Internal auditing and human resource management

Going strategic boosts competitive advantage

n today's business world, organizations must be constantly alert to new ways of gaining the upper hand over rivals. Astute operators look beyond the obvious to areas previously unconsidered as potential sources of competitive advantage. Internal auditing (IA) and human resource management (HRM) are two such areas, and when the two form a strategic partnership, the potential exists for a considerable impact upon the nancial performance of the organization.

The conventional roles of HRM and IA

Traditionally, HRM equaled administration and little else. The role of the unit centered around routine tasks such as record keeping and maintenance. Personnel administration, as it was formerly known, had little stake in the business objectives of an organization. Executives considered HRM as something akin to a necessary evil that made no real contribution to productivity or prot levels. It was broadly the same where IA was concerned. IA's role was to assess the risks associated with practices and processes within such areas as production, marketing and human resources. The focus was almost entirely placed upon making sure these areas acted in accordance with company policy and legislation.

A new perspective
Traditional roles of IA and HRM have not disappeared. Indeed, their core responsibilities are fundamental to most organizations. Nevertheless, things have changed. Most executives viewed human capital as a cost needing to be controlled or minimized. Now, they realize that employees contribute signicantly to the nancial performance of their organization. This fresh perspective on the value of employees to an organization has widened the focus of HRM. Shrewd practitioners now appreciate that certain practices within HRM can have a major bearing upon company performance. This has led to functions such as training and incentive payment schemes becoming fused with business objectives. Executives have similarly reappraised the role of IA. Risk management has broadened and IA now has to be aware of practices that can yield competitive advantage. The added responsibility of assessing these strategic risks in relation to both prot and loss mean that IA is no longer just a case of ensuring compliance and efciency.

practitioners now appreciate that certain `` Shrewd practices within HRM can have a major bearing upon

company performance. This has led to functions such as training and incentive payment schemes becoming fused with business objectives.

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DOI 10.1108/09670730410534885

management has broadened and IA now has to be `` Risk aware of practices that can yield competitive advantage. ''
Different IA/HRM combinations
Within both IA and HRM, it has thus become a case of mixing the old and new. Hyland and Verrault suggest that IA functions are either compliance based or risk managing, and HRM practices administrative or strategic. On this basis, the authors propose a model that incorporates four possible combinations of IA and HRM functions. The impact upon the organizational whole varies with each combination: J Value-creating. This combination forms when functions or practices in both IA and HRM are strategic. IA then measures the value of HRM practices, providing an analysis of the cost and benets involved. In return, HRM's involvement with strategic business risks makes it a responsive client of IA. When IA and HRM work in strategic tandem like this, improved nancial performance is the outcome. J Cost minimizing. In this combination, a compliance-based IA function operates alongside an administrative HRM function. Here, the focus is placed upon obeying company rules and discarding practices not legally required. The almost total emphasis on cost-control leaves little or no consideration of the value any such practices may bring to the organization. There is no strategic element in this relationship. J Motivating. Here, the IA function is risk managing and the HRM function administrative. HRM's lack of strategic focus will hinder the company's nancial performance, but as IA provides HRM with a risk assessment of various human resource functions and procedures, the combination allows for future change. IA can inuence HRM to implement its proposals to become more strategically focused and move towards the value-creating combination. However, this may take time. J Limiting. The roles are reversed here with IA compliance-focused and HRM strategic. The outcome, though, is quite different. Even though HRM can operate strategically on its own, this combination limits nancial achievement. Without IA's expertise, HRM cannot measure the value of its practices in both strategic and nancial terms. Consequently, in this combination HRM is unlikely to realize its full strategic potential. Obviously, then, the impact is maximized when both IA and HRM adopt a strategic approach. The greater the strategic match between functions, the greater the impression upon each other and the organizational whole. It would seem that the input of IA is particularly crucial. When risk managing, IA can either be a cooperative partner to a strategically oriented HRM or the motivating force to transform a non-strategic HR function into a strategic one. Signicantly, however, HRM cannot inuence IA to change its practices to any real extent.

Some benets of being strategically focused

A strategically focused HRM can give an organization a competitive advantage over its rivals. Stafng, training systems and nancial incentives are some of the HRM functions that often set one company apart from another. Therefore, it is crucial to match practices within these and other HRM areas to the strategic goals of the organization. When such practices are utilized together in groups, the potential impact increases substantially. Reduced staff turnover, increased productivity and a boost to company prots are some of the measurable outcomes. In one striking example, the deployment of certain strategic HRM practices helped an organization's net prots to rise by over $7,000 per employee. Traditional administrative and compliance-based activities still form an essential part of respective HRM and IA departments. This was evident in a survey that the authors carried out,

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risk managing, IA can either be a cooperative `` When partner to a strategically oriented HRM or the motivating force to transform a non-strategic HR function into a strategic one.

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Keywords: Human resource management, Internal auditing, Strategic, Risk management

but the majority of the 161 executives who responded also indicated that a strategic approach is now being widely adopted in both HRM and IA. However, these ndings must be treated with some degree of caution. It is cool to be strategic and the authors believe that this may have produced some response bias. The point was further illustrated when many respondents gave examples of their own strategic practices that were not actually strategic at all. This apparent lack of awareness of what constitutes being strategic and/or risk managing has obvious implications for other executives measuring the IA and HRM functions and practices within their own organizations.

Comment
This review is based upon: ``Developing a strategic internal audit-human resource management relationship: a model and survey'', by MaryAnne M. Hyland and Daniel A. Verreault. The value of developing strategic relations within and between IA and HRM soon becomes apparent from this article. The thorough analysis of the subject would, however, have beneted from the inclusion of additional practical examples. The article largely employs a readable style, although it can be complex and theoretical in parts. By the authors' own admission, the propositions contained in the article are somewhat exploratory in nature. However, the ndings provide a sound basis for further research and development.

Reference
Hyland, M.M. and Verreault, D.A. (2003), ``Developing a strategic internal audit-human resource management relationship: a model and survey'', Managerial Auditing Journal, Vol. 18 No. 6/7, pp. 465-77, ISSN: 0268-6902.

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