Current development in human resource costing and accounting
Accounting Auditing &
Vol. 11 No. 4, 1998, pp. 495-505.
# MCB University Press, 0951-3574
Received January 1997
Revised July 1997
Current development in
human resource costing and
Reality present, researchers absent?
Jan-Erik GroÈjer and Ulf Johanson
Personnel Economics Institute, School of Business,
Stockholm University, Sweden
Human resource costing and accounting ± from the 1960s to the
A widely shared opinion is that the most fruitful research period of Human
Resource Costing and Accounting (HRCA) was from the late 1960s until
the end of the 1970s. This was a period of basic research that sought to
develop and assess the validity of models for the measurement of human
resource costs and values (Flamholtz, 1985). The topic was first brought up
on the research agenda in the beginning of the 1960s. The disciplines with
a strong influence on these models were Sociology, Industrial Psychology
and Economics. In 1964, Hermansson (1964) published his pioneer work
concerning valuation of human assets and Brummet et al. (1968) used the
term ``human resource accounting'' (HRA) for the first time in 1968. Using
the utility analysis concept, Cronbach and Glaser (1965) and Naylor and
Shine (1965) presented models for estimating the financial utility of
HRA advanced rapidly to the upper reaches of the research agenda, but
at the end of the 1970s the interest in HRCA declined with respect to both
academia and the corporate world. This fact does not necessarily imply
that the quality of HRCA research deteriorated, but the interest in the
subject simply decreased.
In the 1980s, an intensive development took place within utility analysis.
Schmidt et al. (1979) made a significant contribution in 1979, followed by a
series of articles that focused largely on personnel selection problems (e.g.
Boudreau, 1983; Boudreau and Berger, 1985; Cascio and Ramos, 1986;
Hunter and Schmidt, 1982; and later by, e.g., Cascio, 1991; Mabon, 1996;
Martin and Raju, 1992).
During this period, numerous experiments dealing with the influence of
HRCA information on decision making were carried out (e.g., Gul, 1984;
Harrell and Klick, 1980; Hendricks, 1976; Ogan, 1988; Oliver and Flamholtz,
1978). In all these studies, decisions were influenced in some way by HRCA
information. In an early study by Rhode and Lawler (1973) that focused on
the usefulness of HRCA, it was found that managers opposed HRCA
because it was perceived to limit their freedom of action. This result can be
compared with the findings of Latham and Whyte (1994), who reported
that utility analysis reduced the support of managers for implementing a
valid selection procedure. Nevertheless, Highhouse and Macan (1994) found
in a survey of industrial/organizational psychologists that, 46 per cent of
the respondents who had presented an HR activity to management reported
using utility estimates. In contrast, Maher (1996) found that few hotel
companies in the UK undertook any systematic analysis of their human
The less fruitful research period began in the late 1970s. According to
Flamholtz (1985, pp. 2-3), a widespread erroneous belief spread suggesting
that HRA was concerned only with treating people as financial objects,
``although preparing financial statements that included human resources
was undoubtedly a part of HRA, it was not by far the most significant part.
Yet precisely because it was dramatic and innovative, `putting people on
the balance sheet' became the dominant image of HRA for many people''.
The debate was largely focused on the appropriateness of valuing human
resources on the balance sheet. To some extent, this debate remains.
In the late 1980s and early 1990s, other arguments regarding the failure
of HRCA have been put forth. Thus, Scarpello and Theeke (1989) intimate
that HRCA is an interesting concept, but find it hard to understand why
there has not been a serious effort to develop valid and reliable measures.
Roslender and Dyson (1992) have argued that HRCA has failed to develop
further in the way of practical applications.
It is possible to challenge the conclusion that HRCA has failed from a
research ``raison d'eÃtre'' perspective. However, such arguments would
serve only to distract the reader's attention from the subject at hand. In the
next section, we will instead challenge the negative conclusion from a
``Swedish'' HRCA perspective. Because we ourselves have been deeply
involved in the last ten years of Swedish HRCA research and practical
applications, our interpretation of the Swedish perspective is not free of
The overriding factor that led to this article is that the Organization for
Economic Co-operation and Development (OECD), the European
Commission (EC) and the Swedish government have all separately and
recently put ``intangibles'' and HRCA on their agendas (see Section Three).
Our ambition is to try to formulate what we regard as the main conclusions
from the Swedish HRCA scene that would seem to have important
consequences for future international HRCA research.
The HRCA development in Sweden
In Sweden, the demand for better information about human resources has
been obvious during the 1990s. This interest has been shown from many
different parties (e.g., human resource departments, financial departments,
company doctors, unions and, more recently from top management,
investors and politicians). In describing the development in Sweden, we
will use two different perspectives, namely management control and
The management control perspective evolved very explicitly in the mid-
1980s, whereas the interest from actors on the capital market has been
added in the last couple of years.
The management control perspective
In 1991, the Swedish government proposed a legal obligation for
organizations with more than 100 employees to provide an account of
personnel costs (e.g., personnel turnover, sickness leave, training and
working environment) in their annual report. The proposal was based on a
management control perspective in the sense that the idea was to stimulate
working environment investments. Most of the bodies to which the
proposed legislation was submitted for consideration were positive to the
idea of having better information of personnel costs, but they were not
favourably disposed to legislation. Although the proposal was withdrawn,
a host of organizations made their own human resource income statements.
Thus, Lundberg and Wiklund (1994) found that 70 per cent of the
responding personnel managers in Swedish companies with more than 200
employees claimed that they were applying HRCA to some extent. Most of
the organizations had started to do so in the beginning of the 1990s. The
most frequent use of HRCA was, however, a reconsideration of human
resources rather than using a specific model. Roughly, 20 per cent of local
labour union organizations maintained that they used HRCA in their
decision-making process (TCO, 1995). In an investigation conducted by the
Swedish Association of Local Authorities (1994), it was found that 22
percent of the responding 276 Swedish local authorities had decided to use
an accounting approach to HRCA. Only 5-15 per cent of personnel,
accounting and financial managers declared their lack of interest in HRCA.
Absence of resources was seen as the main obstacle for applying HRCA.
Finally, OÈ hman (1996) found that 43 Swedish companies used a model
based on the balance scorecard concept in their 1994 annual report. Our
conclusion is that HRCA, based on a management control perspective,
seems to be used to a substantial degree by many Swedish organizations.
How can we explain the relative frequent use in Sweden (and to some
extent in the other Scandinavian countries) when HRCA is regarded as an
outmoded topic in other parts of the world? The basic management
questions and problems ought to be similar all over the postmodern world.
We will discuss some possible forces underlying and start with a simple
(1) The marketing of the HRCA concept by academicians and
consultants has been successful in Sweden.
A more elaborate answer can be traced to the enterprise level. Johanson
and Nilson (1996a) found the following stimulating and inhibiting forces
concerning the use of HRCA costing as a decision tool for the treatment of
employee alcohol problems (as outlined in Table I).
Here we will not enter a more detailed description of the separate factors.
What is important, however, is to stress that they found more factors
acting against, than in favour of, HRCA. This implies the following:
(2) There has been a strong force to overcome the factors acting against
the use of HRCA on the micro level.
This directs us to a third possible explanation of the Swedish exception, an
explanation that guides us away from the above rationalistic concepts
toward concepts such as reward systems, organizational structure, power
in organizations, etc. According to our knowledge, the personnel director of
a company has become a full member (in all aspects) of its board of
directors earlier or to a much greater extent in Scandinavia than in the rest
of Europe. HRCA, as a management tool, can be used to visualise or
legitimise that position:
(3) HRCA has been used to legitimise the position of human resource
directors as members of the executive board.
A fourth explanation might be that HRCA has not been associated with
``putting people on the balance sheet.'' Flamholtz (1985, p. 8) formulates the
message of HRA in the following way: ``HRA represents both a paradigm, a
way of looking at human resource decisions and issues, and a set of
measures for quantifying the effects of human resource management
strategies upon the cost and value of people as organizational resources.''
The perception of the HRCA concept seems, however, to differ. The balance
sheet issue has not been in the foreground in Sweden. As shown by
Johanson and Nilson (1996a; 1996b), HRCA is mostly associated with a
concerning the use of
HRCA costing as a
Stimulating forces Inhibiting forces
1. Visualise alternatives and
structure the problem
1a. Lack of HRCA knowledge
1b. Contingency models lacking
1c. Means more control and threatens
2. Language and argument 2a. Central organisation and personnel policy
2b. Reduced scope of action
2c. Lack of commitment
3. More measures and better
3a. Central organisation and personnel
3b. Reduced scope of action
3c. Lack of HRCA knowledge
change in thinking, and the accounting as well as the costing aspect of the
concept are seen in their entirety. In spite of substantial individual learning
among managers, the organizational adaptation of HRCA was, however,
much more complicated as was realised by Johanson and Nilson (1996b). In
the Lundberg and Wiklund (1994) study, the most frequent use of HRCA
was a change in thinking about the management of human resources,
which was followed by costing and accounting:
(4) HRCA has mostly been associated with a ``changed way of thinking''
and the accounting and costing aspect of the concept have been
looked upon in their entirety.
A final explanation can be found at the societal level. HRCA might have
been used as a change instrument on the fairly regulated Swedish labour
market as an administrative reform (Brunsson and Olsen, 1990) to
stimulate organizational change (Ezzamel et al., 1995). This can also help
to explain why HRCA has primarily been used in public organizations
where the need of change is supposedly greater compared with private
(5) HRCA might have been used as a change instrument on the
regulated Swedish labour market.
One perspective that is remarkably foreseen in HRCA literature is ethical in
nature. For ethical reasons many argue against the use of HRCA; however,
there are equally many who argue in favour of HRCA for the same reasons
(HaÈllsten, 1997). The two approaches can probably never be united.
Admittedly, HRCA can be applied for different purposes just as a bread-
(6) What we do not know is whether consistently applying HRCA will
lead to value displacements within the organization. What is the
intention of using HRCA and how is it actually used?
Further development of HRCA requires greater knowledge of the ethical
aspect. A second general conclusion is that in Sweden the stimulating
forces seem mainly related to organizational improvement and social order
(to change it), whereas the inhibiting forces seem related to organizational
order (to retain it).
The capital market perspective
The increasing importance of human resources (and the corresponding
failure to account for human resources is illustrated by Figures 1 and 2
(Johanson, 1996). In Figure 1, the difference between market and book
value among companies on the Stockholm Stock Exchange during the last
ten years is shown.
A significant difference is revealed if the companies are ranked according
to dependency on human resources and the highest decile (knowledge-
based firms) is compared with the lowest decile (capital-intensive firms).
This means that investments in human resources represent a
significantly higher value to the capital market today compared with ten
years ago. This is, however, not normally reflected in the bookkeeping
figures or any other quantitative data disclosed by enterprises.
Another indication of the accounting problem (or its failure) is that
accounted goodwill for companies listed on the Stockholm Stock Exchange
grew between 1975-92 from less than 1 BSEK to 37 BSEK, or from less than
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
MSEK Book to Market Value SSE
Market Value (Equity)
Book Value (Equity)
The difference between
market and book value
companies on the
exchange from 1985 to
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Differences; Book and Market Value
Upper Decile (Knowledge-based firms)
Lower Decile (Capital-based firms)
the most and the least
on the Swedish stock
exchange from 1985 to
1994 in relation to the
difference in market
and book value
1 per cent of the total stock exchange value to more than 7 per cent (GroÈjer,
1993). The proposal of the International Accounting Standards Committee
(1995) for intangible assets seems only to scratch the surface without really
solving the goodwill problem.
Even if a change in accounting procedures and figures should not affect
investor decisions (share prices), new information changing judged risk
and future cash flow ought to do it (according to the efficient market
Hansson (1997) has compared share prices of knowledge intensive
companies with companies less dependent on human capital on the
Stockholm Stock Exchange (dividing the selected companies into three
Hansson (1997, p. 1) states that ``The results show that an increasing
dependence on human resources is followed by a rise in abnormal return.
The results indicate that investors are not able to distinguish personnel
investments form expenses, leading to an underestimation of earnings and
return. The findings suggest that investors need accounting information on
human resources to help improve investment decisions.'' The study can be
criticised for using data for a too short period and with a small trading
volume. The results indicate, however, that it is wise to formulate a
hypothesis as HRCA information can affect share prices.
The capital market perspective leads us to the following question: The
need for human resource information from a capital market perspective is
obvious, but what are the forces hindering the disclosure of such
HRCA on the political/institutional agenda
There seems to be a fast growing interest in ``intangibles'' and HRCA by
politicians and administrators in intermediate organizations. For an
extended period, OECD has investigated the theoretical possibility and
practical feasibility of treating investment in human and finance capital
similarly. In a recently published book (OECD, 1996), it was noted that
improvements in the information and decision-making systems that shape
human capital acquisition and utilisation is a key factor in helping a
nation's firms to compete. This leads to the conclusion that human capital
measurement and accounting for human resources have to be improved.
An important issue in the discussion initiated by the OECD has been the
treatment of investments in human capital on the balance sheet. The OECD
will probably propose a thorough investigation to develop guidelines for
voluntary disclosure of human resource information, and thereby
excluding the balance sheet issue. This view is based on the resistance
to a balance sheet valuation from different stakeholders and the fact that it,
despite its 25 years in academic circles, has hardly been in practical use
(except for its use in a few companies and professional sport clubs).
The topic of HRA was also introduced by the EC at the end of 1995 in a
``White Paper'' on education and learning. The intention of the EC is to
prepare guidelines for action to promote teaching and learning in the
member countries. One of five general objectives of this work is to ``treat
capital investment and investment in training on an equal basis''
(European Commission 1995, p. 52).
Thus, the OECD and the EC have intentions to prepare guidelines for the
disclosure of HRA information. Some decisions that have to be taken are
whether such information should be mandatory or not, monetary or not,
inside or outside the annual report and, if inside, inside or outside the
financial statement. The impact of these different alternatives on investors'
or managers' behaviour has been investigated to only a limited extent.
Another indication is that The Dutch Ministry of Social Affairs together
with the European Foundation for the Improvement of Living and Working
Conditions in May 1997 arranged a conference on costs and benefits of
occupational safety and health. Finally, the Swedish government are going
to discuss intangibles and HRCA as two of about 30 issues under the
umbrella heading ``Working Life 2000'' at an EC congress in Sweden in
May 2000. The 30 workshops are to be held in Brussels during 1998-99.
The invited researchers will be asked to write a normative statement in
each area as an input to the EC congress.
More events could be reported, but it seems sufficient to conclude that
there seems to be a fast growing political and institutional interest or
demand for knowledge and action in the area of HRCA and intangibles.
Two main conclusions with respect to future research
In Sweden, there has been a strong and even increasing interest in HRCA in
both research and education. It has been steadily growing during the last
ten years; for instance all new students (nearly 1,000/year) at the School of
Business at Stockholm University study HRCA. Since the end of the 1980s,
a special research institute (Personnel Economics Institute), with nearly 20
researchers, has been performing studies in the area. The Institute also
recently launched the Journal of Human Resource Costing and Accounting.
Currently, there are many indications that Sweden will not remain as an
exception. Apart from the recent interest from the OECD and the EC, the
increasing number of concepts (e.g., HRCA, balanced score-card,
intellectual capital) aspiring to make a contribution to improve the
transparency of human resources and other intangibles indicates a world
wide shift in interest. Many actors that have not been on stage earlier have
recently emerged, including politicians (as in the EC case), accounting
firms (Ernst & Young is supporting the OECD initiatives) and individual
enterprises (e.g., Skandia).
But where are the researchers? The number of published articles dealing
with HRCA issues seems to have been reduced in the 1990s compared with
the 1970s and 1980s.
The problem of HRCA research seems rather to be a failure to recruit
new researchers in the 1990s than a lack of research problems.
Is the shortage of researchers due to difficulties in financing HRCA
research, difficulties publishing research results or just a rumour that the
area is academically ``dead''? (On the other hand, there were as many as 65
researchers participating in the special symposium about ``Accounting and
Human Resources'' at the annual meeting of the European Accounting
Association in Graz, 1997.) The forces underlying the rise and fall of
research topics in accounting are still to be investigated.
Currently, HRCA is a complex and poorly understood process of
accounting. The behavioural impact of HRCA, the many diverging forces
inside organizations, the increasing need of information from the capital
market and pressure and action from supranational organizations such as
the OECD are a part of this change process:
There are several stimulating and inhibiting forces underlying the use and ``non use'' of
HRCA in practice. We currently know little about why and how accounting procedures
and expressions change.
Many of the technical problems associated with HRCA that have had a
historical origin are still unresolved. Those problems can be investigated
under the heading of e.g., HRCA, balanced scorecard or critical accounting.
We have no interest in concept monopolisation, though we have an interest
in the problems in which HRCA is one expression. One problem with a
bureaucratisation of HRCA (e.g., through legislation) is that a subject area
can easily be turned from a profit or efficiency making tool to a cost
consuming procedure. If this was to happen, regulation can do more harm
There are too many forces at play to yield any forecast other than one of
chaos. The only comment we would like to espouse concerning the future of
HRCA is that it seems probable that there will be a HRCA reality open for
research. But where are the researchers?
1. The concept of HRCA comprises both human resource accounting and costing human
resources. The concept, therefore, includes utility analysis, which is often defined as
the financial utility of human resource measures.
2. The ranking has been obtained by using the following selection ratio (Hansson, 1997):
Selection ratio = Ai/(Ni/Wi) where Ai is the average wage; Ni is the proportion of non-
wage costs; and Wi is the proportion of wage costs for firm i.
The proportion of non-wage costs divided with the proportion of wage costs shows the
human resource intensity of the company while the average wage reflects the value of
the production from the human resources to the company.
References and further reading
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