Introduction - All of Economic History in a Nutshell
There have been only three eras in all of economic history: the agrarian
era, the industrial era, and the knowledge era. Not surprisingly, in the
agrarian era, land was the primary source of wealth. In the industrial
era, the primary sources of wealth were machinery and, to a lesser extent,
natural resources. In the knowledge era, human capital is the source of
wealth. Human capital is the embodiment of productive capacity within
people. It is the sum of people’s skills, knowledge, attributes,
motivations, and fortitude.
The accounting and reporting systems that have developed over centuries
reflect this evolution, albeit with a lag. In most of the developed nations,
the currently accepted accounting principles and their related reporting
requirements rest on the foundational assumption that physical assets
(land, machinery, buildings, natural resources and inventory) generate
wealth.
There is, of course, a reason for this that transcends history. Unlike
all other factors of production, human capital is the only factor that
cannot be owned. Although that is as it should be, the omission of human
capital from the balance sheet can play mischief in the wise allocation
and management of resources.
The viability and difficulty in valuing this invaluable and elusive
resource
Human capital represents a huge operating cost that must be managed efficiently
because of its sheer magnitude; in the United States, for example, nearly
70% of all operating costs are ultimately attributable to people. At the
same time—because human capital is also the only asset that cannot
be owned—it must be managed wisely, but also with humanity. Consequently,
a strategy that focuses exclusively on efficiency and cost containment
can, at best, only is successful in the short-run.
Corporate governance is about commitment to values and about ethical business
conduct. It is about how an organization is managed. Accordingly, timely
and accurate disclosure of information regarding the financial situation,
performance, ownership and governance of the company is an important part
of corporate governance. Consequently, the organization is able to attract
investors, and to enhance the trust and confidence of the stakeholders.
Human resource accounting represents both a paradigm and a set of measures
for quantifying the effects of human resource management strategies on
the cost and value of people as organizational resources. In the first
case, human resource accounting provides a perspective for analysing the
effects of management decisions on the human organization and for explaining
the consequences to management. Thus, the human resource professional
can help management to appreciate the long-range consequences and hidden
costs of certain business decisions. For example, if management decides
to lay off workers because of a slowdown in production, current labour
costs will be reduced. However, during the layoff, some of the workers
may find work elsewhere, and will not return. As a result, when management
wants to rehire the workers, it now must find new ones and train them.
This costs considerably more than just rehiring the laid off employees.
Human resource accounting can provide this important perspective to management.
It can also account for the total present and future costs of a layoff.
This is something that conventional accounting would not be able to do
so lucidly.
“Value” of an enterprise
Until recent years, the 'value' of an enterprise as measured within traditional
balance sheets, e.g. buildings, production plant, etc., was viewed as
a sufficient reflection of the enterprise's assets. However, with the
emergence of the 'knowledge economy', this traditional valuation has been
called into question due to the recognition that human capital is an increasingly
dominant part of an enterprise's total value.
The emergence of methods for accounting human resources (methods aimed
at measuring, developing and/or managing the human capital in an enterprise)
can thus be said to reflect the need to improve measuring and accounting
practices and human resource management. However, providing adequate and
valid information on human capital in figures and within traditional balance
sheets has proved extremely difficult; consequently, new approaches such
as social accounting and human resource auditing take into account the
fact that human capital and tangible assets are different in nature by
introducing broader perspectives into human resource accounting.
Need for HRA?
It is important to be aware of the fact that HRA is not only about putting
figures on human capital; it is also about supporting human resource development/management.
Furthermore, increasing pressure will encourage or force enterprises to
report on human capital and to enlarge the perspective from serving mainly
the interests of investors to including the interests of other stakeholders,
notably governments, trade unions and employees. This process is being
further reinforced as stakeholders come to realize the potential of HRA
not only as an accounting system but also as a means of establishing new
structures across interests and policies. The main stakeholders, who include
governments, trade unions, investors, enterprises and employees, are increasingly
formulating policies on HRA in order to influence the design of HRA.
Consequently, there will be a gradual transformation in the tendency
to see HRA as either a management tool or an information system, and so
as primarily a matter for manager and investors. However, the search for
a standard human resource account has led many researchers to focus on
accounting problems and the design of individual accounts in enterprises,
and it has generally failed to link the rise of HRA to the processes of
change in the labour market and in society in general.
Valuing
the Value Creator - The corporate dilemma