Month: October 2021

The P4 (Policies, Programmes, Practices, People) HR concept re­quires to be audited time to time. This will lead to maintain to growth and development of the organization. If you are guiding your HR func­tion through compliance and employee relations issues, you know how challenging your work can be.

With the Human Resource Audit, you can determine where you are, prioritize what you have to do and know for certain you have looked at the right issues. Your comfort level and profes­sional contribution will be confident about moving forward.

Human resource audit means the systematic verification of job analysis, job description, job design, records of recruitment and selection, orientation and placement, training and development, job evaluation, performance appraisal, motivation and moral, compensation packages, welfare and social securities as well as industrial disputes and their solutions.

HR audit is very much useful to verify the HR practices and a vital tool which helps to assess the effectiveness of HR functions and performances of an organisation.

An audit is a review and verification of completed transactions to see whether they represent a true state of affairs of the business or not. Thus, an audit is an examination and verification of accounts and records.

Human Resource (HR) audit refers to an examination and evaluation of policies, procedures and practices to determine the effectiveness and efficiency of HRM. In essence, HR audit refers to:

(i) The measurement of the effectiveness of the HRM’s missions, objectives, strategies, policies, procedures, programmes and activities and.

(ii) The determination of what should not be done in the future as a result of such measurement.

Principles

(i) Define the role of the HR function in the context of the organization’s current and future business plans.

(ii) Create a system for cost-effective hiring.

(iii) Develop programmes for the orientation and training of new employees.

(iv) Develop and manage employee communication.

(v) Prepare key personnel policies and make it available to employees and also train the employees in policy adherence.

(vi) Implement and install the HR IS system.

• Need for independence.
• Audit activities should be budgeted properly.
• Acknowledgment that there are many types of audits.
• Each type of an HR audit has its own goal, scope and might use different methodology.
• Established time frames for every phase/step of the audit.
• Trained auditors.
• Set standards for HR auditing.
• Reporting template and final audit report.
• Auditors should sign NDAs and keep information confidentiality.
• Auditors should agree preliminary on communication strategy.

HR audit is a functional audit. It consists of diagnosing, analyzing, evaluating and assessing future lines of action within the framework of HRM. HRD auditing is a basic tool for the management of a company. Its objective is not only the control and quantifying of results, but also the adoption of a wider perspective that will aid in designing future lines of action in the HRD field.

Thus, HR auditing must perform two basic functions, 1st; it must be a MIS, whose feedback provides information about the situation in order to facilitate the development of managing processes or the development of HRD. On the other hand, it must be a way of controlling and evaluating the policies that are being applied, as well the established process.

Types of Audits

An HR audit can be structured to be either comprehensive or specifically focused, within the constraints of time, budgets and staff. There are several types of audits, and each is designed to accomplish different objectives. Some of the more common types are:

• Best practices. Helps the organization maintain or improve a competitive advantage by comparing its practices with those of companies identified as having exceptional HR practices.
• Focuses on how well the organization is complying with current federal, state, and local laws and regulations.
• Function-specific. Focuses on a specific area in the HR function (e.g., payroll, performance management, records retention).
• Focuses on strengths and weaknesses of systems and processes to determine whether they align with the HR department’s and the organization’s strategic plan.

However, organizations are particularly vulnerable in certain areas. Most lawsuits can be traced to issues related to hiring, performance management, discipline or termination. Some additional risk areas that employers should carefully review in an audit include:

• Misclassification of exempt and nonexempt jobs. Almost every organization has job positions that have been misclassified as exempt from overtime eligibility. The complexity of wage and hour laws and regulations makes it easy to err in classifying a job as exempt, thereby exposing the employer to liability for past overtime.
• Inadequate personnel files. A review of sample personnel files often reveals inadequate documentation of performance for example, informal, vague or inconsistent disciplinary warnings. Performance evaluations may be ambiguous, inaccurate or outdated. Personal health information is often found in personnel files, despite medical privacy laws requiring such data to be kept separate. Accurate and detailed records are essential for employers to defend any type of employee claim, particularly unemployment compensation or wrongful termination claims.
• Prohibited attendance policies. Controlling excessive absenteeism is a big concern for most employers. However, the complexity of family and medical leave laws, with sometimes conflicting state and federal protections, has made many formerly acceptable absence control policies unacceptable. Absences affect workers’ compensation, family and medical leave, disability accommodations, and pregnancy laws. Organizations often have attendance policies that do not comply with relevant laws and regulations or that grant employees more protections than required.
• Inaccurate time records. Employers typically require nonexempt employees to punch a time clock or complete time sheets reflecting their time worked each week. The records generated by these systems typically are the employer’s primary means of defense against wage and hour claims, so time-keeping policies and practices must be clearly communicated and consistently administered.

The HR audit process is conducted in different phases. Each phase is designed to build upon the preceding phase so that the organisation 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. Pre-Audit Self-Assessment: In order to maximise 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 categorises 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.

The critical areas the, comprehensive HR audit covers all areas of HR management like recruitment practices, training and development, compensation and benefits, employee and union relations, health, safety and security, miscellaneous HR policies and practices-welfare, strategic HR issues, manpower planning/budgeting. Besides classifying needs in each of the above areas, the HR audit also cites relevant laws, cases and research to support the recommendations.

Preparation for an audit Auditor engagement: If external firm carrying out the audit, it is preferable to set terms in writing defining and agreeing on scope. If using internal resource it is better to appoint them formally with clarity on scope and select persons who are nonpolitical or those who are not high on hierarchy. Also, if internal persons are auditing there must be training in auditing.

Documents, manuals, handbooks, forms and reports auditor must have access to relevant information contained in employee files and other confidential documents of the organisation. Auditors must be given unrestricted access to records, once they sign agreement for confidentiality.

Data gathering: Completion of a self-assessment questionnaire significantly expedites the audit process and allows for better audit planning.

Audit of the HR policies and practices is the assessment and evaluation of the conventional HR practices being followed in an organization. These include:

• Staffing: Assessment of methods and procedures used in recruitment; recruitment costs; recruitment efficiency in filling vacant positions; efficiency of selection procedures.
• Workforce planning: Assessment of existing resources; future personnel requests; analysis of succession plan; and staff turnover analysis.
• Performance management: Analysis of methods used in the personnel assessment; assessment of results and effects of the personnel evaluation process.
• Compensation and benefits: Analysis of motivation forms; their relationship with personnel motivation; analysis of the level and structure of compensation.
• Training and development: Analysis of targets and forms of training; study of the training program; assessment of personnel after completing training; the efficiency and results of the training program; analysis of development system of personnel in the organization; job analysis; analysis of the plan for personnel development.

Human Resources Accounting is involved in identifying, measuring, capturing, tracking, and analyzing the potential of a company’s human resources and communicating the resultant information to the stakeholders of the company.

It is a process of measuring the cost and value of human resources (employer and employee) and delivering this information to concerned parties. Human resource accounting measures expenses associated with human assets in recruiting, selecting, hiring, training and developing them. This accounting term determines the present economic value of all its employees and managers.

Benefits:

Communicates Information to Investors

It delivers all relevant information to investors. Human resource accounting analyses and prepares reports about manpower working in the organisation and present this report to all concerned parties. These reports clearly depict the productivity of manpower which can be used in determining the true picture of the business state. Investors can easily determine profitability and future growth aspects of business and accordingly take their investing decisions.

Motivates Employees

Human resource accounting helps the organisation in taking all necessary steps for the growth of its employees. It tells the organisation full details about its employee’s affairs and their condition. This helps in designing various welfare programmes by business which improves their satisfaction level. Employees feel that the company cares for them which boost their morale and motivates them to work hard towards their roles.

Designs Training And Development Programmes

Human resource accounting helps in designing proper training and development programmes for employees. It helps in measuring the output by recording and analysing all data about manpower. Inefficiency of employees can be easily detected. This helps in providing training and education to all employees according to their skills and experience.

Better Manpower Planning

Human resource accounting helps organisations in properly planning and managing their human resources. It records each and every detail about manpower working with the organisation. It measures the cost and value of human resources as well as determines their strengths and weakness. All the information collected and recorded is communicated to management from time to time. This helps management in taking right decisions and better planning of human resources.

Attracts Best Manpower

Human resource accounting is practised by reputed and big corporates. Implementation of Human resource accounting improves the goodwill and image of business. Many talented and competent employees want to be the part of these reputed companies. This, therefore, helps in attracting and retaining the best manpower in business.

Formulates better personal Policies

Human resource accounting helps in the formulation of better policies for human resources. It supports the managers in framing policies related to promotion, transfer, job satisfaction, favourable working environment etc. Management gets full details about all employees through human resource accounting which helps them in framing strategic policies as per the requirement of time.

Proper Utilization of Human Resources

Efficient utilisation of manpower is important for every business. It has an efficient role in increasing profitability and productivity. Human resource accounting aims at increasing the efficiency of human resources. It helps in monitoring the activities of manpower by supplying relevant information to managers. Different steps are taken by management from time to time to improve their performance as per information provided to them.

Limitations

Unrealistic Valuation

Human resource accounting seems to be unrealistic approach of valuation. The lifespan of human is uncertain and it cannot be estimated at all. Taking assumption on human life may go wrong at any time thereby resulting in false results.

No Evidence

There is no proper empirical evidence available till yet to prove the utility of HRA. It is a hypothesis that HRA acts as managerial tool which facilitates the effective and better management of employees.

Absence of Standardized Procedure

The human resource accounting does not have any standardized procedure of valuation. It lacks universal acceptability of principles unlike conventional system of accounting. The methods of human resource accounting lack wider acceptance which avoids uniformity. Moreover, the principles are based on various assumptions that may prove wrong at any point of time.

No Clear-Cut Guidelines

Human resource accounting lacks clear cut guidelines on how to differentiate the ‘cost’ and ‘value’ of human resources. There are many drawbacks present in the system used currently for valuing human resources. Life of human is uncertain and therefore valuing them like assets under such foggy conditions is improper. The human resources unlike other physical assets cannot be owned, retained and used as per the pleasure of organization. Also, human resources may leave the organization after getting valued. It is not an easy task to value human resources under such conditions.

Idea May not be Accepted

There is a fear that trade unions and employees may not accept the idea. There may be a division of employees due to their valuation at different levels as those who are low valued may feel discouraged. Trade unions may disapprove idea on the fact that employees will be rewarded on the basis of their valuation in organization.

Dehumanize Human Resources

The valuation of human resources may result in dehumanizing and manipulating the employees. Persons who are given low values are demotivated or discouraged which adversely influence their competencies in work. A feeling of jealousy may erupt among employees when they came to know the differences in relative values leading to disturb the team solidarity.

Measurement Problems

Another major drawback in accounting of human resource is the presence of numerous measurement problems. There is no agreement in between the finance professionals and accountants with regard to method of measurement. The manner in which human resources should be valued and shown in balance sheet is not specified. In addition to this, problems are further compounded due to question of amortization/recovery rate.

Human Resource Accounting (HRA) is the process of identifying, and reporting investments made in the human resources of an organization that are presently unaccounted for in the conventional accounting practice. It is an extension of standard accounting principles. Measuring the value of the human resources can assist organizations in accurately documenting their assets. In other words, human resource accounting is a process of measuring the cost incurred by the organisation to recruit, select, train, and develop human assets.

Recent years have witnessed the emergence of numerous trea-tises on the relative merits of human resource accounting. While the unprecedented pervasiveness of human resource literature suggests that the topic is new to our era, the debate itself is by no means novel. Indeed, the concept of human resource accounting is deeply rooted in the history of economic thought.

To provide a desirable perspective of the current debate and thus a basis for an accurate assessment of the probable impact of human resource accounting, a familiarity with the development of the concept is necessary. The intent of this article is to trace the historical evolution of human resource accounting to its present stage of development. Its purpose is to impart the perspective essential to a thorough understanding of the pros and cons of human resource accounting systems.

Human Capital in Early Economic Thought

Throughout history economists have been concerned with the concept of human capital, but their treatment was limited to including human beings and their skills in a definition of capital.

Several motives for treating human beings as capital and valuing them in monetary terms were expounded. Of these a central motive is apparent to serve as a basis for making a decision or to influence the decisions of others.

Meanwhile, a small group of relatively unknown economists un-dertook to develop techniques to measure the worth of human capital. Basically, two methods of estimating the value of human beings emerged:

• The cost-of-production
• The capitalized earnings procedures.

In the cost-of-production approach costs incurred in “producing” a human asset are estimated. The capitalized earnings procedure consists of estimating the present value of an individual’s future in-come stream. As described below, these two early approaches parallel closely the two basic approaches to human resource ac-counting currently advocated in the current literature.

Early Valuation Methods

Specific methods of human asset valuation, while consistent with one of the two general approaches, varied widely from one advocate to another. One of the first attempts to estimate the money value of human beings was made around 1691 by Sir William Petty. Petty considered labor the “father of wealth” and thus felt that labor must be included in any estimate of national wealth. Accordingly, this first attempt at human asset valuation estimated the value of the stock of human capital by capitalizing the wage bill in perpetuity at the market interest rate; the wage bill being determined by deducting property income from national income.

The first truly scientific procedure for finding the money value of human beings was devised in 1853 by Farr. He advocated the substitution of a property tax for the existing English income tax system. The former would include property consisting of the capitalized value of earning capacity. His procedure for estimating capitalized earning capacity was to calculate the present value of an individual’s net future earnings.

Ernst Engel’s writings around 1883 recommended a cost-of-pro-duction procedure for estimating the monetary value of human beings. He reasoned those expenditures for rearing children were costs to their parents and that this cost might be estimated and taken as a measure of their monetary value.

In 1867, a “composite” version reflecting Farr’s capitalized earn-ings and anticipating Engel’s cost-of-production approach surfaced when Wittstein argued that an individual’s lifetime earnings are equal to his lifetime maintenance cost plus education.

Alfred Marshall was perhaps the most forceful proponent of the concept of human assets. His theoretical approach took on a capitalized-net-earnings flavor. However, departing from his conceptual arguments, Marshall held that it would be out of touch with the marketplace to treat humans as capital in practical analysis,

Human Resources as Consumption Expenditures

Marshall’s view of human capital as being “unrealistic” was per-haps a major contribution to the virtual exclusion of the concept of human resources from the main stream of economic thought from the beginning of the twentieth century to the recent renewal of interest. Marshall’s view, if not a causal factor, is certainly descriptive of the general view that it was neither appropriate nor practical to apply the concept of capital to human beings.

Besides this accepted assessment, various other reasons prob-ably help explain the exclusion of humans from the concept of economic capital. Generally, the mere thought of investments in humans was offensive to most people. Additionally, it has been all too convenient in marginal productivity analysis for economists to treat labor as if it were a unique bundle of innate abilities that are wholly free of capital.

These reasons were probably sufficient to exclude human capital from the core of economic thought for several decades. Expenditures for humans were viewed as “consumption,” in economic jargon, rather than as “investments.” This treatment by economists had a significant impact upon the treatment accorded human resource expenditures by accountants.

Several of the underlying concepts of modern accounting theory are derived from classical economic theory and many of these matured during the period in which human capital was excluded from practical consideration by economists. Because of the close conceptual relationship between early accounting and economics, accounting theorists ignored human assets as the concept was simultaneously ignored in economic analysis. When economists began to treat investments in human resources as “consumption” rather than “investments,” accountants established that these expenditures were “expense” rather than “assets.”

Renewed Interest in Labor Intensive-Specialized Economy

The advent of massive governmentally supported social programs in the decade of the 1960’s rekindled the interest of economists in human assets. Particularly, economists sought to influence the direction of the massive investment in these social programs. They sought to evaluate these programs in terms of return on investment. This desire led to the necessity of thinking of such expenditures as capital rather than consumption expenditures.

Increasingly massive investments by industry in human assets have been cited as compounding the impact of the error of excluding human assets from capital. The large increases in real earnings of workers, essentially unexplained by classical analysis, can reasonably be attributed to return on investment in humans,

Moreover, Mincer has demonstrated the causal relationship between amount of training and interoccupational differentials in personal income.

The contribution of labor toward the growth rate of real national income is increasing as a percentage while the percentage contrib-uted by physical capital is decreasing. Labor’s increasing marginal product can be attributed in part to expenditures for training. Re-search by Thurow directed attention toward the existence of human capital resulting from investments in training programs.

The revival of interest by economists in the topic of human capital was accompanied by, or perhaps caused, an examination of the concept of human resource accounting by accounting theorists. Until then, accountants had considered the problem of valuing human resources to be part of the larger problem of valuing goodwill.

The recent research in this area attempts to distinguish economic values attributable to the human resources of a firm from the values attributable to other components of goodwill. These projects and limited implementation of research results is subsumed under the title of human resource accounting.

Research in human resource accounting reflects the two routes evidenced in contemporary accounting theory. One segment of the research is directed toward the investigation of concepts for the measurement of human resource costs: original cost, replacement cost, and opportunity cost. Another segment investigates the determinants of the value of human resources of employees as a group or of individual employees. This branching of current research in human resource accounting closely parallels the “cost of production” and “capitalized earnings” measurement approaches taken by early economists many decades ago.

Attempts to measure human resource cost have resulted in the development of three different concepts and measurement models. The first of these measurement concepts, original cost, is illustrated in the works of Brummet, Flamholtz, and Pyle who individually and collectively have developed concepts, models, and techniques for measuring the historical cost of human resources. Concern has been expressed over the historical cost concept namely, that the real economic value of the investment may be significantly different than its cost

The model of Brummet, et. al. is a generalized model which can be extended to incorporate replacement costs. Other researchers have developed models for the measurement of human resource replacement cost. The end result of the operation of such models is a measure of the cost to replace individuals occupying organizational position.

Perceived deficiencies in the replacement cost approach to measurements led others to develop the concept of opportunity cost to value human resources. Hekimian and Jones, for example, have suggested a system of competitive bidding to obtain managerial assessments of opportunity cost of human assets. Like the other measurement concepts, opportunity cost measurement has its critics as well.

Essentially, the suggestions to value human assets at historical or original cost are accounting adaptations of the “cost of production” techniques developed by Engels in 1883 and suggested by Shultz in 1960. Proposals to obtain replacement or opportunity cost measures parallel the current conceptual debate in accounting theory to find an acceptable alternate to historical cost.

While one segment of accounting research in human resource accounting has been directed toward measurement concepts, an-other is directed toward the investigation of the determinants of the value of human assets. The development of this theory is proceeding from two different approaches.

Growing out of the studies on organization and leadership at the University of Michigan’s Institute for Social Research, Likert and others have attempted to develop a model of determinants of a group’s value to an organization. Hermanson proposed two possible techniques for the monetary valuation of the total human assets of a firm. Additionally, Brummet, Flamholtz, and Pyle as well as Lev and Schwartz have suggested methods to arrive at the value of employees as a group. In a different approach, Flamholtz has attempted to develop a model of the determinants of an individual’s value to a firm.

With the exception of Likert’s model, the methods proposed for determining the value of employees or groups of employees to an organization are similar in principle to the proposal of the econo-mist William Farr. At the core of the proposals is the realization that the value of people to an organization is the present worth of the future services they are expected to render the “capitalized earnings” approach.

Likert’s model per se is not intended to measure the value of human resources, but the efficiency of various types of management systems. Likert, Flamholtz, Pyle, and Brummet have suggested that measurement of the present state of the causal and intervening variables would provide a basis to forecast future end-result variables. The forecasted end-result variables would serve as a basis to forecast future contributions by employees. This would serve as a basis to value human resources.

Hermanson’s suggested methods attempt to provide protection against manipulation by management. The proposals utilize capitalized current excess earnings or modified future employee earnings as a measure of human capital. In both proposals the impact of the economic concept of value is apparent.

The proposal of Lev and Schwartz to capitalize future compensation is an adaptation directly comparable to that of William Farr. Flamholtz’s suggestion for the valuation of an individual utilizes a series of capitalizations corresponding to the service states the individual is expected to occupy.