Human resource accounting and audit


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Human resource accounting and audit

  1. 1. Presented To: Submitted By: Dr. Rupinder Bir Kaur Sumit Thakur Shobitash Jamwal
  2. 2. • Resource 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.” Introduction
  3. 3. Organisations record the information about human capital in following ways:- 1. Basic Information about human resource: Number of employees, categories, grades, total value of human resources, value per employee. 2. 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.
  4. 4. • 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 Audit
  5. 5. 1. 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 systems • To make training and development functions more effective and need based. Guidelines for HR Audit
  6. 6. 3. 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.
  7. 7. 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: a) The extent of deviation from HRD policies. b) To what extent objectives are spelt out. c) To what extent performance standards have been established Objectives of HRD Audit
  8. 8. • To study the extent to which line managers have complied with HRD policies. • To study the current manpower inventory and identify shortfall of excess.
  9. 9. • 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 Audit
  10. 10. • It 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 Audit
  11. 11. • Attitudinal Survey. • Data Interpretation. Advantages of HRD Audit • To 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 Audit
  12. 12. • To 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
  13. 13. • 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
  14. 14.  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
  15. 15.  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.
  16. 16. The following approaches are adopted for purpose of evaluation: • Comparative approach • Outside authority approach • Statistical approach • Compliance approach • Management by objectives (MBO) approach Approaches to Human Resources Audit
  17. 17. • Comparative Approach In this, the auditors identify Competitor Company as the model.The results of their organization are compared with that Company/ industry. • Outside Authority Approach In this, the auditors use standards set by an outside consultant as benchmark for comparison of own results. • Statistical Approach In this, Statistical measures are performance is developed considering the company’s existing information.
  18. 18. • Compliance Approach In this, auditors review past actions to calculate whether those activities comply with legal requirements and industry policies and procedures. • Management By Objectives Approach This approach creates specific goals, against which performance can be measured, to arrive at final decision about organization’s actual performance with the set objectives.
  19. 19. HR Audit Process Step 1 & 2 • Pre-Audit Information • Pre-Audit Self Assesment Step 3 & 4 • On Site Review • Records Review Step 5 • Audit Report
  20. 20. Human Resource Accounting is, “ The process of identifying and measuring data about human resource and identifying and measuring data about human resource and communicating this information to interested parties” -- AMERICAN ACCOUNTING ASSOCIATION COMMITTEE Definition Of HRA
  21. 21. According to Eric G Falmholtz • FIRST STAGE (1960-1966)– – Beginning of academic interest in the area of HRA • SECOND STAGE (1966-1971)SECOND STAGE (1966- 1971)– – The focus here was more on developing and validating different models of HRA HISTORICAL DEVELOPMENT OF H.R.ACCOUNTING
  22. 22. • THIRD 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 the area of HRA • FIFTH STAGE (1980 onwards ) – There was a sudden renewal of interest in the field of HRA
  23. 23. • 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 in the development of effective management practices. practices. • To motivate individual persons in the organization to increase their worth by training . • HR by giving valuable information. Objectives Of HRA
  24. 24. According to Grojer and Johansson- • As a political tool, used to demonstrate mismanagement of human 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 HRA
  25. 25. Methods 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 Method
  26. 26. 1)Historical 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.
  27. 27. 2) Replacement cost method:- This method was developed by Rensis Likert and Eric G. Flamholtz. The cost of replacing employees is used as the measure of company’s 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. 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 employee’s 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. 3) Opportunity cost method:-
  29. 29. 4) Capitalization 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. 30. 5) Economic valuation method:- Economic valuation method considers the present worth of the employee’s future service expected to be derived during their stay with the organization as the value of firm’s 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.
  31. 31. 6) Return on efforts employed method:- This method measures the value of the firm’s 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.
  32. 32. 7)Adjusted 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.
  33. 33. 8) Reward 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 employee’s 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.
  34. 34. 9) Standard 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. 35. 10) 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.
  36. 36. • Foresee 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 HRA
  37. 37. • Not 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. LIMITATIONSOF HR ACCOUNTING