Hr Audit Assignment Dt. 1.12.2018 By Prakash Chand Kandpal.pdf

NMIMS Global Access School for Continuing Education (NGA-SCE) Course: HR Audit Internal Assignment Applicable for December 2018 Examination Assignment Marks: 30 Instructions:       

All Questions carry equal marks. All Questions are compulsory. All answers to be explained in not more than 1000 words for question 1 and 2 and for question 3 in not more than 500 words for each subsection. Use relevant examples, illustrations as far as possible. All answers to be written individually. Discussion and group work is not advisable. Students are free to refer to any books / reference material / website / internet for attempting their assignments, but are not allowed to copy the matter as it is from the source of reference. Students should write the assignment in their own words. Copying of assignments from other stud ents is not allowed. Students should follow the following parameter for answering the assignment questions.

Question 1. Company XYZ, a technology start-up has grown rapidly since its inception 4 years ago. While the company is increasing manpower at the rate of 30% per annum, it is also losing a lot of key people. You have been appointed as the external HR Auditor for this company. What is the overall HR audit process you will follow? What is the specific approach you will take to audit the attrition in the company? (10 Marks)

Answer 1. Introduction A Human Resources Audit (or HR 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 assess compliance with ever-changing rules and regulations. HR Audit has become an integral part of HR function and activities during recent times wherein it is gauged if the HR function and its sub-functions are functioning properly or not. Any gaps in the policies, procedures, rules, regulations, compliances etc. is assessed through HR Audit and corrective measures are taken. Transparent Audit helps an organization and its stakeholders understand whether the organization is functioning properly or not. Similarly, HR Audit helps organizational stakeholders understand whether the HR function is practicing HR as it is mentioned in its policy manuals or not. If it is functioning properly then the organization will have an edge over its competition through its HR policies and practices. Audit not only helps in bringing transparency but also helps bring quality standards in organization and its core functions. Many organisations treat HR just as a support function however, it is a vast comprehensive strategic function that can help an organization touch new heights with its future oriented strategies, policies, procedures, rules, regulations and compliance aspects. However, it is possible that HR function may develop certain leniencies, which may hamper business in short, medium or long term. To mitigate any kind of shortcomings and to correct them, HR Audit is necessary in all kinds of organisations. It keeps the HR function agile and helps create winning strategies for the organization. Despite the importance of HR Audit, if it is taken as a routine exercise then it may not be able to create any value for the organization and it may prove to be waste of valuables resources.

HR Audit Process HR Audit helps an organization in various ways. Some of the important ones are listed below: 1. 2. 3. 4. 5.

Assesses the overall performance of the organization. Evaluates employee performance. Ensures regulatory compliance. Helps during restructuring, mergers and acquisitions, divestments and downsizing. Assesses the alignment of HR functions with corporate and SBU strategy.

The general process of conducting an audit includes nine key steps, each of which is discussed in detail below: 1. Identifying HR Audit Objectives: This step helps determine the type and scope of the audit and is supposed to be the foundation of the HR Audit. In this important step, the scope objectives and process of HR audit are defined and documented. It is decided whether the scope will deeply audit the function or it will take a filtered scope. The overall audit scope from external auditor depends on organizational budget and overall corporate strategy of the organisation. It may depend on the need of the organization as follows: a) Determine the efficiency and effectiveness of the existing HR policies, practices and procedures. b) Assess the regulatory compliances by the HR department. c) Recognise any functional issues, suggest and take corrective/remedial measures i.e. attrition or employee turnover, absenteeism, employee grievances, learning and development needs, compensation and benefits issues, performance issues etc.

During this first step, it is also decided whether the HR audit will be conducted by internal auditor or external auditor and therefore the terms and agreements of doing the audit are negotiated and documented to come up with the required outcome. 2. Developing a Rough HR Audit Plan and its Process: The next step is to develop a plan for conducting the audit. Identify the goals of the audit, assemble the audit team and create a timeline for completing the audit. In this process the following may be factored in: a) b) c) d)

Where should the HR audit be started? How should the HR Audit be conducted? What areas should be focused during the HR audit? What could be the possible issues that may hamper the audit process?

This process helps in identifying resources, funds and manpower needed for HR audit. It helps decide sources that need to be considered for collecting the requisite data. 3. Collecting the Background Data – In this step information is collected from different sources that could be both internal and external depending upon the scope of the HR audit. This data helps in understanding the environment within the organization and outside. Besides, the HR plan is reviewed for further improvements. Different sources of data collection within the organization are as follows: a) HR policies, procedures and practices b) Corporate vision, mission and strategies c) Stakeholders of the organization, including the top management and HR team members External sources of data collection are as follows: a) b) c) d) e) f) g)

Labour market situations Regulatory and legislative environment Competitive stand of the organization and competition in the industty Industry-wise synopsis Political, social and cultural factors Environmental restrictions Opportunities and threats in the industry

4. Deciding the Criteria and Techniques used for the Collection of Data – In this step, the audit methodologies or techniques are decided. The instruments of audits are finalized i.e. questionnaire, interviews, observation, focus groups and document reviews. These instruments help the audit team in evaluating the specified areas. Part of the evaluation may be interviewing HR employees or department managers. The audit team conducts a thorough review using these instruments either single or in combination as an audit guide. 5. Concluding the Final HR Audit Plan – The information collected from previous steps is sysnthesised to develop a final HR Audit plan. This may include making changes in objectives of audit, sources and methods of data gathering. The final audit plan has the complete information such as: a) b) c) d) e)

HR Audit objectives HR auditing time deadline Nature of data needed Sources and techniques of data collection Cost involved in HR audit

6. Collecting the Complete HR Audit Data – During this step entire data gathered from different sources are compiled in adherence with the HR audit objectives and HR audit final plan. This may included collection of data through interviews and surveys. This includes: a) b) c) d)

Interviewing key manager Executive functions Top functionaries of the organisation Employee representation

The purpose is to understand the various needs, strengths and managerial concerns on various human resources. In addition, information related to various employee interactions is also examined which includes: a) b) c) d) e)

Complaints of employees Processes of investigation Legal counsel interactions Documented statement of witnesses Compliance with various acts

Both qualitative and quantitative data is collected. Review of employee files with frequency of feedback by employees is assessed. This data is gathered through employee files, training manuals, employee handbook, health and safety manuals, internal memos etc. Hence in this step information regarding all HR aspects collected and analysed on the basis of final audit plan to determine the strengths and weaknesses of the existing HR system. 7. Preparation of HR Audit Report – A comprehensive audit report is prepared based on the data and thorough analysis. The audit report must include all HR aspects, such as recruitment and selection, training and development, reward and recognition, performance assessment and industrial relations. The main purpose of HR audit report is to provide data on the following 3elements. a) Strength of the current HR system b) Problem areas to be handled by the organization c) Segments that require further work to be make the audit process smooth and efficient in future. It is essential part of auditors to perform SWOT analysis of the existing HR systems to identify the strengths, weaknesses, opportunities and threats for the organization. The data captured in final audit report must be in 4-different categories i.e. a) b) c) d)

Urgent and important requirements Not urgent but important requirements Neither urgent nor important requirements Important opportunity needs

8. Taking Action on HR Audit Report – This step is final stage in HR Audit process that includes the implementation of the findings of the HR audit within the organization. The HR auditors through this final report recommends various actions or steps to be taken by the organization and its management. The management decides what all aspects to be implemented and what suggestions/recommendations to be kept on hold. These actions include changes in the HR policies and procedures, re-alignment of HR strategy with corporate strategy and taking immediate corrective measures against people responsible for any problems in effective and efficient upkeep of the HR department. HR audit significantly contributes to the process of HR planning. Continuous HR audits help make the organization more: a) Effective & efficient

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b) Proactive and compliant with the regulations laid down by the centre and state governments as a matter of organizational policy. c) Initiative-taking in terms of employment concerns d) Strategic in managing their HR function 9. Create a culture of continuous improvement – A company can’t stop after one audit. A culture of continuous evaluation and improvement needs to be developed. One person could be designated to stay up-to-date on legal and regulatory changes that could affect the company. Another person could be designated to keep track of internal processes to quickly identify problems as they arise.

Specific Audit Approach to Manage Attrition Attrition is prevalent in all sorts of organizations. However many organizations are able to manage it through various corrective measures and retention strategies. Employees move out for various personal and professional reasons. As an HR manager of XYZ, we have the tool of exit interviews available with us. This may be formal for large organizations and informal for small organizations. Through the deeper scrutiny or audit of the exit interviews and with the help of the issues highlighted in those interviews, the HR manager and the auditor both can reach various conclusions and offer corrective measures and action plans which the organization can implement to help the organization control attrition and employee turnover issues and control the employee turnover costs. This process can help in planning and implementing better retention policies in future.

Conclusion With the help of continuous periodic audit of the HR function by internal and external stakeholders without hampering the HR work, an organization can help HR become one of the most effective and efficient service provider to organizational stakeholder while focusing on the strategic part of HR and thereby creating an edge for the organization. We can manage various HR aspects through effective and well planned HR audits.

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Question 2. Company ABC is a manufacturing company with offices across India. They have well defined HR policies and an active HR team. They regularly conduct an Employee Satisfaction Survey to assess the level of employee motivation. Last 3 years has seen the satisfaction scores go down. One key area of disconnect was found to be the compensation and benefits area. Your firm has been appointed to Audit the Compensation and Benefits and suggest appropriate steps. What steps will you follow to do a compensation and benefits audit of the company?

(10 Marks)

Answer 2. Introduction Compensation and Benefits auditing is an independent and objective assessment of an organisation’s activities, processes, internal controls systems, governance and risk management, with regard to one or more of the three aspects of economy, efficiency and effectiveness, aiming to lead to improvements in compensation and benefits area. These improvements could be relating to overall organization and its human resources through various compensation and benefits policies, procedures and metrics. Although the steps will be similar to what is mentioned in question 1 but since it is more focused in nature which relates to the sub-function of HR i.e. compensation and benefits of the company i.e. ABC. Some of the basic questions that should be asked before beginning the compensation and benefits audit are as follows: Employee Classifications 

Are employees properly classified as full-time, advisors, consultants, retainers or part-time?

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Is the classification of workers as independent contractors supported by a written independent contractor agreement specifically drafted for the relationship?

Salaries and Wages 

Are all employees paid at least minimum wage? Is the company paying competitive wages for the industry? If an employee is paid overtime, is the "regular rate" of pay properly calculated? Does it include non-discretionary or bonus pay?

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Are employees classified as exempt being paid on a salary basis? What steps are taken to ensure that improper deductions are not being made from their pay? Does the company have a "safe harbor" policy? If so, how is it disseminated to employees? Are non-exempt employees being paid for all time worked?

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What criteria does the organization use to determine wage increases? Are these practices monitored to ensure equal pay practices for females or minorities?

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Are time keeping records adequately maintained?

Steps in Compensation & Benefits Audit Requesting Documents After notifying the organization of the upcoming audit, the auditor typically requests documents listed on an audit preliminary checklist. These documents may include a copy of the previous audit report, original bank statements, receipts and ledgers. In addition, the auditor may request organizational charts, along with copies of board and committee minutes and copies of bylaws and standing rules. Preparing an Audit Plan The auditor looks over the information contained in the documents and plans out how the audit will be conducted. A risk workshop may be conducted to identify possible problems. An audit plan is then drafted. Scheduling an Open Meeting Senior management and key administrative staff are then invited to an open meeting during which the scope of the audit is presented by the auditor. A time-frame for the audit is determined, and any timing issues such as scheduled vacations are discussed and handled. Department heads may be asked to inform staff of possible interviews with the auditor. Conducting Fieldwork The auditor takes information gathered from the open meeting and uses it to finalize the audit plan. Fieldwork is then conducted by speaking to staff members and reviewing procedures and processes. The auditor tests for compliance with policies and procedures. Internal controls are evaluated to make sure they're adequate. The auditor may discuss problems as they arise to give the organization an opportunity to respond. Drafting the Audit Report The auditor prepares a report detailing the findings of the audit. Included in the report are mathematical errors, posting problems, payments authorized but not paid and other discrepancies; other audit concerns are also listed. The auditor then writes up a commentary describing the findings of the audit and recommended solutions to any problems. Discussions on Audit Report and Action Plan The auditor solicits a response from management that indicates whether it agrees or disagrees with problems in the report, a description of management's action plan to address the problem and a projected completion date. At the closing meeting, all parties involved discuss the report and management responses. If there are any remaining issues, they are resolved at this point.

Conclusion Thus we can audit the Compensation and Benefits through internal auditor or independent external auditor. Through the findings of Compensation and Benefits audit report we can hone the best practices and work on the problem areas. We can plan a robust compensation and benefits policy for company ABC so that it gains market edge with best compensation and benefits policies and strategies.

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Question 3. Kapoor & Co is a family run business, which has been in existence for many years. The MD, Mr. Kapoor, knew each and every employee in his company and ran the company like his extended family. He was personally involved in every performance and increment discussion and would take the final decision for each employee. The employees were quite happy in this set-up. After a few decades, Mr. Kapoor decided to retire from the company and put in place a professional management team to run the company. The new management team has been hired from other companies and has been given a free hand to run the company. The new CEO has appointed your firm to audit the Performance Management process.

Question 3 a. Detail out the steps by way of a checklist you will follow to assess the HR policies.

(5 Marks)

Answer 3 a.

Introduction Assessment of HR policies is an important step in overall HR audit. Through HR policies audit an auditor can understand whether the policies are in line with best contemporary HR policies and practices or corrective measures are needed to improve and re-align them. For this very purpose, HR policy audit is conducted and various corrective measures are taken so that a company like Kapoor & Co. can gain competitive edge in its’ business domain. It is a comprehensive method of objective and systematic verification of current practices, documentation, policies and procedures prevalent in the organization. It also guides the organization in maintaining compliance with ever-changing rules and regulations.

Stepwise HR Audit Checklist to Assess HR Policies 

Has the organization got policies that are relavant today and are the employees been informed of these?

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Are the employees been given a copy of these policies or they have access to these policies?

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Are the HR managers and line managers been trained in dealing with policy related questions?

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Are there different controls in place that ensure the fair implementation of these policies.

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What is the procedure of communicating policies to employees and their supervisors and whether they understand these policies?

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Are policies communicated at different intervals?

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Is there a policy review considered when the need arises?

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Can employees voice their concern regarding various policies and is their voice heard?

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Is there any record of employee concerns and policy decisions in this regard?

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Are managers trained to deal with changing environment when requisite changes are needed?

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Whether the managers communicate the policy changes to employees?

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Are the policies free from any bias?

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Does the organization have in place the following policies? a. b. c. d. e. f. g. h. i. j. k. l. m. n. o.

Recruitment and hiring policy? Induction and orientation policy? Training and development policy? Performance management policy? Rewards and recognition policy? Employee exit and separation policy? Equal opportunities policy? Child labour policy? Unfair employee practices elimination policy? Sexual harassment policy? Code of ethics or code of conduct policy? Employee transfer policy? Expatriate policy? Industrial Relations and Labour relations policy? Employee grievance policy?

Procedure The HR auditors are often called on to assess the human resources policies and practices of various companies besides having an HR Committee or HR Audit Committee in large organizations that deals with audit of HR function. Part of the challenge of that task is determining which areas of compliance must be explored and what risks to monitor. The Human resources policies audit process is mentioned below: Policies and Procedures - You should have clearly defined policies and procedures in writing and you should present them to all employees. In order to prevent lawsuits regarding such actions as wrongful termination or discrimination, you should conduct a new employee orientation. Explain company policy and the discipline process to all employees and have them sign a waiver of acknowledgment. HR audit checklists should contain information about when the orientation is conducted and what is included. Employee Handbooks – Employee handbooks help to create organizational structure and clarify employer expectations. They also promote legal compliance and communicate legal principles in straightforward language. Handbooks ease some of the pressure on human resources departments by answering common questions as well. However, if drafted improperly, or not consistently enforced, handbooks can create litigation risks by espousing policies and practices inconsistent with the law. Employee Records - Audit checklists should include questions about the use and storage of employee records. There are legal requirements associated with the hiring of employees and maintenance of records. For example, you must keep information regarding health-related issues separate from other files to protect the employee's privacy. You must file necessary immigration information for each new hire and maintain copies of certain documents. One checklist question may be where and with whom these files are being held. Company Benefits – Employee benefits are a major part of HR responsibilities, and it's important to keep records of the medical and dental plans you offer while watching associated costs. Audit lists with questions about programs offered with the requirements and limits for coverage can provide a comprehensive view of what is working for the company and the employee. This information is helpful when making decisions about what programs offer the best return on benefit investment. Compensation – How a company pays employees is critical to its performance and success. HR is responsible for recruiting and hiring the most skilled employees the company can afford. You must maintain information about salaries, bonuses and other types of payment. For an HR audit, use checklists containing

questions about determining factors for salaries, when employees are eligible for increases and who is responsible for managing the process to help evaluate areas for improvement.

Conclusion The audit of HR policies will include all sorts of policies that HR adheres to as per the company and state policies and legalities. Whether it be recruitment and selection policy, induction and orientation policy, training and development policy, performance management policy, rewards and recognition policy, exit and separation policy or other fringe benefits and perquisite policies; all form part of these policies.

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Question 3 b. With the new management team leading the performance assessments, identify 5 documents that should form a part of the HR policy manual related to Performance Management and write 2-3 lines describing the relevance of each document in this context. (5 Marks)

Answer 3 b. Introduction Kapoor & Co. has brought professional management to run the company. For the professional management, it is one of the top priorities to understand the talent pool and key HR policies and strat egies being used to run the company before they plan any comprehensive organizational and HR functional strategies and implement them. It is imperative to understand how performance management is practiced and assess the current capabilities and competencies of the company so that future capabilities and competencies can be planned and any negative outcomes can be corrected and dealt with.

5-Key Documents that Should Form Part of HR Policy Manual for Performance Management From the HR Policy Manual perspective the important documents are mentioned below: 1. Financial Documents – Financial documents such as Trial Balance and General Ledger provide vital information about the financials of the company including the human resource costs and expenditure. These document can help the new management understand the various kind of investments and expenses being made by the company on HR aspects i.e. Recruitment & Selection, Onboarding, Training and Development, Performance Management, Rewards and Recognition etc. 2. Employment Agreements – Offer letters, appointment letters, employment contracts, retainership contracts, advisory contracts and consultancy contracts form part of employment agreements and contracts. These documents are integral part of the performance management audit as it helps understand the HR auditors and the management about the total cost to company raise that was given to the new employees and assess whether the currently serving employees are being paid correctly as per their job bands and salary grades if they exist within the organisations. Certain organisations are lacking in this area including various listed companies which don’t have any classified job bands and CTC grades i.e. a supervisory cadre employee is paid more in an organization than a manager which creates demotivation and the employee tries to look for other avenues for better career opportunities. This is a widespread practice in India wherein the publically listed companies are flouting the norms then it is difficult to implement in the smaller companies. This is a very big bias in large organisations wherein a particular community employees flourish while others perish. Adani is one of such companies. 3. Performance Management Documents – Documents pertaining to performance management form an integral part of the audit process. Performance appraisal policy, evaluation criteria document, performance records of the employees, performance assessment records in both qualitative and quantitative forms. Besides this, the financial and other performance record of the company forms an integral part of the performance management audit process. 4.

Payroll Reports of Employees – Payroll reports of employees i.e. their salaries, wages, incentives and perquisites are required to assess the salaries, wages, incentives and perquisites of one class of employees and other class of employees. The audit of these documents can help understand the CTC parity and disparity among the employees. However, this audit is not done

transparently and the audit companies are generally work as partners of the organization and not point out at this aspect. 5. Employee Stock Options – It is an important document in large organisations where employees are given stock options are key stakeholders in organization decision making and profitability. This was a successful practice but during the downturn of the stock markets, this policy loses its attraction as an important retention and performance management tools. This policy mentions about the criteria of issuing stocks to employees on a medium to long-term basis which is primarily performance driven.

Conclusion Besides these documents, employee ethics and code of conduct documents, advances and loans, tax deposits, employee queries and issues in performance evaluation are part of the performance management audit. These documents are further classified in internal and external documents i.e. organizational documents and external documents i.e. agency letters (government and non-government), supplier invoices, contracts, agreements and leases, which may form part of employee performance.

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