Employees Are the Most Important Resource

Companies generally measure their success by total revenue or profitability, but Ronald Adler, the CEO-president of Laurdan Associates, Inc., says employees are among the most (if not the most) important assets a company can have. Adler’s consulting group helps organizations conduct HR audits, and also provides tools for companies that do not have the need or the means to hire outside consultants.

When should a company conduct an HR audit? That depends, according to Adler, on the goals of the audit. Many times his firm is called to “put out fires,” as in response to a discrimination charge or employment-related lawsuit.

Often, an audit serves as a compliance tool to ensure that the company is working within the current employment laws and regulations, particularly at the federal and state level. Another reason for an audit is to identify HR strengths and weaknesses, or to gather information about the company and develop standards to benchmark best practices. If a company is planning to buy Employment Practices Liability Insurance (EPLI), an HR audit is a requirement.

Increasingly, however, companies are recognizing the importance of human capital, and a broad HR audit, along with a proactive plan for change, can maximize the ability of an organization to keep talented employees, alleviate internal problems, and prevent potential problems from arising.

The scope of the audit

When an HR professional hires a consultant, they will discuss the scope of the audit. This involves deciding on the issues to be audited, what parts of the organization will be audited, and who will conduct the audit.

Adler says that starting with small, achievable “bites” is helpful, especially for smaller to mid-sized companies. Updating the employee handbook would be a goal that could have achievable results. Clients want success stories, Adler says; an audit broader in scope will take longer to complete, and the outcomes will take longer, too. Naturally, budgets are an issue, and larger audits are more expensive.

Who is on the team?

One of the first things to decide is who will be on the audit team. Adler strongly recommends that a senior level leader—whether the CEO, CFO, or board director—should be involved at the start.

“In our experience, a higher level champion for an audit brings a commitment for the activity,” says Adler. That commitment means more successful outcomes are likely. An audit inevitably will uncover flaws, which can be threatening to managers. If the company perception is that senior management does not care about the audit, it is less likely that a middle manager will risk revealing flaws or problems within a department.

With companies facing increased internal financial controls due to the Sarbanes-Oxley Act, the financial department or CFO may get involved in an HR audit. This will mean deciding who is the audit leader and setting up regular meetings or reports. The team leader could be the HR consultant, the HR department, the CFO, an attorney, or a risk manager.

Consultant, checklist, or other tool

An HR audit team must decide on whether to hire an outside consultant, use a software or other tool, use an attorney’s checklist, or develop an audit internally. This, again, depends on the scope of the audit and the budget.

• Laurdan Associates sells a low-cost paper or software version of an HR audit tool (ELLA®). This type of tool asks the right questions to guide the team through the audit process. It can address only one section or a broader spectrum of HR issues, and by getting certain answers, such as the number of employees in a company, it points out the laws and rules to follow and processes to put in place.
• Employment law firms offer checklists that HR professionals can use to conduct an audit. This is a good place to start, Adler says, noting that his software “goes deeper.” Some consider having an outside attorney conduct the audit may protect written results through the attorney/client privilege, but that theory is not always foolproof, Adler says.
• Outside consultants can help HR professionals in conducting an audit simply because they bring a level of expertise and objectivity to the task. Within a company there are always politics that may impede the process. Boards and executive committees that used to see the HR audit as purely the in-house HR department’s job now recognize the importance of investing in human capital, and are more willing to hire experts to reduce liability.
• Finally, some companies develop their own audit tool for specific reasons such as wanting to cover their suppliers. These internal audit tools generally require hiring an outside consultant and attorney, and are more expensive than other alternatives.

Measure what you treasure

“Organizations measure what they treasure,” says Adler. If the company says on its website that it cares about diversity, then it should be measuring diversity and holding management accountable. This means looking at the numbers of women and minorities in upper management positions by reviewing EEO1 reports and hiring practices, and mandating change if necessary.

Since Sarbanes-Oxley, government has required publicly traded companies to implement internal controls in the financial arena. This attitude has progressed to the realm of human capital. The EEOC encourages companies to conduct HR audits, and the OFCCP (Office of Federal Contract Compliance Programs) supports internal self-assessments. While measuring the value of employees to an organization is not as simple as quantifying sales, it is important to make an effort and measure that value. Human capital may have the biggest impact on the bottom line.

Change in the air

Senior management and the audit team must make a commitment, prior to the audit, that the results will yield action. Once the audit is finished, the team prepares a final report. The report should include an executive summary of the findings, identifying key problems and prioritizing solutions. Adler says the executive summary should be just that: a summary of the major points from the audit that the CEO can read without having to go through the whole report.

Change must result from an HR audit; and those who took part—including any employees involved in a company survey—should know about the plans for change. Survey participants must be sure that there will be no retaliation for candid responses, and that, once the audit is done, changes will occur.

If employers discover something is lacking or wrong in HR policies and do not take action, it is worse than ignorance—especially in case of a lawsuit. “An HR audit… exposes potential problems that are discoverable—now we have something in writing,” Adler says. If nothing changes after the audit, the company not only will lose employees, but also could be hurt in a lawsuit.

Getting started

If you are an HR professional considering undertaking an audit, how do you go about it?

• Get executive commitment. If you have senior management backing the HR audit, the process and results will have more meaning to all the players.
• What are the goals? Whether the audit is in response to an employment law claim, HR management strengths and weaknesses, or to develop standard for best practices, you need to determine the objectives up front.
• What is the scope? The scope of the audit could be as broad as looking at all the issues and areas that affect human capital, or more specific legal or policy issues. This will also depend on budget.
• What parts or members of the organization will be audited? Decide who will be audited, whether departments, individual plants, or divisions.
• Who is on the audit team? Decide who will be on your audit team and who will conduct the audit, whether it will be an HR professional, the CFO or auditing department, a consultant, or other.
• Which auditing tool?  Choose a software tool such as the Employment-Labor Law Audit ™ (ELLA ®), a law firm’s checklist, or an internally developed audit.
• What are the costs of conducting the audit? Costs include purchasing an auditing tool or hiring outside consultants, computer-related costs, overhead, salaries, etc.
• Decide on audit team governance. Planning how often you will meet, whether there will be interim reports, and who has access to data, etc., will expedite the process. Where possible, the fewer people who know about the audit and its results, the better for the process.

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