Tag: Cost Control and Management Accounting Osmania University b.com Notes

Comprehensive:

An audit team must consider the business plan and its corporate strategies from the very beginning. The HRD auditor needs to take into account where the company intends to be after a definite period of time. The top level management needs to discuss these issues with the auditor. The auditor needs to examine the objective evidences such as long-term documents as well.

Thereafter, the auditor needs to assess the skill base required to perform the new roles and the current skill base of HRD staff in the company in relation to various roles and role requirements.

Following this, an auditor should verify the effectiveness of the existing HRD mechanisms in developing people and ensure that human competencies are available in adequate levels in the company. An HRD audit examines linkages with other systems. The HRD structure existing in the company should be adequate enough to manage the company’s HRD functions. Top management and senior managerial styles of managing people need to promote a learning culture.

The managerial styles should facilitate the creation of a learning environment. Auditors need to examine this difficult task.

Linkages with Other Systems:

There is a linkage between HR and other functions such as production management, maintenance management, total quality management, personnel policies, strategic planning, etc., in any organization. An audit examines these linkages between HRD and other systems. On the basis of evaluation, HRD auditors suggest future HRD strategies required by the company.

The suggestions further include:

(a) The structure the company needs to have for developing new competencies,

(b) The systems that need to be strengthened

(c) The ideal managerial styles and work culture conducive and compatible with HRD processes in the company. The managerial styles of the top management should also be emphasized.

Business-Driven:

HRD audit is business-driven and primarily focuses on fulfilling the objectives. Along with meeting objectives, HRD audit evaluates HRD strategy, structure, system, staff, skills and styles, and their appropriateness.

HRD audit is not a problem-solving exercise. HRD audit does not always provide solutions to organization-specific problems involving industrial relations, discipline, performance, etc. However, it throws some insights into the sources of the problem. It never gives feedback about any specific individu­als.

However, it gives feedback about the HRD department, the structure of the HRD departments, competency levels of the personnel manning, leadership styles, processes practiced, interrelationships of HRD system with systems, influence of the HRD on the other systems, etc.

HRD audit is one of the five systems used to measure the effectiveness of HR practices, the other systems being:

(a) Benchmarking

(b) HR accounting

(c) HR information system

(d) HR researches.

Business linkages of HRD are very crucial component of HRD effectiveness. HRD systems, competencies and the culture must be aligned with the business goals of the corporation. The alignment could be ensured through the direct linkages with customer satisfaction and employee motivation indices.

The HRD system should focus on the above dimensions. Questions like are the HRD systems aligned towards the important business goals of the corporation, and does the HRD staff reflect adequate understanding the commitment to the business goals of the organisation and are the HRD processes and culture suitable for achievement of goals need to be answered.

Human Resource Accounting (HRA) is the process of identifying, measuring, and communicating data about human resources. Flamhoitz (1974) defined HRA as ‘Accounting for people as an organizational resource. It involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organization’.

HR valuation tells the potential investors about the human assets of a company. The investors can assess the returns from human assets which infect is the return they get from the people who are managing their investments. It also assures the customers the company that it has the requisite human capital reserves to service their demand. The employees of the company also feel assured when they come to know that they are counted as assets by the company and not expenses. HR valuation also serves as a tool for improved performance appraisal and man power assessment. It also helps the management in realizing the present value of its future commitment of providing employee compensation. It also helps the management in taking appropriate decision regarding the use of human assets. Managers get valuable feedback regarding the effectiveness of their HR policies and practices.

Human resource valuation means the identification and measurement of the value of human resources and then supplying this information to the interesting parties. It is sometimes also defined as a method of assigning value to the employees on the basis of their future economic services to the organization. The employees of value at the present worth of the services they are expected to render during their stay in the organization or a particular period of time.

(1) Monetary measures include:

(a) Historical cost method

It suggests capitalizing the expenditure of the firm incurred on recruitment and selection, training and development of the employees and treats them as the assets of the organization for the purpose of HR accounting. This method suffers from a limitation that the capitalization of costs does not reflect its true value. The total performance has to be judged in relation with the total cost associated with the HR to reflect its value.

(b) Replacement cost method

The cost of replacement of individual and the re-building cost of organization is assessed to reflect the HR asset value of the individuals and the organization. However this method may not reflect either the actual cost or the contribution associated with HR

(c) Opportunity cost method

This model envisages the computation of monetary value and the allocation of people to the most promising activity and thereby assesses the opportunity cost of main employees through competitive bidding among the investment centre.

(d) Economic value method

The value of human resource is evaluated on the basis of contribution they are likely to make in the organization during their stay with the organization. The payments made to the employees in the form of salary, allowances and benefits are estimated and discounted appropriately to arrive at the present economic value of the individual.

(2) Non-Monetary measures:

(a) Expected realizable value method

The elements of expected realizable value like the productivity, transferability and promote-ability are measure using personal research, appraisal techniques or other objective methods. The productivity is measured by objective indices and managerial assessment. The promote-ability and transferability are measured in terms of potential using psychometric tests and subjective evaluations.

(b) Discounted present value of future earnings

This method was use by Rencis Likert who proposed three sets of variables-casual, intermediate, output. These helped in measuring the effectiveness over a period of time. Casual variable include leadership style and behaviour, the intermediate variable are morale, motivation, commitment to goals etc. and these in turn affect the output variables like production, sales, profit etc.

Issues in Human Capital Measurement

The Reality: People are Critical to Business Performance

Most business managers understand that the capabilities of their employees are the difference between “make or break” results. They are keenly aware that capable people position their company to compete with current competition while simultaneously creating the ability to go after new markets and innovative new products and services. They make an organization strong, agile and flexible, which gives a chief executive option. When the future is uncertain, options are what a chief executive needs most of all.

The Fantasy: Assets Can Be “Cost Reduced”

When these same executives sit down with “the numbers,” people look like a huge cost, which makes them a target for cost reductions. It is hard to know what exactly this cost consideration includes. Consider salaries, benefits, training, relocation, HR department and information technology expenses, plus the time managers spend in hiring, performance appraisals, disciplinary actions and employee development. Few companies actually know their total investment or the percentage these investments represent in their total operating expense. More importantly, what is the company getting for all that money? When this question can’t be answered, cost reductions are sure to follow. Yet if people are an asset, these costs are actually investments. Investments are made with the expectation of a return, which implies that the asset must have value. A “cost reduction” of an asset is called decapitalization. Companies that “downsize” may be decapitalizing and not even realize it.

Human Capital: The Real but Intangible Asset

Finance will tell us that people cannot be an asset. They are not owned or controlled by a company. This is true. However, people are the owners of their own human capital; the knowledge, skills, talent and enthusiasm that they invest in various aspects of their lives. Some of their human capital will be invested in their work. Therefore, the collective human capital investment people make in a company is an asset that meets all the criteria of an intangible asset a part of a company’s productive capability.

Managing by the Numbers

The “numbers” of financial accounting do not tell a business manager much about the investment or the value of human capital. These numbers can create serious distortions when making human capital investment decisions, causing managers to destroy shareholder value in the process of making the “numbers” look good. Managing “by the numbers” requires relevant measures. Most business managers know net income, revenues and earnings per share off the tops of their heads; they can recite return on equity and assets. Do they know the return on investment in human capital? Not likely. This is where ProOrbis’ expertise in human capital asset management and paradigm shifting methodology can transform the way large organizations view and value their human capital assets, leading to bigger and better returns on their investment and a more productive, sustainable organization.

Reporting

Human capital reports provides qualitative information on the employees, HR practices, trends in the company etc which can help the business grow. It covers aspects like organization structure, employee data, expertise & skills of the employees, salaries, policies etc. Human Capital Reporting is reporting of valuation of human resource inside company, which usually consists intangible values.

People inside organizations are becoming source of competitive advantage. As key talent become strategic advantage, human capital reporting is the way forward. Many companies have attempted to put valuation of human capital on their balance sheet. There is no framework to perform valuation of human capital. In such case, companies attempted their own methods for reporting in financial statements. This subjectivity creates lot of issues in the absence of no prescribe accounting standards.

Issues with Human Capital Reporting

1. No mechanism to verify correct valuation in terms of accounting

We know that all the financial reports published by the companies are audited. Financial Audit ensures correct accounting practices are followed and brings out any fraudulent activities in accounting. For HCR, there is no such audit. Hence HCR not subjected to verification.

2. Companies which initiated HCR as the good practice found themselves in financial trouble

Companies who reported their human capital could not maintain their own financial health. Because of this, HCR could not gain required attention to be followed as standard practice. HCR lost its value with sceptics of being used for accounting frauds. Human capital reporting needs to evolve through these issue to be best practice which would be aimed at highlighting the greater goal of potential of human resource the company has.

Organizations are increasingly finding it imperative to improve returns on investment, in order to stay competitive. Traditionally, accounting norms were viewed only from the financial perspective and were applied to all departments ranging from marketing, production, distribution, etc. HRM was limited to salary and administration and, while doing so, it was analysed from the perspective of provisioning and expenditure.

However, in today’s competitive scenario, it has become essential to analyse HRM activities and assess their contribution in a more systematic and methodical manner. The Indian industry has aggressively adopted various innovative systems, such as HR audit and balanced scorecard, with a macro perspective of balancing performance management across all organizations.

Human Resource (HR) Audit is not only a tool for evaluating the personnel activities of an organisation, but also an important aspect of the human resource management. It is a great deal of attention from Human Resource Practitioners.

It basically review the effectiveness of human resource practices. It gives feedback about HR functions not only to operating managers, but also the HR department about how very well operating managers are meeting their HR duties.

Therefore, audit is the key word, which control and check the Human Resource activities in a public organisation and an evaluation of how these activities support overall organisational strategy. In the opinion of Gray “The primary purpose of personnel audit is to assess how 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 gap between objectives, lay-out and results achieved. The end product of evaluation should be to formulate plans for corrections or adjustment.”

Systematic audit can help build strong rapport between the department and operating managers. Further, audit creates discipline in personnel staff and encourages them to move away from intuitive techniques to a more rigorous assessment of the likely benefits to be achieved.

This aims at the following:

• Introducing the theoretical framework behind concepts such as HRA, HR audit and balanced scorecard.
• Explaining the strategic framework behind their implementation in international vis-a-vis the Indian context.
• Presenting case studies to drive home learning.

Rationale

A very famous watch-manufacturing company ventured into eye-care business. They needed, besides other staff, optometrists at every eye-care retail outlet, across the nation. A good optometrist is a vital link between the company and the customers. Many times it is the optometrist who coverts a potential to an actual customer.

The company had a very good hiring team in place and was confident that it would be able to hire very able personnel for their eye-care division as well. Their primary targets would be various students graduating from different optometrists colleges in India. They had been following these processes for quite some time for their watch-division.

The company went ahead with its plan of expansion. Later, when the hiring team visited the colleges to hire optometrists, to their dismay they found that most of these graduates were not employable. They had requisite knowledge but did not have very high level of skill that would be required in this profession.

They had hardly any time to train them now. Left with no option, they hired optometrists from competitors at a very high market price. Obviously the acquisition cost went-up that was least expected when the company was expanding into a new business.

In retrospect they should have ‘audited’ their hiring process in light of the new business and seen whether they needed to incorporate any changes. This would have forewarned them about the real state of talent demand and supply situation and they could have organized some pre-hiring training for the various graduating optometrists.

This way they would have not only been able to keep their hiring cost under control but would have also been successful in sowing a greater degree of loyalty among their new recruits. A timely audit would have saved the company a lot and made their process more efficient.

The rationale of the audit hence can be outlined as:

1. Audit increases the efficiency of the HR team.
2. It helps in saving a lot of cost.
3. Helps in achieving internal and external benchmarking.
4. Helps in compliance issues to various quality initiatives in the company.
5. Helps in legal compliance.
6. Improves managerial performance.
7. Improves supervision and leadership at all levels of the organization.
8. Helps to retrospect and reflect upon various practices from a practical stand-point.
9. Audit extends HR business partner’s role and helps it make quantifiable contributions in business.
10. Helps in making the HR department more effective and credible.

A fundamental dichotomy in accounting practices is between human and non-human capital. As a standard practice, non-human capital is considered as assets and reported in the financial statements, whereas human capital is mostly ignored by accountants. The definition of wealth as a source of income inevitably leads to the recognition of human capital as one of the several forms of wealth such as money, securities and physical capital.

The term audit is normally associated with financial accounting and refers to the official examination and verification of a company’s financial and accounting records. HR audit is a similar concept in the field of Human Resource Management.

HR audit involves examining and reviewing the organization’s existing policies, procedures and practices regarding recruitment and selection, orientation and placement, training and development, job analysis and design, job evaluation, compensation, morale and motivation, employee health and safety, social welfare, industrial relations, etc.

According to Eric Flamholtz, “Human Resource Audit is a systematic assessment of the strengths, limitations, and developmental needs of its existing human resources in the context of organizational performance.”

Normally, in an organization, not all HR policies are formal and written; there are many informal policies, not officially documented. The HR audit involves the review of all the HR policies, procedures and practices currently adopted by the organization, irrespective of whether they are formal or informal.

The audit also helps to check that the company complies with the legal requirements and regulations regarding employees as laid down by the government of the country. By means of an audit, the company can determine its strengths and weaknesses in the area of HRM and plan accordingly to improve its processes and procedures related to the human resource function.

Human Resource Audit also called Personnel Management Audit is well practised in Western developed countries. In India, there is no lull audit like financial audit of the personnel or Human Resource activities in an organisation. Audit is evaluation, examination, review and verification of completed activities, to see whether they represent a true state of affairs of the activities in the department audited.

Human Resource audit refers to an examination and evaluation of policies, practices, procedures to determine the effectiveness and efficiency of the Human resource management and to verify whether the mission, objectives, policies, procedures, programmes have been followed, and expected results achieved. The audit also makes suggestions for future improvement as a result of the measurement of past activities.

It helps essentially in evaluating the various HR practices and processes in an organization against the set standards. ‘An HR audit involves devoting time and resources to taking an intensely objective look at the company’s HR policies, practices, procedures and strategies to protect the company, establish best practices and identify opportunities for improvement'(SHRM, India).

‘A Human Resources Audit is a comprehensive method (or means) to review current human resources policies, procedures, documentation and systems to identify needs for improvement and enhancement of the HR function as well as to ensure compliance with ever-changing rules and regulations’ (Strategic HR Inc.).

The HR audit shall include evaluating:

• Selection
• Job Analysis
• Recruitment
• Performance Management
• Performance Appraisals
• Performance Feedbacks
• Competency Mapping
• Training Process
• Rewards Management
• Benefits Management
• Employee Relations
• Workplace Safety
• Best Practices
• Compensation
• Managerial performance
• Supervisory Performance
• Leadership at various levels
• HR Business Partner Role
• HR Strategic Initiatives
• Legal HR issues.

(1) Historical Cost Method:

This method is based on costs incurred or recruitment, training, familiarization etc. It is developed by Rensis Likert. This is a very simple method based on traditional principles of accounting. Under this method an attempt is made to have a proper match between cost and revenue.

The plus point of this method is that the organization can show the value of human capital in its balance sheet and profit and loss account, the weak point of this method is that it fails to fulfill the need of developing a system of HRA based on systematic valuation of human resources.

(2) Replacement Cost Method:

Under this method the replacement cost of existing personnel is estimated. Replacement cost includes the cost of recruitment, training and opportunity cost for the intervening period. This serves the purpose of making valuation of human resources periodically. It helps in planning for human resources in future. The difficulty in this method is that the value differs from person to person making it difficult to find identical replacement of the present human assets.

(3) Economic Value Method:

The payment made to the human resources till their retirement are calculated and appropriately discounted to get their present economic value.

(4) Standard Cost Method:

This method is in improvement over replacement cost method. Under this method the standard costs of recruitment, training and development are developed and established every year to overcome complications in calculations. There costs represent the value of human resources for accounting. It is easy for implementation and control.

(5) Present Value Method:

Under this method the net contributions of employees to the earning of the organisation are discounted to have present value of human resources.

(6) Current Purchase Power Method:

In this method the historical costs are converted into current purchasing power of money with the help of index numbers.

(7) Opportunity Cost Method:

Under this method the value of human asset is determined in their alternative use or the next best alternative use. This value forms the basis for valuation of human asset of organisation. For calculation of opportunity cost bidding method is used. But it is difficult to decide bid or offer.

HR audit involves examining and reviewing the organization’s existing policies, procedures and practices regarding recruitment and selection, orientation and placement, training and development, job analysis and design, job evaluation, compensation, morale and motivation, employee health and safety, social welfare, industrial relations, etc.

According to Eric Flamholtz, “Human Resource Audit is a systematic assessment of the strengths, limitations, and developmental needs of its existing human resources in the context of organizational performance.”

Normally, in an organization, not all HR policies are formal and written; there are many informal policies, not officially documented. The HR audit involves the review of all the HR policies, procedures and practices currently adopted by the organization, irrespective of whether they are formal or informal.

The audit also helps to check that the company complies with the legal requirements and regulations regarding employees as laid down by the government of the country. By means of an audit, the company can determine its strengths and weaknesses in the area of HRM and plan accordingly to improve its processes and procedures related to the human resource function.

Human Resource Audit also called Personnel Management Audit is well practised in Western developed countries. In India, there is no lull audit like financial audit of the personnel or Human Resource activities in an organisation. Audit is evaluation, examination, review and verification of completed activities, to see whether they represent a true state of affairs of the activities in the department audited.

Human Resource audit refers to an examination and evaluation of policies, practices, procedures to determine the effectiveness and efficiency of the Human resource management and to verify whether the mission, objectives, policies, procedures, programmes have been followed, and expected results achieved. The audit also makes suggestions for future improvement as a result of the measurement of past activities.

There are mainly five approaches in the study of Human Resource Audit.

They are:

(i) The comparative approach

(ii) The outside consultant approach

(iii) The statistical approach

(iv) The compliance approach

(v) The management by objectives-MBO approach

(i) Comparative Approach:

In this approach, the auditors can collect and analyze data of their own company and also compare the data of different firm or company. After comparing the data of different companies, then the auditors choose the best one, which, is most suitable for the organisation. Thus, comparative approach helps the auditors to get best data.

(ii) Consultant Approach:

The organisation performance can improve only by an outside consultant. Consultant approach gives different types of ideas to the auditors which is most essential for comparative purposes in the organisation.

(iii) Statistical Approach:

In the statistical approach, certain statistical measures of performance are developed based on the company’s existing data. For examples-absenteeism and accident rates. These data help the auditors in assessing the positive and negative aspects of company’s performance.

(iv) Compliance Approach:

In the compliance approach, auditors review the past results and actions of the company’s policies and procedures. The check work of the auditors to go with the legal norms of the company’s policies and procedures.

(v) Management by Objectives (MBO) Approach:

The management by objectives approach deals with the specifications of goals against which performance is assessed. In this approach, managers set objective in their specific areas of responsibility.

The methods for evaluating and disseminating data take the form of:

(a) Comparison between time periods.

(b) Comparison of organisations.

(e) Trend lines, frequency distributions and statistical co-relations.

(d) Ratio analysis voluntary turnover rate

(e) Classification of data.

(j) Graphical or pictorial display.

Organizations are increasingly finding it imperative to improve returns on investment, in order to stay competitive. Traditionally, accounting norms were viewed only from the financial perspective and were applied to all departments ranging from marketing, production, distribution, etc. HRM was limited to salary and administration and, while doing so, it was analysed from the perspective of provisioning and expenditure.

However, in today’s competitive scenario, it has become essential to analyse HRM activities and assess their contribution in a more systematic and methodical manner. The Indian industry has aggressively adopted various innovative systems, such as HR audit and balanced scorecard, with a macro perspective of balancing performance management across all organizations.

Human Resource (HR) Audit is not only a tool for evaluating the personnel activities of an organisation, but also an important aspect of the human resource management. It is a great deal of attention from Human Resource Practitioners.

It basically review the effectiveness of human resource practices. It gives feedback about HR functions not only to operating managers, but also the HR department about how very well operating managers are meeting their HR duties.

Benefits

Role Clarity of HR Functions: People working in HR department must be very clear about their roles and responsibilities. They should have a clear understanding that their priority should be in the interest of the organization says HR audit. The role transparency function is performed by HR audit to ensure they understand their role.

Promoting Critical Business Plans: Every organization follows certain strategic plans in order to achieve organizational goals. HR auditor’s responsibility is to convince management to disclose these plans to employees of the organization so that they can participate comfortably in the decision-making process of the company. The aim is for employees to contribute their point of view about these plans and involve themselves completely.

Analysis of HR Functions: An HR audit plays a very crucial role in analyzing the functioning of the HR department. It helps in evaluating the performance of the employees and developing their leadership qualities. If necessary, the HR audit also helps in re-designing the development system of the HR department.

Improving Organizational Competency: An HR audit helps in identifying the strength and weaknesses of the present administrative system. If there is any drawback in the functioning of the system, the HR audit tries to develop techniques by which productivity can be increased. These positive impacts are also visible in HRIS, working procedures, delegation and clarification of roles and responsibilities.

Limitations

Any audit is undertaken to evaluate the effectiveness of systems and procedures. The HRD audit is not an exception. However, if the HRD audit is held due to the directives/fancies of the CEO, it can lead to negative results. For instance, initially the top management may be very supportive of the HRD audit process.

However, when the feedback is continuously negative, they may become hostile and sometimes even aggressive with the auditors. Quite often the failure of an HRD audit is on account of failure in the implementation of corrective action based on the feedback. There have been instances when the HRD audit is used for a negative purpose, such as victimizing the HR department and removing some of the HR employees.

HR Audit should be voluntary and should be proactively undertaken by the management. There should not be any compulsion to conduct HR Audit, in order to facilitate a fair and objective report generation.

An HRD audit does not give an evaluation of the individuals, but it essentially focuses upon units and systems. However, if consultants so desire, they can give a formal feedback to the individuals.

Lack of Objectivity:

Objectivity and other necessary skills are essential for managers who are doing audits so that the interpretation of the data collected can be done properly. The absence of objectivity hampers the audit. Many companies, on the other hand, hire outside auditors with HR auditing knowledge and skills.

Generally, experts themselves conduct an audit of the HR function. While auditing, the senior audit expert should be familiar with some of the common errors of interpretation, which may crop up while analyzing the outcome of employee opinion.

These include the following:

• Making a single observation based on the report,
• Assuming consensus based on the opinions of a limited group of individuals
• Rejecting observations without conducting more study;
• Interpreting reports as valuable without examining their implications; and
• Complicating situations based on majority viewpoints while disregarding minority opinions.

Absence of Established Metrics:

 It is rare for HR audits to be evaluated based on established metrics or other performance standards in most organizations. This is one of the major problems for the organization. Therefore, senior managers are advised not to conduct audits without appropriate metrics and performance standards. Measures and performance standards can be established by b) framing a meaningful audit process

Managers consider audits to be a threat:

In some organizations, managers may have a feeling of fear about the HR audit. This is because managers think that they will be caught for doing wrong acts, if they have done any, and will definitely be punished for the wrong acts. An HR audit is used by some unethical managers to induce obedience in employees.

Organizations reduce this fear of audit by not considering audit scores to directly assess any manager’s performance. Manager7s assessment should be done considering the execution of corrective measures to reduce the wrong acts found during the HR audit. No punishment should be given, in any case, as a consequence of the HR audit.

Human Resource Audit is a comprehensive method of objective and systematic verification of current practices, documentation, policies and procedures prevalent in the HR system of the organization. An effective HR audit helps in identifying the need for improvement and enhancement of the HR function. It also guides the organization in maintaining compliance with ever-changing rules and regulations. HR audit, thus, helps in analyzing the gap between ‘what is the current HR function’ and ‘what should be/could be the best possible HR function’ in the organization.

Though HR auditing is not mandatory like financial auditing, yet, organizations these days are opting for regular HR audits in order to examine the existing HR system in line with the organizations policies, strategies and objectives, and legal requirements. HR auditor can be internal or external to the organization. Generally, HR consulting firms render the service of external HR auditors.

Need

According to Yoder, the need for personnel audit is largely influenced by several conditions.

• Organisational Structure: Continuing feedback is facilitated if an organisation has a personnel department.
• 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.
• Communication and Feedback: An effective two-way communications system often reduces the need for a formal audit.
• Status of an Industrial Relations Manager: If he participates in the top management plans, reports, discussions and decisions, the need for a formal audit may be less frequently felt.
• Location and Dispersion: The need for a formal audit is directly related to the number of isolated plants.
• Administrative Style: The greater the delegation of authority and decentralisation of power, the greater the value of a regular and formal audit.

Significance

In modern times, personnel and industrial relations audits have been widely accepted as tools with which managers can control the programmes and practices of the personnel and industrial relations department.

• The changing role of the government, which intervenes more often and more extensively now, to control manpower management by an organisation with a view to protecting the interests of the employees, providing them with better working conditions and ensuring their economic security.
• A change in managerial philosophy and theory, as a result of which a management now feels that employees’ participation in the activities of an organisation, and their identification with it, have a tremendous influence on the working of that organisation.
• The rising wages, changes in the skills of technical and professional workers, and the increasing expenditure incurred on the industrial relations department these are the factors which have influenced and encouraged the trend in favour of a personnel audit.
• The increasing role played by trade unions and their strength, as a result of which they often question managerial competence in industrial relations.

HR audit is an important management control device. It is a tool to judge organisations performance and effectiveness of HR management. According to Dale Yoder, “Personnel audit refers to an examination and evaluation of policies, procedures and practices to determine the effectiveness of personnel management.”

It is an analytical, investigative and comparative process. It gives feedback about HR functions to operating managers and HR specialists. It enables to know about the effectiveness of personnel programmes. It further provides feedback about how well managers are meeting their HR duties. It provides quality control check on HR activities. It refers to determine the effectiveness and efficiency of HRM.

Process

Determining the Scope and Type of Audit:

Since HR is a very wide field, the company may either choose to conduct a comprehensive review of all HR functions or it may decide to review a few specific areas as it deems necessary. For example, a company may choose to review only the policies and procedures related to recruitment, selection and orientation policies.

Determining the Audit Method:

HR audits are usually conducted by using a questionnaire that elicits information about the relevant HR areas. The audit may also be conducted by interviewing managers and employees of the HR department to analyze how well they have understood the company’s policies and how efficiently these policies are being implemented. When using a questionnaire, care should be taken to design it in such a way that it elicits all necessary information regarding the areas to be audited.

Data Collection:

This step includes the actual process of collecting data about the organization and its HR practices. Information is collected by using the questionnaire and by interviewing relevant HR personnel about the HR procedures and policies being used in the company.

Setting the Standards:

To assess the efficiency of HR functions, the information collected has to be compared with some pre-determined standards. These standards have to be pre-set and any acceptable level of discrepancies should be specified clearly. Comparing the actual results with the standards will give an idea about the efficiency with which the HR functions are being performed.

Feedback about the Results:

After collecting information and comparing the results, the audit team summarises the findings and provides feedback to the company’s HR personnel and senior management in the form of an audit report.

The results of the audit should be discussed with the employees of the HR department so that they are made aware of the present condition of the HR functions in the company. Discussion with employees will also throw up new ideas for improving the policies and procedures in future.

Develop Action Plans:

Once the results of the audit are out, this information should be used for improving the working of the HR department. The findings of the audit should be categorised according to order of importance: high, medium and low. The organization should examine the areas of weaknesses as revealed by the audit and find ways to overcome them. Conducting HR audit would serve no practical purpose if no actions are taken.

While HRA has been in India for over a decade and leads BHEL, awareness is only being implemented now. However, the level is still small for awareness and acceptance, as many companies do not take the initiative, despite the fact that the data is available, to give shareholders public numbers.

The lack of an industry standard is a major deterrent. That means each company must develop its own standard, which can become an awkward process because many of them continue to improve their business. The establishment of a standard can help industrial organisations such as Nasscom. The need for extensive research is another aspect which works against accepting HRA. Many companies do not want to find their HR’s value complexly. While most (large) enterprises have access to these best practises, it is not an economically viable option for small and medium-sized enterprises. In addition, as is Naresh Taneja, HR Director of HCL Technologies, many people are uncertain how useful HRA is in decision-making (Mumbai, previously Gulf Computers). Due to the dynamism of this industry, it is difficult to predict what will be your future needs and how technology in the near future will shape. Only the HRA advantages are raised here. In addition, HR communication is voluntary. In this context, HR disclosures from companies across companies and industries are unstructured, inconsistent and incomparable. Even these HRA communications are of little assistance with decision making since they are unaudited and untrustworthy.

However, in order to overcome these problems, each company needs to develop its own standards which can be a tedious process, as no industry standard or industry standard exists. However, industrial groups such as Nasscom and Assocham can help to set a standard. Since the Indian Institute of Chartered Accountants (ICAI) does not have laws or rules in 1956, and since no accounting norm is in place, some companies have stopped this practise. ICAI and other regulatory and accounting authorities should draw up certain guidelines regarding the valuation and reporting of HR in order to ensure that the information disclosed is objective, reliable and relevant. A tool to compare and standardise HRA divulgations is the current HRADI. The accounting authorities should make efforts to integrate their opinions on this subject with the requests of decision makers to establish a uniformly acceptable HR assessment method and reporting method (management and investment). In knowledge-based sectors where HRA is regarded as the main elements to monitor its business activities, HRA can help organisations achieve their aims. In measuring and reporting on such valuable assets, the government and other professional and responsibility authorities should consider the high importance properly initiated by HRA at the national and international levels.