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Practice of Human Resource Accounting in Banking Sector of Bangladesh

Article · June 2012

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 International Journal of Accounting and
Financial Management Research (IJAFMR)
ISSN:2249-6882
Vol.2, Issue 2 June 2012 14-23
© TJPRC Pvt. Ltd.,

PRACTICE OF HUMAN RESOURCE ACCOUNTING IN BANKING SECTOR

OF BANGLADESH

SYED MOUDUD-UL-HUQ1 & PANUEL ROZARIO PRINCE 2

1
Lecturer Department Of Business Administration, Mawlana Bhashani Science And
Technology University, Santosh, Tangail. 2 Lecturer, Department Of Business
Administration, Victoria University Of Bangladesh, 15/11/APanthapath,Dhaka.

ABSTRACT

Success and failure of corporate undertakings purely depends upon the human resources. Now-a-
days human resource is a prime concern for all the institutions especially for financial institutions as they
have required investing a huge amount of capital. In this context, it is worth while to examine human
resource accounting practices in corporate sector i.e. banking sector in Bangladesh. For the convenience
of completing the research paper successfully it has been prepared based on a sample of 25 commercial
banks and practice of human resource accounting has been measured on five broad indicators which
incorporates several sub indicators. In the survey it has found only few banks had mechanism to practice
of human resource accounting in 2010 and now in 2011 almost the same number of banks has such
mechanism and score improved by .09 due to the some enhancement program in this regard and it has
been found that banking sectors in Bangladesh are often alleged as too vague in the issues of practicing
human resource accounting.

KEY WORDS: Human Resource Accounting (HRA), Practice, Commercial Bank, Indicators, Weighted
Scoring Model.

INTRODUCTION

The concept of HRA is one of the branches of modern accounting systems. Earlier, this
accounting system developed by an Italian monk, Luca Paciolo who used his analytical skills to discuss
the system of double-entry accounting. By laps of time, the span of accounting has been accelerated and
as a part of it; the demand of the public and the organizations have turned into diversification in
practicing of accounting systems. Most of them want to know the actual cost of human resources and
future economic value of human resources because they have required investing a huge amount of capital
to develop human resources. As a result of this human resource accounting has been developed.
Practice of Human Resource Accounting in Banking Sector of Bangladesh 15

However, from the various sources of data it is agreed that Rensis Likert, R. Lee Brummet,
William C. Pyle and Eric Flamholtz are the most prominent pioneer of developing human resource
accounting through formulating of concepts and methods. One outcome of the research (Brummet,
Flamholtz & Pyle, 1968) the term “Human Resource Accounting” was used for the first time. From the
analysis of different literatures we see that the practice of HRA has been developed with five phases,
these are:

1st phase: (1961-65): Introduction of concepts

2nd phase: (1966-71): Development and formulation of models for HRA.

3rd phase: (1971-76): Growth of research for HRA.

4th phase: (1976-1980): Declining the interest for HRA.

5th phase: (1980 onwards): Improvement of practices.

Generally, it is the managerial technique which helps the management to identifying cost for HR
and considering its future economic value to the organization so that strategic business decisions can be
taken regarding human resources and providing information to the stakeholders. If such accounting is not
done, then the management runs the risk of taking decisions that may improve profits in the short run but
it will cause immense long term impairment by reducing their productivity and by creating salary
distortions across the organizational structure in future. So, by the practicing of HRA an organization can
be benefited in case of -

* cost effectiveness

* ensuring the best use of human resources

* sound & effective basis for human asset control

* Providing information to the stakeholders about, how much value addition is

created by the organization to country’s human resource as part of the
corporate social responsibility.

* Enhancing the internal assets of the particular concern by considering the HR as assets.

* The productivity of human resources.

Though the practice of HRA is enough significant to implement in any organization but from the
early stage of practicing HRA is struggling and vague in the issues of acceptance over the world. As a
16 Syed Moudud-Ul-Huq & Panuel Rozario Prince

part of it Bangladesh and its corporate culture has not yet been improved this practice at such satisfactory
level. Hopefully, it can be said that many organizations in Bangladesh has become aware of the
application of HRA and they realized that the practice of this mechanism will improve the quality of
human resources by considering their future earnings power. They also realized that if they can
implement this practice within the boundaries of organization then it can prevent the misuse and under-
use due to thoughtless, rather reckless transfers, demotions, lay-offs and day to day maltreatment by
supervisors or other superiors in the administrative hierarchy, efficient allocation of resources in the
economy, effecting economy and efficiency in the use of human resources and proper understanding of
the evil effects of avoidable labor unrest on the quality of internal human resources. Specially, the
majority responses of practicing HRA in Bangladesh increasing from financial institutions; where human
resources are the main elements to flourish the economy.

OBJECTIVES

In this paper an initiative has been taken to evaluate the present state of practicing HRA and to
determine the barriers and remedies for implementing HRA practice in banking sector of Bangladesh.

METHODOLOGY

As this study is pragmatic one, it uses primary and secondary data analysis to assess the practice
of HRA of financial institutions (i.e. commercial banks) in Bangladesh. For conducting this study we
have randomly selected 25 commercial banks out of 44 commercial banks. We have been composed data
from various books, journals, articles, published literature, periodical and annual reports. Moreover, we
have been collected data from the skilled personnel of HRD and Finance and Accounts Dept. of various
commercial banks through providing semi-structured questionnaire. This paper has been analyzed by
using Weighted Factor Scoring Model on the basis of five broad indicators along with its some of sub-
indicators and considered the data in between 2010 and 2011 in order to make this research work more
informative and reliable.

EXPLANATION OF INDICATORS

To measure the status of human resource accounting practice in banking sector five indicators
have been used. These are as follows-

• Nature of HRA- This indicator is used to get the idea about the priority concern of banks
towards practicing HRA.
Practice of Human Resource Accounting in Banking Sector of Bangladesh 17

• Valuation of HR- This indicators focus on about the valuation of HR with help of cost
approach, economic value addition approach or the other approach i.e. NPV approach or
standard cost approach.

• Financial statement and HRA- This indicator indicates the treatment of cost for HR (i.e. the
cost for recruitment, selection, hiring, training and development of human assets). It also
indicates whether the transparency and financial accounting disclosure followed by the bank
or not about HRA.

• Auditing Practice- This indicator indicates that the practice of auditing in consideration of
HR.

• Enhancement program for practicing of HRA- It indicates the training program to make the
people understand about the concept of HRA and make them cautious about the benefit for
practicing HRA in the organizations.

These indicators are developed for the convenience of making this paper more relevant and
reliable (included with sub-indicators: details are provided with responses in the table no-1) to get the
idea of level of practicing HRA in banking sectors in Bangladesh. Indicators have been prepared in light
of relevant issues of practicing HRA. Here an initiative has been taken to get idea whether any progress
has taken place in the area of practicing HRA in banking sector of Bangladesh.

WEIGHT ALLOCATIOON AND SCORING OF INDICATORS

All five indicators are equally weighted in case of scoring overall score and each sub indicator is
also equally weighted to score each indicator. For example to calculate the score of the indicator titled as
“Nature of HRA” there are three sub indicators: 1st is “Having the priority concern of banks towards
practicing of HRA”, the 2nd is “Having any designated person assigned or any department in the bank”
and the last one is “Having any isolated segment of cost regarding HR” and these three sub indicators are
weighted equally. Here is to be noted that the third indicators have two sub indicators but the first sub
indicator “Application of cost for HR” have different dimensions and all the dimensions of this sub
indicator is weighted equally and then consider the second sub indicator for allocation of weight. In this
manner according to the nature of response score has been allocated to each indicator as the score can be
attributed a well balanced reflection of reality.

Following weighted Factor Scoring Model is used to calculate the score of each indicator and the
overall score.
18 Syed Moudud-Ul-Huq & Panuel Rozario Prince

Here,

Si = Total score

Sij = Score of the jth indicator in case of overall score and score of the jth sub indicator in case of
each indicator.

Wj = Weight of the jth indicator in case of overall score and weight of the jth sub indicator in case
of each indicator.

Score is calculated on scale of 1.00

FINDINGS AND ANALYSIS

To get the idea of level of practicing HRA in banking sectors in Bangladesh five indicators have
been prepared in light of relevant issues of practicing HRA which has already been mentioned earlier.
However, to analyze the present state of practicing HRA the table-1 shows the responses of practicing
HRA on each indicator.

Table 1 The number of responses of practicing HRA on each indicator.

Indicator 2010 2011

1.0 Nature of HRA

1.1 Having the priority concern of banks towards practicing of HRA 4 10

1.2 Having any designated person assigned or any department in the

0 2
bank)

1.3 Having any isolated segment of cost regarding HR 2 5

2.0 Valuation of HR

2.1 Cost Approach 25 20

2.2 EVA Approach 0 2

2.3 Others 0 3
Practice of Human Resource Accounting in Banking Sector of Bangladesh 19

3.0 Financial statement and HRA

3.1 Application of cost for HR:

3.1.1 Income Statement Item 23 20

3.1.2 Balance Sheet Item as Assets (i.e. intangible or other assets) 2 5

3.2 Transparency and financial accounting disclosure about HRA

0 5
(voluntary)

4.0 Auditing Practice

4.1 Regular practice of auditing 25 25

4.2 Is there any emphasis to asses the value of HR? 1 4

4.3 Is there any practice of auditing about HRA? 0 0

5.0 Enhancement program for practicing of HRA 0 4

The priority concern of banks towards practicing of HRA is increasing in 2011 than the year
2010. There is no assigned department to handle this technique to implement in recent past. In case of
valuation of HR only two banks apply the EVA approach where 20 banks follow the historical cost
approach or traditional approach of accounting. It is necessary to mention that 5 banks recently move the
cost for HR to treat them as assets and shown in balance sheet where the other shown in income
statement as revenue expenditure under the head of human resource development cost or other expenses.
As the treatment of this in income statement, it doesn’t show the actual financial position of the concern
and it leads to decline the profit.

Financial statement of each bank is audited by the qualified chartered accountants. But it is a
matter of stun and awe that there is no ground measurement for valuation of HR or no practice of
auditing regarding with HRA. In recent year four banks has given the emphasis to asses the value of HR.

In accordance with the greater consciousness of few banks it undertakes some enhancement
program to implement HRA as a measuring tool of HR and treat them as valuable assets.

From the table-2 it is found that in 2010 among the five indicators “Enhancement program for
practicing of HRA” the fifth indicator scored the marginal but in 2011 it has scored to its highest extent
that means 0.16. This has happened because of increasing the importance at the top level of management
about the practice of HRA but this not enough to implement HRA it requires a complete guidelines by
IFRS and IAS.
20 Syed Moudud-Ul-Huq & Panuel Rozario Prince

Table 2 This table provides the score on each indicator and overall practice of HRA in the bank.

Indicator Score-2010 Score-2011 Improvement

Nature of HRA 0.08 0.23 0.15

Valuation of HR 0.33 0.33 0.00

Financial statement and HRA 0.25 0.35 0.10

Auditing Practice 0.35 0.39 0.04

Enhancement program for practicing of HRA 0.00 0.16 0.16

Grand Score 0.20 0.29 0.09

However, this process is not all perfect as there are some deviations. Have a close look on the
indicators “Nature of HRA” and “Financial statement and HRA” it can be observed that level of
progress has taken in two years (from 2010 to 2011) by 0.15 and 0.10 and the indicators’ score were 0.08
(2010), 0.23 (2011) and 0.25 (2010), 0.35 (2011) respectively. There is no improvement of second
indicator while the third indicator slightly moves positively.

Organizations success not only depends on efficiency of professional management body it is also
very important to have a mechanism to practice of HRA. In the survey it has found only few banks had
such mechanism in 2010 and now in 2011 almost the same number of banks has such mechanism and
score improved by .09 in this regard.

The overall practice of HRA in banking sector has not yet been at the satisfactory level because
most of the resource personnel don’t have the clear concept of HRA. In this point of view it is limited
within the circle of complexities in the issues of its implementation.

BARRIERS FOR IMPLEMENTING HRA PRACTICE IN BANKING SECTOR

The problems involved for implementing HRA practice are as follows:

• Quantification of human resource: There is no specific measurement tool. Since the

productive life of HR is uncertain, future benefit derived by him also is uncertain. As the
useful life of human resources is uncertain, amortization of human resource cost is not
possible.

• Lack of standard norms: There are no standard norms in case of practicing HRA as like as
finance or accounting with which actual performance can be compared.

• Supremacy of financial accounting: Where the existence of financial accounting the interest
of practicing HRA resulting the poor scope to implement.
Practice of Human Resource Accounting in Banking Sector of Bangladesh 21

• Additional cost: Most of the financial analyst think the practice of HRA require the additional
cost which lead the concern become expensive and non-profitable.

• Poor concept of HRA: Resource personnel in the vital areas of business functions i.e. human
resource, marketing, production, planning and development are unable to understand and
recognize accounting as well as finance functions of an organization. But the case is different
in case of human resource in the areas of finance and accounting. These human resources
know the wide scope of finance and accounting and they do accordingly to their level best.
But unfortunately in the context of Bangladesh the different people took place in the bank
that have different educational background as these the human resource managers have little
knowledge of HRA that is not enough to improve of practicing HRA in regular basis.

• Lack of international accounting standard regarding HRA: Accounting has been developed
day to day and it innovate new branches of accounting and issues new standard but still there
is no complete and reliable standard of practicing HRA.

• Lack of guidelines of BB towards practicing HRA: BB has not yet undertaken initiatives to
practice HRA mandatory at all financial institutions (i.e. commercial banks) and disclose all
about the information of HR for transparency.

SUGGESTIONS TO OVERCOME THE BARRIERS FOR IMPLEMENTING HRA

PRACTICE IN BANKING SECTOR

The probable suggestions to overcome the barriers for implementing HRA practice in banking
sectors are as follows:

• Quantification of human resources problem may be solved by applying economic value

approach or present value approach.

• HRA is a modern branch of accounting so it is required the standard norms like accounting
and finance with which actual performance can be compared. By giving the emphasis to
practice of HRA more in the various concern then the banks can assist to formulate a standard
for its own.

• Supremacy of financial accounting can alleviate by making the human resources more
conscious about the significance of practicing human resource accounting.

• The perception of the financial analysts should be changed towards to the practice of HRA
because the practice of HRA may lead the cost at bearable limit in the short-run but it will
lead the maximum benefit in the long-run.

• At least a designated person or a department should be assigned in practicing of HRA in the

bank.
22 Syed Moudud-Ul-Huq & Panuel Rozario Prince

• The period of amortization of human resource assets may be taken as the certain percentage
of effective useful life of the individual personnel of the organization.

• By enforcing law, legislative problem of practicing HRA may be solved. International

Accounting Standards Board should develop and issue standards immediately regarding the
practice of HRA.

• The Ministry of Finance should be into the driving force in promoting the HRA practices in
public sector as well as in private sector financial and non-financial organizations. Moreover,
the Ministry of Finance should set follow-up actions to further promote the introduction and
implementation of the HR-statements, follow and support the completing of the HR-
statements, carry out the necessary HRA development programs, take care of education and
training, and provide information for comparison.

• Bangladesh Bank should undertake initiatives to practice of HRA obligatory at all financial
institutions (i.e. commercial banks) and disclose all about the information of HR for
transparency. This central bank should provide guidelines for HRA as it has provided earlier
which really a better path to perform in the competitive environment.

• Above all the commercial banks should come forward towards to practicing HRA and set
their facilities which supports to maintain HRA.

CONCLUSIONS

The commercial banks in Bangladesh are a long away from the touch of proper practicing of
Human Resource Accounting. In addition, banking sectors of Bangladesh are often alleged as too vague
in the issues of practicing human resource accounting along with a series of problems to implement.

But, if the banks can formulate standards according to their priority basis to compare the actual
performance, undertake training and development programs for better understand the utility of practicing
HRA, Bangladesh Bank provides guidelines towards to practicing HRA, IASB issues a standard for
implementing HRA, then the problems of practicing HRA can alleviate soon and commercial banks in
Bangladesh may continue to boost the economy.

REFERENCES

a) Rahman. Abdur (2005): “Human Resource Accounting its Reporting Practices”, Pakistan
Journal of Social Science, Vol. 3(6), p (889-891)

b) Maria L. Bullen and Kel-Ann Eyler, “Human resource accounting and international
developments: implications for measurement of human capital”, Journal of International
Business and Cultural Studies, p2
 Practice of Human Resource Accounting in Banking Sector of Bangladesh 23

c) Anita Mishra and Monalika Rath, “Role and Significance of Human Resource Accounting in
the Era of Economic Recession”, Global Institute of Management, Bhubaneswar, India

d) American Accounting Association Committee of Accounting for Human Resources (1973):

“Report of the Committee on Human Resource Accounting”, The Accounting review
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e) D. Prabhakar Rao (1993): “Human Asset Accounting: An Evaluation of the Indian

Practices”, ASCI Journal of Management, Vol. 22

f) Eric G. Flamholtz (1971): “A Model for Human Resource Valuation: A Stochastic Process
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g) Eric G. Flamholtz (1999; Third edition): “Human Resource Accounting: Advances in

Concepts, Methods and Applications”, Kulwer Academic Publishers

h) Karl-Erik Sveiby (2004): “Methods for Measuring Intangible Assets”, Retrieved from
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i) Lev B, Schwartz B A (1971): “On the Economic Concept of Human Capital in Financial
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j) Likert R. (1971, May): “Human Organizational Measurements: Key to Financial Success”,

Michigan Business Review, p1-5

k) R.G.Barry Corporation (1971): “Annual Report”, (Details in Flamholtz 1999)

l) Gunnar Rimmel (2004): “Perceptions of Human Resource Disclosures - Evidence from

Annual Report Users of Two Corporations”, Journal of Financial Reporting, Regulation and
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m) Smith Jr., J. M. and Skousen, K. F. (1995): Intermediate Accounting, (Latest edition),

(Comprehensive Volume), College Division, South-Western Pub. Co.

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