Accouwing. Organizations and Socierv, Vol. 1. No. 2-3, pp. 167-174. Pergamon Press, 1976.

Printed in Great Britain

SYSTEMSDYNAMICSANDHUMANRESOURCEACCOUNTING"
TREVOR GAMBLING
U~liversity of Birmingham
Abstract
Accountants all over the world are being told that their particular view of the world is too narrow.
Within this context. the article reviews the potentialities and problems of Human Resource
Accounting, and in passing, critically discusses some previous comments on more general behavioural
research in the accounting area. Particular consideration is given to the role which dynamic systems
models may serve and the paper reviews some of the authors initial observations and experiences in
the area.
Human resource accounting is by no means a
single topic for research. It contains large areas
which are not really interpretable in terms of
behavioural science, while those which can be
interpreted in that way can be seen to be very
interesting, of vital importance to good manage-
ment. but whose analysis seems to involve one in
most tendentious questions of philosophy, politics
and in the end of morals. Indeed, it seems possible
to argue that what distinguishes the accountant
from other scientists is this very desire to
encompass the whole physical and social world in
a single all-embracing system of analysis. This is
the same sort of claim as Newtonian physics makes
about the physical world alone: as is the case with
classical physics, a number of points of difficulty
suggest that the theories are not quite true - but
that doesnt prevent the general adequacy of the
explanations from assisting greatly in the solution
of many important practical problems.
However, there can be no doubt that at this
time accountants all over the world are being told
that their particular view of the world is too
narrow, and fails to show the influence or even the
existence of many factors which are of impor-
tance. In particular, critics seem to feel that their
analysis is purely economic in its interest and
neglects almost all social and behavioural issues.
One must ask why it is only recently that
businessmen and administrators have come to the
conclusion that there was a case for any sort of
extra economic accounting. Some might suppose
that it was because our ancestors were a
hard-headed and hard-hearted lot whose modus
operandi was to grab the cash and let the rest go
hang! Even if this were true, it would still require a
certain belief about how things worked - a model,
in fact. Essentially this would be that markets
were perfect, so that all the effects of any
activity were fairly reflected in the price system.
That is to say that there was no discrepancy
between the social net product and the private net
product and *externalities did not exist (or if
they did. they were kept within reasonable limits
by law or custom). When Pigou first raised the
latter debate it was thought that it was extremely
difficult to demonstrate either its truth or error,
but now most people need littie convincing of the
proposition that the price-mechanism is a faulty
instrument at least in an affluent, post-industrial
society.
Traditional accounting is very clearly based on
this perfect market assumption; indeed, one can
see that if the price mechanism really could take
care of all side effects, a simple listing of priced.
first-order transactions would be all that could be
said about the activity of an enterprise. Consider
how the American Accounting Association Com-
mittee on the Measurement of Social Costs (1974,
p. 99) neatly limits its remit:
We were concerned fundamentally with first order
effects only . . We were not concerned with social costs
in the traditional economic sense of Pareto optimality.
*An earlier version of this paper was presented at the Seminar on Human Resource Accounting held at the European
Institute for Advanced Studies in Management, Brussels. The research project discussed is financed by the British
Social Science Research Council.
167
168
TREVOR GAMBLING
This leads this committee to confine its discussion
to thi: possible need to report on the presence (or
absence) of specific programmes initiated by the
company in areas like training, community service,
environmental and consumer protection; the idea
that what the company does in its main
production programme is infinitely more influ-
ential in alJ these areas (and on society in
general) can simply be ignored - as second order
effects.
If it is accepted that the price-mechanism is
faulty, so that externalities do exist, the model
one is compelled to use to order ones affairs at
any level of aggregation becomes a fairly complex,
multi-level, multimedia dynamic simulation.
My own research activity in human resource
accounting has been in the construction of some
models of this type - and my current task is their
external validation, by which I mean that some
models should be so constructed and quantified
that it is possible to identify dependent and
independent variables and obtain a good fit
between the predicted and observed dependent
variables over a period of time. This apparently
straightforward approach would seem to be
anathema to another AAA Committee, this time
the Committee on the Relationship of Behavioral
Science and Accounting (1974, p. 13 l), who voice
considerable dislike for such appeals to external
validity -
External validity asks the question of generalizability: to
what populations, settings, treatments variables and
measurement variables, can this experimental effect be
generalized? The emphasis so far (in accounting, not
necessarily in behavioral science) has been on external
validity and this imbalance has caused some unfortunate
side effects.
The contrast is with internal validity, which the
Committee seems to equate largely with rigor
and which they believe resides in laboratory
experiments designed to test rather smah segments
of a theory as opposed to broader based field
studies. It is my view that even from the point of
view of high theory, this approach is mistaken; it is
the relative significance of laboratory experiments
which may distinguish the social sciences from the
natural sciences! We can learn a lot from how a
chemical reacts under conditions of weightlessness,
in a vacuum and so on; how a man reacts in
society only has meaning in the context of that
society, which itself provides the taxonomy,
model, the general Weltanschauung that alone
provides any basis for making statements about the
phenomenon at ail.
This difficulty is certainly not unknown to the
Committee, who say (p. 135) of behavioural
accounting researchers:
Unfortunately, too much of behavioral accounting
research has consisted of hunting and tracking something
without knowing what it was. Perhaps the greatest
deficiency in behavioral accounting research is the lack of
formul mo&ls. By formal models, here, we simply mean
systematic attempts to formulate sets of principles,
postulates and hypotheses about relationships among
variables which can then be tested empirically.
Now this demand for a model, and a proper
taxonomy for categorizing phenomena is
central, or should be central, to what accounting is
all about. However, both Ricco Mattessich and
Orace Johnson have claimed that accountants are
far too little concerned with such matters. I have
said elsewhere (Gambling, 1974a) that the present
fragmentation of the social sciences is a splendid
device for categorising (and perhaps therefore
devaluing?) other people S problems. This makes it
possible for economists to have their model and an
attendant taxonomy, social psychologists another,
political scientists a third, and so on. Quite often,
these people wili be describing the same
phenomenon, but in quite different ways. This
may be fair enough in an abstract sort of way, but
the problems become very great when one tries to
bridge the gaps between two or more disciplines,
or in more concrete terms, if one wants a model of
the workings of a society or social subgroup 11s a
whole. Because real-life problems are strictly
meaningless apart from their context in society,
the businessman, the statesman and the admini-
strator are rarefy in a position to carry out
controlled experiments, and the accountant is
right in there with them, providing control data
and decision-making data about a dynamic
situation which unobligingly wanders over the
whole gamut of social science, economic, political
and behavioural. This suggests that the data for
external validation must be obtained from some
overah picture of the situation of the entity as a
whole - in effect an accounting system.
The general feeling that accounting is failing to
include noneconomic factors has tended to
crystalise into demands that accounts should
reflect greater concern for human factors of
production, on the one hand, or alternatively that
it should set out what the enterprise is doing (or
not doing) for society - usually in those areas
where externalities to the price system are
SYSTEMSDYNAMICSANDHUMAIIRESOURCEACCOUNTING 169
supposed to exist, such as race-relations, pollution,
womens rights and consumer protection. Human
resource accounting has been discussed for some
years past in American journals, but without much
concrete result. Now trans.atlantic interest seems
to be turning from this topic to the barren field of
socio-economic operating statements, probably
because the latter are extracted from ordinary
accounting data, while human resource accounting
demands a more radical restatement of the whole
concept of what an account really is.
Human Resource Accounting is sometimes
called Human Asset Accounting, and newspaper
correspondents invariably ask, Does that mean
you want to put people on the balance sheet, like
plant and buildings? This is by no means possible:
if people did appear anywhere on the balance
sheet, it would be as part of the goodwill of the
whole enterprise. Goodwill cannot be subdivided
in any meaningful way between what arises from
the possession of a good work-force, and what
arises from the plant, the patents, the customers,
the site and all the rest. One might be tempted to
feel that one could nevertheless capitalise the
amounts spent on recruitment and training, but
reflection (or experiment!) shows conclusively
that such amounts can only be arrived at after the
most tendentious allocations of overheads. People
do learn on the job, but one is on shakey ground if
one seeks to capitalise any part of their wages,
supervision costs or the like. It is like trying to
assess how much food a young animal needs to
grow, apart from what it needs to stay alive;
improperly fed, the animal does not stop growing,
if just grows more slowly, develops rickets and
anaemia, a variety of skin diseases and so on. The
simile is quite exact, since both the worker and the
animals are systems, which can only exist as a
whole.
Thus if someone gets C40 for a weeks work,
there is nothing else for the accountant to do with
this amount but credit the cash-book and debit
work in progress, works overhead or whatever.
However, it must be recognised that the fact that
the man was employed for that period has also
enhanced (or diminished) his skills, made him
more or less loyal to the enterprise and more or
less eager to work. A complication is that it is not
solely what happens at work which affects these
attitudes, but it is reasonable to suppose that a
substantial part of most changes in these areas will
be generated by experience at work.
It seems then that we have to reject all ideas of
valuing working and putting them on the balance
sheet! What form could Human Resource
Accounting then assume? Obviously, one could
include demographic data about the work-force as
a commentary on the normal accounting state-
ments; breakdowns of the work-force, by sex, age,
grades, ranges of pay, levels of, education and
training, statistics on industrial disputes, injuries,
absenteeism, engagements and discharges.
Especially if these were presented in columnar
form over a number of years, one could see many
firms who were running into trouble whatever
their balance sheets might at present say to the
contrary. A firm which hired a large number of
bright young men in the late 1950s and early 60s
may have numbers of highly paid but under-
employed (and apprehensive!) mandarins in the
1970s. On the other hand, data of this sort only
invite the user of the accounts to write his own
scenarios for what might happen; the company
employs 14 Ph.Ds, which is good if it has a big
basic research programme, but disastrous if they
are just disappointed university teachers earning
their bread as draughtsmen . . .
. In any case, there is a logical flaw in attempting
to combine either a cash value or commentary
material on the work-force with the normal
accounts of the enterprise. In all countries and
under all political systems, enterprises are run on
self-financing lines, which is to say that they are
required to stay solvent, and in particular not to
distribute funds which might jeopardise that
solvency in the future. Traditional accounts are
thus about cash, and cash is something that can be
owned; it follows that the enterprise is an entity
which can logically be made the subject of an
account about its cash resources. This is why the
author made the slighting reference to socio-
economic operating statements in an earlier
paragraph - a company does not own the society
in which it operates, so such statements are
without meaning if prepared from the point of
view of the company and the activities under its
control. Similarly, the company does not own its
workers, so not only can they leave with their
skills, but the companys shareholders are not an
entity to whom one could make an account for
them even while they remain employed.
Especially if one adopts the behavioural
theory of the firm_ it is possrble to see that
nevertheless the firm (in the broader sense of
the workers, managers and shareholders) is an
entity which could support some sort of accounts,
170 TREVOR GAMBLING
although not one which is chargeable with a duty
of solvency. Perhaps what is significant about such
a firm of collaborators as they are called is not
that they have collaborated in the past, but that
they propose to continue to collaborate in the
future. Its assets and liabilities are not at aU of a
financial nature, but consist of the machinery of
the collaboration itself, the organisation - or the
system. This system will include the plant and
machinery, and even the debtors and cash, but not
in the same role which they play as assets in the
financial accounts of the company; they are just
resources, like the labour itself, which have to
become available in the right quantities at the right
time before any production at all becomes
possib le.
Now the obvious way of depicting a future
state of a system is through a simulation model.
One might operate the model in a number of ways;
reference has been made to the possibility of a
reader constructing scenarios for the future as an
aid to using conventional accounting data. What
the simulation will do is to provide one or more
such scenarios in a complete and consistent form.
One could see what return on capital would be
needed to attract necessary finance, while holding
all the other resources in a steady, satisfactory
combination. Alternatively, one could see what
would happen to wage-rates if productivity were
held steady, or to the productivity if wages were
held steady. Finally one could just see what would
happen given some likely pattern of wages. interest
rates and so on. It should be appreciated that we
prepare one of these scenarios by implication
every time we draw up a set of accounts, to the
extent that any values placed upon non-monetary
assets in excess of their realisable values must
imply a belief that the system is going to function
in some reasonable fashion in the future. The
traditional accounts are really some sort of
estimate of the present value of future C&I flows
using this scenario.
It follows that while an attempt to provide an
overall expected pattern simulation must
require all the flows of resources to be modelled at
once (and so prove a most involved exercise), the
other things being equal simulation can consider
each flow individually. Accordingly it becomes
possible to construct a model which shows how
the flow of labour is supposed to be brought into
operation, and what factors affect its productivity.
At the outset it must be admitted that the separate
treatment of flows in this way obscures one of the
most troublesome problems to arise in practice
over this resource. The simulation seeks to show
some pure measure of productivity in respect of
labour alone; in practice usually some improve-
ment in overall productivity is observed only after
a change has been effected in the physical plant or
methods of organisation. Subsequent wage nego-
tiations are likely to revolve around the question
of how much of the improvement in profit should
go to the labour-force and how much to those
collaborators who provided the other elements in
the system. Possibly the model might give at least
some clue as to the solution to this dilemma, but it
would follow that the separate model might prove
difficult to validate in isolation.
Also the model might portray the reaction of
an individual worker, or seek instead to deal with a
whole group of workers. The former type might be
useful where the reaction of an individual officer
to a personal situation is of the essence; for
example in the case of a police-officer or an
air-line pilot. On the other hand, the more typical
industrial situation will more often involve the
group as a unit, since the situations facing them
tend to be continuous streams of largely
homogenous operations. A simulation for model-
ling the individual appears in Gambling (1974b);
however, it is probably useful to say something
about this here, because much of the work done
by behaviourists in this area deals with the
individual, and moreover the concepts are much
easier to understand in those terms as well. Briefly,
the model assumes that expenditure on education
and training is one of the causes of acquisition (or
loss!) of various skills by the worker; the actual
level of skills possessed at any one time is
compared with the levels required by the task
given to the worker, and also with the role the
worker himself sees as playing. If the levels are
fairly well-matched, the worker is assumed to find
pleasure in his work, and so give rise to some
rewards of the system (which can be nil or even
negative as any mismatching increases). These
rewards of the system, plus the rewards of the
individual (essentially his pay) are then compared
with his needs; the surplus or deficit arrived at in
this way determine his productivity. The system is
i!lustrated in Fig. 1.
It does not take much imagination to see that
the rewards of the system are likely to affect the
acquisition and loss of skills. that productivity will
affect pay. that pay will affect role and that the
role will affect needs! These feedback loops in the
SYSTEMS DYNAMICS AND HUMAN RESOURCE ACCOUNTING 171
Productlvtty
system
Fig. 1
system can be negative and suggest that it is one
which can easily get out of control. People who
have a negative reward from the system are going
to demand large amounts of pay in order to
remain reasonably productive. To the extent that
their pay enhances their expectations, their needs
will increase and their satisfaction with the job will
decline. Thus, unless one can either increase the
job-satisfaction or ensure the payment of
increasingly large rates of pay, the job required of
this individual is seen to be non-viable. This is why
this type of analysis has suddenly become so
important; continuous increases in real pay
demands a growing economy - in a non-growth
situation the choice is between job-enrichment and
non-viability only.
This connection between pay, rewards of the
system and growth can be illustrated very well by
the industry which the author knows best - the
universities. For many years these institutions have
been hiring very bright men while assuring them
that they have no guarantee of promotion beyond
the rank of lecturer. In fact, every recruit is certain
that he will be given a senior lectureship and
perhaps even a chair in the fullness of time! To the
extent that the universities until quite recently
have been growing very rapidly, in general they
have not been disappointed. In a non-growth
university system we cannot hope to attract
suitable people to the lecturer grade as a career
grade. This is a type of work in which the rewards
of the system are usually high, so the need to
provide specifically for senior lectureships for all
competent officers might be met by adverse
changes in such things as staff-student ratios,
location of disciplines and much else. On the other
hand the guarantee of promotion would add
weight to the pressure for short contracts (rather
than established status) for younger academics and
so reasonably lead to a demand for higher salaries
by all ranks. At the same time, a no-growth
economy will have a drastic effect on the amount
of remunerated outside work which often forms
a fair proportion of the overall remuneration of
semor academics; thus there may be further
demands forthcoming from the top of the scale. A
great deal of unclear thinking (and the resulting
anomalies) can be swept under the carpet so long
as the economy expands . . .
The model shown in Fig. 1 does not directly
help in the preparation of the scenarios recom-
mended to illustrate the probable impact of the
human resources on the fortunes .of the colla-
borators who comprise the firm. This is because it
deals with an individual, and the effect of the
individuals as a group is not a simple summation of
their individual effects; they will be changed by
group dynamics, very much in the way that the
technique of consolidation modifies group
accounts. In any case, the model as described in
Gambling (1974b) presents some loose ends; the
job-specification and the basic pay are taken as
externally arising constants. Obviously these items
are themselves a product of the human resource
system, although they are formed at a more
aggregated level than that of the individual or the
small group.
It is possible to build another model at this
higher level of aggregation, and this may be
preferable to attempting a consolidation of the
172
TREVOR GAMBLING
individual models, since much of the material
needed for such a model is already available.
Manpower planning is in any case well suited to
treatment as a dynamic simulation; a rather
specialised example of this is to be found in the
authors discussion-paper entitled The Admissions
to a University Faculty as a System Dynamics
Model. The model described in that paper
concentrated upon such matters as the provision
of accommodation and finance as limiting factors,
while assuming that necessary staff-members and
students would be forthcoming as needed! This
is a common fault in such exercises, although
todays undergraduates provide the pool for
tomorrows post-graduates, who provide the staff
for the day after that. What is needed is an
amalgamation of the two models, which will
describe (for the general industrial enterprise) not
only the flows of personnel, finance and
accommodation, but also the supply, wage-rates,
skills and productivity as well. Moreover, the
manpower needs of the enterprise are for
quantities of service of various kinds, rather than
for bodies; it is their productivity which
converts service into bodies, and so creates
the demand for the different classes of labour.
So much for the theory! We must now turn to
the problem of whether information about the
behaviour of variables like tasks and rewards of
the system are likely tobe forfhcoming in real
life. It is certainly true that some sorts of models
of this phenomenon could be built without any
reference at all to behavioural variables. This is
done simply by treating the human resource as a
black box about whose inner workings nothing
is known. This is the standard approach of
econometrics and involves identifying various
factors which are thought to be the independent
variables of the model and then using some
techniques of multivariate analysis to infer their
mathematical relationship with the dependent
variables from series of historical data. Thus one
might perhaps relate labour-turnover to age, race,
sex and level of education. Now it is rather
difficult to measure or even observe the workings
of a human society or personality; some quite
respected figures in the social sciences might go so
far as to declare it to be strictly impossible if the
terms are to be interpreted literally, while the rest
of us may feel a certain uneasiness that anyone
should try. There seems to be no halfway house
between the black box and the skinner box!
Perhaps the most significant finding of my
research project will turn out to be the fact that
there are firms in Great Britain which are
genuinely interested in building models which
attempt to open up the black box. Their reasons
give me some confidence to state what human
resource accounting really is, even if its methodo-
logy seems to require a little more work from my
team and myself. The response can be summarised
like this:
(a) I have been in touch with 20-odd
enterprises of various sorts of whom 5 seem fairly
certain to participate in the model-building/
validation activity at this time. One is a
comparatively small subsidiary of a larger group;
the remainder could reasonably be described as
household names. The smaller firm is particu-
larly interesting from a scientific point of view
because it seems to require a sort of halfway house
between the individual and the group versions
of my models. Perhaps I might add that the
comparative success in locating suitable speci-
mens in no way lessens my desire for others,
since generalisation is still veiy difficult from this
comparatively small sample!
(b) However, what I have seen so far does
suggest a general pattern for such models. This
comprises (1) a dynamic inventory forecast of
levels of skill and numbers of personnel; (2) a
manpower planning model which shows the eftect
of various possible personnel policies on recruit-
ment, labour turnover, morale, rewards and so on;
plus (3) a financial model which simply calculates
the wages expenditure, recruitment and training
costs etc. for the different policies.
(c) Some might claim that this was just
manpower planning with knobs on! This would
be a fair criticism, were it not that all 5 firms had
also come to the conclusion that their problems
required the installation (or extension) of some
fairly elaborate system of continuous record-
keeping about many aspects of their personnel
function. It is this accounting element which
has been missing from so much work in this area.
(d) Finally, it is also interesting to comment on
the sort of problems which the various respon-
dents have seen as areas where Human Resource
Accounting might prove useful. Obviously, these
tend to be very sensitive areas indeed, so one must
be rather guarded over the details disclosed.
(i), (ii) Two firms are in areas with high and
very mixed immigrant populations; quite apart
from the race relations aspect, high labour
turnover has been something of a problem,
SYSTEMS DYNAMICS AND HUMAN RESOURCE ACCOUNTING 173
especially to one of the companies. These firms are
interested, in other words, in whether the
manpower planning section of the model can
disclose a personnel policy which will secure a
stable work force with a proper racial distribution
over all ranks and over a period of time.
(iii) Another firm has three distinct sources of
labour: ordinary school leavers, those with
management potential and temporary labour. Is
it possible to devise a policy which will supply the
firms needs for all these classes over a period of
time and also supply a satisfactory career-pattern
for each of them?
(iv) Another firm is in an industry which by
tradition has employed exclusively casual labour.
Not only are there now union and social pressures
for decasualisation, but this come-and-go approach
to employment extends through highly skilled
workers to quite senior members of the technical
management at a very high cost. Of course the
reason for the casual labour in the past has been
the nature of the market for the product, and this
is not changing. Is it possible to discover patterns
of recruitment and training which may be
compatible with likely demands? Would the
resulting model suggest a pattern of contracts
which might form a satisfactory demand?
(v) At a more individual level, another
respondent is about to make a most profound
change in the working methods of a section of its
organ&lion. Is it possible to find a pattern of
(1) recruiting, and (2) training the workers, which
can be combined with (3) the rate of implementa-
tion of the new scheme so as to cause minimum
disruption?
All these questions are certainly about man-
power planning with knobs on, but the financial
implications of their resolution or non-resolution
are obvious as well: The first four enterprises
depend for their long-term viability on the
provision of satisfactory policies in these areas; the
fifth one can do itself actual harm by its
?mprovements unless the right patterns are
found.
However, there is another element running
through the first four cases which is probably
more significant than any financial effects which
the problems themselves may entail. All of them
are being required to justify their personnel
policies to an outside body - the Race Relations
Board, the Department of Employment and
perhaps the Trade Union Congress! That is to say
that a fundamental aspect of Human Resource
Accounting (as revealed by the prQCtiCQ/ demand
for it) is a form of stewardship accounting or
accountability, rather than financial accounting
or management accounting of the more general
type. It seems that decision-makers who do not
arrive at their decisions in an open court or
legislature are likely to be asked to provide
evidence of the grounds on which they have acted.
This is a real-life social audit, and the really
interesting point is that the people affected by it
are seeking a model which is both dynamic and
attempts to open up the box of the human
organisation.
The reason is the subtlety of the Race Relations
legislation, which seeks to go beyond requiring a
simple numerical balance within a firm, but also
looks at the opportunities given to minority
groups to advance their careers. An econometric
type of model would merely confirm an
undesirable state of affairs - namely that minority
groups have high turnover-rates, toil to complete
further education and in fact do not get promoted
either! The legislation requires firms to take
positive steps to overcome this, so what the
personnel people have to demonstrate is the
sincerity of their belief that some new policy
would bring about a fair distribution of promotion
in the future. This requires an exercise of skill and
judgement in the field of social psychology, but
nevertheless seems to me to be a true accounting
function. One might note that British corporation
legislation does not define divisible profits, so
that rather similar demonstrations of well-founded
decision-taking have been demanded for many
years in cases where companies go into liquidation
after a fairly recent payment of dividend.
The justification for equating accountability
with accounting in both examples is the need to
maintain records about the variables which are the
subject of the decision. It is clear that records
needed to explain personnel transactions are now
effectively required of British companies, even if
very few have much idea of how to set about
providing them.
174
TREVOR GAMBLING
B IB LIOG RAPHY
American Accounting Association, Report of the Committee on the Measurement of Social Costs.
Supplement of Volume XLLX, The AccounringReuiew (1974), pp. 99-l 13.
American Accounting Association, Report of the Committee on the Relationship of Behavioral
;;;;z9and Accounting. Supplement of Volume XLIX. The Accounting Review t1974k pp.
Gambling, T:. Socieral Accounting (London: Allen & Unwin, 1974a).
Gambling, T., A System Dynamics Approach to Human Resource Accounting, i7re Accounting
Review (1974b), pp. 538-546.