A healthy HR function in an organization is as important as the physical and mental well being of a human body. Typically the basic reason why organizations prefer to conduct an HR audit is to get a clear judgment 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 well-managed and prepared to meet potential challenges and opportunities;
• To maintain or enhance the organization's reputation in a community.

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 its 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.

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, not urgent needs but important, not urgent but not important needs, and important opportunities needs. 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 non political 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 organization. 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.

On-site access:

The on-site portion of the audit is the most critical.

Using audit findings

How does an organization use HR audit results? Since the HR audit results are classified, an important aspect is already taken care of. Critical needs should be the first ones to be addressed. Organizations generally have three options for dealing with audit results.

• Use the HR audit as a blueprint or action plan for addressing HR needs;
• Address as many needs as possible using the organization's internal expertise and resources;
• Contract out those need areas where internal expertise and resources are not available or do not fit in the core competencies of the organization.

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. The key to an audit is to remember that it is a tool to discover and not to test. There will always be room for improvement in every organization

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