Human Resources Accounting And Financial Performance Of Banks In Nigeria

Project and Seminar Material for Accountancy / Accounting

Human Resources Accounting And Financial Performance Of Banks In Nigeria


Abstract


The authors x-rayed the relationship between human resource accounting (HRA) to financial performance of banks in Nigeria. It is believed that a well-developed system of HRA could contribute significantly to internal decisions by management and external decisions by investors. The authors adopted the survey research design. An instrument was designed using the 5-point Likert scales. The instrument (questionnaire) has 17 items. A total of 22 samples were drawn from the target population using the simple random sampling technique. Out of the 22 questionnaires administered, 21 were returned upon which the analysis was based. This represents 96% response rate.

The Chi- square statistical technique was used to test the hypothesis at 5% alpha level. It was found that HRA is a major factor in the financial performance of banks. It is also empirically verified that HRA value in the balance sheet of organization does help the organization make more rational decisions. HRA should be made a necessary element of financial reporting. The authors recommended the necessity of recognizing human resources asset in the financial statement of financial position and using current cost to measure it; human resource cost should be reported in asset accounts rather than as expenses; effort to improve HRA should focus on the value of quality management, since it is positively related to the future operating performance of the banking industry.

This study concludes that a well-developed system of HRA could contribute significantly to internal decisions by management and external decisions by investors Fajana (2002).


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. 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. 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. (Prabhakar, 1993).

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”. 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.

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. (Flamholtz, 1971). 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. (Flamholtz, 1999).

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. (Karl-Erik Sveiby, 2004).

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. (Anjorin B, 1992). It is through the combined and concerted effort of people that monetary and material resources are harnessed to achieve organizations goals. (Likert R, 1971). 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. Infact, 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.

The nature accrues to the firm over a long period i.e. as long as the employee remains with the firm as a result of human resources accounting. Hence such costs should be capitalized and amortized over the entire period so that the Balance sheet gives a true and fair view of the state of affairs of a business. (Brummet, 1983). Since human resources are capable of enlargement

over a period of time, there should be innovative investment in its people and how the value of people changes over a period of time. Human resources accounting is one of such methods which endeavour to reduce the cost, measures and improve the value of people to an organization.

The link between human resources policies and organizational performance is the use of employee surveys combined with benchmarking over the years. When employees are viewed as assets rather than simply costs, there is a positive impact on an organizational performance. A mix of financial and non-financial measures (actual versus budget, cash flow, customer satisfaction, economic value added, employee satisfaction, employee turnover, safety, sales and shareholders total return) leads to improved organizational performance.


1.2 Statement of the Problem

Despite the fact, that there is a high growth rate in human resources accounting in every industry, there is scarcity of literature devoted to studying the impact of human resources accounting in the banking industry particularly in Nigeria. The literatures used have not been able to address the relationship between human resources accounting and its importance to in organizational performance. Banking industry as a heart of economic development in any country with its major resources as human resources, there is a need to study how the industry can utilize its human resources to achieve its set goals or objectives.


1.3 Objectives of the Study

The main objective of the study is to examine and investigate the impact of human resources accounting on the performance of banks in Nigeria.

Other specific objectives are to:

  1. To determine the relationship between human resources accounting and the financial performance of banks in Nigeria.
  2. To determine the significant influence of human resources accounting in the banking industry.
  3. To proffer solutions to the problems affecting the system of human resources accounting and the financial performance of banks in Nigeria.
  4. To identify problems affecting the system of human resources accounting and financial performance of banks in Nigeria.
  5. To determine effective system of human resources accounting to the financial performance of banks in Nigeria.

1.4 Research Questions

In the course of carrying out this research, the following questions shall be provided answers for.

  1. Is there any relationship between human resources and the performance of banking sector?
  2. What is the effective system of human resources accounting in banking industry?
  3. What are the problems affecting the system of human resources accounting in banking industry?
  4. What is the relationship between human resources accounting and economic value of people to the banking industry in Nigeria?
  5. What are the importances of human resources accounting in the financial performance of banks in Nigeria?

1.5 Research Hypotheses

During the course of study, the following research hypotheses shall be tested.

  1. Ho: There is no relationship between human resources accounting and the performance of banks.
    Hi: There is a relationship between human resources accounting and the performance of banks.
  2. Ho: Human resources accounting is not effective in the banking industry.
    Hi: Human resource accounting is effective in the banking industry.
  3. Ho: There is no problem confronting human resources accounting in the banking industry.
    Hi: There is problem confronting human resource accounting in banking industry.
  4. Ho: There is no relationship between human resource accounting and economic value of people to the banking industry.
    Hi: There is a relationship between human resource accounting and economic value of people to the banking industry.
  5. Ho: Human resource accounting is not important to the financial performance of banks in Nigeria.
    Hi: Human resources accounting is important to the financial performance of banks in Nigeria.

1.6 Significance of the Study

At the end of this study, the banking sector will learn how to utilize its human resources to the maximum advantage. Also, the findings of this study will enable the captains of banking industry to be sensitive to the need of the human resources and also to adopt strategy to decide effective leadership in order to optimally utilize their human resources.


1.7 Scope and Limitations of the Study

In this study, there is bound to be limitation to be encountered during the course of this study. These limitations need to be stated to aid the users of the research findings for effective decision making.

Limited time available to carry out the research which affects the sample signs used for the research proposal.
The limited funds that affect the coverage of the area in which the research is carried out.


1.8 Definition of Terms

i. Accounting:

It is the systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.

ii. Resources:

Something to be used to help achieve an aim.

iii. Organization:

An organized group with a particular purpose.

iv. Amortization:

The gradual payment or payoff of debt.

v. Depreciation:

Reduction in value or wear and tear of an asset over time.

vi. Communication:

A means of sending or passing information.

vii. Investment:

The act of using money or spending money or effort In order to earn a profit or achieve a result.

viii. Versatile:

Been able to do or be used for many different things.

ix. Strategy:

A plan designed to achieve a long term aim.

x. Efficiency:

Working productively with no waste of money or effort.

xi. Wealth:

A large amount of money and valuable possession or the state of being rich.

xii. Motivation:

A state of being stimulated or interested in.

xiii. Potential:

Capable of becoming or developing into something.

xiv. Productivity:

The efficiency with which things are produced.

xv. Human Capital:

The set of skills which an employee acquires on the job through training and experience which increases his value in the market place.


Chapter Five


Conclusion, Findings and Recommendations

5.1 Conclusion

The study has shown that firms should ensure proper accounting for investment in human assets while such expenditures should be capitalized rather than written off to profit and loss accounts. Human capital value development, contributes significantly to the overall performance and survival of Banks in Ogun State. The failure of professional accountants to treat human resources as assets just like physical and financial assets led to the emergence of Human Resources Accounting (HRA). (Eddie and Peter, 2002). Human Resources Accounting advocates the measurement and reporting of the cost and value of people and their capitalization in organization resources rather than writing them off to profit and loss account. The value of human resource component of all organizations are treated in the conventional financial statement by writing off expenditures on human capital development to the profit and loss account rather than being capitalized and shown in the balance sheet.


5.2 Findings

  1. The study revealed that majority of employees, directors and shareholders 219(68.4%) have tertiary education and majority (51.2%) aged between 26 and 35 years. The majority 122 (38.13%) have annual salary of N200, 000 – N300, 000. Majority – 69 (66.83%) of the Banks workers and directors have attended one form of training or the other in recent time.
  2. The study revealed that majority 315 (98.5%) confirmed human resource team is vital to the overall performance of Banks. It was also revealed 314 (98.4%) that human resources expenditures should be capitalized and treated as assets. 313 (98.4%) of the respondents revealed that the management of Banks is the major determinants of Banks performance in Ogun State. The Banks expended an average of N613, 636.28 per annum, per staff as salaries and wages. The average staff strength was eighteen.
  3. While the Banks reported on their staff training activities, they have failed to reveal the amount expended on staff training and development.
  4. The study also shows that human capital development has positive and significant impact on overall performance of Banks in Ogun State and answers the research question in section one of the study. Specifically, employees‟ compensation in terms of salaries, wages and staff training and development has positive and significant impact on the survival and overall performance of Banks in Ogun State.

5.3 Recommendations

  1. The accounting profession all over the globe should create a framework in the balance sheet to recognize treatment of human resources and appropriate value to be attached based on the inherent qualities of human capital.
  2. Recognizing human capital in financial statement would show accuracy in profit declaration.
  3. The study recommends that firms can significantly improve on their performance by investing in their employees and seeing the payment of salaries and training cost as investment expenditures for the development of human asset towards enhancing the productivity of human asset. Human capital expenditures should be perceived as investment costs that can be capitalized and included in the balance sheet rather mere operational cost to be written off to the profit and loss account.

This study recommends for domestication of Human Capital Accounting practice in Nigeria through legislation and ensuring complete participation of all stakeholders as this will help in strengthening investment and related decision, also international accounting standard (38) on accounting for intangible assets should be expanded to cover human resource or a new standard be develop to cater for Human resource practice in Micro finance banks and by extension enterprises in Nigeria.


Human Resources Accounting And Financial Performance Of Banks In Nigeria


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