dr sharron o'neill

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“Commerciality” in Safety:

The Accountant’s Perspective

- Macquarie University

- Safety Institute of Australia

- Safe Work Australia

Dr Sharron O’Neill CPA

International Governance and Performance (IGAP) Research Centre

Department of Accounting & Corporate Governance, Macquarie University

© S. O’Neill, IGAP Research Centre

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Background

• WHS Act: s27 (officers’ due diligence)

focuses attention on the role accounting

plays in WHS governance

1. Ensure appropriate resource allocation

2. Measuring and reporting on financial and non-

financial performance (hazards, risks, processes

and outcomes)

3. Verification of provision of resources and processes


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Conceptual Framework

• Getting the accounting ‘right’ - important

because accounting plays a dual role in the

achievement of work health and safety goals

– Passive: ‘counting’ & ‘reporting’

on safety

– Active: influencing WHS

outcomes in deliberate

as well as unintended

ways.


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Understanding the ‘bean counters’

• Purpose of business:

– Traditional: To maximise returns to shareholders

(within the limits of the law)

– Alternate: To pursue its goals and interests to ensure a

reasonable return on equity (within the social licence to

operate)

• Primary responsibility is to the shareholder

• Accounting standards - legally enforceable rules to

govern financial accounting and reporting practice.


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Key Accounting Concepts

• Key financial accounting/reporting concepts include:

– Accounting Entity Assumption: defines the boundaries

of the financial accounts;

– Reliability: information measured without bias or error;

– Materiality: information is of a magnitude that its

omission would make a difference to users’ decisions;

– Valid: measures measure what they report to measure;

– Relevance: information is useful for decision-making.

• Expenditure (costs) can relate to cash spent on: – assets (capital expenditure), or

– expenses (which reduce profits immediately)


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Allocating financial resources

Resource allocation decisions are typically informed

(justified) using cost–benefit analysis

• methods include: net present value, payback period,

internal or required rate of return, economic value

added etc.

Costs : Outflows, or reductions in inflows of economic

benefits (typically cash).

Benefits: Inflows, or reductions in outflows of economic

benefits.


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Examples of WHS costs

Direct WHS costs (actual cash outlays):

Capital investment, (re)design, salaries, compensation premiums,

PPE for consumables, medical supplies (eg first aid), failure costs

(fines, legal fees, medical treatment), WHS programs (e.g. D&A),

recruitment costs for replacement employees etc

Indirect WHS costs (typically time and resources):

Costs relating to incident investigations, worker / management

consultation, return to work management, administration and

record-keeping; lost or reduced productivity pertaining to: non-

injured / traumatised employees; new workers (in training), and

workers recently returned or on reduced duties; peripheral

damage to machinery or equipment; additional overtime required,

and production delays / machinery downtime.

Also think about revenues and savings I:D = 2:1 ROI = 4:1


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Cost-Benefit Analyses

Problem: when CBA is applied to WHS decisions

Reliability concept

• Risk identification, control, safety training and incentives,

incur added, measurable, implementation expenses, yet

the benefits are not so easily traced to the bottom line (Chen and Chan 2004; Ginter 1979; Reber et al. 1993).

Accounting entity assumption

• “Classic externality” - Employers bear the costs of

prevention while the employees enjoy the benefits (Chelius 1991)


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Economic Cost of Safety (failure)

– Trends reveal an increase in the total cost of injury

and illness over time (approx. 5% of GDP)


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Comparative distribution of the economic cost of WRII

across stakeholder group

0

10

20

30

40

50

60

70

80

90

100

2004 2012

Employer

Community

Worker

% 5%

21%

74%

3%

53%

44%

(Source: Safe Work Australia)


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Investing in WHS

• Research shows the frequency and severity of injury is inversely related to management effort…

• However, given the choice employers may spend less on injury prevention than is “socially desirable” because - the entity receives limited benefits when successful and bears limited costs of failure (Chelius 1991, p22).

• WHS legislation requires minimum investment and employs a reasonable practicality test, NOT a traditional cost / benefit analysis, and introduces significant financial penalties for breeching WHS duties.


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So, is there a “business case” for safety?

A business case is not always financially based – it

may focus on financial, regulatory or strategic goals.

• Where investment is legally required, the financial

analysis goes to how to meet the requirement, not

whether to meet it.

• Strengthen the business case for WHS investment by:

– considering strategic and regulatory issues.

– integrating the WHS issue(s) into broader business

frameworks (eg. system reliability, service delivery,

risk management, employer of choice) (eg. Behm et al 2004)


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Investor Interest in WHS

• Investors are increasingly interested in

understanding WHS performance levels

– Investment banks, superannuation funds, institutional

and private investors want to know about risk:

includes key WHS hazards, WHS failures (high

consequence in particular) and WHS failure costs

– They understand the inter-connectedness of WHS

and broader financial goals

• There is a perception that how a company

manages WHS reflects the way they manage

business ‘risk’ more generally.


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Case 1:

Glenbrook

Source:

Hopkins 2005

(above)

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Case 2:

ESSO

Source:

Hopkins 2000

(above)

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Problems with focusing on LTIFR?

– LTIs is not a valid or reliable measure of injury and is certainly not a valid or reliable measure of WHS.

– LTI / LTIFR doesn’t capture all illnesses / injuries, or even all most serious injuries. LTIs are (only) a valid measure of that subset of injuries and illnesses that resulted in at least 1 day work absence.

– When LTI (or LTIFR) is accompanied by total workdays lost, they together provide relevant information to help inform decisions about the subset of WHS failures that result in lost productivity.

WRII

LTI


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LTIFR: If not a measure, an indicator?

– LTIs are an indicator of which attribute(s) of ‘injury’?

192,500 injuries

Short absence: < 5 days absence from work

93,100 injuries

Long absence: 1 week to 6 months absence

35,700 Disabilities

(full or partial)

357 Fatalities

Source: Australian compensation data FY 2008/9


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Total cost burden, by stakeholder

0

10,000

20,000

30,000

40,000

50,000

60,000

Short absence Long absence Incapacity Fatality

Employer

Community

WorkerEconom

ic c

ost,

$b

n

Greatest cost

to business

(Source: Safe Work Australia 2012)


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Note:

• Injury numbers are decreasing but costs continue to rise.

• Could this be due to a changing severity profile of injury?

• Eg. Analysis of NSW compensation data shows how

focusing only on LTI and Fatality may be misleading and

hide trends in high consequence (non-fatal injury) (Source: O’Neill, McDonald & Deegan 2012)


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So, what does this mean?

• LTI and LTIFR

– Can provide useful insight into lost productivity

– Can not provide useful insight into injury outcomes

– Can not provide useful insight into WHS (i.e. risk)

– LTI data is not appropriate for:

• Understanding the cost of injury & illness

• Informing WHS strategy and resource allocations

• Evaluating the success of WHS interventions

• Evaluating WHS performance of individuals


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The contemporary injury triangle

Inverts the traditional triangle so as to direct attention to those injuries with the greatest financial (and human) consequences.

Human

Impairment

First

Aid


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The contemporary injury triangle

Impact based on impairment to a person, rather than a firm


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Commerciality in Safety

Understand safety from the business’ perspective

- Consider both the financial and strategic goals of a firm

- Focus on resourcing safe & healthy work, the deliberately

considered integration of production & safety goals, holistic

assessments and better business decisions regarding:

– Resource allocation

– Capital expenditure

– Organisational change

– Performance management and reward


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Questions

For further information contact:

Dr Sharron O’Neill

[email protected]

mailto:[email protected]

dr sharron o'neill

Business

indirect whs costs

whs governance

expenditure costs

recruitment costs

whs outcomes

whs programs

role accounting plays

failure costs fines