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Presented To: Submitted By:
Dr. Rupinder Bir Kaur Sumit Thakur
• 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
• 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
Organisations record the information about human capital in
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
• 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.
1. Identification of areas of HR audit e.g. recruitment process,
job description, employee classification, leaves, personnel
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.
Guidelines for HR Audit
3. Focus on developing Good Business Practices:
By meeting strategic goals, enhancing such goals and
dovetailing such goals with the overall strategies of the
4. Focus on Legal Compliance.
5. Focus on Administration Issues: Maintaining personnel or
HR files, how they are kept, degree of confidentiality in record
6. Auditing HR Functions.
7. Employee-relation Audits: questionnaires, exit interviews,
job satisfaction studies etc.
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
Objectives of HRD Audit
• To study the extent to which line managers have complied
with HRD policies.
• To study the current manpower inventory and identify
shortfall of excess.
• The actual state.
• The congruence between the desired and the actual state.
• The alignment with the overall organizational strategy and
• The compliance with the rules and regulations.
• Auditing HR practices, auditing HR professionals, auditing
HR functions or department.
Scope 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
Importance of HRD 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
• To perform a due diligence review for various stakeholders.
Methods and techniques of HR Audit
• 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?
Role of HRD Auditor
• 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
• World bank has sanctioned an aid of Rs 1650 crores.
HRD and National Planning
Change in employment relationship and restructuring of
organisations is controlled by Government to deal with
Employment matters are highly regulated and
organisation-wide HRD activities are limited.
Lay-offs and terminations are restricting HRD activities.
HRD in Asian Countries
Introduction of new technology is resulting in large scale
displacement of workers, skill-mismatch and redundancy.
Widespread training and development programs in the
Established a Skill Development Fund to counter the
changing technology and train workers.
Limited HRD activities.
Retraining of workers.
The following approaches are adopted for purpose of
• Comparative approach
• Outside authority approach
• Statistical approach
• Compliance approach
• Management by objectives (MBO) approach
Approaches to Human Resources Audit
• 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 company’s 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 organization’s actual performance with the set
HR Audit Process
Step 1 & 2
• Pre-Audit Information
• Pre-Audit Self Assesment
Step 3 & 4
• On Site Review
• Records Review
• Audit Report
Human Resource Accounting is, “ The process
of identifying and measuring data about human resource
and identifying and measuring data about human
resource and communicating this information to
-- AMERICAN ACCOUNTING ASSOCIATION COMMITTEE
Definition Of HRA
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-
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
This was the period of decline in the area of HRA
• FIFTH STAGE (1980 onwards ) –
There was a sudden renewal of interest in the field 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 in the development of effective
management practices. practices.
• To motivate individual persons in the organization to
increase their worth by training .
• HR by giving valuable information.
Objectives Of HRA
According to Grojer and Johansson-
• As a political tool, used to demonstrate
mismanagement of human resource.
• As a pedagogical instrument for analyzing and
• As a decision making aid to ensure that decision on HR
are more rational from the management point of view.
Uses Of HRA
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
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.
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 company’s 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
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 employee’s 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
3) Opportunity cost method:-
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
earnings of homogeneous group of
5) Economic valuation method:-
Economic valuation method considers the present worth of the
employee’s future service expected to be derived during their
stay with the organization as the value of firm’s 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.
6) Return on efforts employed method:-
This method measures the value of the firm’s
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.
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
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
employee’s 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.
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.
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
• 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
• Helps potential investor judge a company.
Advantages of HRA
• 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 .
• Lack of Empirical evidence.
LIMITATIONSOF HR ACCOUNTING