Reason for selection of the two articles
The remuneration the employees both in the form and cash and non-cash for the services provided to the company is termed as employee’s benefits. Apart from the cash component of that is being paid to the them, other perks that are provided include bonus, free or concessional meal passes, pension plans, car allowances and fuel allowances etc. These perks and benefits are governed by set of rules and regulations under the umbrella of accounting standards. The same has been analysed and presented in the given report.
The two articles that have been selected are “The negative effect of an accounting standard on employee welfare: the case of McDonnell Douglas Corporation and FASB 106” and “Attaining legitimacy by employee information in annual reports”.
The principles of those standards revolve around the timing of recognition of those benefits and the methods to measure the incentives and its subsequent reporting in the financial statements (Alexander, 2016).
- The two journals highlights the important points with respect to employee benefits and the need of disclosure in the annual report.
- The two journals highlights the need of the management discretion in the management of the employee related issues. This would ideally involve extensive use of assumptions, estimates and judgement based on experience on part of the management.
- Since, these matters are subjective in nature, it would require a greater attention of the auditors as he would be requiring to analyse the basis of these nature of assumptions and estimates in line with the laid down accounting principles and relevant guidelines including the accounting journals.
For this we need to go through a relevant article articulated and presented by Richard and Stephan. The article is titled “The negative effect of an accounting standard on employee welfare: the case of McDonnell Douglas Corporation and FASB 106”. This study explains in detail the negative repercussions on the employees when employee well-being decisions are taken by the respective employers purely considering the economic considerations. The management invariably tends to focus solely on the paying off the employee benefits under the statutes and the compliance framework which effects the overall quantum of benefits paid to the employees. The rules prescribed in FASB 106 provide that employers are expected to accumulate the benefits of employees in the form of medical, life insurance and retirement plans and which are to be paid to the employee over and after the work life of the individual (Richard & Stephan, 1995). There are one more relevant article titles as “Attaining legitimacy by employee information in annual reports”. The article is documented and presented by two people, Pamela and Tamara. One of the main areas of focus of this article is to lay focus on the disclosure by the company of all information that relates to the benefits paid to the employees in the audit report of the company. The image of the company takes a boost in the society if there remains a transparency in the acknowledging the remuneration the company pays to towards its human capital. The disclosure related to employee remuneration is not an isolated reporting. It is a part of the overall corporate governance requirements of the entity that the companies are expected to make to the society at large (Pamela & Tamara, 2013)
Purpose of the two studies
The above-mentioned corporation in this case terminated the prevalent employee benefits in their organization immediately at the year-end in which the laws relating to FASB 106 was adopted. The company went to justify the act by saying that the termination of the benefits and the commencement of the FASB rules have no connection to each other. They furthered their case stating that this would be cost beneficial for the company as the defence industry of which they were a part of were facing severe budget constraint and pricing issues. The thing to be noted here is that the corporation is touted as the one of the largest companies in aerospace production equipment in the world. For the non-union employees, their health benefits provided earlier were done away with. The reasoning provided was the rules laid down by the FASB 106 which has specific mention about certain aspects of health benefits which are post retirement. The standard puts down a whole new approach of computation which is basically the pay-per-as-you-go approach by accruing the anticipated cost of the health benefits post retirement (Trieu, 2017). The second article shows some research that has been done been on many listed companies that make employee related disclosures to prove the correctness of their observation. They have categorized the information related to employee’s relation as positive or negative or a combination of both. This article also does some analysis on the disclosures pertaining to social responsibilities linking the company and the social environment in which it operates. The study also inculcates the inclusiveness of the human capital as well as the participation on the community standards. The primary concern of the study is to highlight the fact as to whether these disclosures create a positive impact on the society or not. There is no law stating compulsory employee remuneration requirement to be made by the companies but it’s done voluntarily to as an enhanced part of corporate responsibility.
The FASB has clear cut policies relating to accounting treatment to be followed for retirement benefit plans which are to rest on conformed terms between the employer and the employee. FASB 106 defines post retirements benefits as not being gratuities. They are to be considered as part of the employee remuneration for rendering their services to the company. As the payment for this compensation is not made upfront or on recurring basis by the employer, these can be considered as deferred compensation. Unlike an ad-hoc amount being paid as a flat amount at the time of retirement, they are to be paid by the employer based on the computation of the quantum of services rendered by them over the years for the company. This would eventually turn out to be a computation based on their earning (Werner, 2017). Since it would be covered under the terms of the agreement a d would be a part of the total compensation, an employer cannot back track from its commitment to pay at a later stage by simply scrapping the plan. This ultimately shows, that FASB was designed in a way to reduce these uncalled-for situations where employers terminates plan after a certain point of time and as a result the employee suffers the financial brunt. The company justification of termination of the prevalent benefits was in account of the overall cost considerations of the company was not taken well among the employee union for obvious reasons. The bone of contention of the article who among the employee or the employer was justified. The principle argument for the management was that it was responsible for the profitability of the company and its growth and it must improve the quantum of returns that the stakeholders receive and hence their decision was in the best interest of the company. Therefore, it justifies the approach as ethical purely from an organizational and shareholder point of view. It is alright to look after the profitability but if it comes at a cost of disgruntled employees, then it needs to be thought again. From the point view of employees, they are being denied of the rights which they were promised to be paid. This is unethical. The employees of any company would play a pivotal role in the growth of the company and undermine the human capital will not help the company in achieving its objectives in the long run. A trust deficit in the employer-employee relationship will hamper the performance of the employees (Arnott, et al., 2017).
Similarities and Differences between the two articles
The main conclusion that we observe is that the rights of employees are being considered subordinate to the interest of the shareholders and they remain vulnerable to financial exploitation. It is among the responsibilities of the company to take good care and safeguard the interest of the employees and not make them a scapegoat in fulfilling objectives of other stakeholders.
The disclosures are to be made only if the management decides to do it. A debate on the overall significance of the corporate social responsibilities and its effect and impact on the society as well as to the company has been raging on for quite some time. It is thus established giving the credit the where its due is not only a principle for personal affairs but also has its application in the corporate hemisphere. The rewards, incentives and compensation meted out to the employees is a method to recognize their effort in building the stature of the company both financially and in other terms. This information regarding this needs to be made public so that the society is made aware that there is collective growth that has taken place or is taking place and it’s not only about the company but also the people associated with it. It is true that one of the primary concern of the people charged with the governance and managerial aspects of the entity are to create value for the shareholders but it is also to be considered that it should not come at the cost interest of employees being compromised (Belton, 2017).
Conclusion
Just like any other tangible or intangible asset would have a level of significance in an organization, human capital, i.e., the human resources are a very valuable part of the organization in its pursuit towards growth and achieving the objectives. Impeding employee confidence by not proving them with the benefits will have a very negative impact on the organization (Jefferson, 2017). When appropriate disclosures regarding employee pay out is disclosed in the annual report, it builds the confidence of the society on the organization and creates an atmosphere of contentment and harmony.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, 97, pp. 58-68.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Pamela, K. & Tamara, Z., 2013. Attaining legitimacy by employee information in annual reports. Accounting, Auditing & Accountability Journal, 26(7), pp. 1072-1106.
Richard, B. & Stephan, H., 1995. The negative effect of an accounting standard on employee welfare: the case of McDonnell Douglas Corporation and FASB 106. Accounting, Auditing & Accountability Journal, 8(3), p. 12.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25, pp. 57-80.
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