EFFECTIVE OF HUMAN RESOURCE ACCOUNTING ON FINANCIAL PERFORMANCE OF QUOTED MONEY DEPOSIT BANK IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

The growing importance of human resources accounting is a determinant of economic success at both the macroeconomic and microeconomic levels which dictates that firms need to adjust to this new economic reality. Specifically, if human capital is a key determinant for organizational success, then investment in the training and development of employees to improve performance is a critical component of this success (Ahmed, 2011). This broad socioeconomic shift underscores a growing need for measuring and analyzing human capital when making managerial and financial decisions. Yet important human resource decisions involving hiring, training, compensating, productivity and other matters are often made in the absence of specific information about the different cost and benefit of these particular choices (Flamholtz, 2011). Human resources accounting is a managerial tool that can be used to gain this valuable information by measuring the cost of recruiting, hiring, compensating and training employees. It can be used to evaluate employee training programs, increase productivity and improve managerial decision making regarding promotions, transfers, layoffs, replacement, and turnover (Bassey, 2012).

The American Accounting Association’s Committee on Human Resource Accounting (2013) has defined Human Resource Accounting as “the process of identifying and measuring data about human resources and communicating this information to interested parties”. Human resource accounting, thus, not only involves measurement of all cost investment associated with the recruitment, placement, training and development of employees, and also the qualification of the economic value of the people in an organization (Flamholtz, 2019).

The past few decades have witnessed a global transition for manufacturing to service based economies. The fundamental difference between the two lies in the very nature of their assets. In the former, the physical assets like plants, machinery, materials etc. are of utmost importance. In contrast, in the latter, knowledge and attitudes of the employees assume greater significance. For instance, in the case of an I.T firm, the value of its physical assets is negligible when compared with the value of the knowledge and skills of the personnel. Similarly, in hospitals, academic institutions, consulting firms etc. the total worth of the organization depends mainly on the skills of its employees and the services they render. (Becker, 2016). Hence, the success of these organizations is contingent on the quality of their Human Resource, its knowledge, skills, competence, motivation and understanding of the organizational culture. In knowledge-driven economies, it is imperative that the humans be recognized as an integral part of the total worth of the human capital. It is necessary that some methods of quantifying the worth of the knowledge, motivation, skills and contribution of the human elements as well as that of the organization processes like recruitment, selection, training etc. which are used to build and support these human aspect is developed. Human resource accounting (HRA) denotes just this process of quantification/measurement of the Human Resource. (Ahmed, 2011).

Human resources accounting centers on the valuation of human capital available to organizations and its recording and subsequent reporting in the financial statement of the organization. Human capital is the main factor towards achieving the organizational goals of maximizing the wealth of the owner. The economist Milton Friedman states, from the broad and general point of view, that total wealth includes all sources of income consumable services. One of such is the production capacity of human beings and accordingly, this is one form in which wealth can be held. (Becker, 2016)

Human resource accounting facilitates effective and efficient use of human resources. Human resources along with financial and material resources, contributes to the production of goods and services in an organization. Physical and monetary resources by themselves cannot improve efficiency or contribute to an increased rate of return on investment. (Flamholtz, 2019). It is through the combined and concerted effort of people that monetary and material resources are harnessed to achieve organizations goals. (Flamholtz, 2019). Human resources in the business organizations cannot be over-emphasized in this modern world, as human resources therefore is the most important assets of an organization. In fact, with additional training and experience gained over a period of time, they tend to do well on the job. This fact however, is ignored when a firm’s balance sheet is prepared. All expenses relating to recruitment, training and development of employees are charged against the revenues of a particular accounting period. The expenses on human resources are fixed in nature and do not offer any immediate return.