Proceedings of the 3rd European Conference on Intellectual Capital

A Multi-Stakeholder Perspective on <strong>the</strong> Value Relevance <strong>of</strong>,
Human Capital; Practice <strong>of</strong> Human Capital Accounting and
Human Capital Disclosure: A Review <strong>of</strong> Existing Literature
Krishanthi Ganga Vithana, Riham Rizk and Amir Michael
Durham Business School, Durham University, UK
v.k.vithana@durham.ac.uk
riham.rizk@durham.ac.uk
a.e.iskander@durham.ac.uk
Abstract: The potential <strong>of</strong> employees to generate more and more wealth for firms, identified by scholars as <strong>the</strong>
Human Capital (HC) <strong>of</strong> <strong>the</strong> firm, has become a vital factor in determining success in turbulent business
environments. Though ample research evidence are found on aspects such as HC accounting (Becker, 1962;
Brummet et al 1968; Lev and Schwartz, 1971; 1972; Flamholtz, 1971; 1972a; 1972b; 1972c), accounting for <strong>the</strong>
worth <strong>of</strong> employees (Roslender and Dyson, 1992; Roslender, 1997), HC reporting practice and disclosure
(Abeysekera, 2008; Abeysekera and Guthrie, 2004; Subbarao and Zeghal 1997), <strong>the</strong> behavioural impact <strong>of</strong>
human capital disclosure (Ax and Marton, 2008; Lajili and Zeghal, 2006;), a consensus on HC accounting and
disclosure practice has not been achieved via a standard set <strong>of</strong> guidelines. Consequently, a practical gap is
observed between <strong>the</strong> attempts <strong>of</strong> scholars on developing methodologies and frameworks to practice HC
accounting and reporting and subsequent voluntary practices by listed firms. Fur<strong>the</strong>rmore, although <strong>the</strong> problem
<strong>of</strong> information asymmetry has arguably been reduced via voluntary disclosures, <strong>the</strong> value relevance <strong>of</strong> HC
disclosure has rarely been explored in <strong>the</strong> existing literature, particularly from a multiple stakeholder perspective
due to conflicting interest amongst stakeholder groups (Lev, 1988; Petersen and Plenborg, 2006; Zhou, 2007;
Leuz and Verrecchia, 2000). Addressing <strong>the</strong> above identified practical and research gap, this review work
critically evaluate existing literature on <strong>the</strong> value relevance <strong>of</strong> three aspects; HC, HC accounting practice and <strong>the</strong>
disclosure <strong>of</strong> HC information in <strong>the</strong> annual reports <strong>of</strong> <strong>the</strong> firms. Through this critical review, ultimately, <strong>the</strong>
requirement <strong>of</strong> an objective mechanism to measure HC accounting and disclosure is emphasised and
additionally it is suggested that <strong>the</strong> balanced scorecard framework be utilised as a tool to capture <strong>the</strong> human
capital accounting and reporting practice specially in terms <strong>of</strong> discovering <strong>the</strong> value relevance.
Keywords: HC, HC accounting, HC disclosure, worth <strong>of</strong> employees, value relevance
1. Introduction
HC accounting has been debated by scholars over <strong>the</strong> past several decades. However, this
phenomenon has become a diversified research interest <strong>of</strong> many academicians and researchers even
to day (Abeysekera, 2006, Ax and Marton, 2008; Lajili and Zeghal, 2006). The concept <strong>of</strong> simply
treating <strong>the</strong> spending on people in valuing <strong>the</strong> economic pr<strong>of</strong>it under <strong>the</strong> neo classical approach has
been criticized by many researchers relying on <strong>the</strong> Marx’s labour <strong>the</strong>ory <strong>of</strong> “surplus value” where <strong>the</strong>y
have fur<strong>the</strong>r declared Marx’s labour <strong>the</strong>ory <strong>of</strong> value as a foundation for describing and explaining <strong>the</strong>
role and practice <strong>of</strong> financial reporting (Bryer, 1994). Additionally, many <strong>of</strong> <strong>the</strong> attempts to formalise
<strong>the</strong> practice <strong>of</strong> HC accounting started decades back through critical arguments on valuing <strong>the</strong> HC <strong>of</strong>
<strong>the</strong> firm on different bases (Brummet et al 1968; Lev and Schwartz, 1971; Flamholtz, 1971; Flamholtz,
1972a; Flamholtz, 1972b; Flamholtz, 1972c). Recent research evidence on <strong>the</strong> subject <strong>of</strong> HC has
focused on <strong>the</strong> HC reporting and disclosure aspect ra<strong>the</strong>r than <strong>the</strong> accounting and valuation
(Abeysekera, 2006; Abeysekera and Guthrie, 2004; Subbarao and Zeghal 1997; Ax and Marton,
2008; Lajili and Zeghal, 2006). Against this backdrop, this review paper has been divided into main
sections to critically review <strong>the</strong> literature on value relevance <strong>of</strong> HC, HC accounting and HC disclosure.
2. Human capital
HC is simply understood as <strong>the</strong> potential <strong>of</strong> employees <strong>the</strong>mselves to generate more wealth for
organizations in future which becomes surplus value over <strong>the</strong> returns <strong>of</strong> <strong>the</strong> o<strong>the</strong>r physical and
financial assets <strong>of</strong> <strong>the</strong> firm. In mergers and acquisitions this is treated under current accounting
practice as <strong>the</strong> goodwill <strong>of</strong> a firm. Due to <strong>the</strong> unique potential <strong>of</strong> employees, however, researchers
have argued that <strong>the</strong> spending on employees should not be treated as an expense in <strong>the</strong> year it is
incurred particularly due to <strong>the</strong> fact that some employee expenditures may generate returns over a
period <strong>of</strong> time (Brummet et al, 1968; Flamholtz, 1972a). Flamholtz (1972a). It is also claimed that <strong>the</strong>
value <strong>of</strong> <strong>the</strong> human resources is derived through <strong>the</strong> ability <strong>of</strong> employees to render service which
have economic value. The treatment for HC accounting by Lev and Schwartz (1971) is developed
similarly whereby HC is treated as “a source <strong>of</strong> income embedded in a person in <strong>the</strong> form <strong>of</strong> his brute
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