Human Resource Accounting and Audit

Presented To: Submitted By:Dr. Rupinder Bir Kaur Sumit Thakur Shobitash JamwalHuman Resource Accounting and AuditResource can be defined as an object which can provide expected future services.Human Resource Accounting (HRA) is the process of identifying, measuring and communicating data about human resources.In 1974, Flamhoitz defined HRA as: Accounting for people as an organizational resource. It involves measuring the costs incurred by business firms and other organisation to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organisation.IntroductionOrganisations record the information about human capital in following ways:-Basic Information about human resource: Number of employees, categories, grades, total value of human resources, value per employee.HR acquisition: number of employees acquired in the year, cost of acquisition, levels for which they were acquired, HR development, all information pertaining to HRD activities of the organisation, HR maintenance, Cost related to HR maintenance, HR separation, Cost related to HR separation, attrition rate, details of benefits provided to employee. It examines and evaluates policies, procedures and practices to determine the effectiveness of HRD function in an organization.Human resource audits are potentially powerful tools in promoting wiser, more equitable use of human resources and more accurate human resource planning. It works on the principle of prevention is better then cure.E-enabled HR audit system is not always required. HRD Audit1. Identification of areas of HR audit e.g. recruitment process, job description, employee classification, leaves, personnel records etc.2. Goals of HR Audit:To make effective HR policies.To ensure compliance with all regulatory norms.To correct existing deficiencies or people related problems in any department, section, or organisation as a whole.To correct the performance evaluation systemsTo make training and development functions more effective and need based. Guidelines for HR Audit3. Focus on developing Good Business Practices:By meeting strategic goals, enhancing such goals and dovetailing such goals with the overall strategies of the organisation.4. Focus on Legal Compliance.5. Focus on Administration Issues: Maintaining personnel or HR files, how they are kept, degree of confidentiality in record keeping.6. Auditing HR Functions.7. Employee-relation Audits: questionnaires, exit interviews, job satisfaction studies etc.

To determine the effectiveness of management programs.To analyze the factors involved in HRD and develop a statement of findings with recommendations for correcting deviation, if any, on the following issues:The extent of deviation from HRD policies.To what extent objectives are spelt out.To what extent performance standards have been established

Objectives of HRD AuditTo study the extent to which line managers have complied with HRD policies.To study the current manpower inventory and identify shortfall of excess.

The actual state.The congruence between the desired and the actual state.The alignment with the overall organizational strategy and goals.The compliance with the rules and regulations.Auditing HR practices, auditing HR professionals, auditing HR functions or department.

Scope of HRD AuditIt helps to identify the changing training needs and development of new training modules for effective utilization of manpower due to technological changes.To keep pace with environmental changes, management philosophy and practices at the organisation level like participative management, employee empowerment, total employee involvement.

Importance of HRD AuditAttitudinal Survey.Data Interpretation.Advantages of HRD AuditTo ensure effective utilization of HR.To comply with administrative regulations.To inculcates sense of confidence in management.To develop and sustain organisation reputation in the society.To perform a due diligence review for various stakeholders.

Methods and techniques of HR AuditTo get the current facts.To study the effectiveness of the present system by answering the following questions:-Why was the practice introduced?What would be the result if the practice is discontinued?What could be the best possible alternative? Role of HRD Auditor

At national level focus of HRD activities is to develop employable human resource.By increasing literacy, developing graduates and postgraduates, professionals and scientists etc.It encompasses health, housing, provision for drinking water, hospital and medical facilities, social security and other welfare measures.In India availability of employable people is relatively less. World bank has sanctioned an aid of Rs 1650 crores. HRD and National Planning Indonesia: Change in employment relationship and restructuring of organisations is controlled by Government to deal with surplus labour.Employment matters are highly regulated and organisation-wide HRD activities are limited. Malaysia:Extreme recession.Lay-offs and terminations are restricting HRD activities. HRD in Asian Countries Philippines: Introduction of new technology is resulting in large scale displacement of workers, skill-mismatch and redundancy. Widespread training and development programs in the industries. Singapore: Established a Skill Development Fund to counter the changing technology and train workers. Thailand: Limited HRD activities.Retraining of workers.

The following approaches are adopted for purpose of evaluation:

Comparative approachOutside authority approachStatistical approachCompliance approachManagement by objectives (MBO) approach

Approaches to Human Resources AuditComparative ApproachIn this, the auditors identify Competitor Company as the model. The results of their organization are compared with that Company/ industry.Outside Authority ApproachIn this, the auditors use standards set by an outside consultant as benchmark for comparison of own results.Statistical ApproachIn this, Statistical measures are performance is developed considering the companys existing information.Compliance ApproachIn this, auditors review past actions to calculate whether those activities comply with legal requirements and industry policies and procedures.Management By Objectives ApproachThis approach creates specific goals, against which performance can be measured, to arrive at final decision about organizations actual performance with the set objectives.

HR Audit ProcessHuman ResourceAccounting is, Theprocess ofidentifying and measuring data about human resource and identifying and measuring data about human resource and communicating this information to interested parties-- AMERICAN ACCOUNTING ASSOCIATIONCOMMITTEE

Definition Of HRAAccording to Eric G FalmholtzFIRST STAGE (1960-1966)Beginning of academic interest in the area of HRASECOND STAGE (1966-1971)SECOND STAGE (1966-1971)The focus here was more on developing and validating different models of HRA

HISTORICAL DEVELOPMENT OFH.R.ACCOUNTINGTHIRD STAGE (1971-1976) This period was marked by a widespread interest in the field of HRA. R.G.Barry experiments contributed substantially during this stage.

FOURTH STAGE (1976-1980) FOURTH STAGE (1976-1980) This was the period of decline in thearea of HRA

FIFTH STAGE (1980 onwards ) There was a sudden renewal of interest in the field of HRA

Provide cost value information about acquiring, developing , allocating and maintaining HR. Enable management to effectively monitor the use of HR.Find whether human asset is appreciating or depreciating over a period of time.Assist inthe development of effective managementpractices.practices.To motivate individual persons in theorganization to increase their worth by training . HR by giving valuable information.

Objectives Of HRAAccording to Grojer and Johansson-As a political tool, used to demonstrate mismanagement ofhuman resource.As a pedagogical instrument for analyzing and structuring .As a decision making aid to ensure that decision on HR are more rational from the management point of view.

Uses Of HRAMethods of HRA:- Historical cost method Replacement cost method Opportunity cost method Capitalization of salary method Economic valuation method Return on efforts employed method Adjusted discounted future wages method Reward valuation method Standard Cost Method Currant Purchasing Power Method26Historical cost method:- This method developed by Brummet, Flamholtz and Pyle. According to this method, the actual cost incurred on recruiting, selecting, training, placing and developing the human resources of an enterprise are capitalized and written off over the expected useful life of human resources. The procedure followed for human resource asset is the same as that of other physical asset.

27Replacement cost method:-

This method was developed by Rensis Likert and Eric G. Flamholtz. The cost of replacing employees is used as the measure of companys human resources. The human resources of a company are to be valued on the assumptions as to what it will cost the concern if existing human resources are required to be replaced with other persons of equivalent experience and talent.

28 In order to overcome the limitations of replacement cost method, Hekimian and Jones suggested the use of opportunity cost method which determines the value of human resource on the basis of an employees value in alternative uses. Accordingly the value of an employee is based on his opportunity cost-the rice other divisions are willing to pay for the services of an employee working in another division of an organization. Opportunity cost method:-

29Capitalization of salary method:- The advocates of this method Baruch Lev and Aba Schwartz have used the concept of human resources in terms of economic value in this model. According to them the salaries payable to employees during their stay with the organization may be used as a replacement for the value of human resources, in view of the close co-relation between employees compensation and their value to the organization. Thus the value of human resources is the present value of future earnings of homogeneous group of employees.

30 Economic valuation method:-

Economic valuation method considers the present worth of the employees future service expected to be derived during their stay with the organization as the value of firms human resource. Although there are some resemblances between earlier model i.e., capitalization of salary method and this model, yet they differ with each other. The economic valuation model recommends the capitalization.

31Return on efforts employed method:- This method measures the value of the firms human resources on the basis of efforts made by the individual for the organizational benefits. These efforts are evaluated in the light of the following factors :

Positions an employee holds; Degree of excellence employee achieves; Experience profile of the employee.

32Adjusted discounted future wages method:-Roger H. Hermanson developed this model wherein he recommends measuring the value of human resources on the basis of relative efficiency of an organization in the industry. This model relates the value of human resources with the extra profit the firm earns over and above the industry expectations. In fact, this model attributes the difference in profitability rates between firms of an industry to the varying efficiency of their human resources.

33Reward valuation method:-

As an improvement over the capitalization of salary method Flamholtz developed a model commonly known as Stochastic Rewards Valuation Method. The method seeks to measure the value of human resources on the basis of an employees value to an organization at various services states (roles) that he is expected to occupy during the span of his working life with the organization. The author has identified the major variables which determine the value of an individual to a firm.

34Standard Cost Method :- This method envisages establishment of a standard cost per grade of employee, updated every year. Variances produced should be analyzed and would form a useful basis for control. Replacement costs can be used to develop standard costs of recruitment, training and developing individuals, such standards can be used to compare actual results with those planned.

35 Current Purchasing Power Method :- Under it, instead of taking the replacement cost to capitalized, the capitalized historic cost of investment in human resources is converted into current purchasing power of money with help of index numbers. Its great advantage is its simplicity even though it might produce only approximate answers and approximately correct data.

36Foresee the changes.Provides different methods of testing.Increase productivity. Brings high return.Helps individual employee to aspire.Provides scope for advancement.Throws light on the strength and weaknesses of the existing workforce.Helps potential investor judge a company.

Advantages of HRANot easy to value human asset.Results in dehumanizing human resource.No evidence.HR is full of measurement problem.Employees and Unions may not like the ideas .Unrealistic. Lack of Empirical evidence.

LIMITATIONS OF HR ACCOUNTING

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