Quantitative and Qualitative HR Auditing

Auditing of the HR function can be different things to different organizations.  As the auditing demands of our clients become emergently complex, we have been led to further explore the different alternatives present in literature and practice.  This has led us to an investigation and conclusion which we would like to share.   Auditing has evolved, becoming increasingly specific, until the term functional audit has emerged. The objective of a functional audit is to diagnose, analyze, control, and advise within the boundaries of the functional area being audited.

The HR audit is a type of functional audit. Thus, as a first approach, one could say that HR auditing consists of diagnosing, analyzing, evaluating, and assessing future lines of action within the framework of HRM.

HR 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 defining future lines of action in the HRM field. Thus, HR auditing must perform two basic functions. First, it must be a management information system whose feedback provides information about the organization’s compliance posture.  This in turn facilitates the development of processes to properly manage the HR function.  Second, it must be a way of controlling and evaluating the policies that are being applied, as well as the processes that have been established.

The purpose of this writing is to create an awareness of the alternatives present in the auditing function and to offer a few guidelines for the appraisal of the HR function. The objective is to present the different approaches with which the HR audit can be presented.

Approaches to HR Auditing

HR auditing has evolved in recent years to the point that it has ceased to be a mere instrument of control and has become a necessary decision making tool in personnel related matters.  As a result, all of the functions and competencies of HR auditing are being progressively expanded. In this way, a differentiation is made between two approaches relative to HR auditing: those centered in the function's internal aspect, and those centered on the external aspect.

From an internal perspective there is a trend of valuing its actions as a result of the activities undertaken and its costs. In this way, the department's capability would be judged on its ability to supply certain services to the organization at the lowest possible cost. Under this approach, the operational measurements traditionally used place the focus on activities, costs, or productivity ratios.

From an external perspective, if it is understood that the ultimate appraisal of the effectiveness of HR is based on their impact on the company's results, then the measurements should include results obtained outside the function (but inside of the company).

Another well-known classification of HR audit approaches is the difference between three focuses, which are the legal audit of performance or conformity, the operative or efficacy-based audit, and the strategical audit.

The Legal Approach in HR Auditing

This first concept of HR auditing is based on a legal outlook. This concept is centered on the verification that the current labor laws are being fulfilled. The audit should verify if the firm's policies, practices, and documents regarding employee hiring, retention, discipline, termination, and post-employment are both fair and legal. These practices and policies must: prohibit discrimination by offering equal employment opportunities; protect the employment seeker from being discriminated against on the basis of age; carry out minimum wages; and contain provisions regarding disabilities and reasonable accommodations for disabled workers.

The basic functions of the audit of performance as an element of HR auditing are divided in three parts.  The first function is examining to see if the firm is fulfilling all its administrative social obligations, as well as those relative to the collective rights of its personnel. The second is to study the relationship between the employees and the firm based on the legal statutes. The final function is verifying if the firm fulfills its financial obligations (for example, social security payments), as well as its informative ones.

Concern about labor risks has created a function within HRM with the purpose of altering working conditions by identifying the risks that could stem from them and implementing necessary preventive measures. Such preventive activity could fit perfectly into the legal approach of HR, although the effort that the company can make in this sense can go beyond the application of the existing risk prevention laws. The requirement for labor security and hygiene is a part of the search for quality of life in the workplace, which is becoming increasingly demanded from companies.

Focus of the Function Audit

The function audit centers on observing if the procedures applied are the adequate ones and if they function correctly. That is, checking to see if the relationship between objectives and procedures is a satisfactory one and if this has been achieved in the most cost effective manner.

The function of this level of the HR audit is to study and analyze each one of the specific areas of HRM. The analysis should center on the planned measures, the method of implementation, and the results obtained. In order to carry this out, the areas that are to be studied must first be identified. Afterwards, a list of the indicators that will serve to analyze each of them must be made. These indicators can be either quantitatively (absolute numbers or ratios) or qualitatively derived from the responses given by the people involved (management, employees, or consultants).  Much of the information can be derived from  Affirmative Action Plans data.  A list of the indicators corresponding to the different areas of the HR function could contain some of the following.

1) Description of the Company's Staff

The composition of the complete staff can be described by: reporting relationships, years of service, experience and academic background, and sex, among others; the number of permanent and temporary employees, and indexes of personnel rotation and absenteeism.

2) Job Analysis

Job analysis can include: the number of positions and the occupants per position; the status of the job descriptions in the company; the degree of detail in the job description forms; and the methods used to analyze and describe the jobs.

3) HR Planning

Planning includes the methods employed to plan personnel needs and the measures adopted to cover future regular or temporary personnel needs.

4) Recruiting and Personnel Selection

This area can be very extensive depending on the extent of data-gathering utilized by the company and includes: identifying the number of days needed to fill a vacant position; the number of applications received by work place categories; the average number of days between the time the application is received and a final response to the candidate is made; the average cost of recruitment and selection per job recruited; and the degree to which internal and external sources of recruitment are used.

5) Training

The training indicators are: the procedures followed and the frequency with which personnel training needs are analyzed; the criteria followed to define the content of the training programs; the evaluation criteria of the efficacy of the training programs; the percentage of the HR or departmental budget dedicated to training; the average number of hours of training per employee; and the percentage of employees that participate in training programs by work place categories.

6) Individual Career Development

These indicators include: the percentage of people promoted per number of employees; the percentage of vacancies covered internally and externally; and the average time per employee it takes to receive a promotion.

7) Compensation

Compensation can be measured by: the average wage per employee and wage difference among employees; the percentage of pay linked to the employees performance contribution; and the internal equity and external competitiveness of the compensation system.

8) Performance Appraisal

Evaluation indicators include: the level of usage of the performance appraisal system for promotion or career development; the level of feedback of results to the company's personnel; and the degree to which poorly performing employees are assisted in improving their performance.

9) Work Conditions

Work conditions can be assessed by the frequency and index of the graveness of work-related accidents and by the labor accident and sickness prevention policies that are in place.

The Strategic Audit Approach

The audit should also analyze if the personnel policies are in alignment with the general objectives and the organizational strategy of the company. It must also translate the HR strategy into plans and programs. Thus appears a new element of the audit of HR, the strategical audit, defined as "the evaluation of the adaptation of the HR policies and practices in their support of the company's general strategy."

The strategical audit of HR helps assure that the HR programs are aligned with the company's long-term objectives. In this way, the HR function is becoming a source of competitive advantage and is ceasing to be considered as a specialized and unrelated function that incurs high costs to the company. When performing this evaluation, the auditor must identify the company's organizational strategy before suggesting the HR policies that will contribute to its achievement. These policies are then compared to the HR practices that are currently being applied, which leads to the modification of some policies to better conform to the firm's strategy.

With this approach, the measurements applied must be useful in identifying if the HR activities are being developed adequately, if the correct results are being obtained, and if such actions add value to the business. The importance that management gives to its human capital is one of the most important factors that investors look for when assessing the attractiveness of a company.

Recognizing the strategical importance of HR for any organization, the measurements of results can lead to measuring the impact on business through the extraordinary benefits generated as a result of a better trained and motivated work force.

Some companies, on the other hand, have developed and applied a balanced scorecard approach to the HR function and treat it as a business unit in and of itself. HR leaders must use four different techniques to measure internal client attitudes, financial impacts, operative efficiency, and strategic capability.

Conclusion

Given that the human factor is a prime strategical element, it is logical that a measurement effort be made of the way the HRM function is undertaken in the company. That is the content of the HR audit, which goes beyond the simple investigative function, and is an extension of the traditional concept of the accounts audit.

The existing literature describes different approaches to HR auditing, including the legal approach, the function-based approach, and the strategic approach. All of them have been analyzed in this writing.

 

The legal approach centers on finding out if the company is complying with the current labor laws. Presently, it focuses mainly on the evaluation of the company's efforts in the prevention of work-related risks.

The function approach analyzes the application of different HR policies. Several measurement systems have been presented with the same basic ideas, which include the study of planned measures, the method of implementation, and the results obtained. Yet, these two approaches are limited to the operational and tactical fields, and do not evaluate if HRM supports or aids in the achievement of the company's strategy.

This is why the strategical approach has been developed as a means of determining if the HR function is a source of competitive advantage for the company. This third approach can make the company's management aware of the true importance of its employees by identifying them as a key resource worth optimizing. This idea can lead to mistakes when the employees come to be considered as property of the company. The correct interpretation would be to think of personnel not as human capital, but as the “owners and investors of human capital”.

 

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