Article
HR audits: A key to uncovering hidden risks and enhancing efficiency
Oct. 3, 2024 · Authored by Deanna Kempinski
As teams leverage advanced technology, seamless integrations and automated systems, the reliance on hands-off methodologies has grown. However, this increased productivity can create a false sense of security. It’s crucial to scrutinize these processes to uncover potential vulnerabilities.
Consider the following critical questions to identify areas of exposure:
- People-centric processes: Where do manual errors most frequently occur?
- Technology-centric processes: Which automated processes lack human oversight, potentially leading to data gaps or information discrepancies?
- Financial and fiduciary risks: With what processes are the largest risks associated?
- Outdated processes: Which processes haven’t been reevaluated for an extended period?
- Common complaints and errors: What are the recurring issues the HR operations team is addressing, and which processes are involved?
- Siloed work: What tasks are confined to individual resources?
By addressing these questions, organizations can better manage risks and ensure their HR processes are both efficient and secure. It’s critical that, as human resources (HR) leaders, we maintain awareness of potential exposures and align audit processes to combat these gaps. Internal audit processes are valuable for a variety of reasons. They can lead to objective insights, create opportunities for process improvement, help manage risks, improve efficiencies, and reduce errors that can lead to financial loss or non-compliance penalties.
The audit process includes identifying the procedure that will be audited and then drafting an audit plan to include timing, data sources, participants, levels of review, and report expectations. It is not uncommon for an audit plan to focus on a single procedure at the beginning of the process and then expand to include other concerns that should be addressed. Clearly defining objectives and expectations is central to a successful audit process.
HR leaders should consider proactively scrutinizing processes, including:
- Payroll integrations and updates: Ensuring accurate and timely payroll processing
- Benefit plan data maintenance: Keeping benefit plan information current and accurate
- Billing and reconciliation procedures: Verifying that billing and reconciliation are performed correctly to avoid financial discrepancies
- Annual enrollment preparation and closing activities: Streamlining the enrollment process to enhance employee experience and participation.
- Third-party provider data integrity: Ensuring that data from third-party providers is accurate and reliable.
- Employee customer service experience: Continuously improving the support provided to employees to enhance satisfaction and engagement.
Let's review an example of an effective outcome from an internal audit of a common benefit plan practice:
Henry had been a dedicated member of the HR department for 15 years. Known for his meticulous attention to detail, Henry was responsible for preparing the self-bill for the company’s life insurance and disability plans. He had developed an efficient process where he exported enrollment data from the benefits system and loaded it into a workbook. The cover sheet of this workbook automatically calculated the premiums owed, making the task seem almost effortless.
Recently, Sarah joined the company as the new Vice President of HR. She quickly recognized Henry’s expertise and trusted his deep knowledge of the benefits information. However, aware of the significant financial exposure that employee benefit billing could present, Sarah decided to take a proactive approach. She requested that a member of the accounting team work with Henry to validate the billing procedures.
Jay, a junior accountant from the Accounting Department, was assigned to the task. He tested each of the billing processes and audited the data. During his review, Jay discovered a critical error in the formula used in Henry’s workbook. This error had caused the organization to overpay the self-bill by $11,000 a month for the past two months. Luckily, the error was caught early in the plan year.
Upon learning of the mistake, Sarah immediately acted. She collaborated with the benefits provider to negotiate an adjustment, aiming to recover the overpaid amounts.
The incident described above underscores the importance of regular audits and cross-departmental collaboration in maintaining financial accuracy and integrity.
While not all audits require third-party involvement, engaging in the services of an independent organization can offer significant advantages by providing an objective perspective built upon subject matter expertise. Third-party participation can bring fresh insights, enhanced creditability, and a sense of urgency to an audit process. Stakeholders invested in the audit’s outcome will gain confidence when the findings and recommendations come from an unbiased source.
Additional advantages to third-party involvement include the value of specialized expertise and knowledge of best practices that stem from that specialization. External perspective is particularly valuable in heavily regulated processes, where compliance and precision are critical and there is the potential for significant risk including fines and penalties. These types of processes are often related to federal and/or state wage/hour regulations and benefit plan compliance and fiduciary responsibilities. By leveraging third-party auditors, organizations can uncover hidden vulnerabilities, implement industry-leading practices, and ensure a thorough and impartial evaluation of their processes.
When partnering with a third-party auditor, HR leaders should ensure that the auditor prepares a comprehensive audit plan. This plan should clearly identify the key points of the review, establish a detailed timeline and include pre-audit meetings to align on expected outcomes. These steps are crucial for setting clear expectations, ensuring thorough preparation and fostering effective collaboration throughout the entire process.
By taking a proactive approach to process scrutiny through the utilization of internal audits and third-party audits, when necessary, HR leaders can foster a culture of continuous improvement, mitigate risks, and ensure that their organizations remain compliant and efficient.