The quest for high quality financial measures of OHS performance presents particular challenges for accountants. For example, the current set-up of accounting information systems in most firms is often not conducive to capturing and presenting OHS-related cost information in a meaningful way (Rikhardsson 2004) and there is often significant uncertainty about the magnitude and timing of OHS expense recognition (Drexel 1992). Overall, the attempts of OHS managers to deal with their organisation’s accounting systems have been described as an exercise in futility because, although managers may receive a lot of financial information, there is a substantial lag between OHS incidents and any subsequent financial impact, leaving
financial data of little use for timely OHS analysis and decision-making (Drexel 1992; MacCorkle 1994). Despite these criticisms, some OHS costs, such as the cost of workers’ compensation insurance premiums, are relatively easy to capture in financial accounting systems and to make visible in management reports (ABS 2002). Workers’ compensation costs
The substantial costs associated with workers’ compensation insurance premiums, or direct compensation payments to injured employees for those firms licensed to self- insure, are the most frequently employed financial ‘measures’ of OHS performance
(Ackers et al. 1992). This is illustrated by the estimated $8 billion in premiums to workers’ compensation schemes paid collectively by employers across Australia in the 2005/06 financial year (ASCC 2009). The routine presentation of compensation costs in management accounting reports is claimed to have a “dramatic safety effect” as their impact on bottom-line profitability provides both an incentive for managers to pursue safety improvement and positive reinforcement when these improvements are reflected in cost reductions (Chelius 1991, p24; Reber et al. 1993).
Nevertheless, while compensation costs may be useful they fail to provide a valid and reliable proxy for current OHS performance for a number of reasons. First, the inability of accountants to allocate these costs across departments or business units in a meaningful way is often due to the tendency to allocate cost arbitrarily or using inappropriate cost drivers (Bottomley 2000; Chelius 1991; Clarke and O'Neill 2006; Stewart 1991; WorkCover NSW 2005a). Second, an inconsistent relationship exists between the cost of a firm’s insurance premium and its underlying health and safety performance
(WorkCover NSW 2005c). This is typically due to the method of determining insurance premiums in that the calculation of workers’ compensation premiums, particularly for small employers, typically does not even consider their previous compensation claims history. However, costs are more informative for very large employers, as their premiums are “close to 90 percent experience-based” (WorkCover NSW 2005c). Third, both cost and injury data provided by the various State or Federal workers’ compensation schemes is widely recognised as a poor measure of work-related ill health since compensation payments tend to grossly under-estimate the total cost of occupational injury and illness (Drexel 1992; Herr 1998; NOHSC 2004a). This is often because aggregated compensation statistics only reflect those injuries and illnesses for which a claim is registered with and accepted by a workers’ compensation insurer36 (CCH 2003). Indeed, research both locally and internationally has acknowledged the systematic under-reporting and under-estimation of workplace
related deaths and injury rates (Herr 1998; NOHSC 2004b). Illustrating the failure of workers’ compensation data to provide a complete picture of workplace health and safety, annual Australian data reveals only 189,400 (or 39.6%) of the 477,800 persons who experienced a work-related injury or illness37 actually applied for compensation from a workers’ compensation insurer (ABS 2001, p1). In a separate study of work-related fatalities, evidence from coronial enquiries revealed 249 deaths in the 2004/5 reporting year, although only 14938 (60%) of these were captured by the National Data Set for Compensation-based Statistics (ASCC 2008c, p1).
OHS incidents may go uncompensated for a variety of reasons, most typically because the injured party failed to lodge a compensation claim. In many such cases, the injury was considered too minor. Other reasons include: a lack of awareness of the eligibility or availability of benefits; the perceived negative impact of a claim on current and future employment; the effort involved in making a claim; the employer agreeing to cover the injured worker’s costs outside a workers’ compensation scheme; or an inability to clearly trace the illnesses or injuries back to their work- related drivers (Productivity Commission 2004; Ringleb and Wiggins 1990; Yu and Hunt 2002). Finally, workers’ compensation cost is an incomplete measure of OHS outcomes because compensation premiums fail to capture a wide range of non- compensable and often externalised occupational illness and injury expenses39 such as those identified in Section 2.1.4 above (Stewart 1991).
Non-compensated costs
In addition to the financial costs associated with workers’ compensation premiums or payments, financial accounting information systems may capture a range of non- compensated, OHS-related business costs. Some, such as the costs associated with the repair or replacement of damaged physical assets, tort liability, litigation expenses, insurance losses, OHS training, fines and other penalties, can be captured and directly traced to their relevant cost drivers (MacCorkle 1994; Stone 1995).
More difficult to identify, difficult to clearly trace back to work-related illness or injury drivers, and therefore difficult to isolate as OHS costs within the accounting system, are a broad array of other indirect and often immeasurable costs such as costs associated with lost productivity, workplace disruption or decreased employee morale
(MacCorkle 1994). These may also relate to the cost incurred to repair or replace company property damaged through accident, sabotage or vandalism, personnel
37
This study relates to the year ended September 2000.
38
Table 2-1 revealed 128 worker fatalities for 2004-5 as reported in ASCC (2008b) whereas the ASCC (2008c) Compendium reflects all work-related deaths, including workers and others (e.g. bystanders).
39
For example, these injury-related costs may be transferred to public health and social security systems or to the injured person or their benefactors. This is explained further below.
costs such as work-related sick leave or other leave, lowered employee morale, higher staff turnover, unscheduled overtime, recruitment of replacement employees and lost productivity due to inexperienced replacement workers. Alternatively, costs of business disruption may be associated with production disturbances and downtime, reduced productivity, internal administration, training or retraining, dissemination of information, corporate reporting and compliance, public relations and reputation damage. Finally, there are also the additional expenses incurred to evaluate and modify systems, equipment or processes to prevent repeated occurrences of the injury or illness (MacCorkle 1994; Rikhardsson 2004; Stone 1995).
Not captured at all are those financial expenses that remain uncompensated by either employers or insurers (Ringleb and Wiggins 1990; Yu and Hunt 2002). These include expenses such as uncompensated pharmaceuticals; the opportunity costs of lost earning capacity; personal costs of relocation or retraining; and costs that are inevitably subsidised by social security or public health systems or transferred to the afflicted employee (Stewart 1991). These challenges notwithstanding, MacCorkle
(1994) suggests the inability to accurately capture the full range of OHS costs should not preclude use of the best estimate obtainable. Given the difficulty identifying and quantifying many indirect health and safety costs, and in spite of the limitations of the compensation costs, the total OHS cost to an employer is traditionally estimated at four times the direct workers’ compensation cost (MacCorkle 1994).