finalhuman resource audit

7/31/2019 FinalHuman Resource Audit

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HUMAN RESOURCE AUDIT

Definition:

Human Resource Audit is a systematic assessment of the strengths, limitations, and developmental

needs of its existing human resources in the context of organizational performance. A Human

Resources Audit is a comprehensive method (or means) to review current human resources policies,

procedures, documentation and systems to identify needs for improvement and enhancement of the HR

function as well as to ensure compliance with ever-changing rules and regulations. An Audit involves

systematically reviewing all aspects of human resources, usually in a checklist fashion.

Sections of review include:

Hiring and Orientation

Benefits

Compensation

Performance evaluation process

Termination process and exit interviews

Job descriptions

Form review

Personnel file review

Scope of Audit:

Whenever the H.R. Audit it taken up, the scope is decided. Audit need not be exhaustive, but should be

focused on particular function of H.R.M. such as Training and Development, Performance Appraisal,

Compensation, etc.. However, the objective and approach of H.R. Audit, more or less, remains the

same, regardless of scope. Generally, no one can measure the attitude of human being and also their

problems are not confined to the HR department alone. So it is very much broad in nature.

It covers the following HR areas:

Audit of all the HR function.


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Audit of managerial compliance of personnel policies, procedures and legal provisions.

Audit of corporate strategy regarding HR planning, staffing, IRs, remuneration and other HR

activities.

Purpose of HR Audit:

To examine and pinpoint strength and weaknesses related to H.R. areas and Skills and

Competencies to enable an organization to achieve its long-term and short-term goals.

To increase the effectiveness of the design and implementation of human resource policies,

planning and programs.

To help human resource planners develop and update employment and program plans.

Auditing Process: Steps in H.R Audit:

Auditing process varies from organizations to organizations. Generally involves following STEPS:

Step One: Briefing and Orientation/Key Staff Members meet:

1. To discuss particular issues considered to be important.

2. To chart out audit procedures, and

3. To develop plans and program of audit.

Step Two: Scanning:

Scanning material information scrutiny of all available information pertaining to personnel, personnel

handbooks and manuals, guides, appraisal forms, computer capabilities and any other related

information.

Step Three: Surveying employees:

1. Interview with key managers, functional executives, Top functionaries in the organisation and

employees representatives, if necessary.

2. The purpose is to pinpoint issues of concern, Present strengths, anticipated needs and

managerial views on human resources.


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Step Four: Conducting interviews:

1. What questions to be asked, are developed during scanning of information.

2. It is better for H.R. Audit, if clarity about the key factors of H.R.M. selected for audit and the

related questions that need to be examined.

Step Five: Synthesising:

The data gathered is synthesized to present the

1. Current Situation.

2. Priorities.

3. Staff pattern, and

4. Issues identified.

Step Six: Reporting:

1. The results of the audit are discussed with Managers and Staff Specialists, in several rounds.

2. Important issues are identified for inclusion in the formal Report.

The audit process:

The HR audit process is conducted in different phases. Each phase is designed to build upon the

preceding phase so that the organization will have a very strong overview of the health of the HR

function, at the conclusion of the audit. These phases include:

Pre-Audit Information: This phase involves the acquiring and review of relevant HR manuals,

handbooks, forms, reports and other information. A pre-audit information request is forwarded to the

client who compiles the necessary information for review by auditors.

Pre-Audit Self-Assessment: In order to maximize the time spent during subsequent portions of the

audit, a pre-audit self-assessment form, if sent to the client can be of use. The self-administered yes/no

questionnaire asks a number of questions about current HR policies and practices.

The completion of this self-administered questionnaire allows auditors to identify key areas for focus

during the HR audit.


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On-site Review: This phase involves an on-site visit at the client's facility interviewing staff regarding

HR policies and practices. A very in-depth HR audit checklist is completed.

Records Review: During the on-site visit, a separate review is conducted of HR records and postings.

Employee personnel files are randomly examined as well as compensation, employee claims,

disciplinary actions, grievances and other relevant HR related information are checked.

Audit Report: The information gathered is used to develop an HR audit report. The audit report

categorizes action needs into three separate areas. The areas that are urgent and important (UI), not

urgent needs but important (NUI), not urgent but not important needs (NNI)), and important

opportunities needs (IO). As a result of this scheme of classification, managements can prioritize their

steps.

The critical areas:

The comprehensive HR audit covers all areas of HR management like recruitment practices, training

and development, compensation and benefits, employee and union relations, health, safety and security,

miscellaneous HR policies and practices-welfare, strategic HR issues, manpower planning/budgeting.

Besides classifying needs in each of the above areas, the HR audit also cites relevant laws, cases and

research to support the recommendations.

Preparation for an audit:

Auditor engagement: If external firm carrying out the audit, it is preferable to set terms in writing

defining and agreeing on scope .If using internal resource it is better to appoint them formally with

clarity on scope and select persons who are non political or those who are not high on hierarchy. Also,

if internal persons are auditing there must be training in auditing.

Documents, manuals, handbooks, forms and reports auditor must have access to relevant information

contained in employee files and other confidential documents of the organization. Auditors must begiven unrestricted access to records, once they sign agreement for confidentiality.

Data gathering: Completion of a self-assessment questionnaire significantly expedites the audit

process and allows for better audit planning.

On-site access: The on-site portion of the audit is the most critical.


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Using audit findings:

How does an organization use HR audit results? Since the HR audit results are classified, an important

aspect is already taken care of. Critical needs should be the first ones to be addressed. Organizations

generally have three options for dealing with audit results.

Use the HR audit as a blueprint or action plan for addressing HR needs.

Address as many needs as possible using the organization's internal expertise and resources.

Contract out those need areas where internal expertise and resources are not available or do not

fit in the core competencies of the organization.

An HR audit is much like an annual health check. It can perform the same function for the

organization. An audit is a means by which an organization can measure where it currently stands and

determine what it has to accomplish to improve its HR functions. It involves systematically reviewingall aspects of human resources, usually in a checklist fashion, ensuring that the government regulations

and company policies are being adhered to. The key to an audit is to remember that it is a tool to

discover and not to test. There will always be room for improvement in every organization.

Approaches to HR Audit:

There are four approaches for the purpose of evaluation of HR in any organization:

1. Individual Interview Method

2. Group Interview Method

3. Workshop Method

4. Questionnaire Method

For HR Audit, either combination of methods or all the methods are used

1. Individual Interview Method:

Top level management and senior managers are interviewed, individually. It helps in following:

Knowing their thinking about future plans and opportunities available for the company.

Knowing about their expectations from the H.R.Audit.


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Getting sensitive information pertaining to working styles and culture.

Union leaders, departmental heads, some strategic clients and informal leaders are also interviewed,

individually. In case of small companies, manned by professionals, interviews can be extended with

selected employees from different levels and functions.

2. Group Interview Method:

Group interviews and discussions with the employees and/or executives of large companies for H.R.

Audit, facilitate collection of information about effectiveness of existing systems.

Composition of Group:

Ideally, the group should be of 4 to 8 persons.

Group should consists of same or similar level of employees from cross functional areas.

In case of large organisation, group interviews for each functional area can be conducted,

separately.

Relevant questions that are asked in individual and group interviews:

1. What do you see as the future growth opportunities and business directions of the company?

2. What skills and competencies does the company have which you are proud of?

3. What skills and competencies do you need to run your business, or to perform your role, more

effectively at present?

4. What are the strengths of your HRD function?

5. What are the areas where your HRD function can do better?

6. What is good about your HRD subsystems, such as:

performance appraisal,

career planning,

job rotation, training,

quality circles,


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2. Individuals or groups are asked to assemble in a room or hall are explained the objective and

process of HR Audit. They are then given questionnaires.

3. They submit the questionnaire, duly filled in, to the HR Auditor.

4. The HR Auditor compiles the feedbacks, makes observations, conclusions and

recommendations.

5. Audit Results are informed to the Participants before the report is submitted to the top

management.

HUMAN RESOURCE ACCOUNTING


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Human resource Accounting is the process of identifying and reporting the Investments made in the

Human Resources of an Organisation that are presently not accounted for in the conventional

accounting practices. In simple terms, it is an extension of the Accounting Principles of matching the

costs and revenues and of organising data to communicate relevant information in financial terms.

The Quantification of the value of Human Resources helps the management to cope up with the

changes in its quantum and quality so that equilibrium can be achieved in between the required

resources and the provided human resources

Importance of Human Resource Accounting:

Human Resource Accounting provides useful information to the management, financial analysts and

employees as stated below:-

Human Resource Accounting helps the management in Employment and utilisation of Human

Resources.

It helps in deciding transfers, promotion, training and retrenchment of human resources

It provides a basis for the planning of physical assets vis-a-vis human resources

It helps in evaluating the expenditure incurred for imparting further education and training of

employees in terms of the benefits derived by the firm.

It helps to identify the causes of high labour turnover at various levels and taking preventive

measures to contain it.

It helps in locating the real cause for low return on investment, like improper or under-

utilisation of physical assets or human resources or both.

It helps in understanding and assessing the inner strength of an organisation and helps the

management to steer the company well through the most averse and unfavourable circumstances.

It provides valuable information for persons interested in making long term investments in the

firm.


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It helps the employees in improving their performance and bargaining power. It makes each

employee understand his contribution towards the betterment of the firm vis-a-vis the expenditure

incurred by the firm on him

Objectives of Human Resource Accounting:

To furnish cost value information for making proper and effective management decisions about

acquiring, allocating developing and maintaining human resources in order to achieve cost effective

organisational objectives.

To monitor effectively the use of human resources by the management.

To have an analysis of the Human Asset, i.e. whether such assets are conserved, depleted or

appreciated.

To aid in the development of management principles and proper decision making for the futureby classifying financial consequences of various practices.

Methods of Human Resource Accounting:

Approaches to Human resource accounting was first developed 1691 the next stage was during 1691-

1960 and third phase post-1960. There are two approaches to HRA. Under the cost approach, also

called human resource cost accounting method or model, there is a) Acquisition cost model and

b)replacement cost model. Under the value approach there are a) present value of future earnings

method, b) discounted future wage model, c) competitive bidding model.

1. Cost Approach

This approach is also called as acquisition cost model.This approach is developed by Brummet,

Flamholmay tz and Pyle but the first attempt towards employee valuation made by a foot ware

manufacturing company R. G. Barry Corporation of Columbus, Ohio with the help of Michigan

University in the year 1967 . This method measures the organizations investment in employees using

the five parameters: recruiting, acquisition; formal training and, familiarization; informal training,

Informal familiarization; experience; and development. this model suggest instead of

charging the costs to p&l accounting it should be capitalized in balance sheet.the process of giving an

status of asset to the expenditure item is called as capitalization. in case of human resource it is

necessary to amortize the capitalized amount over a period of time. so here one will take the age of the


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employee at the time of recruitment and at the time of retirement. out of these a few employee may

leave the organization before attaining the superannuation. This is similar to a physical asset.

e.g.:- If company spends one lakh on an employee recruited at 25 years, and he leaves the organization

at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The

company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be

charged to p&l account i.e.

100000\30=3333.33

3333.33*25=83333.33

100000-83333.33=16666.67

This method is the only method of human resource accounting which is based on sound accounting

principals and policies.

Limitations

The valuation method is based on false assumption that the dollar is stable.

Since the assets cannot be sold there is no independent check of valuation.

This method measures only the costs to the organization but ignores completely any measure of

the value of the employee to the organization (Cascio 3).

It is too tedious to gather the related information regading the human values.

2. Replacement Cost approach

This approach measures the cost of replacing an employee. According to Likert (1985) replacement

cost include recruitment, selection, compensation, and training cost (including the income foregone

during the training period). The data derived from this method could be useful in deciding whether to

dismiss or replace the staff.

Limitations


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Substitution of replacement cost method for historical cost method does little more than update

the valuation, at the expense of importing considerably more subjectivity into the measure. This

method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost

to replace an employee (Cascio 3-4).

3. Present Value of Future Earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of

future earnings, adjusted for the probability of employees death/separation/retirement. This method

helps in determining what an employees future contribution is worth today.

According to this model, the value of human capital embodied in a person who is y years old, is the

present value of his/her future earnings from employment and can be calculated by using the following

formula:

E(Vy) = Py(t+1) I(T)/(I+R)t-y

T=Y Y

Where,

E (Vy) = expected value of a y year old persons human capital

T = the persons retirement age

Py (t) = probability of the person leaving the organisation

I(t) = expected earnings of the person in period I

r = discount rate

Limitations

The measure is an objective one because it uses widely based statistics such as census income

return and mortality tables.

The measure assigns more weight to averages than to the value of any specific group or

individual (Cascio 4-5).


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4. Value to the organization:

Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the

same employee, the employee should be allocated to the highest bidder and the bid price incorporated

into that divisions investment base. For example a value of a professional athletes service is often

determined by how much money a particular team, acting in an open competitive market is willing to

pay him or her.

Limitations

The soundness of the valuation depends wholly on the information, judgment, and impartiality

of the bidder (Cascio 5).

5. Expense model:

According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral

outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job

performance are measured using traditional organizational tools, and then costs are estimated for each

criterion. For example, in costing labor turnover, dollar figures are attached to separation costs,

replacement costs, and training costs.

E a r l y D e v e l o p m e n t s of H RA i n t h e U ni te d S t a te s

Research during the early stages of development of HRA was conducted at the University

of Michigan by a research team including the late organizational psychologist Rensis Likert,

founder of the University of Michigan Institute of Social Research and well known for his work

on management styles and management theory (Likert, 1961, 1967), faculty member R. Lee

Brummet, and then Ph.D. candidates William C. Pyle and Eric Flamholtz. The group worked on a

series of research projects designed to develop concepts and methods of accounting for human

resources. One outcome of this research (Brummet, Flamholtz & Pyle, 1968a) was a paper

representing one of the earliest studies dealing with human resource measurement-- and the one

in which the term Human Resource Accounting was used for the first time. Brummet,

Flamholtz & Pyle (1968b) also published another article in which they assessed the impact that

HRA can have on management.


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Flamholtzs (1969) Ph.D. dissertation, an exploratory study in the area of HRA, developed

a theory of an individuals value to an organization and how it could be measured though HRA.

Brummet, Flamholtz & Pyle (1969) focused on HRA as a tool for increasing managerial

effectiveness in the acquisition, development, allocation, maintenance,

and utilization of its human resources. The authors work represented one of the first attempts to

develop a systemofaccounting for a firms investments and studied the application of HRA in

R.G. Barry Company, a public entrepreneurial firm.

The early work in HRA provided inspiration for the next phase of early HRA development, basic

academic research developing measurement models. Interest in HRA was evident in the many

studies conducted since its inception as noted in Sackmann, Flamholtz & Bullen (1989),

Flamholtz, Bullen & Hua (2002), and Flamholtz,Kannan-Narasimhan & Bullen (2004).

Hu m an R e so u r c e A c c o un t in g a n d I n ter n a t i o n al F in a n c i al R e p o rt in g S t a nd a r d s

In recent years United States GAAP has been moving toward adoption of more complex

measurement methods in financial reporting compared with the traditional historical cost approach

to asset measurement, including a focus on the measurement of the time value of money and

present value calculations. Meeting, Luecke & Garceau (2001, p. 57) indicate that

in many cases the expected cash flow approach is a better measurement tool than traditional

methods, and that CPAs should use it to report asset and liability values in the absence of

specific contractual cash flows. Certain current assets are now reported at their fair market

values at each balance sheet date, and many items on the balance sheet that are noncurrent are

measured at the present value of the estimated future cash flows. Campbell, Owens-Jackson, &

Robinson (2008, p. 31), note that fair value accounting, which SFAS No. 157 requires in some

areas of financial statement reporting starting in fiscal years beginning November, 2007,

attempts to calculate and report the present value of future cash flows associated with an asset or

liability.

As accountants have become more accustomed to complex measurement approaches,

some similar to the approaches taken in developing HRA value measures, it seems reasonable

that nontraditional HRA measures may become more accepted in future financial reports.

In addition there has been increased interest in accounting for intangible assets in


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financial reporting by both the Financial Accounting Standards Board and the Securities and

Exchange Commission. As noted in Flamholtz, Bullen & Hoa (2002, p. 948), since human

resources are a primary component of intangible Assets, the state is being set for a renewed

interest in HRA from a financial accounting perspective.

U.S. GAAP is not the only set of financial accounting standards affected by these

developments. In fact, the Securities and Exchange Commission (January 4, 2008) recently

announced in November 2007 that non-U.S. companies listed on the U.S. stock exchanges could

use International Financial Reporting Standards (IFRS) instead of U.S. GAAP, and if they choose

to use IFRS, would no longer be required to provide a reconciliation between their reported

numbers and U.S. GAAP. Additionally, the Securities and Exchange Commission (November 14,

2008) released a roadmap of proposed dates by which U.S. based publicly traded companies

would be expected to adopt the IFRS in the future. However, in recent months, the adoption of the

IFRS by U.S. companies has been strongly debated, and it will be seen in the years ahead whether

this materializes. Yet, the consideration of international reporting standards is another indication

that the environment for financial accounting reporting is one that potentially encourages the

consideration of alternative measurement and reporting standards.

Since 2001, the International Accounting Standards Board (IASB) has been developing

and promulgating the IFRS (International Accounting Standards Board, 2009). Prior to 2001, the

International Accounting Standards Committee (IASC) issued International Accounting Standards

(IAS), which were adopted initially by the IASBwhen it replaced the IASC. While the IFRS do

not currently have standards requiring HRA, it could be argued that they are moving closer toproviding more flexible approaches to accounting measurements and reporting. For example, the

international standards IAS 38 Intangible Assets and IFRS 3 on Business Combinations allows for

the recognition of the intangible asset goodwill, which indicates a willingness to allow for

valuation of assets that are not traditional tangible assets, such as human resources. The valuation

of goodwill often involves complex assessments of fair values as well as periodic reassessments to

determine whether the fair values have become impaired. These more difficult and challenging

measurements of goodwill and other fair values are similar to some of the challenges documented

in the past related to the measurement of human resources, particularly when using the value

approach to HRA.Thus, the movement toward fair value accounting seen in recent years for both

U.S.GAAP as well as for international standards indicates a more sophisticated approach to the

measurement of assets, tangible as well as intangible.

This might suggest a willingness to recognize the need for, and consider the measurement


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and use of HRA in future external financial reporting.

Hu m an R e so u r c e A c c o un t in g in M a n ag er i al R e p o rt in g a n d D ec i s i o n -M a kin g

In addition to external financial reporting, HRA may be useful as a managerial tool to aid

in making managerial decisions that will benefit the long-run strategic goals and profitability of

the company. As opposed to external financial reporting, managerial reporting does not require

adherence to a strict set of GAAP in specific financial statements in acceptable format reported

to the public (Bullen, 2007, p. 89). However even if human assets are not reported on the face of

external financial statements, HRA can play a crucial role in internal managerial decision-

making, and HRA measures can be used to show that investments in a companys human

resources may result in long-term profit for the company (Bullen, 2007, p. 89).

When managers go through the process of HRA measurement treating human resources as

capital assets, they are more likely to make decisions that treat the companys employees as long-

term investments of the company. Flamholtz (1979) describes the HRA paradigm in terms of the

psycho-technical systems (PTS) approach to organizational measurement. According to the

PTS approach, the two functions of measurement are:

1) Process functions in the process of measurement and

2) Numerical information from the numbers themselves.

Whereas one role of HRA is to provide numerical measures, an even more important role is the

measurement process itself. The HRA measurement process as a dual function attempts to increase

recognition that human capital is paramount to the organizations short and long-term productivity

and growth.

For example in a potential layoff decision, with use of HRA measures in addition to only

traditional accounting measures, management is better likely to see the hidden costs to the

companys human resources and the long-term implications to the human assets. This is because

HRA views human resources as assets or investments which must be maintained for long-run

productivity. Layoffs may affect future long-term profits from lost productivity, costs of rehiring

and retraining when business returns, and costs of lower morale of existing workforce. If

management quantified the actually costs of layoffs, management might be less inclined to use

layoffs as a way to cut costs and boost short-term profits at the expense of long- run productivity

and profits.

Flamholtz, Bullen & Hua (2003) utilized the HRA measure of expected realizable value, and


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found that employees participation in a management development program increased the value of

the individuals to the firm.In addition the authors noted (p. 40) that the HRA measures provided

upper level management with an alternative accounting system to measure the cost and value of

people to an organization. Thus HRA represented both a paradigm or way of viewing human

resource decisions, and the set of measures for quantifying the effects of human resource

management strategies upon the cost and value of people as organizational resources

Davidove & Schroeder (1992) indicate that too may business leaders have no generally

accepted definition or accounting procedure for tracking training investments, and note that a

lower training investment is not automatically better for an overall return on investment. The

authors suggest that although many business leaders still view training as an overhead expense,

with thorough ROI evaluations training departments can convince business to view them as

partners in creating the assets crucial to organizational success.

Other authors have expressed similar views suggesting the benefits of HRA measurements

and the process of measuring human resources. For example Johanson & Mabon (1998) indicate

that expressing human resource interventions in financial terms and /or cost benefit terms is more

effective than using soft accounting information such as the data on the job

satisfaction. Because the classical function of accounting is the determination of the value of the

economic activity, performing analysis with hard numbers such as cost-benefit analyses helps us

determine how resources should be used by human resources for various interventions. Toulson &

Dewe (2004) conducted a survey study utilizing component analysis and found two reasons why

measuring human resources is important.

The first is that measurement reflects the strategic and competitive importance of human

resources, and the second suggests that to earn credibility, human resources must be expressed in

financial terms. McKenzie& Melling (2001) suggest that, if properly implemented, the human

capital planning and budgeting process will become a key driver of strategy in that strategic

human capital planning and budgeting ensures that the best resources are mobilized for each

internal process They indicate that too often organizations focus 100% on meeting the financial

budget first without consideration of the effect the cost slashing will have on strategy, and note

that the financial numbers are a lagging indicator of where a firm has been and should not be

substituted for leading indicators of where the firm is going. Rather management should focus

clearly on causal, leading indicators that drive successful financial measures, and that it is through

skills-based budgeting that the fallacy of financial focus can be avoided.

Moore (2007) suggests that the value of human capital should be more fully considered


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when making decisions about the acquisition and disposal of peopleand notes that the

accounting practices currently employed by companies can have an undue influence in driving the

strategic decisions of these companies. Moore notes that there are parallels between the process

of acquiring an employee (a human capital asset) and that of acquiring a fixed capital asset.

However while most companies acknowledge the contributions of its employees, they do

not think of the acquisition or disposal of human capital assets in the same way or with the same

thoughtful planning or strategic thinking as they do fixed capital assets.

H RA Me as u r e m e n t M o d e l s

Human Resource Accounting may be measured in terms of human resource cost or in

terms of human resource value. According to Flamholtzs model for measurement of original

human resource costs (1973, 1999, p. 59), human resource costs may be explained in terms of the

two major categories of acquisition costs and learning costs. Acquisition costs include the direct

costs of recruitment, selection, hiring and placement, and the indirect costs of promotion or hiring

from within the firm. Learning costs include the direct costs of formal training and orientation and

on-the-job training. In a human resource in accounting system, these costs are reported in asset

accounts with future economic benefits rather than as expenses. Flamholtz ( 1999, p. 160) noted that

the concept of human resource value is derived from general economic value theory, and like all

resources people possess value because they are capable of rendering future service. Thus as

Flamholtz notes, an individuals value to an organization can be defined as the present value of the

future services the individual is expected to provide for the period of time the individual is expected

to remain in the organization.

The Stochastic Rewards Valuation Model, originally developed by Flamholtz (1971) for human

resource valuation, and further explained in Flamholtz (1999), is a five step process that begins with

defining the various service statesororganizational positions that an individual may occupy in the

organization. The next step is to determine the value of each state to the organization, the service

state values, which can be calculated either by using a number of methods such as the price-quantity

method or the income method. Then the persons expected tenure or service life

in the organization is calculated and the persons mobility probability or the probability that a

person will occupy each possible state at specified future times is derived from archival data.

Next the expected future cash flows that the person generates are discounted in order to determine


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their present value. According to Flamholtz (1999, pp 160-161 ), there is a dual aspect to an

individuals value. First, the persons expected conditional value, is the amount the organization

could potentially realize from his or her services if the person maintains organizational membership

during the period of his or her productive service life. Second, the persons expected realizable

value. is the amount actually expected to be derived, taking into account the persons likelihood of

turnover.Using the Flamholtz model, Flamholtz, Bullen & Hua (2003) showed a practical method

for calculating ROI on management development, and showed the incremental cash flows that an

organization will receive due to investment in management development. The article concluded that

use of HRA as a tool to measure the value of management development enhances not only the value

of human capital but also the value of management accounting. Similar to the Flamholtz model,

another earliest model of human resource value measures human capital by calculating the present

value of a persons future earnings (Lev & Schwartz, (1971). Dobija (1998) proposes an alternate

model for capitalization, where the rate of capitalization is determined through the natural and the

social conditions of the environment. Utilizing a compound interest approach, this method takes

into account the three factors for valuing the human capital embodied in a person. These include the

capitalized value of cost of living, the capitalized value of the cost of professional education, and

the value gained through experience. Alternately, Turner (1996) refers to the framework issued by

the International Accounting Standards Committee and recommended the use of the present value

of the value added by enterprise, and measures assets by the four methods of historical cost, current

cost, realizable value and present value. Cascio (1998) proposed a method for measuring human

capital based on indicators of human capital of innovation, employee attitudes and the inventoryof knowledgeable employees.

According to this method, innovation commands a premium and therefore needs to be

measured, for example by comparing gross profit margins from new products to the profit

margins from old products. Employee attitudes predicting customer satisfaction and retention are

an important indicator of human capital and therefore need to be measured, as well as measures of

tenure, turnover, experience and learning.

I n ter n a t i o n al D e v e l o p m e n t s i n Hu m an R e so u r c e A cc o un t in g


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Interest in HRA related reporting has grown in a number of countries across continents. In

discussing HR metrics, Hansen (2007) notes that two thirds of the 250 largest companies in the

world now issue sustainability reports along with their financial reports in order to capture the full

value of the organization. Global standards for sustainability reporting require the disclosure of

workforce data that reflect the potential for future performance and profitability. Sustainability

reporting has been formalized under guidelines by the Global Reporting Initiative, an international

network of business, labor investors and accountants.

Schwartz and Murphy (2008) also comment on human capital metrics, suggesting that a

class on the subject would benefit all undergraduate management majors. They suggest that

primary among those benefits is a change in mind set toward using data and metrics to design and

evaluate management policy rather than relying on experience, fad or hype; and suggest that

students familiar with HR metrics should be better equipped to prove and enhance the

contributions of human resources to theirorganizations.

Some research has included aspects of HRA in studies examining and comparing

reporting practices of a number of countries. A study by Subbarao and Zehgal (1997) gave a

macro-level perspective to HRA disclosure in financial statements by analyzing the differences

across countries in the disclosure of human resources information disclosure in annual reports

across six countries. The authors found differences in disclosures of HR information across

countries and provided accounting and financial professional insights on the HR information areas

they need to focus on in their country. In another study, Boedker, Mouritsen & Guthrie (2008)

examined contemporary trends from Europe, Australia, and the United States, in enhanced

business reporting (EBR), which includes aspects of HRA. The authors found a vast diversity in

international EBR practice, including measurement and reporting models, and suggested the need

for further research about the barriers to and consequences of harmonization. The paper covers

contemporary debate on EBR and seeks to inform the US SEC Advisory Committee on

Improvements to Financial Statements (Prozen Committee). Other research has focused more

specifically on the authors country, but oftenwith implications for the international development

of HRA.

Limitations of Human Resource Accounting:


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Human Resource Accounting is the term used to describe the Accounting Methods, systems and

techniques, which coupled with special knowledge and ability, assist personnel management in the

valuation of personnel in their knowledge, ability and motivation in the same organisation as well as

from organisation to organisation. It means that some employees become a liability instead of

becoming a human resource. HRA facilitates decision making about the personnel i.e. either to keep or

to dispense with their services or to provide training. There are many limitations which make the

management reluctant to introduce HRA. Some of the Attributes are:-

There is no proper clear cut and specific procedure or guidelines for finding costs and value of

human resources of an organisation. The systems which are being adopted have certain drawbacks.

The period of existence of Human Resource is uncertain and hence valuing them under

uncertainty in future seems to be unrealistic.

The much needed empirical evidence is yet to be found to support the hypothesis that HRA as atool of management facilitates better and effective management of human Resources.

As human resources are incapable of being owned, retained, and utilised, unlike the physical

assets, there is a problem for the management to treat them as assets in the strict sense.

There is a constant fear of opposition from the trade unions as placing a value on employees

would make them claim rewards and compensations based on such valuations.

In spite of all its significance and necessity, the Tax Laws dont recognise human beings as

assets.

There is no universally accepted method of the valuation of Human Resources.


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