Wharton Professor Calls for Required Human Capital Accounting Disclosure

A recent Harvard Business Review article by Professor Peter Cappelli, Director of Wharton’s Center for Human Resources, discusses the influence accounting rules have on key human resource decisions. In a piece titled “How Financial Accounting Screws Up HR,” Cappelli argues that treating employee-related expenditures as expenses rather than investments distorts hiring, training, outsourcing and other human resource decisions. While expenditures for equipment, software and other organizational inputs are deemed to be investments and amortized over the period which the company expects to benefit for such investments, investments in training and development, inducement awards to attract new talent and compensation in general are treated as current expenses under GAAP even though the benefits from such investments accrue over multiple years.  

Cappelli hypothesizes that treating employee expenditures as current period expenses contributes to outsourcing of work to gig workers and contract employees that lack organizational knowledge and are less committed than regular employees.  He is also critical of the aggregation of employment costs in the broad category of “SG&A” expenses.  Cappelli advocates for the SEC to require disclosure of key employee measures, including workforce cost, turnover, and percent of openings filled from within – similar to what is likely to be included in the SEC’s forthcoming HCM rules (expected this spring).

While Cappelli’s advocacy for greater disclosure recognizes the importance of investments in human capital as important drivers of value creation, the disclosures recommended pose potential competitive risks and impose a significant data collection burden for companies without a compelling rationale for such disclosures. Companies currently disclose workforce information in their corporate citizenship reports, diversity and inclusion reports, and other disclosures tailored to the company business strategy and supporting talent strategy.  Replacing this principles-based approach with a highly prescriptive set of SEC-mandated human resource measures might distort investors’ understanding of a company’s approach to human capital management.