Impact of Human Resource Auditing Practices on Business Performance of some select companies in India: A study
Submitted by:
Pritha SenUnder the supervision of:
Dr. Ram Prahlad ChoudharyAssistant Professor, Department of Commerce
University of Calcutta
Impact of Human Resource Auditing Practices on Business Performance of some Select Companies in India: A Study
Success of corporate undertakings purely depends on the quality of human resources. Human element is the most important input in any corporate enterprise. Man with his own conscience, efficiency and thought makes the main objective of an organisation successful. Human Resource Audit (HRA) is an addition to the various tools and concepts used for effective management of human resources. It has a vital role to perform particularly in the service industry where the human resources are a part and parcel of product or service that is being consumed. It is a tool for evaluating the personnel activities of an industry or a company. This audit is an overall quality control check on all human resources activities in an industry and an evaluation of how these activities support the strategies of industries. According to Flamholtz (1987) Human Resource Audit is a systematic assessment of the strengths, limitations and developmental needs of its existing human resources in the context of organisational performance. Human Resource Audit gives an account of the skills, abilities and limitations of its employees. Human Resource Audit is a sort of feedback on the duties and working of the managers and other employees of the organisation. It is a sort of quality control of human resources of an organisation. Human Resource Audit can be conducted for a department or the whole organisation. It gives a more professional image and helps in bringing out the problems not necessarily linked with human resources division of an organisation.
In a study conducted by T.V.Rao (1999) is reported that Human Resource Audit is a great deal of work regarding the use of human resources as an organisational development intervention and is a unique feature of Indian Organisation.

According to Dulan, Schuler and Valle (1999) defines it as the evaluation of the adaptation of the human resource policies and practices in their support of the company’s general strategy.

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Yeung and Berman (1997) points out that Human Resource Practices can play three major roles:
Building critical organisational capabilities
Enhancing employee satisfaction
Improving customer and shareholder satisfaction
A plethora of research exists examining the relationship between Human Resource Practices and the organisational performance. Such research has been conducted at the corporate (business unit) and at departmental levels. Effective Human Resource (HR) Planning and management is required at all stages of an employee’s corporate lifecycle to help ensure employee growth and satisfaction. Employees satisfaction is vital to the success of an organisation because of it’s direct impact on productivity. The combination of high satisfaction and maximum productivity amounts to employee engagement. Engaged employees are invaluable assets since they are motivated to perform to the highest of their abilities because of their dedication and voluntary commitment to the success of the organisation. Investments in Human Resource Practices have been linked to firm financial performance such as training(Russell,Terborg and Powers, 1985), selection and staffing (Terpstra and Rozzell, 1993), appraisals (Borman, 1991) and compensation (Gerhart and Milkovich,1992).

According to Philips (1996) human resource audit is an investigative, analytical and comparative process that attempts to reflect the effectiveness of the human resource function. The definition offered by the Society for Human Resource Management is the process of assessing Human Resource programs and services to determine effectiveness or efficiency.

Good Human Resource Audit Practices can influence financial and other performance indicators of corporations by generating employee satisfaction which in turn can influence customer satisfaction. Most successful corporations believe it is their people who provide them a competitive advantage.

A comprehensive audit report provides not only key measurements, strengths and areas of enhancement but also points out opportunities that a business or organisation can leverage to become an employer of choice and meet it’s long-range goal of attracting, recruiting, developing, rewarding, leading and retaining talented employees.

Literature Review:
In a study conducted by Nevado (1998) considers that the audit should also analyse if the personnel policies are in alignment with the general objectives and the global strategy of the company. It must also translate the human resource strategy into plans and programmes.
Brown (2000) considers that the measurements used to evaluate the company’s personnel reflects neither it’s value nor it’s performance. This is why he proposes an alternate procedure that consists of creating a Human Capital Index based on four elements that must be carefully studied considering their relative importance to the company: the number of years in the business, the level in the company (by job grade or original chart level), the number and variety of positions held and the performance rating which is subjective.
Ostroff (1995) developed an overall HR Quality Index based on the aggregate ratings of all HR activities of a firm. On the basis of this index, firms were grouped into four categories. The firms that scored higher on the HR Quality Index consistently outperformed than those with a lower index on four financial measures: market/book value ratio, productivity ratio (i.e. sale/employees), market value and sales.
In 2000, the French author Ingalens suggests that Human Resource audit represents a judgement on the quality of human resources of an organisation.
As Welbourne and Andrews (1996), highlighted the importance that management gives to its human capital is one of the most important factor that investors look for when assessing the attractiveness of the company.
As per Higgins (1997), human resource audit should verify if the firm’s policies, practices and documents regarding employee hiring, retention, discipline, termination and post employment are both fair and legal. These practices and policies must prohibit discrimination by offering equal opportunities, protect employment seeker from being discriminated.

Macduffie (1995) observed from his studies that innovative Human Resource Practices are likely to contribute to improved economic performance only when:
Employees possess knowledge and skills
Employees are motivated to apply this skill and knowledge through discretionary effort.

Huselid (1995) used two scales; one to measure employee skill and organisational structure and the second to measure employee motivation. The first scale included a broad range of practices intended to enhance employee knowledge, skills and abilities and provide mechanisms to use those for performing the roles. The second scale measured how well designed the appraisal system were and how well they were linked to compensation and merit decisions in the corporations. He found that in a sample of 3452 firms representing all kinds of industries, one standard deviation increase in management practices was associated with increase in sales, market value and profits.
A subsequent study by Huselid and Becker (1997) found that one standard deviation improvement in Human Resource system index was associated with an increase in shareholder wealth of $41,000 per employee.

Similar results found in Germany by Bilmes (1997).This study found a strong link between investing in employees and the stock market performance of the corporation. Companies that use workers at the core of their strategies produced higher long term returns than those others.

Watson Wyatt, a firm of consultants developed a Human Capital Index. They surveyed over 400 US and Canadian companies in 1999 and linked Human Resource Practices with market value by tracking shareholders return over a five year period. He concluded that undue investment was put into practice that yielded very little benefit. Importantly, the research found that there is a negative impact where the activity does not directly support the objectives of the organisation.
A system which is known as Human Capital Appraisal was developed by three partners Friedman, Hatch and Walker (1998) consists of a matrix of systematic intervention steps vs five Human Resource areas of activity. The steps are clarify, assess, design, implement and monitor and the areas of activity covered are:
Recruitment , retention and retirement
Performance management and rewards
Career development, succession planning and training
Organisation design
Measuring human performance have long been of interest to researchers and practitioners(Avery and Murphy, 1998, Bernardian and Beatty, 1984 and Hyde, 2001).One process in measuring and evaluating human capital that has received much attention in the
A study by Johnson, Ryan and Schmit (1994), at the Ford Motor Credit revealed that attitudes concerning workload, teamwork, training and development, satisfaction with the job, and satisfaction with the company were all related to customer satisfaction.

Dr. T.V. Rao provides both framework and a detailed methodology of Human Resource Development (HRD) audit so as to enable corporations to conduct an internal audit of their Human Resource functions themselves. He developed “Human Resource Development Scorecard” which can be used to assess and benchmark the maturity level of the Human Resource Development function in organisations and make it more business driven. It assigns a four letter rating to grade four critical dimensions of HRD which contributes vitally to organisational performance: HRD systems maturity, HRD competencies, HRD culture and values and HRD linkages to business goals.

The American specialist in this field, Bill Coy argues that human resource audit represents a process of politics, procedures, documentations, system and research practices regarding the functions of the human resources within an organisation.

A Human Resource Audit, is a tool for evaluating the personnel activities of an organisation. The audit may include one division or an entire company (K. Aswathappa, 2006). It gives feedback about the human resource functions to operating managers and human resource specialists. In short, the audit is an overall quality control check on Human Resource activities in a division or a company and an evaluation of how these act support the organisation’s strategy.

The proposed study is unique in nature as earlier research works have been done on Human Resource Accounting Practices but no research has been conducted on Human Resource Auditing Practices.

The objectives have been enumerated below:
To analyse the development of Human Resource as an Asset
To explore the theoretical framework of Human Resource Auditing Practices
To draw the relationship between Human Resource Auditing and business performance
To make a review on global practice on Human Resource Auditing
To find out the benefits of the employees and other stakeholders of the corporate entities in India by adopting Human Resource Auditing Practices
To report on the present position on adoption of Human Resource Audit Practices by the Indian companies
To shortlist the findings and thereby making recommendations and conclusions
Selection of appropriate and scientific method is essential to complete the research. So, both primary and secondary data are to be used. Primary data can be collected through field survey and also by conducting personal interview, telephonic interviews and mailing of questionnaires, Secondary data can be collected from different journals, local dailies, annual reports of the companies and various circulars issued from time to time are also likely to help in assessing the strengths and weaknesses of the Human Resource Development. At first, a sample of 10 companies should be drawn from all BSE and NSE companies following Human Resource Audit Practices. Different types of information and data are to be collected from a sample survey to measure the impact of Human Resource Auditing Practices on the business performance of those selected companies in India. The period of study should be of 4 years i.e. from 11-12 up to 14-15. During the research process several selections are to be made about the organisations following Human Resource Auditing Practices, respondents and documents containing statistical data. Various statistical tools and techniques i.e. Testing of Hypothesis, Correlation Regression etc. will be applied to find out the impact on business performance by adopting Human Resource Audit Practices. Questionnaires may also be used during the interviews so that a detailed report on interviews may be presented. These reports will make it easy to compare and analyse the answers of the interviewees. These questionnaires attempt to assess various dimensions of Human Resource Development including the implementation of the various systems, policies and procedures. Individual interviews are essential when sensitive information has to be obtained. Such information pertains to working styles and culture. Union leaders, departmental heads and others are all interviewed individually. In addition, if the organisation is small and is largely managed by professionals, the coverage can be enlarged to include interviews with selected sample of representative employees from different levels and functions. Interview serves as a good mechanism for collecting information about the effectiveness of the existing system. Thus all the necessary information can be collected by applying all these methods and finally research process can be started to find out the impact on the business performance of the selected companies in India.

Introduction ( Rationale of the study, Review of the literature, Chapterisation and limitations of the study)
Historical Background of Human Resource Development
Human Resource Auditing Practices: A Global Scenario
Human Resource Auditing Practices in India: An Overview
Impact of Human Resource Auditing Practices on Business Performance in a Few Selected Corporate Entities in India
Summary of Findings, Recommendations and Conclusions
Brown, M.G. “Human Capital’s for Measure”, The Journal for Quality and Participation, 2000, pp 28-31.

Davenport, T.O. “Workers are not assets”, Across the Board, 2000, pp 30-34.

Higgins, H.N. “Personal Audit”, National Public Accountant, 1987, pp 25-27.

Welbourne, T.M., Andrews, A.O., “Predicting Performance of Initial Public Offerings: Should Human Resource Management be the Equation?” Academy of Management Journal,1996,39, pp 891-919.

Jacques Ingalens” Audit des Resources” Humaines, Editions Liasions, 3e editions, p 91
Bill Coy, Senior Associate for Human Resource Consultation, L. Piana Associates, Inc “Introduction to Human Resource Audit”, 2002, pp 162.

Huselid, M.A. “The impact of human resource management practices on turnover, productivity and corporate financial performance”, Academy of Management Journal, 1995, 38, pp 645.

Yeung, Arthur K. And Bob Berman,” Adding value through human resources: Reorienting human resource measurement to drive business performance”, Human Resource Management, 1997, 36, pp 321-335.

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Macduffie, J.P., “Human Resource bundles and manufacturing performance: Organisational logic and flexible production systems in the world auto industry”, Industrial and Labour Relations Review, 1995, 48, pp 199.

Friedman, Brian, James, Hatch and David M. Walker,” Delivering on the promise: How to attract, Manage, and Retain Human Capital”, Arthur Andersen, New York.

Bilmes, Linda, K. Wetzekar and P. Xhonneux,” Value in human resources”, The Financial Times, 1997.

Schuler, R and S. Jackson,” Linking corporate strategies with human resource management practices”, The Academy of Management Executive”, 1987, 1, pp 207-219.

Pfeffer, J. “The Human Equation: Building profits by putting people first”, MA: Harvard Business School Press, Boston, 1998.

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Huselid M.A. and B.E. Becker, “The impact of high performance work systems, implementation effectiveness, and alignment with strategy on shareholder wealth, Unpublished paper, Rutgers University, New Brunswick, N.J.,1997, pp 18-19.

Kaplan, R.S. and D.P. Norton,” The Balanced scorecard measures that drive performance”, Harvard Business Review, 1992, pp 71-79.

Gerhart, B. and Milkovich, G.T.(1992).Employee compensation: Research and practice. In Dunnette,M.D. and Hough, L.M. (eds), Handbook of industrial and organisational psychology: Palo Alto, CA: Consulting Psychologist Press, Vol 3, pp 481-569.

Russell, J.S. Terborg, J.R. and Powers M.L. (1985), Organisational performance and organisational level training and support, Personnel Psychology,38,pp 849-863.

Terpstra, D.E. and Rozell, E.J. (1993), The relationship of staffing practices to organisational level measures of performance, Personnel Psychology, 46, pp 27-48.

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