HUMAN RESOURCE ACCOUNTING & ADUIT

HUMAN RESOURCE ACCOUNTING & ADUIT

SYLLABUS • INTRODUCTION • HUMAN RESOURCE COSTS • HUMAN RESOURCE ACCOUNTING SYSTEM • HUMAN RESOURCE AUDIT • HUMAN RESOURCE AUDIT REPORT

Introduction • Human Resource factor is very crucial, important and sensitive factor of production. Even though human resources are the most important element of the business process, their value is not shown among the assets in a traditional statement of financial position. Human resources are truly the most valuable resources a firm can possess.

INTRODUCTON • The total growth of the organization depends mainly on the skills of its employees and the services they render. Hence, the success of any organization is contingent on the quality of their Human Resource- its knowledge, skills, motivation and understanding of the organizational culture. • Therefore, it is imperative that the humans be recognized as an integral part of the total worth of an organization.

In order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills, and contribution of the human element • Human resource accounting (HRA) denotes just this process of quantification/measurement of the Human Resource. • “Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business.

HUMAN CAPITAL AS A FOUNDATIONAL ASSET • Human Capital valuation is required by analysts in order to give those more tools to objectively assess company viability. • It is important to notice the critical factors that the human capital plays as the foundation of the financial capital. • The human intellectual asset is, like many physical assets, hard to value. • Based on management, vision and monitoring, structural capital is critical and is one explanation of the high rewards given to CEOs.

HR AS AN ASSET • Once organisations realise the actual benefit and take it as a growth process, it will only help them in increasing their shareholders’ value. When a company is able to assess an individual’s worth, it helps in increasing its own worth. • Basically HRA can be tracked through two methods - Cost-based Analysis and Value-based Analysis.

HUMAN RESOURCE ACCOUNTING • Definition:- The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as “The process of identifying and measuring data about human resources and communicating this information to interested parties”.

According to Likert (1971), HRA serves the following purposes in an organisation: • It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness; • It allows management personnel to monitor effectively the use of human resources; • It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved; • It helps in the development of management principles by classifying the financial consequences of various practices

OBJECTIVES OF HRA • The objective of HRA is to inform general public how far enterprises are successful in fulfilling the human contributions also come to light through HRA. • To facilitates effective and efficient management of human resources. • To furnish cost value information for making management decision about acquiring, allocating, developing and maintaining human resources in order to obtain cost effective organizational objectives. • To provide information of changes in the structure of manpower to the management.

To provide qualitative information on human resources. • To provide more relevant and timely information to the interested parties. • To provide a sound and effective basis of asset control. • To know whether the human resources are properly utilized and allocated. • To allow management personnel to monitor effectively the use of human resources. • To evaluate the return on investment on human capital.

MEASUREMENT IN HRA • The two main approaches usually employed for the measurement are: • 1. The Cost Approachwhich involves methods based on the costs incurred by the company, with regard to an employee. • 2. The Economic Value Approachwhich includes methods based on the economic value of the human resources and their contribution to the company’s gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.

INVESTMENT IN EMPLOYEES • To establish an effective standard for managing and assessing human resource development is required. • To improve the functional level of an organization over the long term, it is necessary to envision the employee career path based on the thrust of the company’s management, and to create a training and development system that combines OJT (on-the-job training) with Off JT (off-the-job training).

The other models are: • Brummet, Flamholtz, and Pyle’s economic value model • Hermanson’s unpurchased goodwill model • Human organizational dimensions methods • Methods for valuation of expense centre groups

Return on Investment Approach • HR ROI = Results (actual performance or expectations) Salary + human resource development investment • Theconcept of HR ROI is expressed with the above equation. The denominator of the HR ROI is essentially the total amount of compensation for a targeted individual employee. This total compensation includes salary, a benefits package and investment in human resource development. • The fixed HR ROI rule aims at encouraging more high-performance employees to improve their skills and knowledge through a training and self enhancement program.

HR accounting system • It is true that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on ‘Return on Investment’ (ROI), with very few concrete steps being taken to track ‘Return on Knowledge’. • Human capital also provides expert services such as consulting, financial planning and assurance services, which are valuable, and very much in demand.

Three purposes can be distinguished in the HRCA (1) An ambition to improve the management of human resources from an organisational perspective by increasing the transparency of human resource costs, investments and outcomes in the management accounting rituals, such as profit and loss accounts, balance sheets and investment calculations; (2) Attempts to improve the bases for investors company-valuation. (3)Aspirations from human resource specialists, company doctors or unions to use monetary arguments when suggesting investments in human resources.

Implications for Measuring Human Capital Advantage • The findings laying out the “human capital value chain” are these: • 1. In addition to being fairly compensated, people place high value on: • Being in an environment where they can grow and learn and advance *The managerial skills/abilities of their immediate supervisor *Being treated fairly, appreciated and acknowledged *Doing work that makes a contribution • 2. These determinants of employee satisfaction drive employee retention • 3. The retention rate among key employees drives customer satisfaction • 4. Customer satisfaction drives customer retention • 5. Customer retention drives profitability and other measures of financial performance including total stockholder return.

Three categories of learning intervention measures should be captured: • 1. Inputs—measures of the intensity of learning resources available to employees, including formal and informal learning opportunities. • 2. Outcomes—intermediate measures of the effectiveness of learning • 3. Organizational Learning Capacity—an overall assessment of an organization’s commitment to add capacity for learning

Human Resource Audit • "HRD audit is a comprehensive evaluation of the existing human resource development strategies, structure, systems, styles and skills in accordance with both short-term and long-term business plans of the organization. In HRD Audit the skills, styles, systems, strategies, structure is studied and analyzed using a variety of methodologies like interviews, questionnaires, available records, workshops etc. This evaluation helps the organizationhave a clear understanding of the lacunae and better align the HR processes with Business goals."

HR AUDIT • Typically the basic reason why organisations prefer to conduct an HR audit is to get a clear judgment about the overall status of the organisation and also to find out whether certain systems put in place are yielding any results. HR audit also helps companies to figure out any gaps or lapses and the reason for the same. • An HR audit can be used by an organisation for multiple purposes. Some of the more common reasons are: • To identify and address HR-related problems. • To seek out HR-related opportunities. • To conduct due diligence for mergers and acquisitions. • To support initial public offerings.

THE AUDIT PROCESS • The HR audit process is conducted in different phases. Each phase is designed to build upon the preceding phase so that the organisation will have a very strong overview of the health of the HR function, at the conclusion of the audit. These phases include: • Pre-Audit Information • Pre-Audit Self-Assessment • On-site Review • Records Review • Audit Report

Approaches to HR Audit • There are five approaches for the purpose of evaluation of HR in any organization: • Comparative approach • Outside authority • Statistical • Compliance approach and • Management By Objectives(MBO) • The audit is made up of four main steps: • 1) Define desired HR practices for your organization • 2) Assess current practices against the criterion that you have established • 3) Analyze the results • 4) Establish improvement goals and take action

PURPOSE OF AN AUDIT • The audit can serve any of the following purposes: • __To clarify desired practices of HR work and roles within the organization (HR Department, Line Managers). • __To establish a baseline for future improvement. • __To evaluate current effectiveness. • __To standardize practices across multiple sites within a division or company. • __To assess current knowledge and skills required of HR practitioners. • __To improve performance levels to key customers within the organization.

Benefits of HR Audit • It provides the various benefits to the organization. These are: • It helps to find out the proper contribution of the HR department towards the organization. • Development of the professional image of the HR department of the organization. • Reduce the HR cost. • Motivation of the HR personnel. • Find out the problems and solve them smoothly. • Provides timely legal requirement. • Sound Performance Appraisal Systems. • Systematic job analysis. • Smooth adoption of the changing mindset.

Methodology and Instruments of HR Audit • In audit to evaluate the HRD structure, system, culture, competency & other aspects, the following multiple methods are used: • Interviews • Group Discussions and workshops • Observation • Analysis of records and documents • Questionnaires

Audit report • The audit programme comes to an end with the preparation of the audit report. The report may be clean or qualified. The report is qualified when the HR performance contains gaps. Where gaps are observed, remedial measures are suggested. The report is clean where the performance is fairly satisfactory. Estimating your future workforce requirements is an inexact science. But a number of different techniques exist to help you do this, as well as to calculate the state of the labour market in the short to medium-term and assess any problems or implications that result.

Competency required for an effective HRD Auditor • Planning skill • Information seeking skill • Ability to diagnose • Ability to probe • Ability to paraphrase • Organizing skill • Interviewing skill • Facilitation skill • Observation skill • Data recording skill • Documentation & report writing skill • Communication skill • Presentation skill • Proactive • Patience • Initiative Taking • Time Management

Human Resource Development Systems and Procedures • Scope: Audit whether there is the integrated use of training and development, organisation development, and career development to improve individual, group, and organisational effectiveness. These three areas use development as their primary process. • Training and Development: • Organisatlon Development • Career Development

The most important factors influencing HRD Audit intervention and utilization of HRD Audit inputs are: • CEO/Top management commitment to HRD • HRD chief’s commitment to HRD • Management style of the Organization • Organizational characteristics • HRD department profile • Competency levels of the HRD personnel

HUMAN RESOURCE ACCOUNTING & ADUIT