HUMAN RESOURCES ACCOUNTING: AN EMPIRICAL STUDY OF INDUSTRIAL TRAINING FUND

ABSTRACT

This study focused on how to recognize human resources, particularly in the Industrial Training Fund.  Primary and secondary data were used.   The area Offices of the Fund were taken to be primary sampling units and a clustering sampling method was applied in administering the questionnaire and secondary sources data including materials printed and unprinted. Hypotheses  were tested  and analytical  tool were  used. The information  needs  of  shareholders  necessary  under  the stewardship accounting are distorted.    By excluding human resources  investments,  management  is unable to give accurate account of all resources under its control.

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY:

The resources of any organisation are men (human), materials, machines and money.  These are the popularized ‘4M’ concept in management circles.  Each resource plays a vital role in the survival, growth and achievement of the overall goals and objectives of the enterprise.

The material and economic resources are dormant factors in the sense that they require to be put into effective use by the human elements.  Their contribution to the attainment of the goals of   the   organisation   is   revived   and   engineered   by   a   well- programmed   manipulation   and   co-ordination   by   the   human element.     Human  resource  therefore,  is  the  most  important resource of any organisation.

Megginson (1968) defined human resources as “the combined numbers, abilities and output of managerial and non- managerial employees of any intangible and aesthetic elements of human life.   Human resources have a homogenous as well as a heterogeneous component.  The homogenous components reflect the quantitative  aspect  while  the heterogeneous  emphasize  the qualitative nature of human resources.

Conventional accounting treats expenditure to acquire, develop  and  hold  human  resources  as  expenses  rather  than assets.     Human  resources  accounting  deals  with  accounting systems and concepts, which communicate to management and other   interested   parties,   better   data   on   an   organisation’s investment is utilization of human resources.

In his contribution to the development of Human Resources, Accounting, Riases Likert (1967) defined human resources accounting as: “any activity devoted to attaching dollar estimates to the value of a firm’s human organisation and its customer goodwill.  If able, well-trained personnel leave the firm, the human organisation is worthless; if they join it, the firm’s assets are increased.  If bickering, difficult and irreconcilable conflict become greater, the human enterprise is worthless; if the capacity to use differences  constructively  and engage  in cooperative  team-work improves, the human organisation is a more valuable asset”.

Human resources accounting was developed to provide internal control over long-term management of human resources. The future  of any organisation  largely depends  on its ability to effectively manage its human resources today.   A well-managed human asset will guarantee high productivity, high profitability and reliable cost control.

The productive capabilities of human assets can be clearly illustrated by imagining two or more enterprises in the same business.    These  enterprises  are  of  the  same  size  and  have identical equipment and technology.   One of them however, produces more and makes more earnings as a consequence of the superiority of its human assets over the others.

The variables, which can make the human resources of one enterprise superior to that of others were listed by Rinses Likert (1967) as:

1.   Level of intelligence

2.   Level of training

3.  Level of performance goals and motivation to achieve organisational success.

4.   Quality of leadership

5.   Capacity to use differences for purposes of innovation and improvement, rather than allowing differences to develop into bitter, irreconcilable, interpersonal conflict.

6.   Quality of communication upward, downward and laterally.

7.   Quality of decision making.

8. Capacity  to  achieve  cooperative  teamwork  versus competitive striving for personal success at the expense of the organisation.

9.   Quality of the control processes of the organisation and the levels of felt responsibility, which exist.

10. Capacity to achieve effective coordination.

11. Capacity  to use  experience  and  measurements  to guide decisions,  improve operations  and introduce  innovations. The conventional is accounting which records the physical assets  (cash,  inventory,  accounts  receivable  and  plants and equipment does not record these variables.

It is an attempt to rectify flaws deficiency that human resources accounting was developed.  Accountants have directed their searchlight into these areas in order to reflect the weight and importance  of  the  greatest  asset  of any organisation  –  Human Resources.

It is perfectly true that the accounting treatment of people shows them as “cost” and the information and measurements they receive, even if they know than to be one-sided, biased or deficient always direct human beings.  An accounting system, which would show  people  as  “capital  investments”  would  therefore  make  a major difference.

But it is not easy to see how one could show people as assets on the books.  An asset is by definition, something one can sell and something that has a value when a company goes into liquidation.   But a company does not own people and an asset, which can give “notice and leave”, is not an asset in any sense of the word.  There are equally serious practical objections.   But an asset, according to Nweze (2004) is also defined as “anything that can generate income or increase productivity”.

How does one, for instance, measure the “return on training”. Still, the idea has merit, which clearly would be highly desirable for managers to be led by own measurements and their own controls to acting  on their  profession  that  people  need  something  more powerful than meetings, seminars, sensitivity, training, serious or proclamations.

Above all, however, we need practices, which are easier to obtain than changes in vision or attitude.

However,   within   the   most   recent   decade,   accountants, financial managers,  personnel managers and general managers have  reflected  a  new  and  increasing  interest  in  the  subject  of human resources accounting.   It is true its development is still in an early period from conceptual and procedural viewpoint and also in  academic  circles  and  in  business  practices,  the  subject  of human  resource  accounting  possesses  general  intuitive  appeal and long-run potential.

Again, it is a known fact that the development of accounting has been characterized by pragmatism.   The practice of dealing with single issues and the problems at hand has created a system of Generally  Accepted  Accounting  Principles  (GAAP)  that  lacks conceptual underpinnings.

There are contemporary problems created by conceptual deficiencies which include among others “the human resource accounting”, which is an area troublesome to management.

Clearly, one of the most critical factors for the success of any organisation – profit or non profit – is the personnel who work for it. These people represent a cost to the firm, a value to it and an investment that it must maintain. Yet, financial accounting has not accepted the concept needed to account for a firm’s human resources.   While other resources – financial, information and material  (whether  real or unreal or tangible  and  intangible)  are essential.   It is the human resources that are boundless in their impact,    both   positive    and   negative    on   the   organisation. Accounting to Edet (1998), “people are one of an organisation’s most valuable assets, as assets are resources.  People create the organisation (for organisation means a group of people working together to achieve common goals), guide and direct its course, and vitalize and revitalize it.   People make its decision, solve its problems and answer its questions”.  Material, machines and even offices themselves can be replaced and any risks involved can be insured  against,  but  a  good  loyal  team  of  workers  cannot  be replaced nearly so easily.   In acknowledgement of this fact, Edet and Cliford Baumback said “a well known Chief Executive, Andrew Camegie,  is quoted to have asserted that he could lose all his assets except his staff and become a millionaire again in a very short space of time.   According to Warner (1996), the idea that expenditure on such things as education, on the job training and healthcare can be thought of, as an investment in an individual’s future ability to generate income is not a new one.  Warner (1976) said “an early statement of the concept of human capital can be found in Adam Smith’s WEALTH OF NATION (1776).

As noted earlier about the development and expansion of human capital, a number of its basic ideas are contained in the above quotation from Warner in Adam Smith.   First, expenditure on the productivity enhancing skills of people has similarities with investment in physical capital, which can be expected to generate income in the future.   Second, expenditure on education, on the- job training, healthcare or migration to areas with greater employment  opportunities,  can all be thought  of an investment, which is normally rewarded in the future higher income.   Third, differing levels of investment in human capital can explain productivity  between  individuals  and therefore,  differences between individuals in their rates of pay.

Fourth, it is in the individual’s  interests  to invest  in human capital when net benefits exceed the net benefits of investing in an alternative asset.  Warner (1996) also pointed out that it is not only private individuals who make decisions to invest human capital but also   in   most   countries,   the   state   undertakes   considerable investment in this area, for example, in education and health.  One rationale for this intervention  is that benefits from investment  in human capital accrue not only to the individuals directly involved but also to society at large.   For example, a more educated and informed community should make better political decisions and raising public health standards reduces the incidence of disease to everyone.

The accounting profession is challenged.  According to Aloba (1998),  “Microsoft  is  the  ultimate  example  of  the  un-recovered value of the intangible assets of the firm, which is 1996 stood at a market value of 11.2 times, its tangible asset value”.  This “missing value”  to a large degree,  represents  the market’s  estimation  of Microsoft’s stock of human (intellectual) capital that is not captured in its financial statement.  This is not exception but rather, the rule

in  financial  accounting  model.    Also,  Aloba  in  Hope  and  Hope (1998) said “Recent estimates suggest that 50 – 90 percent of the value  created  by a firm comes  from management  of traditional physical assets, but from the management of human (intellectual capital has been underscored as the most valuable form of capital in profit oriented organisation and otherwise).   In general, human acquisition of knowledge, as the measure of plants and machinery is  not  captured  in  the  balance  sheets  of  organisations.    It  is important also to say here that, more specifically, labour and entrepreneurship are directly amenable to educational processing or rather human asset development, which is now recognized as a catalyst for the rapid development of an under-developed nation such as Nigeria.

It is now realized that any managerial or organisational decisions that pertain to labour supply, and which have consequences over the long term, are directly amenable to output theory of human capital.   In the same way, that the output adjustment  of firms, the long-run involves investment  decisions, the decisions of labour supply by family members in the long-run also tend to involve such concerned about investment in human assets or human capital.  Importantly, formal education constitutes the principal form of human asset, other elements of human capital include direct and indirect cost of health, on the-job training, apprenticeship  programmes  and  the  search  for  relevant information.   It is to be stressed here that “human capital” should always be associated with economic effects as other assets in the organisations.

Just imaging as Chinsman (1998), opined “there is a general appreciation that while the growth of the physical capital stock may not be a principal cause of economic development, the growth of human capital stock is nevertheless, crucial”.   That there has in fact been, especially, within the last three-four decades, an incremental  appreciation,  by  corporate  organisations  and individuals alike, of the strategic importance of human assets.

According to Davidson and Well (1977), studies have been made to assess the cause and effect relationship of relative investments in human capital and other forms of capital.  And rates of economic and social change in different countries of the world as well as to assess the impact of in and out migration of certain countries, human resources – the brain drain (in most developing nations of the world).   In some of these studies, emphasis has been given to the role of education in the development of human capital and efforts to assess rates of return from various levels of education  and  other  training  inputs.    These  studies  using  the

concept of human capital have clear relevance for policy makers in the public sector.  On a national or macro level, human capital is becoming an operational concept but its use at the enterprise level is very much in its infancy.

This study is therefore, aimed at an empirical study of Human Resources Accounting with the Industrial Training Fund as a case study.

1.2      STATEMENT OF THE PROBLEM:

The  Industrial  Training  Fund  is  a  service  organisation whose monogamous and heterogeneous human resource inputs determine, to a very large extent, the achievement of its set objectives.   As is generally practiced in this country, human resources costs in the fund are written off against the income of the relevant period.

Conversely, cost incurred in the acquisition of plants and machinery are generally considered  as investments  and spread over the useful life of the assets.   The realization that human resources are the greatest asset of any organisation has directed modern  research  efforts  to  its  proper  accounting  and measurement.   Unlike plant and machinery, which depreciate overtime, human resources generally, appreciate with me.

The issue  of human  resources  accounting  in the Industrial Training Fund will attempt to determine the worth of human capital in the fund.   This research effort will also endeavour to evaluate this human capital over a period of time.  The trend established will help in appreciating human resources management patterns in the fund, and subsequently, proffer suggestions as to its effective utilization in the future.

In  a  service-oriented  organisation  such  as  the  industrial training fund, questions that come to the mind of the researcher include what could be the criteria for determining human resources efficiency, productivity and effectiveness? It is hoped that a relationship could emerge between human resources productivity on the one hand and the quality and quantity of human capital.

Considering human resources from investment point of view, this project will endeavour to calculate the return on investment on human capital as well as the depletion rate.  It will also attempt to establish  the  optimum  level  of  help  in  solving  the  problem  of adverse job behaviour patterns, thereby encouraging high productivity in the workforce.

1.3      OBJECTIVES OF THE STUDY:

Considering the relative importance of human resources in the line of any organisation, it is contended that this importance

has  not  been  adequately  reflected  in  the  financial  reporting  of almost all accountants.   This study will hopefully achieve the following objectives:

1)    Recognize human resources, particularly in industrial training fund as an asset and compute its value overtime;

2)    Establish a system of revaluing these human resources with a view to ascertaining increasing (decreasing) investments overtime;

3) Highlight/positive job behaviour patterns consistent with appreciating value of human resources;

4)    Determine  the level of human resources productivity  in the industrial training fund;

5)    Determine  the  impact  of  varying  levels  of  investment  on human capital on productivity;

6)    Suggest ways of determining optimum levels of investment of human resources based on the findings of this study.

1.4      FORMULATION OF HYPOTHESES:

The success ITF management records in the management of human capabilities certainly have a multiplicative effect on the overall effectiveness of the fund.   In the course of achieving the objective of this study, the following hypotheses will be tested.

1.    H0:     Human Resources Accounting productivity is independent of investments in human resources.

H1:     Human Resources Accounting productivity is not independent of human capital investment.

2.    H0:     Human Resources Accounting are effectively utilized in the fund.

H1:     Human Resources Accounting are not effectively utilized.

3.    H0:     There is no linear correlation between Human Resources   Accounting   productivity   and   levels   of investment in human capital.

H1:     There is no linear relationship between productivity and levels of investment in human capital.

1.5      SIGNIFICANCE OF THE STUDY:

The field of human resources accounting is yet at its developmental   stage.     Human   Resources   Accountants   have directed research efforts into this field in order to explore further and extend the sphere of corporate financial reporting practices. Following from the objectives of the study, the researcher hopes that the outcome of the study will be of immense benefit to organisation, management, employees and government.

1.    The Organisation:

Organisations spend a substantial part of their financial resources in the acquisition and development of their human resources.    This  is in apparent  realization  that  the success  an organisation has in developing and acquiring its human resources will certainly be vital to its growth.  An integrated human resources accounting  will  not  only  enable  organisations  to  measure  their most valuable resources but will also provide data necessary for effective and efficient utilization.

2.    Management:

Management   makes   decisions   about   the   allocation   of materials, machines, money and the most important resources – man, in such a way that the objectives of the organisation may be achieved.   Adequate human resources data will, along with data on other three resources enable management to try to optimize the allocation of all the resources under their control

3.    Employees:

Employee  constitutes  the moving force and livewire  of any organisation.  A reflection of their relative importance can make for the much desired motivation and industrial peace.    It is acknowledged that employees have vested interest in the outcome of management decisions of any kind.  A proper human resources accounting has important implications for optimum performance. Employee attitude and orientation can be greatly influenced and modified by providing the right information in the right form.  This will greatly enhance the productive potential of human resources.

4.    Government:

Human resources accounting for individual organisation can be aggregated to get the quantum of investment on human resources on a national scale.   Government will benefit from information  generated  from this study because  of its impact on national   economic   growth   and   productivity.   A   well-managed human resource is an asset to the nation and like all other assets, employed in the productive processes, properly accounted human resources will help government to galvanize its human wealth for the much needed national development.

1.6      SCOPE AND LIMITATIONS OF THE STUDY:

The business entity convention in accounting implies that financial statements are prepared for a business entity, which is distinct from its owners.  The entity of interest in this study is the Industrial Training Fund.  Deductions made at the end of the study can be helpful to accounting.   In spite of these limitations,  it is hoped that this study will further arouse interest in the growing need   to   adequately   reflect   human   assets   in   the   financial statements of organisations.

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