Conducting Human Resource Audits

Scope – Human resource audits involve a company's strategic actions to take an intensely objective look at its HR policies, procedures and practices. This type of comprehensive review of the company's current state can help to identify whether specific practice areas or processes are adequate, legal and/or effective. The results obtained from this review can help to identify gaps in HR practices, and these gaps can then be prioritized for attention in an effort to minimize lawsuits and/or regulatory violations, as well as to achieve and maintain world-class competitiveness in key HR practice areas.

Overview

Human resource audits are a vital means of avoiding legal and/or regulatory liability that may arise from a company's HR policies and practices. In addition to identifying areas of legal risk, audits often are designed to provide a company with information about the competitiveness of its HR strategies by looking at the "best practices" of other companies in its industry. See, HR Benchmarks: How to Become a World-Class HR Organization. In essence, an HR audit involves identifying issues and finding solutions to problems before they become unmanageable. It is an opportunity to assess what an organization is doing right, as well as how things might be done differently, more efficiently or at a reduced cost.

In today's competitive climate, companies operate within the confines of a heavily regulated employee environment. This includes dealing with myriad complex laws and regulations. The scope of the HR function includes establishing and administering a host of policies and practices—many of which involve compliance implications—that significantly influence the productivity and profitability of the enterprise. The principal points are:

Age-related issues in hiring, training, benefits and retirement.
Avoidance of adverse-impact discrimination.
Benefit administration issues.
Disability accommodation.
Disciplinary matters.
Employee development.
Fair Labor Standards Act compliance.
Health Insurance Portability and Accountability Act (HIPAA) compliance.
Employee eligibility to work.
Interim/contingent staffing.
Interviewing and hiring.
Job descriptions.
Leaves of absence.
Organizational development.
Payroll management.
Performance management.
Problem or conflict resolution.
Stress management.
Substance abuse.
Team building.
Termination.
Uniformed Services Employment and Reemployment Rights Act (USERRA) compliance.
Wages and hours.
Workplace violence.

Given that many HR departments are both understaffed and overworked, only in retrospect do many companies become aware of the monetary costs of ignoring HR-related legal hot buttons. Noncompliance with applicable laws and regulations involves significant financial risk. To minimize the risk, many organizations purchase employment practices liability insurance. While this is a sound strategy, companies can take other proactive measures. Chief among these is a voluntary HR compliance audit.

SHRM members who wish to receive additional information and resources on this topic via a one-time e-mail message may go to SHRM's Express Request service and select topic Business Leadership and the key term HR Audits.

HR Audit Defined

An HR audit involves devoting time and resources to taking an intensely objective look at the company's HR policies, practices, procedures and strategies to protect the company, establish best practices and identify opportunities for improvement. An objective review of the company's "current state" can help you evaluate whether specific practice areas are adequate, legal and/or effective. The results can provide decision makers with the information necessary to decide what areas need improvement.

An HR compliance audit generally consists of two main parts:

An evaluation of the company's operational HR policies, practices and processes with a focus on key HR department delivery areas (e.g., recruiting—both internal and external, employee retention, compensation, employee benefits, performance management, employee relations, training and development, etc.).
A review of current HR indicators (e.g., number of unfilled positions, the time it takes to fill a new position, turnover, employee satisfaction, internal grievances filed, number of legal complaints, absenteeism rates, etc.).

An audit usually is conducted by using a questionnaire that asks for the evaluation of specific practice areas. This document helps guide the audit team in scrutinizing all critical areas of a company's HR practices. The audit also may include interviewing selected HR employees and other department managers to learn whether certain policies and procedures are understood, practiced and accepted.

Rationale for Conducting an HR Audit

The changing nature of HR management demands that HR professionals participate and contribute fully to their companies as true strategic business partners. An audit will help a company understand whether its HR practices help, hinder or have little impact on the organization's business goals. The audit also helps quantify the results of the department's initiatives and provides a roadmap for necessary changes. Audits also can help the organization achieve and maintain world-class HR practices.

Types of Audits

An HR audit can be structured to be either comprehensive or specifically focused, within the constraints of time, budgets and staff. There are several types of audits, and each is designed to accomplish different objectives. Some of the more common types are:

Compliance: Focuses on how well the company is complying with current federal, state and local laws and regulations.
Best Practices: Helps the organization maintain or improve a competitive advantage by comparing its practices with those of companies identified as having exceptional HR practices.
Strategic: Focuses on strengths and weaknesses of systems and processes to determine whether they align with the HR department's and/or the company's strategic plan.
Function-Specific: Focuses on a specific area in the HR function (e.g., payroll, performance management, records retention, etc.).

What to Audit

Deciding what to audit will depend largely on the perceived weaknesses in the company's HR environment, the type of audit decided on and the available resources. Keeping a log of issues that have arisen but are not covered in the company's procedures or policies will help identify areas of potential exposure that can be addressed during the annual review process (if they do not need to be addressed immediately).

There are, however, certain areas in which companies are particularly vulnerable. Most lawsuits can be traced to issues related to hiring, performance management, discipline or termination. Some additional risk areas that should be carefully reviewed include:

Misclassification of exempt and nonexempt jobs. Almost every company has job positions that have been misclassified as exempt from overtime eligibility. The complexity of wage and hour laws and regulations makes it easy to err in classifying a job as exempt, thereby exposing the company to liability for past overtime.
Inadequate personnel files. A review of sample personnel files often reveals inadequate documentation of performance—for example, informal, vague and/or inconsistent disciplinary warnings. Performance evaluations may be ambiguous, inaccurate or outdated. Personal health information is often found in personnel files, despite medical privacy laws requiring such data to be kept separate. Accurate and detailed records are essential for employers to defend any type of employee claim, particularly unemployment compensation or wrongful termination claims.
Prohibited attendance policies. Controlling excessive absenteeism is a big concern for most employers. However, the complexity of family and medical leave laws, with sometimes conflicting state and federal protections, has made many formerly acceptable absence control policies unacceptable. Absences affect workers' compensation, family and medical leave, disability accommodations and pregnancy laws. Companies often have attendance policies that either do not comply with relevant laws and regulations or grant employees more protections than required.
Inaccurate time records. Employers typically require nonexempt employees to punch a time clock or complete time sheets reflecting their time worked each week. The records generated by these systems typically are the employer's primary means of defense against wage and hour claims, so it is essential that timekeeping policies and practices be clearly communicated and consistently administered.
Insufficient documentation. Reviews of employer hiring practices often uncover inadequate documentation, such as missing or incomplete I-9 Forms. Employers can be fined between $100 and $1,000 for each failure to accurately complete an I-9 Form. Fines for these violations can easily add up, with reported cases of repayment totaling over $100,000.

When to Audit

Given the resources required for a full-scale audit, most companies will not want to go through this process more than once a year; however, mini-audits that allow for some course correction can be accomplished without too much departmental pain approximately every six months. Scheduling annual checkups to maintain the discipline of a regular review is preferable to only occasional or panic audits (e.g., those that take place only when a potential problem is brewing). Another strategy is to conduct an audit following any significant event (e.g. new plans, management changes, etc.).

What to Expect

A comprehensive audit is a time-consuming and intensely focused project that may require the review of numerous documents and policies, as well as interviewing HR staff, selected employees and managers from other departments. The amount of time involved and the effort required will depend on the size and type of company, the type of information the company hopes to glean, the scope of the audit and the number of people on the audit team.

A full-scale legal compliance audit in particular will cover a great deal of territory and will take longer to complete as compared with a best practices audit in which one specific practice is being benchmarked against another company's approach, or a function-specific audit in which only one key area of the company's HR practices is reviewed.

Costs of an Audit

The actual cost of an HR audit depends on the scope of the review, the number of people interviewed and the size of the audit team. Consequently, the expense will vary greatly from one situation to another. Suffice it to say, though, that the cost of conducting any full-scale HR compliance audit will be far less than defending (let alone losing) even one lawsuit. Some insurance carriers even provide audits as a part of their compliance programs, so it could actually be free.

Who Should Conduct an Audit

The company's HR professionals can perform an audit in-house if they have the expertise, the time, a willingness to objectively acknowledge inadequacies in current procedures and, most importantly, the clout to make or influence the necessary organizational changes. However, if the audit is conducted with internal resources or even with an outside consultant who is a non-lawyer, everything connected with the audit is subject to discovery in litigation relating to employment practices.

If a company has legitimate concerns about what its HR audit may reveal regarding the company's noncompliance with various employment laws and regulations, the company should follow fairly strict audit procedures and protocols and consider hiring outside legal counsel to conduct the audit. In doing so, the company may be able safeguard the audit results through the application of at least one of the three legal privileges against disclosure.

The HR Audit Process: A Model

The general process of conducting an audit includes seven key steps, each of which is discussed in greater detail below:

Determine the scope and type of audit.
Develop the audit questionnaire.
Collect the data.
Benchmark the findings.
Provide feedback about the results.
Create action plans.
Foster a climate of continuous improvement.

Determine the scope and type of the audit

To uncover the needed information, it is important to determine exactly what areas should be targeted for review. If the organization has never audited its HR function, or if there have been recent significant organizational or legal changes, the audit team may want to conduct a comprehensive review of all HR practice areas. On the other hand, if concerns are limited to the adequacy of a specific process or policy, the audit focus should be limited to a review of that particular area.

Develop the audit questionnaire

Whether conducting a comprehensive audit or an audit of a specific practice, it is important to invest sufficient time in developing a comprehensive document that elicits information on all the subjects of the inquiry. A list of specific questions must be developed to ensure that the questionnaire is complete.

Collect the data

The next phase includes the actual process of reviewing specific areas to collect the data about the company and its HR practices. Audit team members will use the audit questionnaire as a roadmap to review the specific areas identified within the scope of the audit.

Benchmark the findings

To fully assess the audit findings, they must be compared with HR benchmarks. This comparison will offer insight into how the audit results compare against other similarly sized firms, national standards and/or internal company data. Typical information that might be internally benchmarked includes the company's ratio of total employees to HR professionals, ratio of dollars spent on HR function relative to total sales, general and administrative costs, cost per new employee hired, etc. National standard benchmarking might include the number of days to fill a position, average cost of annual employee benefits, absenteeism rates, etc.

Provide feedback about the results

At the conclusion of the audit process, the audit team must summarize the data and provide feedback to the company's HR professionals and senior management team in the form of findings and recommendations. Findings typically are reduced to a written report with recommendations prioritized based on the risk level assigned to each item (e.g., high, medium and low). From this final analysis, a roadmap for action can be developed that will help determine the order in which to address the issues raised. In addition to a formal report, it is critically important to discuss the results of the audit with employees in the HR department, as well as the senior management team, so everyone is aware of necessary changes and approvals can be obtained quickly.

Create action plans

It is critical actually to do something with the information identified as a result of an audit. The company must create action plans for implementing the changes suggested by the audit, with the findings separated by order of importance: high, medium and low. It actually increases legal risk to conduct an audit and then fail to act on the results.

Foster a climate of continuous improvement

At the conclusion of the audit, it is important to engage in constant observation and continuous improvement of the company's policies, procedures and practices so that the organization never ceases to keep improving. This will ensure that the company achieves and retains its competitive advantage. One way to do this is to continuously monitor HR systems to ensure that they are up-to-date and to have follow-up mechanisms built into every one of them.

One approach is to designate someone on staff (or an outside consultant) to monitor legal developments to ensure that HR policies and practices are kept current. Likewise, it is important to keep track of the audit findings/changes made, turnover, complaints filed, hotline issues, employee survey results, etc., to identify trends in the company's employment-related issues. Identifying problematic issues, growth areas or declining problem spots can help in the decision of where to allocate time, money and preventive training resources in the future.

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