At times, HR and internal audit professionals miss opportunities to add value to their work because they don't fully understand one another's areas of responsibility. The internal audit team's review of compensation and benefits, for example, might seem more like a test for HR than an opportunity for improvement. Similarly, the internal audit function does not always have the specialized knowledge required to review certain areas within HR and might be less familiar with the risks specific to HR. But when HR and internal audit find ways to work together more effectively, the gains for both are substantial.
Consider these three factors:
- The people costs, including compensation, benefits, training, retention and recruiting are major costs and significant drivers of current and future performance, ensuring a keen interest in the efficiency of these programs and their overall effectiveness.
- An increase in exposure to litigation has resulted from downsizing, benefit cuts, and market-driven losses in retirement programs.
- There are business risks when costs and expenses, such as for health care and pensions, increase unexpectedly.
'Numbers' People and 'People' People
Now is the time for HR and internal audit to increase their connectivity. For example, although HR may be extremely efficient in certain areas, such as delivering training to new hires, effectiveness is not always measured or tracked (something of interest to internal audit that would also be beneficial to HR). Internal audit can help to evaluate these programs and help HR design ways to measure their effectiveness, putting HR in a position to drive continual improvement.
CFOs want a better understanding of the costs and expenses associated with HR programs. They want to know that controls are in place to manage risks, and they want such controls to be understood and properly monitored—which is not always the case.
In addition, where third-party vendors are involved, as with many benefit programs, there may be concerns about whether (1) there has been competitive bidding, (2) there is auditing of expenses, (3) there is oversight of the vendors' performance, and (4) there is a clear delineation of the roles and responsibilities between the company and the vendor.
Internal audit will look to see that there are well defined roles and responsibilities and not an overreliance on any vendor, especially where the vendor is neither contractually nor legally responsible for the operation of the program.
Some of the areas in which internal audit has begun reviewing HR include:
- Health care programs. A traditionally high-expense area in which the determination and payment of claims is outsourced fully. A review by internal audit considers the accuracy of claims, compliance with contract terms and controls around payment accuracy and processing. These reviews also go beyond typical health care programs and encompass COBRA, HIPAA, flexible spending accounts, health savings accounts, health reimbursement arrangements and wellness programs.
- Retirement programs. Another high-expense area in which most administration is outsourced to a third party. Internal audit will want to review whether the third-party administrator has been in place for a significant time with no contract renewal or no competitive rebidding, and whether there has been a contract or operational review of the vendor. Other areas internal audit will focus on include HR's oversight of plan expenses paid to the vendors and the investment fees being charged. Plan expenses is an area of increasing participant litigation and governmental audits, leading more employers to look at ways to install a proper plan governance structure to handle these issues.
- Compensation programs. Compensation news is on the front page almost daily, so the risks (financial and reputational) are well known. Assuring that proxy disclosures are correct, stock-based compensation information is accurate and that these programs are in line with governmental requirements is of paramount importance. Internal audit will want to be sure that HR is attuned to the accounting and proxy requirements and ensure that proper controls and safeguards are in place.
- HR programs. As mentioned above, the effectiveness of general HR programs like recruiting, training and retaining employees typically has not been measured or monitored. These high-spend areas, which literally are the future of any organization, are coming under scrutiny—in many cases for the first time.
The growing relationship between HR and internal audit can improve an organization dramatically. The first steps, as always, are to open the lines of communication, seek the expertise of advisors and begin to set some short-term, achievable goals.
Charlie Yovino leads the PricewaterhouseCoopers' Atlanta global HR services (GHRS) practice and is the national leader for the GHRS tax, accounting and regulatory practice. He has over 27 years working with qualified plans and benefit issues, focusing on qualified plan compliance, controls, governance, and risk management issues.
What to Expect from the IRS Tax Audit Initiative, SHRM Online Legal Issues, March 2010
SHRM Online Benefits Discipline