team gathers data from workers. The team collects information about wages, benefits, supervisory practices, career planning assistance, and other dimensions of job.

Audit of Corporate Strategy – Human resource professionals does not set corporate strategy, but they strongly determine its success. By assessing the firm’s internal strengths and weak­nesses and its external opportunities and threats, senior management devises ways of gaining an advantage, such as –

(a) Stresses superior marketing channels,

(b) Low-cost production, etc.

(c) Understanding the strategy has strong implications for human resource planning, staffing, compensation, em­ployee relations, and other human resource activities


Human Resource Audit – 4 Main Processes of HRA

HR Audit is based on a deeper study and analysis of HR policies, programmes, philosophies and practices and comparing them with the standards and the HR records and reports. This process includes both factual information (recorded data) and perceptual information (opinion survey).

The steps are:

(i) Identification of indices and indicators;

(ii) Examining variations during the period by comparing the progress of the previous corresponding period;

(iii) Comparing variations and determining reasons for such variations; and

(iv) Preparing the final report and submitting the same to the top management for necessary action.

This audit can be done by any internal or external agency. HR audit is a cumbersome process, as there is no fixed rule on how it is to be done. Therefore, most of the time, it is only a fault-finding process instead of fact-finding one.

1. Survey Feedback:

Survey feedback is a part of HR research. It is the investigation and analysis of any aspect of HR management in a systematic way.

Objectives of Such Research/Survey:

(i) To measure the current situation in HRM

(ii) To measure the effectiveness of current policies and programmes

(iii) To suggest ways for improving the effectiveness of current policies and programmes

(iv) To suggest revision of existing policies, if required.

2. Method:

The method is based on an opinion survey of employees, where they are given the opportunity to voice their opinions about a specific HR function, i.e., effective HRD climate, employee empowerment, performance appraisal, working environment, etc.

We know, for proper HRD at operational level, “Development climate” is required.

Such a climate is characterized by:

i. A tendency at all levels, especially at the top level of organisation to treat people as the most important resource;

ii. Managers believing that the development of competency of the employees is their responsibility;

iii. Faith in employees that they can improve their abilities at any stage;

iv. Open communication;

v. Encouraging risk-taking;

vi. Helping employees to know their strengths and weaknesses;

vii. A general climate of trust;

viii. Team spirit;

ix. Supportive personnel policies;

x. Development oriented appraisals, training, rewards, job rotations and career planning programmes.

Studying information collected from employees through structured questionnaire is the HRD climate survey.

3. Administration of Survey:

A questionnaire, prepared on a 5 point scale, bearing different items broadly on the points, is administered among employees. Let us say that if 20 questions are there, the score will range from 0 to 80. T.V. Rao, the father of HRD movement in India, proposed a 38 item questionnaire. He said that companies getting scores closer to or above 150 have excellent HRD climate, those getting scores above 114 have good climate and those getting scores below 76 have a scope for improvement.

4. Model Questionnaire with Statements:

Please give your assessment on the HRD climate in your organisation by rating your organisation in each statement using the following 5 point scale:

4 = Almost always true, 3 = Mostly true, 2 = Sometimes true, 1 = Rarely true and 0 = Not at all true.

(i) The top management comes up with policies and programmes to make employees enjoy their work.

(ii) The top management believes that employees are an important resource to the organisation.

(iii) Development of subordinates is considered as an important part of the job of managers.

(iv) Managers take active interest in subordinates, helping them learn their jobs.

(v) People are helpful to each other.

(vi) Seniors help juniors to prepare them for future responsibilities.

(vii) Performance appraisal is based on objective assessment and not on favouritism.

(viii) Employees are given the freedom to experiment with new methods and try out creative ideas.

(ix) Weaknesses of employees are communicated in a non-threatening way.

(x) Team spirit is of high importance in the organisation.

(xi) People trust each other in the organisation.

(xii) Employees are afraid of expressing their feelings with the superiors.

(xiii) Future plans of the organisation are made known to the employees.

(xiv) Job rotation facilitates employee development.

(xv) Career, opportunities are pointed out by seniors to juniors.

The employees’ opinion, collected through a detailed questionnaire is analyzed systematically to know about the HRD climate of an organisation. Similar survey feedbacks also help the organisation to know about the effectiveness of other HR programmes.


Human Resource Audit – Reasons for HRA in an Organisation

Organizations undertake HR audits for many reasons:

i. To ensure effective utilization of HR.

ii. To review compliance with the laws and regulations.

iii. To instil a sense of confidence in the HRD so that it is well managed and prepared to meet potential challenges and opportunities.

iv. To maintain or enhance the reputation of the organization in a community.

An audit examines the important aspects of the organization and its management, and is a means of identifying strengths, weaknesses, and areas where rectification may be warranted. An audit is done on a sampling basis. And in a 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:

i. To identify and address HR-related problems.

ii. To seek out HR-related opportunities.

iii. To conduct due diligence for mergers and acquisitions.

iv. 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 keeping in view the intended outcome.


Human Resource Audit – 11 Important Benefits of HRA in an Organisation

The rationale of human resource valuation for manpower management essentially arises from the fact that the collectivity of people happens to be the key to organisational efficiency and effectiveness. At the national level, the quality of people determines the state of the national economy as much as the social and political ethos. Similarly, in an individual firm it is the organised group of human beings that determines the quality of day-to-day performance as well as the growth and prosperity of the firm.

One can speak of human capital being a necessary and vital component of the organisation just as human capital or manpower happens to be the major component of any economic system. The success of an organisation hangs ultimately on the efficiency of its HRs.

Hence, the objectives of an organisation should, therefore, be to acquire their services, to develop their skill, to motivate the people to enhance their level of performance and ultimately to ensure that they continue to maintain their commitment to the organisation. These operations are performed by all the organisations, whether they are profit seeking or non-profit seeking to achieve their desired objectives.

Growth in size and complexity of organisations are inseparable features of modern society, so are complexities of management. Managing people has become increasingly more complex in today’s organisations. The trend towards organisational proliferation for economic advancement has led to the pursuit of goals, which require increasing size and complexity to be accepted for the sake of efficiency. New type of organisations have come into existence over the years with technological advances and increasing control of man over his environment.

In the context of all these changes, the role of people in the organisations has come to be recognised as of vital significance. Along with the concern for the management of the manpower is achieving corporate objectives, attention has also been drawn in recent, years to the necessity of measuring the value of human resources and changes thereof. The assumption underlying the valuation of accounting for human resources is that information relating to the value of human resources is an important ingredient of managerial decision-making.

Over and above, the usefulness of human resource value for internal management, the relevant data are also expected to be useful to investors, creditors, financiers as well as government agencies. The impact of human resource data on managerial decisions and its usefulness to external uses of corporate reports has been the subject of inquiry in a number of research studies. Approaches to the methods of measuring the value of human resources have been developed by a number of researchers keeping in view the nature of use of such data.

The Benefits of HRA in an Organisation can be as under:

1. Provides Status of Overall Functioning:

The traditional accounting system does not provide information about HRA. The expenses incurred during the process of selection, hiring, training and development, etc., are treated as current revenue expenses rather than an investment for the purpose of being capitalised over its useful economic service life.

Resulting in the conventional balance sheets failing to represent the value of HRs and hence these financial reports are unable to reflect the true value of the organisational and the rate of return on actual investments. The rate of investment shows a brighter image than what is the actual position. This is why the information on HRs is necessary to provide a complete picture of the assets holding of an organisation.

2. Effective Control:

The data retrieved from sources can be used as a tool by the management for effective control of the functioning. The basic purpose of HRA is to provide information pivotal for management to perform the functions of acquiring, developing, allocating, conserving, utilising, evaluating and compensating HRs. The result so derived through using HRA for reporting may also be of crucial significance in the management control system.

3. Information to Interested Parties:

HRA information could also be of great use to other beneficiaries through its periodical publication. Such as the bankers giving loans, agencies making investments are interested in the profit and success of the organisation at par the Board of Directors and Chief Executives in having these periodic measurements of the casual and intervening variables. Where the causal variables denote the strategy, skill and policies of leadership, the intervening variables denote the strategy, skill and policies of leadership, the intervening variables reflect the internal health, state and performance capabilities of the organisations.

4. Information of HRs Performance:

HRA can attract investors through publication of information regarding the skill, efficiency and whether HRs of the organisation are able to achieve the organisational goals, for they feel that an entity with skilled, efficient and wise HRs are more desirable for investment, as they may get higher rate of capital gains from their securities and expects greater service potentials than from those with efficient working force. Moreover the efficiency of HRs can be measured through the HRA.

5. Indicator of Prospective Profits:

The investment in human assets ratio may be regarded as a very useful tool to fore­cast the relative position of HRs in comparison to investment made by the organisation in other physical assets, and also service as an important indicator of future profit performance to the investors and other interested parties.

6. Information on Non-Monetary Report:

If the non-monetary performance of the organisation is published annually, the beneficiaries can feel more secured because the measurement of services and reporting of such non-monetary report will make the information system more logical and authentic.

HRA would first identify the variables which determine a person’s value to an organisation that would suggest in developing monetary measures for human value, and by identifying the variables; it would facilitate the development of non-monetary surrogate measures of human value.

7. Development of Employee Behaviour:

If information received through financial statement regarding the organisational, human resources can help the management in developing employee’s behaviour and skill, monitoring their efficiency of performance, reducing employee turnover, absenteeism and improving human relations. The HRs, once treated in the Balance Sheet as assets of the organisation, may achieve some psychological impetus, which ultimately influences their performance in the organisation.

8. Facilitator for Preparing Comparative Analysis:

Comparison of performance between monetary and non-monetary aspects can be made based on the received information, which will be of great help to management for effective control. For this comparison, a few financial ratios may be suggested such as – (a) Ratio of human to non-human; (b) Rates of the value of scientific staff to the total value of human capital. These ratios will help determine the value of HRs in comparison to the total assets, as well as their performance in the organisation.

9. Effective Managerial Decision Making:

The financial statement gives the information related to HRs and the changes in the value of HR assets from time to time to the interested particles, which helps them in taking appropriate decisions and choosing the alternatives. The resource providers may decide on their intended investments on the basis of the rate of return of the entity.

10. A Precursor of Profitability and Productivity:

The funding agencies of the profit-making organisations are generally interested in the organisation’s higher profit, and HRs is the prime mover for achieving maximum productivity. Hence, HRs should be shown as assets in the financial statement to give a meaningful and comparable measure of productivity. The profitability on the other hand, presents the performance and creditworthiness of an entity and such information can only be portrayed by incorporating the value of both human and non-human assets in the financial statements.

11. A System for Optimum Use of Human Resources:

HRA also helps the management in utilising the organisational human resources in the most effective and efficient manner by a pre-decided policy for acquisition, development, allocation, conservation, designed to influence the value of the people.

HRA depicts more realistic financial picture of the organisation. Through financial statements which ensures more comparability and completeness of accounting reporting. Thus, it provides more useful information as an edge to financial analysis.

Audit on a continuous basis or at regular intervals (bi-annual/annual basis):

i. Helps the HR department to know its contribution to the organisation;

ii. Helps in the simplification and standardization of policies and procedures;

iii. Helps in identifying the blind spots of HR programmes and removing them to improve the image of HR department;

iv. Helps in encouraging members of the HR Department to accept more responsibility with better professionalism;

v. Helps in rationalization of HR policies and practices;

vi. Ensures timely compliance (of what?) with legal requirements and other contractual provisions.

HR audit should focus on the study and analysis of each functional area of the HR department. This includes areas like planning, staffing, training and development, motivation, performance management, etc.


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