Human Resources Compliance Audits (Part 1)

In this guest post by a member of Porter Hedges’ Labor & Employment practice group, the Anti-Corruption & Compliance Blog turns its focus to labor and employment law compliance. This post is the first installment of the Blog’s limited series discussing best practices for conducting a Human Resources compliance audit. This first installment of the series provides an overview of the compliance audit process and practical advice at each step when conducting the audit. In a subsequent installment, we will discuss detailed areas of inquiry that companies should assess when conducting a Human Resources compliance audit.

An internal audit of a company’s human resources practices can be used to mitigate potential liabilities by preemptively identifying areas of exposure and proactively implementing corrective measures. Further, by engaging outside counsel to conduct the audit and implementing certain measures, the company can protect the results of the audit from disclosure on the basis of privilege.

The following steps are recommended when developing and conducting a Human Resources compliance audit.

Step One: Determine the Scope of the Audit

At the onset, the company should identify the subject matters that will be included in the audit. The scope of the Human Resources compliance audit can be tailored to the precise preferences and needs of the company. The scope is often influenced by the company’s self-identified areas of concern and willingness to dedicate the necessary time and resources to the audit process. For example, the audit can focus on a single, narrow subject matter, such as wage and hour practices or employee benefits. Alternatively, the company may decide to conduct an exhaustive audit of all Human Resources practices, which may include the entire life cycle of the employment relationship. Regardless, it is important to expressly identify which topics will be covered in the audit and which will be excluded. We will discuss specific areas of inquiry in our next post.

Step Two: Identify the Governing Law

Before beginning the audit, it is critical to determine which law governs the Human Resources practices at issue. The company should identify the applicable federal, state, and local laws based on its operations in order to determine whether the audited practices are in compliance.

Step Three: Draft an Opening Memorandum

To commence the audit, an opening memorandum that defines the scope of the audit (i.e., which subject matters will be assessed and which are excluded), sets forth the initial set of documents and information to be collected, and identifies a point person at the company who is responsible for collecting the documents and how information should be compiled. The opening memorandum provides a point of reference throughout the audit process and can be amended accordingly as the audit evolves. 

Step Four: Gather the Information and Conduct the Audit

Conducting the audit requires planning and organization. Consider creating a spreadsheet that tracks the audit process. The spreadsheet should be organized by subject area and include (i) the specific compliance question with reference to the governing law, (ii) the documents and information reviewed to assess compliance, (iii) the finding(s) on compliance status, and (iv) recommended action items based on the audit result.

Step Five: Draft the Report

Following completion of the audit, a report should be prepared with compliance findings and recommendations. The report should state the purpose of the audit, include a limiting statement that the report is based on only the information provided by the company in connection with the audit, and set out the scope of what was included in the review and what was excluded. The report should also include a key issues summary that identifies the most significant and immediate items that should be addressed by the company. The substantive sections of the report should discuss the audit’s findings, recommended action items, and include reference to applicable laws.

Step Six: Implement the Recommendations

Finally, the company should implement the audit’s recommendations in order of priority. The company should create a timeline and plan for implementing the most time-sensitive and critical compliance issues first.

Porter Hedges’ Labor and Employment attorneys are experienced in conducting privileged internal Human Resources compliance audits. For questions please contact a member of our team.

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