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E D I T E D BY D O U G L A S Z I E G E N F U S S RESEARCH
CONNECTION
The Human Resources Audit
Adding HR to the
regular audit cycle can
help ensure major risksaren't overlooked.
BY KELLI W. V ITO
RENDS IN HUMAN RESOURCES {HR)management often find their way
into theheadlines, forcing organizations to takenotice of their
potential risks. Some recentissues include executive
managementethics, skyrocketing health-care costs,employee fraud,
and MR outsourcing.
Other risks associated with HR includenoncomphance with
employment laws,inadequate compensation and benefitplan design, not
maintaining appropriatestaffing levels, and poor record
keeping.Despite all of these risks, internal audi-tors have only
recently begun to considerregularly auditing the HR function.
Auditors may be surprised at the broadscope of HR issues to
review. A com-prehensive HR audit includes the mainfunctional areas
of workforce planning,employee development, compensation
andbenefits, employee and labor relations, andrisk management.
WORKFORCE PLANNINGA common definition oi workforce plan-ning is
"to have the right number of peo-ple, with the right skills, at the
right timeto perform the required work." An audi-tor reviewing
workforce-planning effortsshould focus on whether HR is
performingadequate analyses and developing actionplans to ensure
the organization is not leftwith a shortage of qualified
workers.
HR departments often spend significanttime recruiting and
selecting job candi-dates. Auditors should assess whetherHR is
documenting applicant informa-tion accurately and timely and
whetherrecords are current. Auditors should alsoverify that HR is
using suitable recruitingsources that are capable of furnishing
ade-quate numbers of qualified applicants.
Risks associated with the inter\aew pro-cess include permitting
untrained managersto ask illegal questions, requiring applicant
tests that arc invalid or illegal, and docu-menting
inappropriate reasons for selectionor nonselection. Supervisors
should not beasking applicants questions related to theirrace,
gender, religion, marital status, dis-abilities, ethnic background,
or country oforigin. U.S. organizations should be carefulnot to
develop hiring tests that vi(jlate theEqual Employment Opportunity
Commis-sion's 4/5ths rule in minorities hired.
In reviewing the organization's structure,auditors should look
for red Hags such asfirst-line supervisors with spans of controltoo
great to he practical; middle managerswith lines of authority over
only one othermanager, and chains of command that arenot clearly
designated or that reflect mul-tiple, conflicting reporting
relationships.Problems in this area can result in conflictsbetween
departments, inefficiencies, inabil-ity to keep up with customer
demands, andlow employee morale.
In organizations that hire contractors,auditors should ensure
controls are in placeto monitor these individuals or pnividers.
Inthe United States, contractor duties shouldbe routinely monitored
to ensure they meetInternal Revenue Service requirements
forcontractor versus employee status.
HR also has a vital role in analyzingemployee turnover. Auditors
can reviewturnover analysis and the exit interviewprocess to
determine whether high turn-over is putting a strain on
recruitingefforts and work productivity and whethermanagement is
appropriately addressingissues raised by exiting employees.
EMPLOYEE DEVELOPMENTTraining is notoriously one of the
firstprograms to he cut in a budget crunch.However, a decrease in
training can havea direct impact on performance and ulti-mately on
an organization's bottom line.Auditors should assess whether HR
is
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monitoring training needs and makingadjustments, offering the
appropriatelevel of training for different positions,and conducting
cost-benefit analysis fortraining programs.
One of the greatest risks an organizationcan face is supervisors
who are not trainedin employment law or how to manage
theirsiihordinates' performance. When auditingthe employee
performance managementsystem, auditors should assess
whetherappraisals are done timely, are based onjob-specific
criteria, and do not documentinformation that could be
considereddiscriminatory. Ineffective performancemanagement systems
can result in a lackof good informal feedback from managersto
employees, minimal employee develop-ment, and low employee
engagement levelsaffecting organizational productivity.
There are also risks associated withemployee counseling and
discipline. Audi-tors should verify that management docu-ments
performance problems and actionstaken, including acknowledgement
thatthe employee was made aware of the prob-lem. This is important
because disciplinedemployees may file an internal grievance
or external complaint or lawsuit. Manage-ment's documentation
should include sup-port for the decision made because it
couldbecome subject to further scrutiny.COMPENSATION AND
BENEFITSEmployee reward systems, including allcompensation and
benefits programs, areone of the most complex HR systems. Areward
system should help support theorganization's strategic mission,
motivateemployees, and reward performance. Com-pensation systems
should be both externallycompetitive and provide internal
equity.Auditors may want to work with a compen-sation expert when
reviewing this area.
During the audit, auditors should ensurethat: a compensation
philosophy has beendeveloped that defines how the organizationwants
to pay people with respect to its posi-tion in the labor market;
there are currentjob descriptions for each position; an effec-tive
market analysis has been conducted; asalary structure has been
developed to helpmanage pay; and an appropriate job evalu-ation
system is being used to slot jobs intothe salary structure. A
review ot the organi-zation's salary administration process is
also
important to determine how employees arepaid throughout their
careers, includingmerit increases, variable performance
pay,promotions, bonuses, stock options, anddeferred compensation,
to name a few.
A key area of risk for U.S. organizationsis appropriately
complying with the FairLabor Standards Act (FLSA) regardingovertime
pay. Organizations must cor-rectly classify each position as
nonexempt(subject to overtime pay) or exempt (notsubject to
overtime pay). In addition, theymust correctly calculate overtime
pay fornonexempt employees. A review of thepayroll function should
ensure that newhires, personnel actions, work hours,
anddifferential pay are efficiently processed sothat paychecks are
accurate and processedtimely. Auditors should verify controls
toensure that the confidentiality of personneldata is maintained,
addifions to base pay areappropriately calciJated and authorized,
fullcompliance with tax and other deductions ismade, terminating
employees' payrolls areprocessed appropriately, and payroll
costsare in line with budgeting objectives.
On the benefits side, employee benefitprograms often include
medical insurance.
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life insurance, vacation and leave policies,and some form of
orgimization-sponsoredretirement or savings plan. Factors to
con-sider in auditing benefit plans are exter-nal competitiveness,
cost effectiveness,management goals, employee needs, andcompliance
with state and federal laws. Inaddition to being financially
burdensome,poorly designed benefit plans may not sup-port an
organization's strategies.
EMPLOYEE AND LABOR RELATI0N5Much of HR administration deals with
theprocesses related to managing employeesthroughout their careers
with the orga-nization. There are several employmentrisks to
consider, including discrimination,harassment, wrongfiil discharge,
negligentbiring, retention, and employee privacy.Internal auditors
should ensure that HR: I las comprehensive policies and
procedures that are compliant withemployment regulations and
reflectbest practices.
Conducts employee attitude surveys andtakes action based on
survey results.
Miunt;uns appropriate employment filesfor each employee,
including separate
files that document demographic andmedical infonnation.How an
organization handles employee
complaints and grievances is an area wherea clear audit trail is
necessary. Documenta-tion should include the date, situation,
andnature of the grievance or complaint; theaction management has
taken; any inves-tigation results; and the final outcome
orsettlement. If an organization has a laboragreement, then policy
changes, attitudesurveys, and employee complaints andgrievances
have an added element of reviewand negotiation.
RrSK MANAGEMENTAccording to the Society for HumanResource
Management, the "people risk"is exposing organizations to more
liabilitythan traditional areas of risk management.With the surge
in worker's compensationexpenses, discrimination violations,
andother compliance issues, the risk function isoverlapping with
safety and IIR more thanever. Auditors' review of the
organization'ssafet)' and health program should focuson whether
work-site analyses to identiiyhazards and potential hazards,
stringent
prevention and control measures, andthorough training are
provided. HR shouldestablish controls to minimize risk, includ-ing
succession planning, adequate sever-ance and outplacement services,
executivecoaching and development, thorough HRhandbooks, documented
employee hiring,training and termination procedures, andinternal
employee surveys.
AN OVERLOOKED AUDIT AREADespite its integral role, MR has often
beenconsidered a "soft" area, and managementmay not understand the
inherent risksinvolved with this function. Adding anHR audit to an
organization's regular auditcycle pro\ades important risk coverage
thatmay have been previously overlooked.
KELLI W. VITO. SPHR, CCP, is the principal ofKV Consulting, a
human resources consultingfirm based in Austin. Texas, and the
authorof Auditing Human Resources from The IIAResearch Foundation
Handbook Series (2007).
To comment on this article, e-mail the authorat
[email protected].
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