When you hear the word “audit,” do you panic? If you’re like many business leaders, the answer is yes! But audits aren’t always a bad thing—an internal audit completed by your human resources team could be exactly what you need to help your organization benchmark its performance and identify strengths and weaknesses, so you can address any critical issues in advance of being faced with an audit from the IRS or another agency. In this article, I’ll explain why an HR audit is an important practice for your company and how to conduct one.
Need help with understanding compliance regulations and laws—or any aspect of HR? Learn why a PEO is one of the smartest choices you can make for your small business.
What is an HR audit?
An HR audit is an objective, systematic review of a company’s policies and procedures carried out internally by a company’s human resource team. According to SHRM, audit results “can help identify gaps in HR practices, and HR can then prioritize these gaps in an effort to minimize lawsuits or regulatory violations, as well as to achieve and maintain world-class competitiveness in key HR practice areas.”
The Importance Of Performing An HR Audit
- HR audits protect companies from risk and help them avoid legal liabilities associated with human resource issues. An HR audit offers the opportunity to protect your company from legal risks and mitigate issues before they become out of control. This is especially helpful in regard to the complex laws and regulations surrounding employment, tax, insurance, and hiring.
- HR audits allow companies to benchmark their strategies and practices. An audit will reveal how your company’s current policies and practices are helping or hindering achievement of strategic goals; it will also help you determine what steps may be necessary to change current practices.
- HR audits help prepare businesses in case of an external audit. An internal HR audit is perhaps the best way to prevent the stress of an unplanned external audit from the IRS or another entity. Performing your own HR audit gives you confidence on where your organization stands in terms of compliance, policies, employment practices, etc.
4 Objectives For HR Audits
An HR audit can be structured differently depending on an organization’s goals. Typically, there are four types of audits; each type is designed to accomplish something different.
1. Compliance Audit
A compliance audit measures how well a company complies with state, federal, and local laws and regulations.
The world of compliance is complicated. Rather than spending your own time and resources to figure it all out, let us handle it on your behalf. At Genesis, we work closely with federal and state legislators to decide what role(s) we need to play as a PEO to help our clients stay within compliance guidelines based on their industry and their location (as some laws vary from state to state). We check to ensure you have updated information, and are aware of changes in regulations. Then, we assist you in correctly implementing any changes that may need to be made.
2. Best Practices Audit
A best practice audit compares a company’s existing practices with those of the industry for the purpose of maintaining or gaining a competitive edge. The scope of this type of HR audit is to see how a company performs vs. its competitors. While it is not legally-based or compliance-related, this type of audit gives companies insight whether or not they are implementing and following through with actions that can help improve competitiveness.
3. Strategic Audit
A strategic audit focuses on the strengths and weaknesses of systems and processes to determine whether they align with the organization’s strategic plan.
4. Function-specific Audit
A function-specific audit focuses on a specific area within the human resource function, for example, the payroll or benefits department of an organization. The objective of this audit is to hone in on one specific area of the operation, ensuring that the structure, policies, and best practices within that specific department align with the strategy of the entire company..
How To Perform An HR Audit: 7 Steps
The process outlined below is an overview of the HR audit process. Although an audit should include these steps, your company should also make an effort to tailor them to be specific to your own strategic goals, compliance requirements, etc.
- Determine the type and scope of HR audit to perform. An HR audit can be structured to be either comprehensive or specifically focused within the constraints of time, budgets and staff. It is a best practice to review your strategic plan as a whole. Keep in mind that with the assistance of a PEO like Genesis HR, your company won’t be in a situation where you feel as though a heavy audit needs to be performed annually and as in-depth as they should be in a good place per our guidance.
- Create a roadmap for your audit. Develop questions or draft goals for the audit, and then determine how it will be executed. The following questions should be answered at this step: What is the best way to achieve the audit? Who will participate in it?
- Collect data. Using the roadmap above, complete your audit and then do an extensive review of the data gathered.
- Benchmark your findings. If possible, compare your findings to those of your competitors; also, make sure what your company is calling “best practices” are still best practices for your industry.
- Provide feedback of results. After the audit, it is important to report findings to help talk through and brainstorm next step recommendations.
- Create action plans. Provide recommendations for what should change, and then identify next steps for making improvements based on the audit, .
- Foster continuous improvement. This means ascribing to an attitude of continuous evaluation and improvement. Companies may find it helpful to designate one person to stay up to date on legal and regulatory issues that may affect the company, as well as to keep track of internal processes to quickly identify problems. Often times this is our client contacts that are our main point of contact.
Additional Resources
- Conducting Human Resource Audits: This SHRM publication goes into detail about the process of conducting an HR audit. It is a must-read for HR teams who are considering doing an audit without the expertise of an outside firm.
- Genesis HR Solutions: Our PEO’s team of experts make audits less intimidating. HR audits are just one of the many solutions we offer our PEO clients—learn more about the many ways we help small to midsize businesses.
