Human resources on the balance sheet: you must look beyond current accounting standards and look at how organizations build corporate value in today's business environment.

• Jurisdiction: United States
• Date: 01 October 2003
• Author: Goughnour, Roberta Clark
• Published date: 01 October 2003
• Author: Goughnour, Roberta Clark

What is the chance we will get caught? Suppose this question was being asked by a couple of 4 year olds sneaking cookies from the cookie jar. What would your reaction be? Would you have a different reaction if I told you this was a couple of teenagers considering vandalizing their school? In both cases, there is no way to know the severity of the consequences or the punishment. It could be quite minor or life-changing. Now suppose a member of your company's executive team is asking the question. How would you react?

The aftermath of the Enron and other corporate accounting scandals has been tough for American business. Investors are reluctant to put money into businesses because of the uncertainty of what the future holds. There are those who believe the development of corporate ethics programs, and implementing new Securities and Exchange Commission regulations, are the ticket to rebuilding consumer confidence in American business and, consequently, the U.S. stock market.

MANAGERS MUST ACT DIFFERENTLY

This sounds good in theory and may fool some of the people some of the time. Unfortunately, the problem is more complicated and deeply rooted than that. Implementing effective business management programs means causing business managers to act differently, and therefore effect lasting change in behaviors. Therefore, the issues causing ethical lapses are the function of current auditing and accounting standards governing how businesses reward employees. Most executive compensation plans reward employees who demonstrate the ability to meet short-term earnings goals. This discourages management from allocating resources to pro grams that will increase expenses in the short-run, even though the end result will be long-term savings and increased financial stability for the organization.

The reality is that current accounting standards are outdated and do not properly account for the true value of most modern corporations. Consequently, reward systems built on current financial measures are focused on the wrong goal. In order to truly understand the depth of this problem, one must look beyond current accounting standards and look at how organizations build corporate value in today's business environment.

ACCOUNTING PRINCIPLES OUT OF DATE

The financial accounting principles in use today were developed during a time when tangible assets such as plant, equipment and other machinery were the major part of an organization's value. Today however, most companies show less than 20 percent of their market value in tangible assets. The real value of the company is in intangible assets, such as customer and vendor relationships, copyrights and patents, research and development, etc. While it is true that these intangibles may have some monetary value on the company's financials, the resources used to develop these assets are frequently considered...