Everything you need to know about human resource audit. Human Resource (HR) audit is a method of evaluating the current Human Resource Development (HRD) strategies and skills.

HR Audit identifies the future HRD requirements of the organization by evaluating the current HR activities and inputs. One of the results of HR audit is to focus on new knowledge, attitudes, and skills required by the employees.

After the HR audit, remarks are given on the performance of the employees as well as the HR practices being followed by the HR department.

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 activity of an organisation. 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.


Definition Propounded by Seybord G- “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”. 

In this article we will discuss about human resource audit. Learn about:-

1. Introduction to Human Resource Audit 2. Meaning of Human Resource Audit 3. Definition 4. Scope 5. Objectives and Need 6. Characteristics

7. Importance 8. Process 9. Characteristics 10. Approaches 11. Outline of Audit Schedule 12. Advantages and Limitation.

Human Resource Audit: Meaning, Definition, Scope, Characteristics, Importance, Process, Approaches, Advantages and Limitation



  1. Introduction to Human Resource Audit
  2. Meaning of Human Resource Audit
  3. Definition of Human Resource Audit
  4. Scope of Human Resource Audit
  5. Objectives and Need of Human Resource Audit
  6. Characteristics of Human Resource Audit
  7. Importance of Human Resource Audit
  8. Conducting Human Resource Audit – Process
  9. Approaches to Human Resource Audit
  10. Outline of Human Resource Audit Schedule
  11. Advantages and Limitation of Human Resource Audit

Human Resource Audit – Introduction

Like financial audits, HR audits are designed to assess management activities, identify policy and practice weaknesses, perform due diligence, benchmark best practices, and to quantify and evaluate outcomes. The Human Resources (HR) Audit is a process of examining policies, procedures, documentation, systems and practices with respect to an organization’s HR functions.

The purpose of the audit is to reveal the strengths and weaknesses in the organization’s human resources system, and any issues needing resolution. The audit works best when the focus is on analyzing and improving the HR function in the organization. The HR audit itself is a diagnostic tool, not a prescriptive instrument.

It is most useful when an organization is ready to act on the findings, and to evolve its HR function to a level where it’s full potential to support the organization’s mission and objectives can be realized.


An organisation has tended to grow bigger, so have the staff departments along with line functions. A time comes when each of them becomes so big that one does not get a fair idea of how they are doing unless special effort is made and studies are undertaken. For the line functions, some indices are available.

In production, for instance, performance can be judged by how much was produced, to what extent schedules were adhered to, at what cost manufacturing was done, what was the unit cost, etc. These figures in themselves are important and they take added meaning when they are compared with, say previous year or years or with the planned and budgeted figures.

Similarly, marketing departments efficiency can be judged by the quantum of sales, sales vis-a-vis competitor’s sales, cost of sales, territories covered, new customers explored, old customers retained, etc.

In case of departments like HR such yardsticks are not readily available. Essentially they have to be evolved according to an organisation’s requirements. Today personnel departments have become big and employ sizable staff and specialists. As such, some kind of audit needs to be undertaken to secret in the functioning of the department. Hence, HR audit comes in the picture.

The HR audit can be divided based on time period, conduct and purpose.

i. Based on time period, the types are adhoc and periodic audits. Adhoc audits are conducted whenever required whereas periodic audits are conducted in regular intervals.

ii. Based on conduct, HR audits can be classified as internal and external audits. Internal audit is conducted by the company’s own staff and external audit is conducted by specifically employed qualified outside personnel.

iii. Based on purpose, HR audits can be classified as compliance audit, best practices audit, strategic audit and function specific audit. Compliance audits check for compliance of relevant laws and regulations. Best practices audit compares the company’s HR practices with companies following best HR practices. Strategic audit analyses the HR practices of the organization for their contribution to the achievement of strategic goals and offers suggestions. Function specific audit concentrates on specific functions of HR like training, performance management and the like.

Human Resource Audit – Meaning

HR audit is a method of evaluating the current Human Resource Development (HRD) strategies and skills. It identifies the future HRD requirements of the organization by evaluating the current HR activities and inputs. One of the results of HR audit is to focus on new knowledge, attitudes, and skills required by the employees. After the HR audit, remarks are given on the performance of the employees as well as the HR practices being followed by the HR department.


HR audit establishes a system of role clarity and accountability. This may take place through separate role clarity exercises or development of an appropriate performance appraisal system. Therefore, it focuses the attention of the organization towards the development of its competency base. For instance, if an organization neglects the human relation competencies of its staff, it may in turn create certain problems, such as wastage of time. With HR audit, many of these problems relating to time management can be streamlined and various HR policies can be strengthened.

Consequently, HR audit helps in maintaining the efficiency of human resource and ensures minimum wastage of time. In addition, it ensures better recruitment policies and induces professionalism among the employees of the organization. It proposes the competence base required by the organization and gives directions for achieving competency requirements of employees at various levels.

Thus, it provides a base for recruitment policies and procedures in the organization. As a result, now-a-days many organizations have adopted new recruitment and retention strategies, which have led to the strengthening of these policies and procedures. Thus, it can be said that HR audit ensures maintenance of quality people by recruiting and then training them.

HR audit also helps in calculating the investments made in training and estimating the returns on such investments. The functions of HR audit are assessment of training needs and utilization of training as a tool for organizational learning, growth, and development. For example, an organization strengthens its training function by implementing a system of post training follow up and sharing of knowledge with others through discussions and action plans within the functional teams.


Many organizations have developed such training policies and systematized their training functions. Training needs assessment also has become more scientific in these organizations. This provides evidence that HR audit, by intervening in the training and development function, ensures effective employee maintenance and grooming.

Human resource 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 organisation. 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 activity of an organisation. 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.

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 function, 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.


This document presents an audit procedure to assess whether the Human Resource (HR) Function at Business Unit (BU) level is delivering its mandate and roles.

The methodology that drives this audit is based on four key principles advocated by a leading HR consultant and teacher, Dave Ulrich.

The cutting edge research and consulting work has shown that:

1. Line manager friendly systems, and procedures are available to help management execute their people management role (i.e., the technical-professional and service role of HR);

2. Line management are equipped to work within the various labour relations laws and codes of conduct that govern the relationship between labour and management in the workplace (the compliance role of HR);

3. Each Business Unit has an overall people management (HR) strategy in place that increases the value of employees to the business (the strategic role of human resource);


4. HR systems and procedures are run at optimal cost (financial management role of human resource).

These assumptions can be translated into four critical roles that professional Human Resource professionals must play if they wish to be seen to make a real contribution to a business’ success.

Human Resource Audit – Definition Propounded by Flamholtz, Seybord G and Gray

A human resource audit is a systematic review of the human resource functions, its strategic direction, structure and resources, systems and procedures; cost and capabilities; and ultimately, its contribution to the organization. A well-designed audit provides a diagnostic tool to measure human resource’s performance against organization expectations and leading practices, and target areas that would benefit from improvement.

Human resource audit means the systematic verification of job analysis and design, recruitment and selection, orientation and placement, training and development, performance appraisal and job evaluation, employee and executive remuneration, motivation and morale, participative management, communication, welfare and social security, safety and health, industrial relations, trade unionism, and disputes and their resolution.

Human Resource audit is very much useful to achieve the organizational goal and also is a vital tool which helps to assess the effectiveness of human resource functions of an organization.

Flamholtz – Human Resource Audit Analysis 1987 – An audit is a means by which an organization can measure where it currently stands and determine what it has to accomplish to improve its human resource function. It involves systematically reviewing all aspects of human resources, usually in a checklist fashion, ensuring that government regulations and company policies are being adhered to. The key to an audit is to remember it is a learning or discovery tool, not a test. There will always be room for improvement in every organization.


Definition Propounded by Seybord G -“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”.

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 organisation by identifying the gaps between objectives and results, for the end product of an evaluation should be to formulate plans for corrections or adjustments.”

Human Resource Audit is an additional tool used for effective management of human resources. Human Resource Audit consists of comprehensive evaluation of Strategies, Systems, Practices, Structures and Competencies, Styles and Culture and their appropriateness to achieve the short and long term business goals of the organisation.

Human Resource Audit – Scope

In simple terms, audit means verification of activities. HR audit refers to the evaluation of the HR activities in an organization. The audit is required to periodically review the HRD functions and the effectiveness of implementation of HRD. As such, a systematic and a comprehensive audit of all the HR functions is essential. The audit findings facilitate renewal of the HRD system in the organization, whenever required.

The main objective of HR audit is to assess the effectiveness of the human resource functions and to ensure compliance. Anyone with sufficient HRD experience can conduct this audit. HR audit manifests its need and importance primarily in auditing the functions of HRD department and the competen­cies possessed by the personnel of the department.

Both the internal and the external HR auditors can do the audit. However, there is an advantage with the external auditors as they are designated for the said purpose. The internal auditor may suffer from a ‘halo’ effect.


In this regard, TVRLS (T.V. Rao Learning System) conducts a certificate education programme in HRD audit that aims to prepare the participants to be internal or external HR auditors.

Apart from the functions mentioned here, HRD audit also verifies if the department is properly staffed with qualified and suitable professionals and if the related functions are organized and performed well at the requisite periodicity. The systematic evaluation of HR functions and related activities is termed as HR audit.

Human resource audit is a systematic assessment of the strengths, limitations, and developmental needs of an organiza­tion’s existing human resources in the context of organizational performance.

The audit can be a part audit or a full audit. Part audit may include audit of HR functions in one or few departments while a full audit refers to audit of all the departments, that is, the entire organization.

Similar to quality management system audit, HR audit is also ‘fact finding’ and not ‘fault finding’. One must accept the audit findings in the right spirit. The audit process finds the loopholes, and based on the audit report, the HR functionaries initiate necessary corrective actions. As an HR personnel, one must find the most suitable corrective action and implement them. It is important to be vigilant to oversee the effectiveness of results from the action taken. HR audit aims to provide feedback about the HR functions to the HR professionals, analysts, and operating managers.

The scope of HRD audit is decided only when audit is taken up. However, the approach to be followed while conducting an HRD audit and the objectives to fulfil remain more or less the same.


The scope of the audit includes the following:

1. Human resource inventory

2. Current competencies

3. Organizational structure

4. HRD instruments (or mechanisms or sub-systems)

5. Organizational climate assessment

6. HRD outcome variables.

The scope of HRD audit extends over the following functions:

1. Procurement function

2. Development function

3. Compensation function

4. Maintenance function

5. Integration function.

The spectrum of a full HR audit generally includes the following:

1. Performance and potential appraisal

2. Legal compliance

3. Compensation, reward, incentive, and salary administration

4. Recruitment and selection

5. Induction and placement

6. Training and development

7. Separations such as terminations, dismissal, lay-off, etc.

8. Employee relations

9. Communications

10. Files/record maintenance/technology

11. Policies and procedures (including employee handbook)

12. Communications.

An audit needs a considerable amount of data relating to all the functions. Human resource inventory contains all the details about the employees, which include name, addresses (present and permanent), designation (at entry and present), date of birth, family details, qualification, training courses attended, and papers published. Some organizations use personnel information system (PIS) in place of human resource inventory.

Some industries also include psychological bases, occupational values, dominant motives, personality traits, life styles, aptitude, etc., in the inventory.

The auditor verifies the data structure of the HR inventory, which comprises the column variables. He attempts to verify the adequacy of the variables to meet the stated HR objectives. The auditor focuses sharper attention to assess the capability of the organization to achieve the future business goals, linkages between the HR practices and organizational goals.

Unlike quality audit, in HR audit, the external auditor offers suggestions to overcome the weaknesses. The HR audit is contextual and is aimed at helping the organization achieve its goals. For example, HR audit finds how an organization identifies the customer requirements and endeavours to meet the identified customer requirements, which amounts to customer satisfaction.

The auditors mainly examine the effectiveness of the functions relating to human resources. In order to carry out the task, as an auditor, one must be ready with a checklist so that the audit can bring out the salient facts and figures. The auditor prepares the checklist depending on the functions to be audited.

Human Resource Audit Objectives and Need

The various objectives of HR Audit are:

a. To review the performance of human resources department and its activities to determine its effectiveness.

b. To locate the gaps, lapses, shortcomings in the implementation of the policies, procedures, practices, directives of the personnel department and to know the areas where non-implementation and / or wrong implementation has hindered the planned programmes and activities.

c. To take corrective steps in future to rectify the mistakes, shortcomings if any, in effective performance of the work of the human resources department.

d. To evaluate the personnel staff and employees.

e. To evaluate to what extent line managers have implemented the directives and guidelines for effective management of human resources in their respective departments.

f. To seek answers to such questions as ‘What happened?, ‘Why did it happen?’ or ‘Why did it not happen?’ in following implementing policies, practices and directives in managing human resources and to improve qualitative performance of personnel department.

HR audit is concerned with the assessment of the HR function. It is a wide evaluation of HR practices, skills, systems and strategies in the context of business goals of the organisation. It provide a summary of the strength and weakness of HRM functions.

As such, the human resource evaluation aims to analyse and evaluate overall the HR policies and programmes. The important areas of HR evaluation are HR policies, programmes, process, staffing and service quality etc. By way of certain approaches, the HR evaluation programmes might be able to develop different perspective ways for effective HR evaluation.

Need for Human Resource Audit:

Though there is no legal obligation to audit the HR programmes and activities, organisations audit the HR programmes due to the following needs:

(a) The number of employees – Very small units, because of the very small number of persons they employ, require comparatively little in the way of a formal audit.

(b) Organisational structure – Continuous feedback is facilitated if an organisation has a HR department.

(c) Communication and feedback – An effective two-way communication system often reduces the need for a formal audit.

(d) Location and dispersion – The need for a formal audit is directly related to the number of isolated plants.

(e) Status of industrial relations – If the employees participate in top management plans, reports, discussion and decisions, the need for a formal audit may be less frequently felt.

(f) Administrative style – The greater the delegation of authority and decentralization of power, the greater the value of a regular and formal audit.

Human Resource Audit – 5 Main Characteristics: As Process of Examination, SWOT Analysis of Human Resource Systems, Diagnostic Tool and a Few Others

An HR audit is much like an annual health check. It can perform the same function for the organization. An audit is a means by which an organization can measure where it currently stands and determine what it has to accomplish to improve its HR functions. It involves systematically reviewing all aspects of human resources, usually in a checklist fashion, ensuring that the government regulations and company policies are being adhered to.

1. Human Resource Audit is a Process of Examination:

The human resources (HR) Audit is a process of examining policies, procedures, documentation, systems, and practices with respect to an organization’s human resource functions.

2. Human Resource Audit is SWOT Analysis of Human Resource Systems:

The purpose of the audit is to reveal the strengths and weaknesses in the organization’s human resources system, and any issues needing resolution. The audit works best when the focus is on analysing and improving the human resource function in the organization.

3. Human Resource Audit is a Diagnostic Tool:

The audit itself is a diagnostic tool, not a prescriptive instrument. It helps to identify what you are missing or need to improve, and it may even tell you what you need to do to address these issues. It is most useful when an organization is ready to act on the findings, and to evolve its human resource function to a level where it’s full potential to support the organization’s mission and objectives can be realized.

4. Human Resource Audit is the Root Canal of Human Resource World:

Human resource audit used to be the “root canal” of the human resource world, considered to be a painful and frightening event. As with so many traditions in human resource, this one has also faded in recent years. Human resource professionals have come to understand that sometimes an audit is not only necessary — it can yield truly helpful information to help implement change.

5. Human Resource Audit Helps in Implementing Metrics and Benchmark Practices:

And as human resource professionals continue on the path to greater strategic involvement in the business goals of the organization, they know that the audit not only plays an important role in keeping tabs on practices and procedures — it can also help set the stage for implementing metrics and benchmark practices. An audit can put your organization’s metrics to the test by using the measures to monitor key information and trends.

Human Resource Audit – Importance

To keep pace with the changing environment, the importance of periodic HR audit has increased in recent years. The recent economic restructuring programme of the Government of India, prompted the need for restructuring of the organisations, which, inter alia, calls for restructuring of production, manpower, strategies, management practices and philosophies, etc.

All such possible reasons for periodic HR audit can be enumerated as follows:

1. 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.

2. To keep pace with the environmental changes, management philosophy and practices at the organisational 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 (which is 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) and new statutory requirements (pollution control), etc., are now influencing HRD function at the corporate level, the effectiveness of which can only be understood by conducting periodic audit.

In nut shell, importance of HR audit may be highlighted as mentioned below:

i. HRD audit is cost effective

ii. It can give many insights into a company’s affairs

iii. It could get the top management to think in terms of strategic and long term business plans

iv. Changes in the styles of top management

v. Role clarity of HRD Department and the role of line managers in HRD

vi. Improvements in HRD systems

vii. Increased focus on human resources and human competencies

viii. Better recruitment policies and more professional staff

ix. More planning and more cost effective training

x. Strengthening accountabilities through appraisal systems and other mechanisms

xi. Streamlining of other management practices.

Human Resource Audit How to Conduct: 5 Stage Process – Consensus Building, Acquiring Legal Knowledge, Implementing and Conducting the Audit and a Few Others

HR audit can be conducted by the regular staff of the personnel audit section of the HR/personnel department (i.e., Internal Audit) or some outsider may be deputed to conduct HR audit (i.e., External Audit). Both systems of personnel audit should be followed in the organisation because external audit presents a true and fair view of the personnel policies and programmes as the auditor has no personal interest in the conduct of the business.

Both quantitative and qualitative yardsticks should be used for purposes of evaluation. They may be time standards, cost records, test scores, training scores, interview records, work stoppages, medical reports, accident reports, grievance reports, turnover reports, payroll data etc. The audit report should invariably be submitted within a reasonable time after the audit work is over.

HR audit can be carried out either by attitudinal survey or by interpreting data. Interpretation of data can be done either by simple comparison over a period or by ratio analysis or by graphical or pictorial displays. T.V. Rao and Udai Pareek (1996), to measure the effectiveness of people management, developed a set of questions mostly to suggest linking of HRD to the corporate objectives, goals and strategies, effectiveness of free flow of HRD information down the ranks, application of knowledge of behavioural science and industrial psychology for HRD, etc.

For other HRD sub­systems too, they have developed similar sets of questions, adding responses which can help an organisation to audit their HRD activities.

Stage # 1. Consensus Building Stage:

Most Human Resources professionals are well aware of the issues that create the greatest legal risks. Hiring, firing, benefits, wage and hour compliance, employee handbooks and illegal discrimination are the most common areas where lawsuits arise.

In order to assess the degree of exposure that a company has, the management of an organization must first be familiar with the legal requirements in each of these areas. Other legal obligations arise from state and local laws as well. The Human Resources professional must also have at least a basic familiarity with the employer’s obligations under those laws.

Stage # 2. Acquiring Legal Knowledge:

A HR professional can conduct an HR audit even if he/she does not have the necessary legal knowledge himself/herself. There are commercial HR audit tools available that can guide a HR professional through a self-audit. In addition, there are service providers (Consultants) who can also perform an audit for a fee.

Stage # 3. Implementing and Conducting the Audit:

After assuming a knowledge of the substantive law, the next step in conducting an audit is to gather information on the operating environment and procedures with respect to the functioning of various HR practices and functions in the organization. In this regard, HR professionals are guided in this process by a checklist (which might be in print, on software, or web-based).

Stage # 4. Analyzing the Audit Information:

The next step involves analyzing the HR-related information. After the information in the checklist is processed, the next step involves analysis of the organization’s employment practices and policies so as to determine whether the company is in compliance with the applicable laws. The net result of the HR audit should be some sort of a scorecard, or a list of action items that would need attention on the strategic perspective.

Stage # 5. Taking Actions/Interventions:

The audit report should provide both a snapshot of the company’s strengths and also a roadmap for how to correct its weaknesses. If actions or interventions are being taken so as to correct the deficiencies, the audit would have its effectiveness.

Human Resource Audit – Top 9 Approaches: Benchmarking, Return on Investment, Key Performance Measures, Programme Evaluation, SHRM Profiling & Few More

1. Benchmarking Approach:

Benchmarking is the process of continuously comparing and measuring performance. Organisations can measure against “best in class,” or against internal benchmarks.

“More than 80% of Fortune 500 companies use benchmarking to reinforce their own philosophy of continuous change and improvement.”

Benchmarking externally is about learning from the best. Benchmarking internally typically implies an undertaking to work hard for year over year improvement.

Some organisations distinguish between two levels of benchmarking. At one end of the spectrum we have strategic benchmarking that involves using best practices to develop corporate, programmes, product strategies and results. At the other end we have operational benchmarking, which involves assessing and implementing best practices to improve processes.

Regardless of what we are trying to improve with benchmarking, the following steps will usually apply:

i. Identify a management practice, work process or result to be improved.

ii. Analyse your practice, flow-chart process and identify results indicators.

iii. Measure our own performance.

iv. Identify benchmarking partners (if benchmarking externally).

v. Determine data collection methods.

vi. Collect data.

vii. Determine performance gap.

viii. Project future performance.

ix. Develop action plan.

x. Implement action plan.

xi. Monitor results.

xii. Recalibrate benchmarks. (Repeat process.)

It is important to remember that benchmarking isn’t about the wholesale copying of another organisation’s best practices. If we are benchmarking externally, it entails measuring our performance and processes against “best-in-class” organisations and integrating those relevant processes and practices into your organisation and its culture where/if appropriate. Internally, it speaks to benchmarking the current state, setting improvement standards and then taking subsequent measures.

2. Return on Investment Approach:

Over the last several years, most human resources professionals have read articles or books advocating that “Human Resource” must have a seat at the strategic decision-making table within organisations. Although, typically speaking,

Human Resource executives seek to be full partners with senior management team colleagues from finance, marketing, operations, etc., the reality too often is that some difficulty is experienced in explaining to operational managers why the invitation to the table should be extended.

Return on Investment (ROI), offers human resource managers a very worthwhile tool to explain in financial, as well as other terms, how human resource contributes to the bottom line.

It provides human resource managers with a methodology to outline to colleagues that human resource is more than simply “overhead.” Finance is an international language, and human resource professionals must learn to converse well in this area. Return on Investment, as explained by Phillips, describes a detailed cost-benefit analysis methodology. It permits managers to conduct an assessment of a given human resource initiative and present in concrete numbers how this has saved the organisation money.

In discussing the Return on Investment measurement process in human resources management at a recent conference, Jack Phillips was careful to point out and emphasise the importance of isolating the effect of the human resource intervention as calculations are being made.

Unless a clear and indisputable link can be established between the intervention and the saving, the methodology will lose credibility. Moreover, Phillips also suggested that human resource professionals take a conservative approach with colleagues when describing the saving/return.

Jack Phillips is not alone in his support for “return on investment” as a credible tool to measure performance in Human Resource. Adapting the work of Michael W. Mercer (Turning Your Human Resources Department into a Profit Center), Diane Lustenader of Lake. Associates points to the “Human Resource Cost Analysis Model.” It reflects the same goals as return on investment methodology.

She suggests asking the following eight questions that will lead to a potential measure as to the cost/benefit of a given Human Resource solution:

i. What problem are we trying to solve?

ii. What are the causes of the problem?

iii. What is the problem costing the company? Has it been measured?

iv. What are the possible solutions?

v. What are the costs to the solution?

vi. Does the solution cost less than the problem?

vii. What is the cost/benefit ratio?

3. Key Performance Measures Approach:

In 1995, the conference board established an international working group of representatives from major global corporations to support its research into performance measures. In striving to find tools to help companies better manage their business, non-financial measures were developed by the working group to augment more traditional indicators. These measures evolved and became known as key performance measures.

The Conference Board Report 1118-95 entitled New Corporate Performance Measures offers this typical sample of key measures:

i. Quality of output;

ii. Customer satisfaction/retention;

iii. Employee turnover;

iv. Employee training;

v. R&D investments;

vi. R&D productivity;

vii. New product development;

viii. Market growth/success;

ix. Environmental competitiveness; and

x. Other measures specific to each company.

While there is no hard and fast rule as to how many measures are appropriate, the tendency, when beginning to think about measurement, is usually to start with a significant number and work the list down to a manageable group.

4. Programme Evaluation Approach:

Most organisations, at one time or another, have had occasion to engage in program evaluation. Various human resources programmes such as – recruiting, career management, new employee orientation, training, succession planning, employee relocation, to mention only a few, are processes where programme evaluation methodology is an entirely suitable assessment tool.

Conceptually, programme evaluation findings may be used in a similar fashion to those that might result from an audit.

Programme evaluation results can help answer the questions:

i. Are we doing the right things?

ii. And, if so, are we doing the right things well?

A programme evaluation can provide baseline data that can serve as benchmarks against which to set improvement/measurement targets for the future.

5. Strategic Human Resource Management Profiling Approach:

In the recent publication, Tomorrow’s Human Resource Management, Michael Beer argues that “for a Human Resource function to develop a strategic role it will have to develop and institutionalize a core action learning process.” He describes Strategic Human Resource Management Profiling as such a process. It permits managers to assess the alignment of their organisations with strategy and values. He explains that this is done in partnership with employees.

The process is facilitated by a “profiler” from human resources or the strategic planning department.

The process begins with the leadership team defining its strategic task and its values.

An employee task force of eight high-potential employees, one or two levels below the top team, is appointed to interview 100 employees and customers about what barriers to strategy implementation they perceive and about the extent to which management’s behaviour is aligned with its stated values.

Data collected by the task force is fed back to top management and processed in a three- day profiling meeting.

The first day of the meeting is devoted to feedback with the task force using a fishbowl method to facilitate open communication. The second day is devoted to rigorous diagnosis using a diagnostic model. The third day is devoted to developing a vision as to how the organisation and its management processes must be redesigned and to the creation of a number of design teams which will be engaged in the actual redesign activity.

To create accountability, it is intended that the general manager will report task force findings to the next level after reviewing them with the employee task force.

Issues identified through Strategic Human Resource Management Profiling in several corporations revealed six key barriers to strategy implementation and reformulation –

i. Poor co-ordination and teamwork;

ii. Unclear strategy and priorities;

iii. An ineffective top team;

iv. Top-down or laissez-faire management;

v. Poor vertical communication (particularly upward communication); and

vi. Inadequate management and management development throughout the organisation. (“The Transformation of the Human Resource Function – Resolving the Tension between a Traditional Administrative and New Strategic Role,”)

Findings of this nature give a clear picture of where an organisation can set its sights with regard to benchmarking, seeking out best practices, etc., and then measuring improvement.

6. Legal Compliances Approach:

Legal concept of Human Resource auditing is based on a legal outlook. According to Antona (1993), the audit of performance or conformity consists of “making an inventory of the social situation of the company, considering the labour law norms and regularly verifying the company’s compliance with the applicable regulations.”

Thus, this concept is centered on the verification that the current labour laws are being fulfilled. The audit should verify if the firm’s policies, practices, and documents regarding employee hiring, retention, discipline, termination, and post-employment are both fair and legal.

These practices and policies must – prohibit discrimination by offering equal employment opportunities; protect the employment seeker from being discriminated against on the basis of age; carry out minimum wages; and contain provisions regarding child labour in both organised unorganised sector.

According to Nevado (1998), the basic functions of the audit of conformity or of performance as an element of human resource auditing are threefold. The first function is examining to see if the firm is fulfilling all its administrative social obligations, as well as those relative to the collective rights of its personnel. The second is to study the relationship between the employees and the company based on the legal statutes.

The final function is verifying if the company fulfills its financial obligations (for example, social security payments), as well as its informative ones.

Concern about labour risks has created a function within human resource management with the purpose of altering working conditions by identifying the risks that could stem from them and implementing necessary preventive measures.

Such preventive activity could fit perfectly into the legal approach of human resource, although, the effort that the company can make in this sense can go beyond the application of the existing risk prevention laws. The requirement for labour security and hygiene is a part of the search for quality of life in the workplace, which is becoming increasingly demanded from companies.

7. Financial Analysis Model Approach:

Financial analysis models applied to Human Resource development programmes are increasingly being seen in the literature and in cases that document for their use.

Grossman [2000] proposes a three-pronged approach for the measurement of the Human Resource function. First, according to this model, there should be efficiency measurements that help to determine the way in which the resources are being used. Within this group are the measurements of turnover, quits, and discharges as a percentage of total employees, average tenure of employees in various jobs, absenteeism, employee productivity, and intellectual capital.

After calculating the measurements of efficiency, they must be compared to the results obtained in previous periods. Nevertheless, this is not sufficient, and it is critical to benchmark against others in the same industry or profession. When inefficiencies are revealed, careful analysis of the problem should follow before expenditures are slashed. These cover the efficiency side, but one must also look at the value- creation side.

Thus, it is necessary to develop a new set of strategic measurements that connect directly with the mission and strategies of the company.

The creation and selection of these ratios is more difficult, given that they depend greatly on the specific company of which one is talking about. Fitzenz [1999] proposes a measurement that includes quality, efficiency, and service. He suggests using a ratio constructed around five factors that can be applied to anything that one chooses to measure. These five factors are cost, completion time, quantity, quality, and the human reaction.

This system concludes with the calculation of measurements of the human resource activities, which try to demonstrate their financial viability. These measurements are based on the idea of the ROI ratio, which is calculated by dividing the monetary value of a human resource programme by its costs. For this, the cost of the programme that is being measured must first be determined, and then it must be translated into monetary terms.

8. Value Addition Approach:

Hudson (2006) talks about a human resources audit approach with the aim of optimising the results of human resource audit.

This involves three key stages:

i. Diagnosis – we seek to identify the level of maturity of the human resources which matches the current situation in a company by means of a questionnaire.

ii. Defining the strategy – the results are obtained through this questionnaire with the situation existing in the marketplace. Using benchmarks, the tool determines the key development areas a company should implement to optimise its human resource management policy.

iii. Production of an audit report – the process ends by identifying the key points for development and by drawing up an estimate of the financial and human investments required to achieve the objectives.

Human Resource Audit – Outline of Audit Schedule: What will be Reviewed during an Audit: Human Resource Organization, Recruitment & Selection, Job Evaluation and Others

The following lists the core human resource functional areas and summarises what will be reviewed during an audit; it is not all-inclusive, and it may be subject to change. The scope of work for the audit may include a review of internal policies and processes, a review of filing and tracking systems, and surveys and questionnaires of employees and managers on the effectiveness of the human resources operation in the department.

The audit schedule outlines who will be audited, when the audits will occur, and the functional area to be audited.

1. Human Resource Organization/Administration:

Organization of human resource function, including appropriate class of professional positions; delegation of authority to and within the department; quality control to ensure consistency in authorities delegated within the department; documentation of processes, operating standards and practices, and internal controls; retention, matrix, use of separation incentives, and outplacement practices; how staff remain current and up to date with the human resource field and the personnel systems; and techniques for communicating with employees and appointing authorities in department.

2. Recruitment and Selection:

Recruitment methods, methods used in workforce and succession planning, and use of turnover data; access to and quality of job announcements; quality of job analyses; exam development, administration, and scoring; length of eligible lists, including merged lists and notice of appeal rights; and referrals and interviewing practices.

3. Job Evaluation:

Standards, processes, and internal and quality control methods for reviewing and updating essential functions, turnaround times, and repeat requests; internships for new evaluators; allocation process including quality of reports and employee notification; process to address concerns with non­-appealable decisions.

4. Compensation and Benefits:

Standards and processes used to develop and communicate internal compensation policy and plans; internal controls to ensure accuracy and consistency of pay and leave; policies on pay adjustments; pay differentials and incentive awards; overtime pay; housing, leave tracking systems, standards and processes for enrollment for new employees in benefit plans and compensation surveys, minimum wages payment of wages and compensation and benefits under labour laws.

5. Performance Management:

Most current performance pay programme is approved including methods of communication to new and current staff and plan for mandatory supervisory training; completion rate of plans and ratings including quality control and review for consistency of ratings; methods used to determine distribution of awards; efficiency and communication of the internal dispute resolution process; and compliance with requirements for performance appraisal system.

6. Workforce Development:

Orientation programme for new employees and supervisors; training programmes and delivery methods including courses, training staff, and cost; workforce development policies including drug- free workplace, workforce violence and sexual harassment prevention and diversity.

7. Industrial Relations:

Number, type, and outcome of appeals, grievances, reviews; internal grievance processes; other forms of alternative dispute resolution used; communication methods and forms; number, type, and outcome of corrective and disciplinary actions; any methods used to address work environment issues and overall relationship with workman/employees and union and the status of labour court cases.

8. Records Management:

Content of employee, payroll, medical, and position files; internal controls to ensure accuracy and control access and labour law provisions under labour law.

Human Resource Audit – Advantages and Limitation

Advantages of HR Audit:

Every organisation has been established with an objective and to achieve this objective, management prepares policies and adopts practices. Human resource management being a part of management team needs to contribute towards the main objective. Hence HRM will have its objectives, policies and practice in line with main objective.

Now, it is not known how much HRM contributes towards main objective. It is possible through HR Audit will help the management to review the policies and practices on the basis of its result. Management will be in a position to adjust the policies and practices to meet the changing requirements of the organisation.

Following are the advantages of HR audit:

(a) Helps to adjust policies and practices of HRM.

(b) Provides control on HRM functions.

(c) Provides cooperation between line and staff.

(d) Express what our objective is and what we are doing.

(e) Helps to improve the existing policy and practices.

(f) Finds out weak areas of HRM.

(g) Helps to keep the HRM policy and practices young and fresh.

Limitations of HR Audit:

HR audit is rarely a failure; however, it may have some negative results when conducted for some other department instead of the one for which it is planned.

The limitations of HR audit are as follows:

i. Failure to Implement HR Audit:

Means that an organization might not be able to implement the HR audit because of change resistance shown by employees. This in turn hampers the achievement of organizational objectives. For example, HR audit in an organization proposed that certain new performance parameters needed to be introduced for increasing the performance of the employees in the organization.

These parameters would help in finding out the areas of concern of the employees’ performance and improving them as well. However, employees strongly opposed this idea as they felt that their jobs would be threatened with these new performance parameters. Thus, HR audit failed due to implementation failure in this case.

ii. Damages the Image of the HR Department:

Means that when HR department terminates or lays off employees, it earns a bad reputation. Such decisions can have an adverse effect on the overall HR department of the organization as well as its functions. Prospective candidates might not be willing to join the organization because of perceived job insecurity that prevails in the organization.

iii. Using Third Party Consultation for HR Audits:

Means seeking advice from a consultant on HR audits feedback. Third party consultants are not the employees of the organization so it is difficult for them to find a mismatch between the organizational needs and employee competency. Therefore, their services may not completely fulfil the purpose of the HR audit of the organization.