Current development in human resource costing and accounting


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Current development in human resource costing and accounting

  1. 1. Reality present, researchers absent? 495 Accounting Auditing & Accountability Journal, Vol. 11 No. 4, 1998, pp. 495-505. # MCB University Press, 0951-3574 Received January 1997 Revised July 1997 Accepted September 1997 COMMENTARY Current development in human resource costing and accounting 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 1990s A widely shared opinion is that the most fruitful research period of Human Resource Costing and Accounting (HRCA)[1] 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 personnel selection. 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
  2. 2. AAAJ 11,4 496 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 resource investments. 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 bias. 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
  3. 3. Reality present, researchers absent? 497 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 capital market. 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 proposition: (1) The marketing of the HRCA concept by academicians and consultants has been successful in Sweden.
  4. 4. AAAJ 11,4 498 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 Table I. Stimulating and inhibiting forces concerning the use of HRCA costing as a decision tool 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 integrity 2. Language and argument 2a. Central organisation and personnel policy develops 2b. Reduced scope of action 2c. Lack of commitment 3. More measures and better management 3a. Central organisation and personnel policy 3b. Reduced scope of action 3c. Lack of HRCA knowledge
  5. 5. Reality present, researchers absent? 499 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 organizations: (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- knife: (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.
  6. 6. AAAJ 11,4 500 A significant difference is revealed if the companies are ranked according to dependency on human resources[2] 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 900 000 800 000 700 000 600 000 500 000 400 000 300 000 200 000 100 000 0 MSEK Book to Market Value SSE Market Value (Equity) Book Value (Equity) Figure 1. The difference between market and book value among Swedish companies on the Swedish stock exchange from 1985 to 1994 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 50 000 45 000 40 000 35 000 30 000 25 000 20 000 15 000 10 000 5 000 0 MSEK Differences; Book and Market Value Key Upper Decile (Knowledge-based firms) Lower Decile (Capital-based firms) Figure 2. Comparison between the most and the least human capital dependent companies on the Swedish stock exchange from 1985 to 1994 in relation to the difference in market and book value
  7. 7. Reality present, researchers absent? 501 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 hypotheses). 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 portfolios). 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 information? 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).
  8. 8. AAAJ 11,4 502 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.
  9. 9. Reality present, researchers absent? 503 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 than good. 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? Notes 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 Boudreau, J.W. (1983), ``Effects of employee flows on utility analysis of human resource productivity improvement programs'', Journal of Applied Psychology, 68, pp. 396-406.
  10. 10. AAAJ 11,4 504 Boudreau, J.W. and Berger, C.I. (1985), ``Decision-theoretic utility analysis applied to employee separations and acquisitions'', Journal of Applied Psychology, No. 70, pp. 581-612. Brummet, R. L. et al. (1968), ``Human Resource Measurement: a challenge for accountants'', The Accounting Review, April, pp. 217-24. Brunsson, N. and Olsen, J. (1990), Makten att reformera (The power to reform), Carlssons, Stockholm. Cascio, W.F. (1991), Costing Human Resources: The Financial Impact of Behavior in Organizations, 3rd ed., PWS-Kent, Boston. Cascio, W.F. and Ramos, R.A. (1986), ``Development and application of a new method for assessing job performance in behavioral/economic terms'', Journal of Applied Psychology, No. 71, pp. 20-28. Cronbach, L.J. and Glaser, G.C. (1965), Psychological Tests and Personnel Decisions, 2nd ed., University of Illinois Press, Urbana, IL. European Commission (1995), Teaching and Learning. Towards the Learning Society, Office for Official Publications of the European Communities, Luxembourg. Ewing, P. (1995), The Balanced Scorecard at ABB Sweden, Stockholm School of Economics, EFI No. 6554. Ezzamel, M. et al., (1995), Changing Managers and Managing Change, The Chartered Institute of Management Accountants, London. Flamholtz, E. (1985), Human Resource Accounting, Jossey-Bass Publishers, Los Angeles, CA. GroÈjer, J-E. (1993), Redovisa anstaÈ llda paÊ balansraÈ kningen! (Account for the worth of employees on the balance sheet), Labora Press, Stockholm. Gul, A. (1984), ``An empirical study of the usefulness of human resources turnover costs in Australian accounting firms'', Accounting, Organizations and Society, Vol. 9 No. 3/4, pp. 233-39. HaÈllsten, F. (1997), Personalekonomi och det goda (Human resource costing and accounting and the good workplace), BAS, School of Business, Gothenburg University. Hansson, B. (1997), Personnel Investments and Abnormal Return On, unpublished paper, School of Business, Stockholm University. Harrel, A.M. and Klick, H.D. (1980), ``Comparing the impact of monetary and non-monetary human asset measures on executive decision making'', Accounting, Organizations and Society, Vol. 5 No 4, pp. 393-400. Hendricks, J. (1976), ``The impact of human accounting information on stock investment decisions: an empirical study'', Accounting Review, pp. 292-305. Hermansson, R. (1964), Accounting for Human Assets, Occasional paper No. 14, Michigan State University. Highhouse, S. and Macan, T. (1994), ``Communicating the utility of human resources activities: a survey of I/O and HR professionals'', Journal of Business and Psychology, Vol. 8 No. 4, Summer. Hopwood, A.G. (1987), ``The archaeology of accounting systems'', Accounting, Organisations and Society, Vol. 12 No. 3, pp. 207-34. Hunter, J.E. and Schmidt, F.L. (1982), ``Fitting people to jobs: the impact of personnel selection on national productivity'', in Dunnette, M.D. and Fleischman, E.A. (Eds), Human Capability Assessment, Erlbaum, Hillsdale, New Jersey, pp. 223-72. International Accounting Standards Committee (1995), Intangible Assets, Exposure draft E 50, Rochester.
  11. 11. Reality present, researchers absent? 505 Johanson, U. (1996), Increasing the Transparency of Investments in Intangibles, unpublished speech notes for workshop 6 at the OECD conference in Ottawa, December. Johanson, U. and Nilson, M. (1996a), ``The usefulness of human resource costing and accounting'', Journal of Human Resource Costing and Accounting, Vol. 1 No. 1, pp 117-38. Johanson, U. and Nilson, M. (1996b), Human Resource Costing and Accounting and Organisational Learning, Working paper, Personnel Economics Institute, School of Business, Stockholm University. Latham, G. and Whyte, G. (1994), ``The futility of utility analysis'', Personnel Psychology, Vol. 47, pp. 31-46. Lundberg, J. and Wiklund, C. (1994), TillaÈ mpning av personalekonomi- en nulaÈ gesrapport (The Use of HRCA), School of Business, Stockholm University. Mabon, H. (1996), ``The cost of downsizing in an enterprise with job security'', Journal of Human Resource Costing and Accounting, Vol. 1 No. 1, pp. 35-62. Maher, A. (1996), ``Measuring human resource value: an analysis based on the hotel industry'', Journal of Human Resource Costing and Accounting, Vol. 1 No. 1, pp 15-33. Martin, S.L. and Raju, N.S. (1992), ``Determining cutoff scores that optimize utility: a recognition of recruiting costs'', Journal of Applied Psychology, No. 77, pp. 15-23. Mirvis, P.H. and Lawler, E.E. (1983), ``Systems are not solutions: issues in creating information systems that account for the human organization'', Accounting, Organizations and Society, No. 8, pp. 175-90. Naylor, J.C. and Shine, L.C. (1965), ``A table for determining the increase in mean criterion score obtained by using a selection device'', Journal of Industrial Psychology, No. 3, pp. 33-42. OECD (1996), Measuring What People Know. Human Capital Accounting for the Knowledge Economy, OECD Publications, Paris. Ogan, P. (1988), ``Assessing the impact of human resource accounting information on managerial decisions: a field experiment'', Personnel Review, March, pp. 29-35, OÈ hman, P. (1996), Kunskap i aÊrsredovisningen (Knowledge in the Annual Report), LuleaÊ Graduate School, p. 5. Oliver, J. and Flamholtz, E. (1978), ``Human resource replacement cost numbers, cognitive information processing and personnel decisions. A laboratory experiment'', Journal of Business Finance and Accounting, Vol. 5 No. 2, Summer, pp. 137-157. Rhode, J.G. and Lawler, E.E. (1973), ``Human resource accounting: a critical assessment'', Industrial Relations, No. 15, pp. 13-25. Roslender, R. and Dyson, J.R. (1992), ``Accounting for the worth of employees: a new look at an old problem'', British Accounting Review, No. 24, pp. 311-29. Scarpello, V. and Theeke, H. (1989), ``Human resource accounting: a measured critique'', Journal of Accounting Literature, Vol. 8, pp. 265-80. TCO (1995), TCO ekonomernas hoÈstrapport (The Autumn Report from the Economists of TCO), Stockholm. The Swedish Association of Local Authorities. KommunfoÈrbundet (1994), Personalekonomi i kommuner (The use of HRCA in Swedish Local Authorities), Stockholm.