All you need to know about HR auditing

Norchahya Ahmad, Vice President of The Institute of Internal Auditors Malaysia shares all you need to know about HR auditing, from its challenges to the impact of technology.

Q What are the differences between normal internal auditing and auditing human resources?

The main purpose of internal auditing is to analyse and provide objective assurance and counsel on issues related to a company’s business practices and risks by examining the effectiveness of governance, risk management and control. HR auditing is oftentimes part of an internal auditing exercise when the company is undergoing an operational audit.

HR auditing is a comprehensive method to review current HR policies, procedures, documentation and systems to identify areas for improvement in the HR function. HR auditing also assesses the company’s HR compliances with the ever-changing rules and regulations of the country which business is conducted.

Q What’s the role of internal auditors in human resources and why is it so important?

The role of internal auditors in HR auditing is to identify the strengths and weaknesses in the HR function and ensuring compliance with not just the company’s goals and objectives, but also the country’s employment laws. From the HR audit exercise, internal auditors can advise the management team on how to establish more efficient documentation and technology practice, or how to maintain or improve competitive advantage for the changing economic and job environment. A fruitful HR audit will signal areas of the HR function that can be improved on.

More importantly, aside from providing a status report on the company’s human resource management, internal auditors going through an HR audit checks for any legal and regulatory violations by employees, stakeholders, or the organisation itself, against employment laws. Violations come with heavy penalties and carry the risk of harming the company financially or in reputation. A proper HR audit that ensures company policies and procedures are fair and consistent can also increase employee satisfaction. Having a satisfied and productive workforce means that the company can reduce costs associated with staff turnover etc.

Q Can someone from the HR team be trained to carry out auditing?

Yes. HR team members can be trained as short-term “guest” auditors monitored by the internal audit team. Use of in-house guest auditors can be a cost-effective method for an internal audit function to obtain specialist skills to supplement internal audit knowledge and assist in adding more value from internal audit work, with potential to provide a more credible and effective audit reporting outcome for audits of technical areas.

The issue of independence needs to be carefully considered each time a guest auditor is selected, which has been achieved in many organisations where guest auditor programs have been successfully implemented.

In time, the individual can enrol into the globally recognised certification programme for Internal Auditors offered by IIA Malaysia – Certified Internal Auditor (CIA).

Q What are the key challenges faced when auditing HR and how can they be overcome?

A key challenge to HR audit is evaluating talent management, which focuses on hiring, retaining, motivating and developing the right individuals within the company. It is difficult to predict and control an employee’s career motivations and the company will be at risk when top talent resigns.

To prepare for these scenarios, internal auditors assess the organisational setup and effectiveness of the talent development programs to develop risk mitigation plans accordingly as well as assess the maturity of the organisation’s short, medium, and long-term succession plan for managerial staff and technical roles.

They may also audit the internal communication process between the employees and the HR management team to allow for honest feedback in a safe and controlled environment, as well assess the ability to act upon these feedbacks and ensure long-term improvements within the talent pool.

Ever-changing employment laws and regulations are also a challenge to auditing HR as any violations and changes can put a company’s profitability and productivity at risk. The HR management team should work closely with internal auditors to ensure these new laws or amendments are made aware of on time, effectively administered, and followed through.

Q Whilst auditing HR, what typically are the HR sub-functions that come up short, and why do you suppose that is the case?

Effective talent recruitment and retention is one of the shortcomings of the HR function that internal auditors often identify. This HR sub-function that deals directly with employees, often involve other intrinsic factors, such as bias. Subconscious bias during recruitment and performance reviews are common.

Letting performance issues fester due to biases can impact the company’s overall performance as the bias treatment of underperforming staff may demotivate high performing staff. One way to ensure HR is conducting an objective assessment is to implement blind CVs and performance reviews.

Q In what ways is the fast-evolving digital era affecting the internal auditing and HR landscape?

Technology has allowed for a faster hiring process by using questionnaires, algorithms, and even artificial intelligence to match jobseekers to employers. As documentation, processes, and communications move towards digital, technology has made HR practices more efficient in processing employee information.

However, the risks involved have also evolved. Companies need to have proper cybersecurity measures put in place to protect the data and privacy of employee records. It is the role of an internal auditor to assess the effectiveness of the measures and provide assurance on who is able to access confidential data, as well as advise on whether the company has the capacity to introduce new technology into their workflow.

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