MANAGING HR ISSUES

LESSON 32:
HUMAN RESOURCE AUDIT
We have discussed the different functions of HRM. The
functions covered are HRP, job analysis and design recruitment
and selection, orientation and placement, training and development, performance appraisal, job evaluation, employee and
executive remuneration, motivation, participative management,
communication welfare, safety and health, industrial relations,
trade unionism, and disputes and their resolution. These
activities are performed in furtherance of certain societal,
functional and personal objectives.

HRM OBJECTIVES

ORGANIZATIONAL OBJECTIVES

HRM ACTIVITIES

The HRM audit

At this stage several questions crop up. For example:

Does the organisation regularly forecast the supply of and

HR AUDITS

demand for employees in various categories?

HRM OUTCOMES

Do job analyses exist for all positions in the organisation?

Are all potential sources of recruitment identified and

evaluated?
Are measurable selection criteria developed and used while
filling up jobs?
Do effective training and development programmes exist?
Is there a performance evaluation system that helps assess

past and potential performance?

Is the remuneration programme designed to motivate

employees?

Fig.26.1 The HRM audit

Benefits of Human Resource

Management Audit
Several benefits that result from an HR audit are:
Identification of the contributions of the HR department to

the organisation,
Improvement of the professional image of the HR
department,
Encouragement of greater responsibility and

professionalism among members of the HR department

Is the plant unionised?

Clarification of the HR departments duties and

responsibilities,

Does a grievance procedure exist?

Does the organisation have high quality of work life?

Stimulation of uniformity of HR policies and practices,

Does the HRM practice respond to individual employee

Finding critical personnel problems,

needs and aspirations?

Does the HRM practice contribute to organisational
effectiveness?

Ensuring timely compliance with legal requirements,

Reduction of HR costs through more effective personnel

Does the management underestimate the capacity of HRM

to contribute to organizational effectiveness?

It is necessary to take a look at these and other questions. HR
audit is highly useful for the purpose

Nature of Human Resource Audit

An HR audit is a tool for evaluating the personnel activities of
an organisation. The audit may include one division or an entire
company. It gives feedback about the HR functions to operating
managers and HR specialists. It also provides feedback about
how well managers are meeting their HR duties. In short, the
audit is an overall quality control check on HR activities in a
division or company and an evaluation of how these activities
support the organisations strategy (see Fig. 26.1)

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procedures,
Creation of increased acceptance of the necessary changes in
the HR department and
A thorough review of the departments information system.

The HR manager himself or herself is interested in knowing

his or her department s effectiveness. It is not that the department is infallible. Errors do happen. Policies and practices
become outdated. By auditing itself, the department finds
problems before they become serious. Done correctly, the
evaluation process can build a strong rapport between the
department and operating managers, and it can reveal outdated
assumptions that can be changed to meet the departments
objectives and future challenges. Systematic assessment instills
discipline in the personnel staff and encourages them to move
away from intuitive techniques to more rigorous assessment of
the likely benefits to be achieved. Further, a personnel function
must establish credibility with the management by justifying its
programmes and clearly demonstrating how it contributed to
the attainment of organisational goals.

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An HR audit must cover the activities of the department and

extend beyond, because the peoples problems are not confined
to the HR department alone. Thus, the audit should be broad
in its scope. It must evaluate the personnel function, the use of
its procedures by the managers and the impact of these activities
on the employees.
Specifically, an HR audit covers the following areas:
1. Audit of human resource function,

16.The HR department disseminates information down the

ranks.
17.The HR department does not handle staff-welfare, canteens,
or payrolls management.
18. The HR department has knowledge qfbehavioura1 sciences
and industrial psychology
19.The HR department gets feedback on its performance from
other employees.
20.HR practices are audited, their costs computed, and then
effectiveness evaluated.

2. Audit of managerial compliance,

3. Audit of the human resource climate, and
4. Audit of corporate strategy.

Figure 26.2 Hr Audit

Audit of Human Resource Function

This involves audit of all HR activities discussed till now in this
book. For each activity, the auditors must (i) determine the
objective of each activity, (ii) identify who is responsible for its
performance, (iii) review the performance, (iv) develop an action
plan to correct deviations, if any, between results and goals, and
(v) follow up the action plan.
The following 20 criteria would help measure effectiveness of
the HR function of an organisation.Each statement has a fourpoint rating scale varying from very true to not true.
1. In your company, all issues are closely linked to every other
business process.

This HR management audit allows you to rate the extent to

which an organisation has basic HR activities in place a-c how
well they are being performed. In deciding upon your rating,
consider also how other managers and employees would rate
the activities. The total score provides a guide for actions that
will improve HR activities in your organisation
Instructions: For each of the items listed below, rate your
organisation using the following scale:
Very Good (complete, current, and done well)

3 points

Adequate (needs only some updating)

2 points

Weak (needs major Improvements/changes)

1 point

Basically Nonexistent

0 points

2. The HR department is represented in strategy-building

sessions of the top management.

I. Legal Compliance

3. HR issues are discussed explicitly when strategic plans are

formulated.

2. Immigration reform

4. The performance of the HR department and of the

organisation are linked.
5. The HR function is given as much, or more significance, as
other functions.

4. Wage and hour laws

1. Equal employment opportunity requirements

3. Health and safety
5. Employment-at-will statements
6. Privacy protection

6. HR managers have sufficient power to suggest strategic

initiative to the top management.

7. ERISA reporting/compliance
8. Family/medical leave

7. The HR department can easily compete for funds and

management involvement.

II. Obtaining Human Resources

8. The structure of the HR department is effective in delivering

competent services.

10.HR supply-and-demand estimates (for 3 years)

9. Line managers are recruited along with trained specialists in

the HR department.
10.The services of the HR department are equally available to
everyone.

9. Current job descriptions and specifications

11.Recruiting process and procedures
12.Job-related selection interviews
13.Physical exam procedures
III. Maintaining Human Resources

11.The head of the HR department is always accessible to all

employees.

14.Formal wage/salary system

12.The HR department plans the companys manpower needs

proactively.
13.The HR department conveys organisational goal to everyone.

16.Employee recognition programs

14.The HR department links appraisal and compensation to

corporate objectives.

19.Grievance resolution process

15.The HR department meets the companys and individuals

training needs.

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15.Current benefits programs/options

17.Employee handbook/personnel policy manual
18.Absenteeism and turnover control
20.HR record-keeping/information systems

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165

MANAGING HR ISSUES

Scope of Audit

MANAGING HR ISSUES

IV. Developing Human Resources

What should cause concern to the HRM is the avoidable

turnover. Avoidable turnover gives an excellent measure of the
HR climate as it directs attention to that part of the turnover
which can be reduced. The specific actions that will help
minimize employee turnover shall be better hiring practices,
orientation training, workingconditions, remuneration and
benefits, and opportunities for advancement. What is significant is that turnover rate is worse than a high turnover if the
top performers are not retained. Therefore quality of turnover is
more important than the quantity of people leaving and people
joining an organisation.

21.New employee orientation program

22.Job skills training programs
23.Employee development programs
24.Job-related performance appraisal
25.Appraisarfeedback training of managers
Total Points
HR Audit Scoring

Evaluate the score on the HR audit as follows:

60-75

HR activities are complete, effective, and probably

meeting most legal compliance requirements.

45-59

HR activities are being performed adequately, but they

are not as complete or effective as they should be.
Also, it is likely that some potential legal risks exist:

30-

Major HR problems exist, and significant attention

needs to be devoted to adding and changing the HR
activities in the organisation.

Below 30 Serious potential legal liabilities exist, and it is likely

that significant HR problems are not being

Absenteeism Absenteeism refers to the failure on the part of

employees to report to work: though they they are scheduled
to work. In other words, unauthorised absences constitute
absenteeism.
Absenteeism is computed and is expressed in terms of
percentages. Table 26.1 shows absenteeism rates in select
industries.

Table 26.1
Absenteeism in select industries

Fig. 26.2 Sample HR audit checklist

Evaluation of an HR function is useful to justify the existence
of the department and the expenses incurred on it. If the
department fails to contribute to the companys bottom line, it
has no reason to function. Similarly if the expenses incurred on
the HR department far exceed its benefits to the organisation,
they must be pruned drastically to make the department
economically viable. How many organisations conduct HR
audit?

Prevalence of HR Audit
Audit of Managerial Compliance
This involves audit of managerial compliance of personnel
policies, procedures and legal provisions. How well are these
complied with should be uncovered by the audit so that
corrective action can be taken. Compliance with the legal
provisions is particularly important as any violation makes the
management guilty of an offence
Audit of the Human Resource Climate
The HRM climate has an impact on employee motivation,
morale and job satisfaction. The quality of this climate can be
measured by examining employee turnover, absenteeism, safety
records and attitude surveys.
Employee Turnover Employee turnover refers to the process of
employees leaving an organization and requiring to be replaced.
High turnover involves increased costs on recruitment, selection
and training. In addition, high labour turnover may lead to
disruption of production, problems in quality control, and
difficulty in building teamwork and morale.
Certain percentage of labour turnover is unavoidable. Resignation, retirement, death and transfers do take place causing
displacement in workforce. Similarly, business expansion
necessitates hiring of people.

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Absenteeism costs money to the organisation, besides reflecting

employee dissatisfaction with the company. Like employee
turnover, there is avoidable and unavoidable absenteeism.
Absenteeism is unavoidable when the employee himself or
herself falls sick, his or her dependants at home suddenly
become unwell or there is an accident inside the plant. Unavoidable absenteeism is accepted by managers and is even sanctioned
by labour laws. For instance, one days leave with wages for
every 20 days of service is allowed by the Factories Act, 1948.
Avoidable absenteeism arises because of night shifts, opportunities for moonlighting and earning extra income,
indebtedness, lack of job security, job dissatisfaction, and
unfriendly supervision. This absenteeism needs intervention by
the management. Managers should take steps to remove causes
of absenteeism. On the positive side, managers must create a
work environment which will make the employees realise that it
makes sense to work in the factory rather than staying at home
and waste their time.
Accidents Organisations maintain records relating to accidents.
Accidents, do cost money to the organisation. They also reflect
the prevailing organisational climate. The management must
have a safety plan, implement it and evaluate its effectiveness.
Attitude Surveys Attitude surveys are probably the most
powerful indicators of organizational climate.Attitudes
determine an employees feeling towards the organisation,
supervisor, peers and activities..

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Audit of Corporate Strategy

Besides functions, compliance and satisfaction, audit may
extend to corporate strategy also. HR professionals do not set
corporate strategy, but they strongly determine its success.
Corporate strategy helps the organisation gain competitive
advantage. By assessing the companys internal strengths and
weaknesses and its external threats and opportunities, the
senior management devises ways of gaining an advantage.
Whether the company stresses superior marketing channels,
service, innovation, low.cost production, or some other
approach, HRM is affected. Understanding the strategy has
strong implications for HR planning, staffing, remuneration,
industrial relations, and other HR activities.

Audit and Personnel Research

HR auditors depend on personnel or HR research for data.
Research is understood as the systematic and goal oriented
investigation of the facts to establish a relationship between
two or more phenomena. Its purposes, as was pointed in
Chapter 23, are varied. Specifically, research can lead to an
increased understanding of and improvement in HR\practices.
The major topics covered in HR research are:

developed based on the companys existing information.

Examples of such measures are absenteeism and turnover rates.
These data help auditors assess the performance. In the
compliance approach, auditors review past actions to determine
if those activities comply with legal requirements and company
policies and procedures. A final approach is for specialists and
operating managers to set objectives in their areas of responsibility. The MBO approach creates specific goals against which
performance can be measured. Then the audit team researches
actual performance and compares it with the objectives?
The audit programme comes to an end with the preparation of
the audit report. The report may be clean or qualified. The
report is qualified when the HR performance contains gaps.
Where gaps are observed, remedial measures are suggested. The
report is clean where the performance is fairly satisfactory.
S cope
Human Resource
Functions
Approaches
Comparision
Managerial
Compliance

Employee
Satisfaction

Outside
Authority
Stastical

Compliance
Corporate Strategy

Human
Resource
Research

Evaluation
Report

MBO

Fig. 26.3 Process of human resource audit

Wage surveys,

Recent industrial settlements,

Figure 26.3 shows the HR audit process. The audit covers four
areas, and, to do so, one or more strategies are adopted. The
audit is conducted with the help of data provided by HR
research. The audit report provides feed-back to the HR
department.

Job analysis,

Notes

Effectiveness of various recruitment sources,

Effectiveness of training efforts,
Survey of supervisors effectiveness,

Job satisfaction survey,

Survey of employee needs,
Attitude survey towards reward system, and
Areas of high accident frequency.

Findings on the topics listed above and other related areas

constitute the basis for HR audit.

Approaches to Human Resource Audit

Auditors may adopt any of the five approaches for the purpose
of evaluation:6 (i) comparative approach, (ii) outside authority
approach, (iii) statistical approach, (iv) compliance approach, and
(v) Management By Objectives (MBO) approach. It may be
stated that irrespective of the approach, the data for assessment
are provided by HR research.
In the comparative approach the auditors identify another
company as the model. The results of their organisation are
compared with those of the model company. Often, the
auditors use standards set by an outside consultant as benchmark for comparison of own results. This approach is called the
outside authority approach. The third approach is the statistical
approach. Here, statistical measures of performance are
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MANAGING HR ISSUES

Attitude surveys may be conducted through face-to-face

interviews but are usually done through anonymous questionnaires. The resulting information from the survey provides an
invaluable insight what employees are feeling and thinking. It
can also be used to specifically address business problem
associated with productivity, turnover, absenteeism, tardiness,
work-group effectiveness, and industrial relation