It doesn’t require a lot of imagination to think of ways that these documents could be compromised. Fire, theft, misfiling, the aforementioned flooding; any number of natural or human forces can render your paper records unsalvageable. True, these same events could also theoretically occur at a data center where your digital records are stored. The difference is that your physical files probably don’t have a redundant backup stashed safely in a different location.
So why does it matter? You’re hopefully not contending with fires and floods on a regular basis, and if they’re mostly old records then it may not seem like a catastrophic loss. One problem is that even older records can be critical to ensuring that your business meets compliance standards.
Even if you’re not in a heavily regulated industry there are plenty of scenarios where the loss of records can put your business at serious risk. You may need them for tax purposes, or to defend your business against litigation from a disgruntled employee or customer. The onus is on you to maintain this information, so “the dog ate my payroll records” is not an excuse that will fly with a Sarbanes-Oxley auditor.