An Unexpected Approach to Worker Safety: Bolster Your Accounting Department
The link between everything from morale to the seasons and workplace safety is well-worn territory for workers’ compensation, but a new study takes a different perspective — what if the accounting department holds the key to fewer reportable injuries and a safer workforce?
According to Danye Wang, assistant professor in the University of Iowa Accounting Department, it’s a natural fit.
“Workplace safety is usually about labor or operational management topics, but in our paper, we’re taking an accounting perspective to [see] how accounting information is related to workplace safety,” she explained.
“Accounting information is not just financial statements; it’s also about the information system of the company.”
The Accounting Approach
Wang and her team of researchers used a couple of methods to determine the relationship between workplace safety and accounting information quality, beginning with establishment-level (rather than firm-specific) Occupational Safety and Health Administration data.
From there, they chose different proxies to define information quality across firms, which were:
- the accuracy of management earnings forecasts;
- the speed with which management releases an earnings announcement after its fiscal year end;
- the absence of internal control weaknesses; and
- the absence of restatements.
The second measure was enterprise resource planning (ERP) and its adoption.
As the paper notes, ERP systems improve internal information environments by automating, standardizing and integrating operation performances across business functions. That makes ERPs a relatively direct and intuitive measure of the internal information environment for the headquarters of a company and affiliated establishments.
“We wanted to try and see how an information system within a company can impact workplace safety,” Wang said. “And we believe that information quality during the preparation of accounting information can help firms to quantify the cost and the benefits of workplace safety.”
How the Breakdown Led to Insight
There’s a significant imperative to quantification within the risk management profession and workers’ compensation market, since sophisticated safety programs and protocols can be expensive, daunting to implement and difficult to maintain.
“Generally, we found that the firms with higher information quality have lower workplace injuries. We believe that this is due to the fact that high accounting information quality can show the benefits and costs of workplace safety. Some firms under-invest in workplace safety measures, because they don’t know what the costs of these issues are. The account information can help them quantify their investment.”
The researchers make the point that lack of executive knowledge about the issue is widespread, citing separate studies that found, among senior finance executives, nearly half believe lost work-time due to workplace injuries/illness has a critical impact on a firm’s performance, but more than 70% didn’t know the actual financial impact of lost time.
All while 60% of CFOs claimed they understood that a dollar invested in safety carried a two-dollar or more return.
Better information quality provides the necessary level of transparency to prove that safety is a good investment, even when companies are under pressure in an unstable economy.
Just as it does individuals, a six percent hike in the consumer price index as of the February 2023 Bureau of Labor Statistics (BLS) release stings companies, which are watching markets plunge and talent walk out the door.
Finance and Safety: Looking Ahead
Wang’s team notes in their discussion of the impetus behind the study that the link between financial constraints and workplace safety is well-established, with the drive to meet or beat market expectations and access to private equity as just two of those factors.
The University of Iowa team also contends in the paper that investment efficiency can be assessed through higher information quality, a boon for both the tangible fixes like equipment maintenance and replacement, and intangible activities like training and enforcement.
“The takeaway is that there are more benefits to an accounting information system than people typically think about. I believe that the workplace safety issue is not an intended goal, but I wanted to bring up how an accounting information system can help firms reach their organizational efficiency goals.”
And specific to efficiency, the intangible benefits can grow as companies become safer.
Commentary from the International Risk Management Institute notes that there’s a distinct link between workplace safety and morale. The behavior commonly referred to as “safety leadership” engenders confidence in the organization and direct supervisors, leading to greater job satisfaction.
Although recent BLS reports indicate that fewer people quit in January 2023 — down by 207,000 to 3.9 million workers — the overall quit rate is little changed at 2.5%. So the pains of talent retention are still top of mind for most companies.
For Wang’s team, manager/supervisor behavior was another area of focus for the study. They argue that high information quality can help managers allocate work more effectively across the organization’s departments by fixing the “substantial information asymmetry” between a single outpost and headquarters, driving behavioral fixes with real-time safety measures.
Further, high information quality can facilitate quantifiable measures of safety as part of managerial performance reviews, adding significant stakes to the cost-benefit analysis of tangible and intangible safety benefits described above.
Applying It All to Workers’ Comp
The business case Wang and her team are making is a compelling one.
The latest numbers from the National Safety Council indicate that the cost of workplace injuries totaled $163.9 billion in 2020, about $1,100 per U.S. worker across industries.
For two of the information quality measures linked to ERPs used in Wang’s study, an associated decrease in injuries of 3.3% and 4.3% was observed. This can easily translate into millions of dollars a year for businesses, depending on certain workforce characteristics and industry-linked injury severity.
For the University of Iowa research team, this study adds to the larger business case analysis of workplace safety with a brand new perspective, and for Wang, the results are ideal for future research projects.
“In general, I research how account information might play a role in the labor market,” she said.
“For a follow-up study, I’d like to look at how firms change their behavior based on findings about workplace safety derived from accounting information — more training, investment [and] hiring more experienced employees.” &