Valuation of Human Resources

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.