What is HR audit?

What is HR audit? Discuss how it is carried out in an organization and
cite an organization where it is carried out successfully. Briefly describe
about the organization you are referring to.

Answer. An HR audit is like an annual health check. It plays a vital role in instilling
a sense of confidence in the management and the HR functions of an
organization.
Typically the basic reason why organizations prefer to conduct an HR audit is to
get a clear judgement about the overall status of the organization and also to find
out whether certain systems put in place are yielding any results. HR audit also
helps companies to figure out any gaps or lapses and the reason for the same.
Since every company plans certain systems and targets, an HR audit compares
the plans to actual implementation.
The concept of HR audit has emerged from the practice of yearly finance and
accounting audit, which is mandatory for every company, to be done by external
statutory auditors.
This audit serves as an examination on a sample basis of practices and systems
for identifying problems and ensuring that sound accounting principles are
followed. Similarly, an HR audit serves as a means through which an organization
can measure the health of its human resource function.
Organizations undertake HR audits for many reasons:
 To ensure effective utilization of human resources.
 To review compliance with tons of laws and regulations.
 To instill a sense of confidence in the human resource department that it is wellmanaged
and prepared to meet potential challenges and opportunities.
 To maintain or enhance the organization’s reputation in a community.
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An audit is a systematic process, which examines the important aspects of the
function and its management, and is a means to identify strengths, weaknesses
and areas where rectification may be warranted. An audit is done on sampling
basis. And in 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:
 To identify and address HR-related problems.
 To seek out HR-related opportunities.
 To conduct due diligence for mergers and acquisitions.
 To support initial public offerings.
How an audit is conducted is very often determined by it’s 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 from the intended outcome.
The audit process
The HR audit process is conducted in different phases. Each phase is designed to
build upon the preceding phase so that the organization will have a very strong
overview of the health of the HR function, at the conclusion of the audit. These
phases include:
Pre-Audit Information: This phase involves the acquiring and review of relevant HR
manuals, handbooks, forms, reports and other information. A pre-audit information
request is forwarded to the client who compiles the necessary information for
review by auditors.
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Pre-Audit Self-Assessment: In order to maximize the time spent during
subsequent portions of the audit, a pre-audit self-assessment form, if sent to the
client can be of use. The self-administered yes/no questionnaire asks a number of
questions about current HR policies and practices.
The completion of this self-administered questionnaire allows auditors to identify
key areas for focus during the HR audit.
On-site Review: This phase involves an on-site visit at the client’s facility
interviewing staff regarding HR policies and practices. A very in-depth HR audit
checklist is completed.
Records Review: During the on-site visit, a separate review is conducted of HR
records and postings. Employee personnel files are randomly examined as well as
compensation, employee claims, disciplinary actions, grievances and other
relevant HR related information are checked.
Audit Report: The information gathered is used to develop an HR audit report. The
audit report categorizes action needs into three separate areas. The areas that are
urgent and important (UI), not urgent needs but important (NUI), not urgent but not
important needs (NNI)), and important opportunities needs (IO). As a result of this
scheme of classification, managements can prioritize their steps.
Example of the Audit of the Local HR Department of a
Multinational Bank
The bank to which this audit relates is a well-known multinational organization with
offices in many countries. Under the present operating principles, the HR
department is audited once every two years. As it is an international organization,
the practice usually followed is that an Audit Team is compiled from one or more
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countries, on the basis of the auditor’s previous experience in a functional area, as
well as the overall understanding of the workings of the HR department.
The local HR department is usually given notice in advance of the upcoming audit.
Proper arrangements are made for the travel and stay of the auditors. A pre-audit
report is also formulated by the HR department, which consists of the overall
structure of the department, the functional responsibilities of the members, the
number of years of experience and background of the personnel in terms of
education and training etc. This report is sent to the leader of the audit team in
advance, usually two weeks before the start date of the audit, so that he/ she can
identify areas to focus upon, share the information with the area specialist in his
team, and formulate a more accurate audit plan. The team leader will have
considerable experience in setting overall status of the audit plan, an
understanding of the business areas and dynamics of the country in question.
Upon arrival, the team leader will meet with the Country Business Manager and
the HR Head, as well as Senior Executives of the various business lines. This is to
gain a familiarization with the state and goals of the business and its key
personnel, as well as their expectations. These can then be translated into what
should be the focus of the audit (Compliance and Risk Review vs. Functional
Competence, for example). It also gives the HR head an idea of the scope and
depth of the audit to be conducted.
The HR head will then meet with the key personnel in the HR department and
discuss the audit deliverables and discuss the audit deliverables and records that
will need to be on hand or submitted to the auditors for their review. Usually the
Deputy HR head is appointed as the Liaison Person for the duration of the audit,
acting as a bridge between the auditors and the HR department- in relation to the
needs of the auditors, explaining the objectives, policies and procedures of the HR
department and answering queries and making clarifications of the questions that
may be brought up. However the auditors should have a free hand in contacting
the area specialists regarding a particular function or responsibility for explanation,
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clarification or query. It will strengthen the understanding and perspective of the
functional area executives and broaden their horizons from a management and
audit point of view.
The HR department in question has been divided into the following functional
areas:
1. Hiring & Recruitment
2. Policies, Procedures & Staff Legal Aspects
3. Training
4. Compensation & Benefits
5. Management of the Human Resources Information System (HRIS) and Data
Feeds
6. Employee Loans
Thus there are six functional managers, each reporting to the HR head. The HR
head in turn reports to the Country Business Manager, with dotted line reporting to
the Regional and Divisional HR heads.