Definition of Human Resources Accounting

The concept of Human Resource Accounting (HRA) is of recent origin. Working on the idea that human assets in an organisation are no less important than its material assets, human resources accounting refers to the method of reflecting the rupee value of the human asset in the company’s balance sheet. A balance sheet that does not reveal the current value of company’s human assets does not, to say the least, portray the true and fair picture of the company’s affairs. This is because the present and future earnings of a company always depend upon the quality of its human organisation.

What is Human Resource Accounting?

The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as “the process of identifying and measuring data about human resources and communicating this information to interested parties”. HRA, thus, not only involves measurement of all the costs/investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an Organization. Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as “the measurement and reporting of the cost and value of people in organizational resources”.

Why Human Resource Accounting?

According to Likert (1971), Human Resource Accounting (HRA) serves the following purposes in an organization:

It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness;

It allows management personnel to monitor effectively the use of human resources;

It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved;

It helps in the development of management principles by classifying the financial consequences of various practices.

Measurements in Human Resource Accounting

The following methods are generally used to compute the value of human resource of a concern:

Valuation at cost: Under this method the employees of anorganization are evaluated on the basis of the cost which the organisation has incurred in selecting and training them. It should be noted that under the traditional accounting system this cost is treated as revenue expenditure and is charged to the profit and loss account. But in human resources accounting this cost is capitalised and is shown as an asset in the balance sheet.

Valuation Economic Cost: Under the first method the human assetis shown in the balance sheet at its historical cost which is not enough if the balance sheet is to serve as a health chart of the organisation. It is essential for this purpose to show all assets (including human asset) in the balance sheet at their economic value. This is the capitalised value of future benefits expected of each asset. The present capitalised value of every employee in an organisation can be found out by estimating his remaining future earnings from employment (assuming the present promotion policy and pay scales to be constant). The aggregate of such present discounted values is then shown as the value of the human resources assets in the balance sheet. It is, however, questioned, how the capitalised value for future expenses can be asset? It is the value of the benefit expected to accrue that should capitalised and not the amount to be spent for the use of the asset.

Valuation of Replacement Cost: Employees can also be valued attheir replacement cost, i.e., the amount which will be needed to replace them completely. It should be noted that it is always impossible to replace the present personnel by a new set of people and still have the same organization.

Knowledge Management control

Knowledge Management Control Systems

The Knowledge Management Control System is an organizational approach to bridging organizational knowledge gaps between organizational disciplines by providing an uninterrupted process of transforming business data into decision making information. The Knowledge Management Control System empowers people, the right people, throughout the organization to make decisions based on predefined structures of authority. This ensures transparency of data, enabling critical informational to be available at the touch of a button. This helps executives see the ‘whole picture’ and can make appropriate decisions criminating corporate collapses and industrial accidents that ruin the balance sheet, personal bonuses and share holder confidence.

The Knowledge Management Control System ensures executives can manage any business from the brain to the balance, from a remote location, and have organizational structures that drive business growth. The innovation of Knowledge Management control system gives companies a huge competitive advantage over its competitors. By moving the management practices from the industrial age into this electronic age we increase the performance of any business by implementing exceptional risk management practices.

Knowledge Management Control System Model

A control system over Knowledge Management model is imperative to ensure viability of predetermined meanings, predefined actions and pre-specified outcomes.

In this ‘complete picture’ Knowledge Management Control System Model, business branches spread at various locations, often various countries or continents are linked to a central Hub called knowledge Management control centre. All information’s pertaining to day-to-day activities and other planning and implementation works are sent to the hub thru various e- sources. The acquisition centre will collect all these into and process at control centre. The information’s are inter-linked and whenever necessary, the ‘complete picture’ is retrieved by the decision making authority

‘Complete Picture’ Model

Knowledge worker are largely self managed problem solvers, as a result, the nature and scope of management has changed. Instead of resting the decision making authority in the hands of a few members of the organization, management is performed by everyone. Most of the employees plan, organize, lead and control themselves as they solve problem at their worksite, with the help of Knowledge Management Control System. For example let us see a case.

Zen Agro is an MNC having farms producing agricultural products more or Less in all hot and humid countries in the world. Their products are ranging wide from ornamental flowers to oil seeds. The working knowledge and information in their various stations are huge. With the help of Knowledge Management Control System’s complete picture’ model, they acquire and accumulate data at their South African head Quarters. The data are not inter-related when received. But, it’s interesting to know how knowledge management has helped them encounter two problems.

Ohio Bhass in the farm manager Zen agro in Thailand. A chemical he has used to control a particular insect aggravated and increased the growth effect of a weed growing in the farm and this information was registered with the control centre. Six months later Research manager Thomson, in Tanzania farm station was looking for some base info to decide on a fertilizer he has to use to increase the growth rate of a grass variety to feed the cows in their diary. He was delighted to see the information provided by Ohio bass and decided on that chemical as the ward he has mentioned is of the same family of the grass Thomson needs. From there on, Thomson increased his productivity and From the information he registered with the control centre Ohio bass started marketing the weed that grows in abundant in his farm as cow feed. Hence, we can understand, Knowledge Management Control System distributes the information to the places where it is necessary and helps in decision making.

Why Knowledge to be controlled?

Consistency is imperative for ensuring homogeneity of processing of the same information in the same manner to ensure the same outcomes and is achieved by minimizing criticism and questioning of the status quo. However, this may take its toll by suppressing innovation and creativity. Even despite organizational control that demands absolute conformance, knowledge worker’s attention, motivation and commitment may moderate or intervene in its influence.

Control is often based on rules and hence is difficult to maintain in a world where competitive survival often depends on questioning existing assumptions. Given an environment characterized by radical and discontinuous change, the survival of the organization would hinge on ongoing assessment of assumptions underlying the business logic as well as ensuring that the definition of business performance outcomes is aligned with the changing market conditions, consumer preferences, competitive offerings, business models and industry structures.

Organizational controls tend to seek compliance with predefined goals that need to be achieved using predetermined best practices and standard operating procedures. Such control systems tend to ensure continuity by enforcing task definition, measurement and control, yet they may inhibit creativity and initiative. Enforcement of such controls is essentially a negative activity because it defines ‘what cannot be done’ and reinforces a process of single-loop learning with its primary emphasis on cruor avoidance.

Hence design of new control system architectures needs to take into consideration ambiguity, inconsistency, multiple perspectives and impermanency of existing conformation. We can say that the traditional external control systems are slowly transitions into a ‘self-control’ system in management.

The ‘Command and control’ system has proved its inadequacy in pulling efficient performance from employees. A self controlled motivated performance and decision making is earning its importance in knowledge management.

Knowledge Management Solutions

Knowledge Management Solutions rely heavily on the human behaviour and cultural aspects of business rather than on computer systems and technology. As the popularity of Knowledge Management increased, the number of tools and methods aimed at supporting Knowledge Management has soared. The main challenge faced by the business houses is to find out which tolls or methods are suitable and efficient for them.

Next Generation Knowledge Management control systems

Knowledge Management control in future will be cultivating commitment of knowledge workers to the organizational vision. As it becomes increasingly difficult to specify long-term goals and objectives, such commitment would facilitate real-time strategizing in accord with the organizational gasman and its real-time implementation on the front lines. Knowledge workers would need to take autonomous roles of self-leadership and self-regulation because they would be best positioned to sense the dynamic changes in their immediate business environment compliance will lose its effectiveness as the managerial tool of control as managers removed from the front lines would have less knowledge about the changing dynamics for efficient decision making. Managers would need to facilitate the confidence of knowledge workers in acting on incomplete information, trusting their own judgments, and taking decisive actions for capturing increasingly shorter windows of opportunity. In the new world of business, the control over employees will be ultimately self-imposed.

Management Control with Reference to Risk Management

In day today life manager and employees practice risk by making decision in different situations. Both in our personal life and business life our decisions are based on variety of factors. In business life risk management is not just a passing trend. It is dynamic and being driven by both governance issues and the demands of the citizens. Risk management does not have to be complex. It can be tailored to meet the needs of the organization in its early stages and can be modified to the level of satisfaction and comfort as the process grows.

Managing risk is a systematic and proactive approach. This means that high risk exposure areas are to be understood, managed and controlled to an acceptable level of exposure so that the organization is properly protected to minimize negative consequences.

Risk specialists have traditionally focused mostly on important causes of risk such as weather, diseases and natural calamities and ways to deal with risk. Risk management has paid little attention to human resource calamities such as chronic illness of an employee, accidental death or impact of interpersonal relationship on business and families. But it is the fact that human resources affect most production, financial and marketing decisions.

The Human Resource Management / Risk Management Interface

Like risk, human resources are pervasive in the business. Human Resource Management is most effective when integrated with decision making throughout the business. This leads to recognition that such production, financial and marketing decision has a human component or influence. Which choice is to be made, how the decision is to be carried out, the follow up and monitoring depends on people. Isolating management team and employee issues from production, financial and marketing management frustrates people and creates unnecessary risk in business.

Human Resource Management is a process that can be broken down into specific activities: jab analysis, writing job descriptions, hiring, orientation, training, employer/employee interactions, performance appraisal, compensation and discipline.

Human resource activities lead to four important implications for risk management.

First, these activities are necessary to keep human resources in harmony with the risk management tools adopted by the management team. Risk management decisions are carried out by people. Placing the right people in right place, training, motivation and rewards are essential to success in risk management.

Second, human resource calamities, e.g., chronic illness, accidental death, interpersonal relationships can create risk in business. To avoid risk careful and appropriate risk management decisions are to be taken by risk specialists. Risk management should anticipate the likelihood of human resource calamities. Human resource contingency planning needs to be an internal part of the risk management.

Third, no management team stays together indefinitely. Every organization will eventually have different managers or be out of business. Management succession is a significant source of risk. Human resource considerations, plus legal and financial considerations, directly affect success in management succession and thus risk management.

Fourth, human resource performance evaluation should be tied to risk management. Risk management strategies are carried out through people. Human resource failures can cause the best planned risk management strategies to fail. Risk management depends on explicit duties being specified in manager’s job descriptions, delegation of power and authority to manage risk following indicated guidelines, and responsibility at the action level or risk management.

Role of Managers in Risk Management

The effective integration of risk management and human resource management requires that managers have certain skills. Most important are: leadership, communication, training, motivation, conflict management and evaluation.

Leadership and control

Every human resource manager has responsibility of leadership. No group of people can come close to their goal without effective leadership. Planning, organizing, staffing, and controlling can substitute some extent of leadership. Delegation of authority and responsibility and other tools of empowering employees decrease the need of leadership. Motivation, trust, and careful development of procedures and policies are also helpful. Still, leadership is necessary.

Communication

Communication is an essential skill for effective human resource management and risk control. In human resource management, clear messages, listening and use of feedback are especially important. Interpersonal relations, interviewing in hiring process, building rapport in the management team and with employees, orientation and training, performances appraisal, conflict resolution and discipline all requires in communication.

Training

Training helps people to learn. Effective training requires teaching skills, an understanding of how adults prefer to learn, practices, communication a systematic approach and evaluation of whether training has been effective.

Motivation

Motivation of employees challenges every manager. Employee motivation helps the organization to accomplish its goal and also helps workers to accomplish their career goals. The managers use a combination of understanding and satisfying employee needs, compensating fairly, making it possible for employees to do their jobs with minimum frustration and treating employees equitably. Overall it reduces the risk as well improve the effectiveness of the organization.

Conflict

Conflict is inevitable among employees, between employees and the management team and among management team. Managers must learn to deal with conflict rather than to avoid it. Conflict management strategies provide the management team positive steps for addressing the conflict. Effectiveness with the strategy is an essential skill for managing human resource as well as to risk control.

Evaluation

Most employees have keen desire for evaluation i.e. information about their performance. Many supervisors find it extremely difficult to share performance evaluation in a honest and helpful manner. Supervisors lacking evaluation skills combat their frustrations by postponement, inflated evaluations and vague communication. Both supervisors and employees need training in evaluation for making it pleasant for both parties.