Why Conduct an HR Audit?
Given these startling statistics, one has to wonder why HR audits are not more prevalent. However, there are reasons other than compliance to take a good look at your organizations HR function such as:
- Developing a framework of analysis within which compliance issues can be identified and prioritized.
- Identifying employment practices and policies that are missing or are not legally defensible if challenged.
- Assessing and measuring actual and required performance and the necessary action to close any performance gaps.
- Evaluating the effectiveness and efficiency of HR practices in their integration with business planning and strategy.
Oftentimes the individual responsible for HR has many other duties and is pulled in many directions. This can lead to compliance gaps when areas are not reviewed on a regular basis to ensure the organization is still in compliance with ever-changing laws.
Equally as often, we find organizations that do not have an HR function, per se, but rather several individuals handling various portions of HR. This situation frequently leads to disconnects between policy and actual processes, generally because no one person is responsible or accountable for administering HR according to policy.
Audits can show whether or not an organization is meeting performance standards or benchmarks as compared to others in their industry, such as turnover rates, ratio of HR staff to number of employees, percentage of benefits per employee, etc.
Finally, an audit will often uncover disconnects between policies or practices and what the organization wants to achieve strategically. Lets say, for example, a financial institution has a goal to increase the number of females promoted to manager or vice president. However, it has extremely rigid work hours or a sick leave policy that does not allow sick time to be used for ill family members. In this scenario, there is a disconnect between what the organization wants to achieve and how they are going about achieving it.
Determining the Type of Audit Needed
Technically speaking, an audit is a formal examination of an organizations accounts or situation. To determine what type of audit would be most appropriate for an organization, one must consider what information is sought. There are several types of HR audits and all of them focus on different processes or outcomes as outlined below:
Compliance - risk-based with a focus on legally required aspects of HR such as Family Medical Leave Act, at-will employment, immigration, Fair Credit Reporting Act, discrimination, harassment, COBRA, etc.
Best Practices - focuses on court decisions that are being used to determine law or administrative systems that reduce errors and omissions, such as hiring and termination processes, performance evaluation processes, disciplinary process and documentation, and litigation or investigation issues.
Strategic - focuses on systems and processes to determine if they are in line with the strategic plan and whether or not they are helping, hindering or having little impact. Areas audited might include organizational effectiveness as measured by turnover, length of time to fill an open position, number of employee complaints, number and cost of unemployment claims lost. It can also uncover ineffective pay practices, pending litigation risks, ineffective training programs, ineffective hiring processes and poorly designed or administered benefit programs.
Function specific - focuses in on a particular area of HR such as wage and hour, immigration, affirmative action, payroll, benefits, etc.
Focus of the Audit
An auditor is one authorized to examine and verify accounts. Therefore, the qualifications (education, experience, certifications and references) of the auditor(s) are critical. Depending upon the type of audit conducted, generally, an auditor looks at three things:
1) Has the company documented its policies and made them available to managers and employees?
2) Are the people responsible for administering the policies (HR and managers) aware of them and are they administering them consistently?
3) Does written documentation found in the personnel files match the other two sources of information?
For example, a company may have an excellent disciplinary policy and forms. It may also have an excellent performance evaluation system and forms. However, if the performance evaluation policy states that employees who are in second level disciplinary action are not eligible for performance evaluations or raises, the auditor will review the file to ensure this is actually the procedure.
During a review of a personnel file, the auditor finds a form showing the employee is in the third level of disciplinary action. Further review of the file also uncovers a completed performance review form for the same time period stating the employees performance is average and that he/she was given a raise. Finally, the auditor finds the fourth level of disciplinary action as well as a termination notice. It is clear in this situation that policy, procedure and documentation did not match. Should the terminated employee file a suit, the documentation will clearly show that the company considered him/her a good employee, regardless of the disciplinary action taken.
In a report, findings and recommendations are generally prioritized based upon the risk level assigned to each item. These risk levels include:
High - Legal requirements based upon HR legislation, case law and compliance. These are items that, in our opinion, require immediate attention.
Medium - Best practices that help a company avoid risks and are, therefore, highly recommended. These are items that we recommend be dealt with in a relatively short timeframe as they can easily become high risks if items fall between the cracks.
Low - Best practice based upon our experience with HR administration in other, similar organizations. These are administrative suggestions to make the department more effective and efficient.
From this report, an HR action plan can be developed to address the most pressing items first. The most common errors found generally include:
- Lack of written policies and procedures or inconsistencies in administering them.
- Poorly designed or indefensible compensation systems.
- Non-existent or poor disciplinary documentation.
- Lack of awareness regarding compliance requirements.
- Reliance on third party vendors to submit compliance forms such as COBRA.
While many organizations are purchasing employment practices liability insurance as a way to minimize the financial risks associated with noncompliance, a thorough HR audit can provide an action plan for shoring up practices and procedures before problems strike.