Auditing the Management of People

4. A Management-of-People Model

A. Introduction

Over the years, auditing has evolved from a transaction-driven to a systems-based approach, and then into results-based and risk-based auditing. Audits dealing with management of people have also evolved out of this same pattern. Initially their focus was on payroll transactions and the systems used to process them. With the advent of the Auditor General Act of 1977 and value-for-money auditing, the audit focus shifted to other personnel systems—such as human resource planning, training and job evaluation—and their effect on, for example, the productivity of public servants or the cost of managing the payroll. From 1983 on, however, a series of studies conducted by the Office, notably Constraints to Productive Management in the Public Service (1983), Well-Performing Organizations (1988) and Values, Service and Performance (1990), seemed to point to factors other than personnel systems that had significant impacts on the performance of public sector organizations. In addition, there was increasing dissatisfaction with systems-based auditing. For example, a survey of practices conducted in 1988 revealed that:

  • management of people was considered in value-for-money audits only if payroll cost was material;
  • when human resource issues were examined, the focus was often on traditional "personnel" functions, (staffing, job evaluation, compensation, etc.), with few tangible results in relation to the time and effort spent;
  • findings related to the management of people were dissociated from other audit observations and reported separately, and cause-effect relationships were not always evident;
  • insufficient consideration was given to the management of people as a critical and integral part of managing an organization to achieve results;
  • scoping sometimes failed to identify critical management-of-people issues having a significant impact on the results of the audit entity; and
  • there was a tendency to steer clear of so-called "softer" issues, such as the nature of the organizational climate and the quality of the leadership or direction provided by entity management.

Today, there is recognition that management-of-people issues need to be more integrated with other issues in value-for-money audits, and that rather than simply auditing processes audits should focus mainly on those aspects of the management-of-people framework, systems and practices that impact on the entity's results. There are several reasons justifying this shift. For one, the nature and focus of management in organizations has changed: there is more acceptance of the critical importance of managing people well to achieve results. Furthermore, successful organizations, enterprises and ventures of all kinds, whether in the public or the private sector, tend to deal with human resource issues in a more strategic comprehensive and fully integrated way, rather than as a staff-oriented function somewhat incidental to core business activities.

For all these reasons, there is a need for a revised approach to auditing management-of-people issues.

This guide, which describes the revised approach, has two parts:

  • a brief section setting down fundamental or basic principles and tenets on which the revised approach to auditing management-of-people issues is constructed; and
  • a concise description of the management-of-people model at the core of the approach, followed by a more detailed description of a number of "families of outcomes" that can be expected in organizations where the management of people is effective and efficient. For each "family of outcomes", criteria are proposed, supplemented with potential questions for consideration. For each "family of outcomes" a short list of possible symptoms, performance indicators, or prompts is provided. This list is aimed at assisting the auditor in determining if there might be an audit issue in the specific "family of outcomes" being considered for inclusion in the audit. Finally, for each "family of outcomes", where appropriate, examples drawn from experience are also provided.
B. Some Fundamental Principles in Managing People
  • People are key to effectiveness.

Organizations are essentially people working together to achieve an objective. People manage the other resources (capital, information, equipment, time, etc.) used by any organization. If people are directed and managed effectively, used efficiently and provided with the proper incentives, they will achieve results. It is only through people that desired results are achieved.

  • The management of people is every manager's responsibility.

Managing people effectively and efficiently is the responsibility of every manager in the organization. It is not solely the responsibility of the human resource department or personnel units. It is managers who must organize people and provide them with direction and feedback on their performance. Managers also play a determining role in creating a productive and stimulating work environment.

  • The management of people has to be integrated into all aspects of the entity's business.

Achieving results requires that all resources of the organization—people included—are managed effectively. Thus, management-of-people issues cannot be dissociated from other issues. Among other things, a proper resource mix is critical to any organization and trade-offs have often to be made (between make or buy, technology or people, for example). A labour-intensive organization that ignores technology, for instance, will not likely survive in a competitive environment, even if people in that organization are well managed. So, while managing people well is a necessary condition for any organization's results and success, it is not sufficient; other conditions must also be met.

  • A clear, well-defined model for management of people can be constructed.

Traditionally, textbooks on human resource management have focused on personnel functions and systems. At the same time, management literature and Office studies on such matters as well-performing organizations, values, service and performance have demonstrated the importance of good "management-of-people" practices, such as providing direction or recognizing and rewarding good performance. Furthermore, management-of-people in the public service differs in some fundamental ways from managing people in the private sector, most notably because the legal and administrative framework is different. For example, labour relations in the core public service are not governed by the same principles, and hiring practices must be more transparent and in accordance with the "merit principle". Thus, in the public sector the government seeks to achieve not simply program objectives but also "social" objectives such as fairness, equity and representation.

A comprehensive "management of people" model requires that all three elements—the legal and administrative framework, the personnel systems and the management practices—be considered when assessing management-of-people issues in an organization. It must be emphasized, however, that while this guide proposed a generic basic model there is no one best way or unique approach to managing people. Managing people in a research environment, for example, may have different requirements than managing people in an industrial or manufacturing setting.

C. Some Fundamental Principles in Auditing Management-of-People Issues
  • The management-of-people model proposed in this guide is not an audit model.

Unless the auditor intends to assess all aspects of human resource management in a given organization, the model proposed in this guide should not be used as an auditing model. Instead, it is intended to assist auditors in their thinking process for identifying risks or selecting management-of-people issues of potential significance for the entity or activity they are auditing. Appropriately used, the model should add value to the process that must take place in order to formulate questions about management-of-people practices, human resource systems and the appropriateness of the existing legislative and administrative framework to the entity's cost-effective achievement of results (outputs and outcomes). The model does not provide answers but rather suggests questions to consider. It is by no means prescriptive.

  • The scoping and selection of people issues should be results-based and risk-based.

Management-of-people audit issues should be results-based and risk-based; that is, business-driven. The audit should focus only on aspects of human resource management that are consistent with the audit objective and essential to achieving business or program results and, where appropriate, other government objectives. The audit scope should be set by selecting key areas from the management-of-people model that have a significant impact on achieving business, program or government objectives for the entity. Occasionally, and depending on circumstances, audit work may also focus on specific human resource systems—such as job evaluation or human resource information systems—either because they are the object of the audit or because of the high cost associated with such systems. In most instances, the audit of human resource systems will require specialized functional expertise.

D. The Management-of-People Model in Summary

The management-of-people model proposed here has three basic elements.

1. The Human Resource Management Framework

Managers are not free to manage people any way they like. Whether in the private or the public sector, managers have to operate within a more or less rigorous legislative and administrative framework established by Parliament or, in the federal government, by central agencies. For example, in the federally regulated private sector, companies have to abide by the terms of the Canada Labour Code. In the core public service, a number of Acts and Regulations and Treasury Board and Public Service Commission policies and directives set important parameters for managing people in departments and agencies. For example, managers in the core public service must comply with various acts such as the Public Service Employment Act (PSEA), the Financial Administration Act (FAA), the Public Service Staff Relations Act (PSRA), the Official Languages Act (OLA) or the Work Force Adjustment Directive (WFAD). Managers in Crown corporations, even if generally less constrained than managers in the core public service, must also take into account an external framework that includes various legislative requirements such as those contained in the Canada Labour Code, including Health and Safety Regulations, in the Official Languages Act or in the Public Service Compensation Restraint Act and many others, including provisions governing the management-of-people explicitly set out in their enabling legislation. Whether from the perspective of a company, Crown corporation, department or agency, the sum of these policies, directives and guidelines constitutes the external human resource management framework.

In addition to this external human resource management framework, managers also have to comply with a number of policies, directives and guidelines specific to their company, department or agency covering a wide range of subjects. For example, a federal department or agency may want to more specifically tailor central agency guidelines on employment equity or some aspects of the government's post-employment guidelines. The sum of the policies and guidelines specific to the company, departmental or agency constitutes the internal human resource management framework.

Thus, in managing people, managers in the private as well as the public sector, whether a Crown corporation, a department or an agency, must take into account the requirements of both the external and the internal framework. Exhibit 1 provides a listing of key elements of the human resource management framework found in most organizations.

2. The Human Resource Management Systems

To assist and at times to control managers in their management of people, organizations often set up human resource systems that should, when properly designed, facilitate the management-of-people from a strategic perspective and for the cost-effective achievement of results or objectives while supporting good management-of-people practices. Such systems are normally defined in accordance with traditional personnel-function activities; for example, human resource planning system; hiring (and dehiring or downsizing) system; career development system; compensation system; performance management system; learning (formerly training) system; etc.

Exhibit 2 lists key human resource systems found in most large organizations.

3. The Management-of-People Practices

Managers in any organization, through their relationship with employees and by their daily decisions, are the most determining factor in the quality of human resource management. The management-of-people really occurs at the interface between managers and the people working with them. For example, it is managers who provide people with direction and feedback on their performance. Managers also play a determining role in the creation of a productive and stimulating work environment. It is also managers who communicate information to employees and who must listen to their concerns so that senior management can take them into consideration. Management practices are at the core of managing human resources. Exhibit 3 lists management-of-people practices normally carried out by managers.

In any organization, all three key elements—management-of-people practices, the human resource management framework and human resource systems—interact and overlap significantly. For example, human resource systems and management-of-people practices should normally be consistent with legislation or government regulations. Similarly, management-of-people practices should be congruent with systems put in place by management, while respecting the spirit and letter of the legislative framework. Management practices are thus influenced by the nature and extent of the organization's human resource systems, while the systems and the practices must be consistent with the legislative and administrative frameworks governing the management of personnel. Each of the three elements interacts with the others, affecting a number of outcomes that will be described later in some detail. Figure 1 provides an illustration of the model with its three elements in relation to outcomes.

E. Intended Benefits of Using the Proposed Model

By using the management-of-people model proposed in this guide and by focusing only on management-of-people issues that affect the results of the entity being audited, a number of benefits should flow:

  • only significant or critical management-of-people issues will be included in the audit scope;
  • management-of-people issues will be fully integrated with other program or management issues being examined, and the focus will be on risks to the cost-effective achievement of the audit entity's goals and objectives;
  • where relevant, "soft" issues will be considered;
  • the link with results and risk will permit a determination of the extent to which management-of-people practices and human resource systems actually support the cost-effective achievement of the audit entity's goals and objectives; and
  • where relevant and necessary, issues concerning the appropriateness of the external or internal human resource framework , including legislation or policies, will be raised when and where they may unduly constrain or conflict with program objectives or cost-effectiveness. Exhibit 4 provides an illustration of the application of the model in one entity and some of the resulting findings.
F. Putting the Model to Use: Four Key Questions

The proposed human resource model, when optimally tuned and linked to the audited entity's mandate, mission, objectives and goals recognizes people as a key and critical resource for achieving organizational effectiveness and efficiency. It also recognizes that management-of-people practices, relevant human resource systems and the human resource framework must be consistent with each other and congruent with the cost-effective achievement of the entity's goals and objectives. The key issue for the auditor is the choice about which parts—or their components—of the proposed human resource model are relevant to the audited entity. Auditors must decide what management-of-people practices, what human resource systems and what part of the human resource management framework are critical to the entity's cost-effective achievement of goals and objectives—that is, key to its business. The auditor's ability to make the right choices is a function of understanding the business, identifying key success factors and conducting a risk analysis.

In this context, four basic questions need to be answered:

  1. What critical management-of-people activities or issues can significantly affect the effective and efficient operation of the audited entity and the expected results?

For each of these critical activities or issues:

  1. Are the external and internal human resource frameworks in place for this program adequate to ensure that results will be achieved in a timely and cost-effective way?
  2. Are the human resource systems supporting the management-of-people practices required to ensure that results will be achieved in a timely and cost-effective way?
  3. Are the management-of-people practices of managers adequate to ensure that results will be achieved in a timely and cost-effective way?

If, upon examination, evidence demonstrates that the answer to these questions is yes, the auditor should be able to safely assume that human resources are being managed with due regard to efficiency and effectiveness within the parameters set.

G. The Cost-Effective Management of People: The Outcomes

If organizations manage people well, a number of outcomes normally should be achieved. A corollary is that if such outcomes are not achieved, there likely are significant weaknesses in the way people are managed, either because the human resource management framework or practices are inadequate or because the human resource management systems are not supportive of the management-of-people practices necessary to achieve of the expected results cost-effectively. These "families" of outcomes can be defined as follows:

Quality of leadership and supervision

The work force is led by a cohesive, competent and sufficiently stable management team providing clear direction, modelling the values espoused by the organization and exercising sufficient supervision and control over the work of employees.

A sustainable, competent work force

The work force has the mix profile (of permanent, temporary and contract personnel) and the knowledge, skills, aptitudes and attitudes to accomplish the various tasks necessary to achieve results in a timely and cost-effective.

An adaptive and learning work force

The work force is given opportunities to acquire work experiences, knowledge and skills and to learn from experience and experimentation, so as to improve its performance over time while adapting to changing circumstances.

A productive work force

The work force is organized and managed to make the best use of available knowledge and skills for the timely and cost-effective achievement of expected results.

A work force accountable for results

The performance of the work force—at the individual, team or corporate level—is periodically assessed against expectations and reported to the appropriate authorities; if necessary, adjustments are made.

A safe and enabling work environment

The work environment is safe—from a physical as well as from a psychological or emotional perspective—and fosters the motivation and commitment of employees to achieve results and improve performance, while taking into account their need for job satisfaction.

An ethical work force

The work force behaves in a manner consistent with the nature of the organization, the tasks carried out and the values espoused, so as to avoid unacceptable behaviour—such as real or apparent conflict of interest—that might negatively affect the organization's image or credibility, or harm individuals, groups of individuals or other organizations.

Key human resource assets are safeguarded

Key human resource assets—know-how, skills, intellectual property or expertise—constituting unique characteristics of the organization or a competitive advantage are adequately safeguarded against loss.

The next sections describe in somewhat greater detail each "family of outcomes" and the implications. For each family of outcomes we have a short introduction to the subject matter; and we propose a criterion, identify potential indicators of problems that can be associated with this outcome, and suggest questions for the auditor to consider. Where available, we provide illustrations of findings from previous audits.