The Problem with Accounting for Employees as Costs Instead of Assets

Source: Ethan Rouen, Harvard Business Review, October 17, 2019

You hear it all the time: companies touting employees as “their most valuable assets.” But under current accounting standards, that is simply false. By definition, employees are not assets since companies do not have control over them. Workers must convert raw materials – be they commodities or blank computer screens – into finished inventory to be paid, but if these workers want to quit, they can take their skills and training with them.

The distinction matters because it allows companies to hide behind platitudes and not disclose whether they invest in their workers in ways that promote long-term success. The current lack of disclosure related to employment practices prevents policy makers and investors from rewarding or punishing companies for how they actually treat their employees. Right now, there’s no universally accepted way to track the management of human capital. We need a new way to account for labor so that we can track and reward companies for how they actually treat their employees.