Human Resource Accounting

and Audit
Presented To:

Submitted By:

Dr. Rupinder Bir Kaur

Sumit Thakur

Shobitash Jamwal

Introduction
Resource can be defined as an object which can provide
expected future services.
Human Resource Accounting (HRA) is the process of
identifying, measuring and communicating data about
human resources.
In 1974, Flamhoitz defined HRA as: Accounting for people
as an organizational resource. It involves measuring the
costs incurred by business firms and other organisation to
recruit, select, hire, train and develop human assets. It also
involves measuring the economic value of people to the
organisation.

Organisations record the information about human capital in

following ways:1. Basic Information about human resource: Number of
employees, categories, grades, total value of human
resources, value per employee.
2. HR acquisition: number of employees acquired in the year,
cost of acquisition, levels for which they were acquired,
HR development, all information pertaining to HRD
activities of the organisation, HR maintenance, Cost related
to HR maintenance, HR separation, Cost related to HR
separation, attrition rate, details of benefits provided to
employee.

HRD Audit
It examines and evaluates policies, procedures and
practices to determine the effectiveness of HRD
function in an organization.
Human resource audits are potentially powerful tools in
promoting wiser, more equitable use of human resources
and more accurate human resource planning. It works on
the principle of prevention is better then cure.
E-enabled HR audit system is not always required.

Guidelines for HR Audit

1. Identification of areas of HR audit e.g. recruitment process,
job description, employee classification, leaves, personnel
records etc.
2. Goals of HR Audit:
To make effective HR policies.
To ensure compliance with all regulatory norms.
To correct existing deficiencies or people related problems
in any department, section, or organisation as a whole.
To correct the performance evaluation systems
To make training and development functions more effective
and need based.

3. Focus on developing Good Business Practices:

By meeting strategic goals, enhancing such goals and
dovetailing such goals with the overall strategies of the
organisation.
4. Focus on Legal Compliance.
5. Focus on Administration Issues: Maintaining personnel or
HR files, how they are kept, degree of confidentiality in
record keeping.
6. Auditing HR Functions.
7. Employee-relation Audits: questionnaires, exit interviews,
job satisfaction studies etc.

Objectives of HRD Audit

To determine the effectiveness of management programs.
To analyze the factors involved in HRD and develop a
statement of findings with recommendations for correcting
deviation, if any, on the following issues:
a) The extent of deviation from HRD policies.
b) To what extent objectives are spelt out.
c) To what extent performance standards have been
established

 To study the extent to which line managers have complied

with HRD policies.
To study the current manpower inventory and identify
shortfall of excess.

Scope of HRD Audit

The actual state.
The congruence between the desired and the actual state.
The alignment with the overall organizational strategy and
goals.
The compliance with the rules and regulations.
Auditing HR practices, auditing HR professionals, auditing
HR functions or department.

Importance of HRD Audit

It helps to identify the changing training needs and
development of new training modules for effective
utilization of manpower due to technological changes.
To keep pace with environmental changes, management
philosophy and practices at the organisation level like
participative management, employee empowerment, total
employee involvement.

Methods and techniques of HR Audit

Attitudinal Survey.
Data Interpretation.

Advantages of HRD Audit

To ensure effective utilization of HR.
To comply with administrative regulations.
To inculcates sense of confidence in management.
To develop and sustain organisation reputation in
the society.
To perform a due diligence review for various
stakeholders.

Role of HRD Auditor

To get the current facts.
To study the effectiveness of the present system by answering
the following questions:Why was the practice introduced?
What would be the result if the practice is discontinued?
What could be the best possible alternative?

HRD and National Planning

At national level focus of HRD activities is to develop
employable human resource.
By increasing literacy, developing graduates and
postgraduates, professionals and scientists etc.
It encompasses health, housing, provision for drinking
water, hospital and medical facilities, social security and
other welfare measures.
In India availability of employable people is relatively
less.
World bank has sanctioned an aid of Rs 1650 crores.

HRD in Asian Countries

Indonesia:
Change in employment relationship and restructuring of
organisations is controlled by Government to deal with
surplus labour.
Employment matters are highly regulated and
organisation-wide HRD activities are limited.
Malaysia:
Extreme recession.
Lay-offs and terminations are restricting HRD activities.

 Philippines:
Introduction of new technology is resulting in large scale
displacement of workers, skill-mismatch and redundancy.
Widespread training and development programs in the
industries.
Singapore:
Established a Skill Development Fund to counter the
changing technology and train workers.
Thailand:
Limited HRD activities.
Retraining of workers.

Approaches to Human Resources

Audit
The following approaches are adopted for
purpose of evaluation:
Comparative approach
Outside authority approach
Statistical approach
Compliance approach
Management by objectives (MBO) approach

 Comparative Approach
In this, the auditors identify Competitor
Company as the model. The results of their
organization are compared with that Company/
industry.

Outside Authority Approach

In this, the auditors use standards set by an
outside consultant as benchmark for
comparison of own results.

Statistical Approach
In this, Statistical measures are performance is
developed considering the companys existing
information.

 Compliance Approach
In this, auditors review past actions to
calculate whether those activities comply with
legal requirements and industry policies and
procedures.

Management By Objectives Approach

This approach creates specific goals, against
which performance can be measured, to arrive
at final decision about organizations actual
performance with the set objectives.

HR Audit Process
Pre-Audit Information
Step 1 &
Pre-Audit Self Assesment
2
On Site Review
Step 3 &
Records Review
4

Step 5

Audit Report

Definition Of HRA
Human ResourceAccounting is, Theprocess
ofidentifying and measuring data about
human resource and identifying and measuring
data about human resource and
communicating this information to interested
parties
-- AMERICAN ACCOUNTING
ASSOCIATIONCOMMITTEE

HISTORICAL DEVELOPMENT
OFH.R.ACCOUNTING

According to Eric G Falmholtz

FIRST STAGE (1960-1966)
Beginning of academic interest in the area of HRA
SECOND STAGE (1966-1971)SECOND STAGE
(1966-1971)
The focus here was more on developing and
validating different models of HRA

 THIRD STAGE (1971-1976)

This period was marked by a widespread
interest in the field of HRA. R.G.Barry
experiments contributed substantially during
this stage.
FOURTH STAGE (1976-1980) FOURTH
STAGE (1976-1980)
This was the period of decline in thearea of
HRA
FIFTH STAGE (1980 onwards )
There was a sudden renewal of interest in the

Objectives Of HRA
Provide cost value information about acquiring,
developing , allocating and maintaining HR.
Enable management to effectively monitor the
use of HR.
Find whether human asset is appreciating or
depreciating over a period of time.
Assist inthe development of effective
managementpractices.practices.
To motivate individual persons in
theorganization to increase their worth by
training .
HR by giving valuable information.

Uses Of HRA
According to Grojer and Johansson As a political tool, used to demonstrate
mismanagement ofhuman resource.
As a pedagogical instrument for analyzing
and structuring .
As a decision making aid to ensure that
decision on HR are more rational from the
management point of view.

Methods of HRA:

Historical cost method

Replacement cost method
Opportunity cost method
Capitalization of salary method
Economic valuation method
Return on efforts employed method
Adjusted discounted future wages method
Reward valuation method
Standard Cost Method
Currant Purchasing Power Method
26

1)Historical
cost
method:This
method

developed
by
Brummet,
Flamholtz
and
Pyle.
According to this method, the
actual
cost
incurred
on
recruiting, selecting, training,
placing and developing the
human
resources
of
an
enterprise are capitalized and
written off over the expected
useful
life
of
human
resources.
The
procedure
followed for human resource
asset is the same as that of
other physical asset.

27

2) Replacement cost method:-

This method was developed by Rensis Likert and Eric G.

Flamholtz. The cost of replacing employees is used as the
measure of companys human resources. The human resources
of a company are to be valued on the assumptions as to what it
will cost the concern if existing human resources are required to
be replaced with other persons of equivalent experience and
talent.
28

3) Opportunity cost method:In order to overcome the

limitations of replacement cost
method, Hekimian and Jones
suggested the use of opportunity
cost method which determines the
value of human resource on the
basis of an employees value in
alternative uses. Accordingly the
value of an employee is based on
his opportunity cost-the rice other
divisions are willing to pay for the
services of an employee working in
another
division
of
an
organization.
29

4) Capitalization of salary method:The advocates of this method

Baruch Lev and Aba Schwartz
have used the concept of
human resources in terms of
economic value in this model.
According
to
them
the
salaries payable to employees
during their stay with the
organization may be used as
a replacement for the value
of human resources, in view
of
the
close
co-relation
between
employees
compensation and their value
to the organization. Thus the
value of human resources is
the present
value of future
30

5) Economic valuation method:-

Economic valuation method considers the

present worth of the employees future service
expected to be derived during their stay with
the organization as the value of firms human
resource.
Although
there
are
some
resemblances between earlier model i.e.,
capitalization of salary method and this model,
yet they differ with each other. The economic
valuation
model recommends the capitalization.
31

6) Return on efforts employed method:-

This method measures the value

of the firms human resources on the basis of
efforts made by the individual for the
organizational
benefits.
These efforts
are
evaluated in the light of the following factors :

Positions an employee holds;

Degree of excellence employee achieves;
Experience profile of the employee.
32

7)Adjusted discounted future wages method:-

Roger H. Hermanson developed this model wherein he

recommends measuring the value of human resources on the
basis of relative efficiency of an organization in the industry.
This model relates the value of human resources with the extra
profit the firm earns over and above the industry expectations.
In fact, this model attributes the difference in profitability rates
between firms of an industry to the varying efficiency of their
human resources.
33

8) Reward valuation method:-

As an improvement over the

capitalization of salary method Flamholtz
developed a model commonly known as
Stochastic Rewards Valuation Method. The
method seeks to measure the value of human
resources on the basis of an employees value
to an organization at various services states
(roles) that he is expected to occupy during the
span of his working life with the organization.
The author has identified the major variables
which determine the value of an individual to a
firm. 34

9) Standard Cost Method :-

This method envisages establishment of a standard cost per

grade of employee, updated every year. Variances produced
should be analyzed and would form a useful basis for control.
Replacement costs can be used to develop standard costs of
recruitment, training and developing individuals, such standards
can be used to compare actual results with those planned.
35

10) Current Purchasing Power Method :-

Under it, instead of taking the replacement

cost to capitalized, the capitalized historic cost
of investment in human resources is converted
into current purchasing power of money with
help of index numbers. Its great advantage is
its simplicity even though it might produce only
approximate answers and approximately correct
data.
36

Advantages of HRA
Foresee the changes.
Provides different methods of testing.
Increase productivity.

Brings high return.

Helps individual employee to aspire.

Provides scope for advancement.
Throws light on the strength and weaknesses
of the existing workforce.
Helps potential investor judge a company.

LIMITATIONS OF HR ACCOUNTING
Not easy to value human asset.
Results in dehumanizing human resource.
No evidence.
HR is full of measurement problem.
Employees and Unions may not like the ideas
.
Unrealistic.
Lack of Empirical evidence.

ANY QUESTION

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