What is an HR Audit and How Should Employers Conduct Them?

What is an HR Audit? 

An HR audit is a way for organizations to identify ways in which they are successful or ways they can improve in a variety of functions, such as recruitment, retention, performance, and compensation. HR audits also help ensure compliance when conducting audits on taxes, security, and financial information. Audits on compliance items are necessary to maintain an ethical organization and a peace of mind, but operational audits can shine light on the areas of your business that are running well or need improvement

When Should Employers Conduct an HR Audit? 

The best time of year to conduct an audit will depend on the organization’s needs and schedule. A slower time of year might be more productive than the organization’s busy season. Likewise, the end or beginning of the year can help an organization benchmark improvements year over year. 

Generally speaking, a proactive approach to audits is best, rather than reacting to a more serious issue with an audit. Audits can help HR teams identify problems early and provide insight to identify systemic issues that are occurring across multiple teams.

What Areas Should Employers Audit? 

There are a few areas to look at when conducting an HR audit:

1. Legal Action Audit: Some common employment law risks include incorrectly classifying independent contractors and employees, incorrectly categorizing employees as exempt or non-exempt for overtime, condifiential information protections, and noncompliance with harrassment or discrimination policies. It may be worth consulting a labor attorney to ensure your documents are legally sound and in-line with federal and state regulations.
2. Recruitment and Retention Audit: This is an opportunity for HR to create a consistent, documented process for bringing on new team members. Tracking metrics like recruitment cycle and time to hire rates can identify challenges preventing organizations from reaching a fully-staffed workforce. Applicant tracking systems can help easily track these metrics—for example, with an all in one HRIS like BerniePortal, applicant tracking is consolidated and organized in one, easy-to-access location that allows HR to share candidate applications, messages, and internal feedback with all hiring decision-makers. This enables more efficient hiring and prevents quality candidates from getting away.
3. Compensation Audit: Regular benchmarking of your compensation against others in your industry and region can give you confidence that your offers aren’t negatively affecting recruitment. Again, look to third-party sources or consultants to help determine a benchmark for these items.
4. Retention Audit: Retention metrics are extremely important because replacing employees is expensive, disruptive and time-consuming. Evaluate voluntary and involuntary turnover rates, as well as talent turnover rate. Are your most talented employees leaving? Are recent hires leaving? A high rate of entry-level or organization turnover may indicate an issue with hiring, not with retention. Are there any retention issues with specific managers? 
5. Performance and Training Audit: Going through a proper performance audit will not only ensure that current and future employees are properly trained and receiving consistent feedback, it will also ensure an organization is benefitting from everything that their employees have to offer. For those employees whose performance may be lagging, take a look at any possible causes and solutions. How are employees trained during the onboarding process? Does ongoing training occur? How do managers give feedback to employees? Is it consistent and documented? 
6. Financial and Tax-Related Audits: If you’ve hired a bookkeeper to help out with finances, you will want to conduct random audits and be fully aware of your bookkeeper’s process. Consider hiring a CPA to double check your finances and catch anything that might trigger an audit from the IRS.
7. Security Audits: Keeping your organization and customer’s data secure is of the utmost importance in this day and age. Being proactive by performing a software security audit, such as a SOC2 audit, and obtaining data security certification will ensure your security is on the right track and bring attention to any weaknesses in your system.

What Audit-Related Questions Should Employers Ask? 

HR teams and employers should identify key team members who will participate. For example, HR will want to have conversations with all managers and potentially other team members who oversee specific items like tech security. The following questions will help get HR teams started: 

1. Where does leadership fall on the spectrum of risk vs. compliance?
2. What are the legal requirements in this area of our business?
3. What are our current processes?
4. What are industry standards?
5. Where can we improve? 
6. What are we doing better than average?

In answering these questions and using this scorecard, HR can produce a report of the findings, share with leadership teams if necessary, and identify if external auditors may be necessary or useful. For discrepancies in legal, tax, and security items, employers might want to consult a second professional opinion. HR teams can also create action plans around inconsistencies, practices that need to be improved and coach managers on improving those areas.

What is an External Audit?

Besides the fact that internal HR audits can help improve an organization, employers can be randomly selected for an external IRS audit in response to a discrepancy on a tax return, or the returns of business partners or investors. External audits can also be conducted by insurance companies, CPAs, or tax agencies. If selected for an IRS audit, employers should consult the guidance of a tax professional. Ideally, HR teams should always be ready for an audit—which is why the internal audit practice is useful.