Why do I need to know about it?
Auditing may have a coldly bureaucratic name, but it’s a more straightforward – and valuable – process than you might think.
As formal assessments designed to provide an independent assurance of an organisation’s activities, the benefits of running audits are considerable. Financial audits can reassure shareholders of the company’s value, thereby bolstering their investment, while operational audits can provide direction to management and motivate employees.
In short, auditing offers interested parties clarity: its checks and balances are a sure-fire way for businesses of any size to improve processes.
Though audits aren’t mandatory for all businesses, larger businesses in particular expose themselves to risks by not auditing. With increased organisation size comes increased complexity; the potential for neglected records, miscommunication, and clouded visibility. Auditing offers a way to keep order.
What do I need to know?
A financial, or external, audit is an annual check carried out to reassure shareholders that a company’s financial statements are accurate.
An external auditor gathers financial information the company has put together about itself and runs a series of tests to check if that information is true, aiming to root out fraud and error. The company then has a chance to adjust its reports before publishing them.
Operational, or internal, audits happen throughout the year and help businesses know whether their operational processes are working in the most productive and lucrative way possible, in departments such as IT, marketing and, of course, HR.
An internal auditing team develops specific tests to assess whether operations in a particular department are functioning efficiently, before making recommendations to alter any processes.
Where can HR add value?
Internal audits are of the most relevance to HR. Why? As Caroline Nugent, HRD at the Financial Ombudsman Service, explains, auditing can identify areas for improvement across the business.
“Audit work can flush out areas where policy or procedural changes are needed,” she says. “I have worked with audit for many years to ensure that how we operate as organisations is transparent.
“Having planned audits, for example in payroll or sickness, has meant reviews have allowed us to check where things need changing or clarity is required.”
Any internal audit of HR areas such as recruitment also means HR is responsible for preparing – and maintaining – relevant records.
The challenge is that auditing can encourage companies to build up aspects of the business for show, to impress auditors, rather than focusing on improving processes, Nugent warns.
“There are risks that, as we shrink resources in HR, that we get into situations where we only focus on checking work that we know audit will be checking – and that is not good for us as a profession.”
Another role HR must play, says Nick Bacon, professor of human resource management at Cass Business School, is “to ensure compliance with qualifications and training”.
“This involves checking qualifications during recruitment, and keeping accurate records on staff training for specific roles and general health and safety training,” he says.
HR’s expertise is just as indispensable post-audit – in informing staff of the results of the audit, and ensuring relevant departments take the next steps.
Auditing’s reputation as a headache for employees is a risk.
“It’s important for HR to make sure that audit work doesn’t become a case of staff thinking ‘don’t put your head above the parapet’ – so not highlighting issues when they have to as they don’t want to be involved,” adds Nugent.
HR has a responsibility to help frame an audit as a positive thing, agrees Diana Melville, lead advisor for the Chartered Institute of Public Finance and Accountancy’s Better Governance Forum.
“Sometimes people see audit as a threat, but really they ought to see it as an opportunity for improvement,” she says.
“I’m sure HR are keen to have a good open culture where people can raise concerns if they need to or ask questions. Having internal audits very much supports that sort of culture because you are opening yourself up to a bit of independent scrutiny.”
This piece appeared in the January 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk