Human Resource Audit - Need and Purpose of Human Resource Auditing - Who should conduct the audit?

Concept of Human Resource Audit

The word “audit” comes from the Latin verb audire , which means, to listen. Listening implies an attempt to know the state of the affairs as they exist and as they are expected/ promised to exist. Auditing as a formal process is rooted in this feature of listening. Consequently, it is a diagnostic tool to gauge not only the current status of things but also the gaps between the current status and the desired status in the area that is being audited.

Auditing has been a routine exercise in the area of finance, especially because it is a statutory obligation. However, in case of Human Resource, there is no legal binding to adopt auditing. Some of the companies nevertheless prefer to have Human Resource audits. Like any audit, the Human Resource Audit is also a systematic formal process, which is designed to examine the strategies, policies, procedures, documentation, structure, systems and practices with respect to the organization’s human resource management. It systematically and scientifically assesses the strengths, limitations, and developmental needs of the existing human resources from the larger point of view of enhancing organisational performance.

The human resource audit is based on the premise that human resource processes are dynamic and must continually be redirected and revitalized to remain responsive to the ever changing needs. Human Resource Audits are not routine practices aimed at problem solving. Instead of directly solving problems, HR audits, like financial audits, help in providing insights into possible causes for current and future problems. The findings of these audits aid decision making in the organisation and are usually internal documents that need not necessarily be shared with the public.

Moreover, unlike Financial Audits that are routine, regulated and standardised, Human Resource Audits are non-routine and may be designed to cater to the unique needs of the organisation at a particular point in time. These are in fact, studies of an unusual nature. The manner in which the Audit is conducted could vary from self-directed surveys to interventions by outside consultants.

An HR Audit is like an annual health check-up, it plays a vital role in instilling a sense of confidence in the Management and the HR functions of an organisation.


Human Resource Audit means the systematic verification of job analysis and design, recruitment and selection, orientation and placement, training and development, performance appraisal and job evaluation, employee and executive remuneration, motivation and morale, participative management, communication, welfare and social security, safety and health, industrial relations, trade unionism, and disputes and their resolution. HR audit is very much useful to achieve the organizational goal and also is a vital tool which helps to assess the effectiveness of HR functions of an organization.

An HR audit also goes beyond looking at the hiring process into areas like employee retention, budgeting, training, employee compensation, management/employee relations and virtually any process or practice within the company that affects its people.

A periodic Human Resource audit can qualify its effectiveness within an organization. Human Resource audits may accomplish a variety of objectives, such as ensuring legal compliance; helping maintain or improve a competitive advantage; establishing efficient documentation and technology practices; and identifying strengths and weaknesses in training, communications and other employment practices.

Human Resource auditing is something that many companies do annually, just as they audit their financial information. This gives them an accounting of their workforce and the efficiency with which the organization as an entity deals with its people, from recruiting to firing. Human Resource auditing can be likened to a person going to the doctor for a general check-up to stay well. The process allows a company to get a general idea of where it stands so it can better correct any potential problems and plan for the future.

When it comes to physical health, prevention of problems is far better than waiting until a problem arises and trying to cure it. The same holds true for human resources auditing. Preventing problems is much easier than trying to fix them after the fact. Good Human Resource planning and auditing can help prevent those problems, and save companies money and difficulties.

Human Resource Accounting benefits the company ascertain how much Investment it has made on its Employees and how much return it can expect from this Investment.

What is Human Resource Auditing?

The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as

“the process of identifying and measuring data about human resources and communicating this information to interested parties”.

HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organisation.

Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as “the measurement and reporting of the cost and value of people in organizational resources”.

Who should conduct the audit?

The team that is responsible for the audit should represent a cross-section of the organization’s staff, including line staff, middle and upper management, and those responsible for HR functions.

Need and Purpose of Human Resource Auditing

The commonly understood audits are the established and regular accounting audits carried out in accordance with specific statutory regulations. However, in the case of human resource audits, there is no legal obligation, but enlightened managements have voluntarily accepted its usefulness depending upon the circumstances. The following circumstances may be cited as examples:

    • felt concern by top management,

    • compulsions of the external forces necessitating a situational audit,

    • business changing significantly influenced by international business decisions affecting human resource management, and

    • an urge on the part of human resource management professionals towards advancement of the practices and systems.

It is necessary to take a look at these and other questions. Human Resource audit is highly useful for the purpose

    • Does the organisation regularly forecast the supply of and demand for employees in various categories?

    • Do job analyses exist for all positions in the organisation?

    • Are all potential sources of recruitment identified and evaluated?

    • Are measurable selection criteria developed and used while filling up jobs?

    • Do effective training and development programmes exist?

    • Is there a performance evaluation system that helps assess past and potential performance?

    • Is the remuneration programme designed to motivate employees?

    • Is the plant unionised?

    • Does a grievance procedure exist?

    • Does the organisation have high quality of work life?

    • Does the HRM practice contribute to organisational effectiveness?

    • Does the management underestimate the capacity of HRM to contribute to organizational effectiveness?

Approaches to Human Resources Audit

    1. The following approaches are adopted for purpose of evaluation: Comparative approach

    2. Outside authority approach

    3. Statistical approach

    4. Compliance approach

    5. Management by objectives (MBO) approach

Comparative approach

In this, the auditors identify Competitor Company as the model. The results of their organization are compared with that Company/ industry.

Outside authority approach

In this, the auditors use standards set by an outside consultant as benchmark for comparison of own results.

Statistical approach

In this, Statistical measures are performance is developed considering the company’s existing information.

Compliance approach

In this, auditors review past actions to calculate whether those activities comply with legal requirements and industry policies and procedures.

Management by objectives (MBO) approach

This approach creates specific goals, against which performance can be measured, to arrive at final decision about organization’s actual performance with the set objectives.

Sample Human Resource Audit question

    • How effective is the selection process in ensuring that people are placed in appropriate positions? Explain.

    • How effective is the appraisal process in accurately assessing performance? Explain.

    • How effective are rewards (financial and non-financial) in driving performance? Explain.

    • How effective are the training, development, and career planning activities in driving performance? Explain.

    • How effective is the appraisal process in differentiating performance levels for justifying reward allocation decisions? Explain.

    • How effective is the appraisal process in identifying developmental needs of individuals to guide training, development, and career planning? Explain.

    • How effective are the training, development, and career planning activities in preparing people for selection and placement into new positions in the organization? Explain.

    • Overall, how effectively are the five components integrated and mutually supportive? Explain.

About Organization and Structure

    • Is there an organizational chart?

    • Does the chart include both employees’ names and position titles?

    • Does the chart show reporting relationships?

    • Is the chart updated as changes occur?

    • As the needs of the organization change, does its structure change?

About HR Department Organization

    • Is the department sufficiently staffed for the industry and the size of organization?

    • Is the budget in line with other organizations of similar size and industry?

    • Has the company been involved in any employment lawsuits?

    • If there have been suits, what were the outcomes?

    • Is there a job description for each position in the department?

    • To what position does the top HR position report?

    • Does the HR Department have a mission statement?

    • Is the HR mission statement consistent with the vision and mission of the organization?

About functions of the Human Resource Department

1. For what functions is the HR Department responsible?

2. Should the HR Department be responsible for all of the functions listed above?

3. Should the HR Department be responsible for functions that are not listed above?