Internal audit of compensations and benefits: Tasks and risks in production systems

Abstract

© 2012, Kauno Technologijos Universitetas. All rights reserved. Compensations and benefits have always been very sensitive and complex activity of HRM process in production systems. Model of compensations presents financial and non-financial rewards linked to efforts and performances of employees and executives. Since this activity is understood as very important due to two main reasons, that compensations are motivation factor for employees and operational costs are for the company, there is a demand of making rewarding process highly effective and efficient for reaching employees and shareholders satisfaction. Besides this, many frauds, risks and problems related to amounts of executive compensations in the past initiate the need of appropriate management and control of this process. One possible way of reaching the effectiveness and efficiency of compensation process in terms of appropriate governance, risk management and control is the internal audit. Internal audit can be defined as method of independent and objective validation that increases the value and improves the operation and performance of organization and also facilitates the effects of related processes to achieve organization’s goals and objectives. The main objective of this paper was to explore the reasons for, the processes involved in and risks of internal audit in HRM area of compensation and benefits. In the paper a desk research method has been used. First, the authors made a review of literature available on internal audit, with significant analysis of internal audit standards. In continuation, the rewarding process and compensations and benefits structure has been analyzed according to the practices of organizations systems and literature of HRM. After theoretical analysis, the authors integrated appropriate aspects and steps of internal audit in compensation process, where they emphasized the role of internal audit in compensation and benefit structures and amount of compensation’s expenditures (related to the executive compensations).Findings of this paper are that the main reason for implementing internal audit through planned system of steps (gathering information, evaluation, analysis and action planning) and approaches (mainly by surveys) is to obtain information that would be helpful for the organization as a whole in terms of improvement of business processes related to compensation and benefit. Also, internal audit of compensation and benefit package can minimize risks that are linked to HR compensation process (employment market risk, reputation risk, compliance risk, external partnership risk, operation risk, financial reporting risk, etc.) where reputation risk is one of the most common reasons for performing internal audit. Areas where internal audit can be done are human resources strategic management, workforce planning and selection; training and development; compensation and benefit system; employee and labor relations; human resources information systems, etc. As the most important areas of HR compensation internal audit there are emphasized overall plan design, cash and stock-based compensation, deferred compensation and pension and retirement contributions.The paper presented one theoretical research made to point out the role of internal audit in HR compensation process. Previous researches related to this topic usually were made to analyze the relation between internal audit and several or even all HR functions. Authors tried to develop a comprehensive model for internal audit of compensations and benefits. Also, the paper described both, internal audit and rewarding processes which were integrated in function of better management in terms of effectiveness and efficiency.