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Diverging Paths: Accounting for Corporate Governance in America and Germany

Published online by Cambridge University Press:  13 December 2011

Jeffrey Fear  and
Christopher Kobrak
Jeffrey Fear
Affiliation:
JEFFREY FEAR is associate professor at Harvard Business School.
Christopher Kobrak
Affiliation:
CHRISTOPHER KOBRAK is professor of finance at the European School of Management (ESCP–EAP) in Paris.
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Abstract

American and German accountancy took different paths in the early part of the twentieth century. In Germany, a persistent disconnect arose between relatively sophisticated managerial accounting practices for insiders and the methods used in public financial accounting. The “equity revolution” America experienced—an enormous shift in the number and expectations of shareholders—prompted new demands for financial statements designed to help evaluate the future earning power of companies. In contrast, the effects of World War I retarded equity–market development in Germany. Political frictions reinforced the Germans's; discomfort with equity markets and increased their resistance to revising accounting principles. Banks, tax law, courts, and lawyers, instead of professional accountants, became the primary source of accounting principles. Only in past decades, under pressure from the European Union and global capital markets, have the accounting systems begun to reconverge.

Type
Articles
Information
Business History Review , Volume 80 , Issue 1 , Spring 2006 , pp. 1 - 48
Copyright
Copyright © The President and Fellows of Harvard College 2006

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References

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39 Eube, Der Aktienmarkt, 30,175; and Rajan and Zingales, “The Great Reversals,” 12–17. Raj an and Zingales recently demonstrated that the stock–market capitalization of most countries in 1913 was generally not equaled until 1990. Stock–market capitalization of Austria (76 percent), Belgium (99 percent), France (78 percent), the Netherlands (56 percent), Sweden (47 percent), and Switzerland (58 percent) were all higher than Germany's. Equity as a proportion of gross fixed–capital formation was 23 percent in Belgium, 14 percent in France, 38 percent in the Netherlands, and 14 percent in Britain. The number of listed companies per million inhabitants was 108.7 in Belgium, 13.29 in France, 6.32 in Italy, 65.87 in the Netherlands, and 47.06 in Britain. See also Deutsche Aktien–Institute (DAI), 2004.

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41 Quick, “Formation and Early Development of German Audit Firms,” 320–39.

42 Quoted in Eube, Der Aktienmarkt in Deutschland, 36; on the important 1896 Exchange Act, see 43–49– For prewar developments, see Fear and Kobrak, “Origins of German and American Accounting and Corporate Control”; Emery, Henry Crosby, “The Results of the German Exchange Act of 1896,” Political Science Quarterly 13 (1898): 286–320CrossRefGoogle Scholar; Fohlin, Caroline, “Regulation, Taxation and the Development of the German Universal Banking System, 1884–1913,” European Review of Economic History 6 (2002): 221–54CrossRefGoogle Scholar; Glagau, Otto, Der Börsen und Gründungs-Schwindel in Deutschland (Leipzig, 1877)Google Scholar; and Weber, Max, Börsenwesen, Schriften und Reden 1893–1898, ed. Borchardt, Knut (Tubingen, 1999).Google Scholar

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49 Baskin and Miranti, History of Corporate Finance, 167; Kroos and Blyn, History of Financial Intermediaries, 130.

50 See Reckendrees, Alfred, Das “Stahltrust”-Projekt: Die Gründung der Vereinigte Stahlwerke A.G. und ihre Unternehmensentwicklung 1926–1933/34 (Munich, 2000), 278–91Google Scholar, 471–507. Such pyramiding was not completely unheard of in the United States, especially in utilities. See Bonbright, James C. and Means, Gardiner C., The Holding Company: Its Public Significance and its Regulation (New York, 1932).Google Scholar

51 Previts and Merino, History of Accountancy in the United States, 250.

52 Parrish, Michael E., Securities Regulation and the New Deal (New Haven, 1970), 31–34Google Scholar.

53 On the prewar state of the profession, see Previts and Merino, History of Accountancy in the United States; Miranti, Accountancy Comes of Age.

54 Quote from Miranti, Accountancy Comes of Age, 129. See also Miranti, “Associationalism, Statism, and Professional Regulation,” 448–57– Previts and Merino, History of Accountancy in the United States, 237–41.

55 See Montgomery, Robert H., Auditing, Theory and Practice (New York, 1912), 80–130Google Scholar. Montgomery provided one of t he standard works and had already made many of these points; it went through numerous editions. See especially, Schmaltz, Bilanz-und Betriebsanalyse in Amerika, 3–30; and Previts and Merino, History of Accountancy in the United States. The authors have also examined sixty German financial statements of fifteen firms, for example. Only one showed gross profit.

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60 Previts and Merino, History of Accountancy, 256.

60 Markus, History of the German Public Accounting Profession, 1–62; Hugh Markus, “British and U.S. Accounting Firms in Germany,” unpublished manuscript, 3. According to Jorg Bankmann, in “Entwicklung des Wirtschaftsprüferstandes,” 178, by 1934 Germany had 770 public chartered accountants (defined in the narrowest sense) and 92 auditing companies. See American Institute of Accountants, 1929 Year Book of the American Institute of Accountants (1929)Google Scholar, 56–101; New York State Society of Certified Public Accountants, Yearbook (Nov. 1930)Google Scholar, 11–69. In both cases, the U.S. count was estimated by taking the number of asterisked names (CPAs) on sample pages and multiplying by the total pages. See also Stevens, Mark, The Big Eight (New York, 1981), 4Google Scholar.

62 Quote from Previts and Merino, History of Accountancy in the United States, 239. Also see Miranti, “Mind's Eye of Reform,” 485–93. On the politics of conferring this professional certification, see Miranti, Accountancy Comes of Age, 4 8–8 5. On “fair return” and “fair value,” see Bonbright, James C., Railroad Capitalization: A Study of the Principles of Regulation of Railroad Securities (New York, 1920), quote from p. 53Google Scholar on the impact of stockwatering.

63 Clark, Social Control of Business, esp. 334–47; see his assessment on p. 345.

64 Miranti, Accountancy Comes of Age, 128–29.

65 Previts and Merino, History of Accountancy, 251–53; and Miranti, “Associationalism, Statism, and Professional Regulation,” 459–60.

66 Bonbright, Railroad Capitalization, 82–88.

67 Previts and Merino, History of Accountancy in the United States, 261.

68 Quote from Miranti, “Associationalism, Statism, and Professional Regulation,” 465. For further discussion of these developments, see Miranti, Accountancy Comes of Age, 146–77. Also see McCraw, Thomas K., “With the Consent of the Governed: SEC's Formative Years,” Journal of Policy Analysis and Management 1 (Spring 1982): 346–70CrossRefGoogle Scholar; and Parrish, Securities Regulation and the New Dea

69 In many national accounting systems, the distinction between what belongs to third parties and what belongs to the holders of common equity is still not absolutely clear. The elementary accounting equation in most continental countries is still expressed as assets = passives. To be sure, accountants in all countries understand the distinction, but the authors have discussed this point with several practicing accountants, who agree that enshrining the distinction in the basic accounting equation reinforces it in t h e minds of students and professionals alike.

70 Küpper and Mattessich, “Twentieth Century Accounting Research in t h e German Language Area,” 345–410.

71 Franz and Kieser, “Frühphase der Betriebswirtschaftlehre,” 76–79; Küpper and Mattesich, “Twentieth Century Accounting Research,” 357–59.

72 Feldman, Gerald, The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914–1924 (Oxford, 1993), 299Google Scholar, 581.

73 Lindenlaub, Dieter, Maschinenbauunternehmen in der Deutschen Inflation 1919–1923: Unternehmenshistorische Untersuchungen zu einigen Inflationstheorien (Berlin, 1985)CrossRefGoogle Scholar.

74 Feldman, Great Disorder, 842–43. For an excellent analysis of the profits of German companies from their tax records, see Spoerer, Von Scheingewinnen zum Rüstungsboom, 146–67. Spoerer's analysis confirms the poor profitability of German firms in the 1920s.

75 Wirtz, Carl, “Der Betriebsverglich dargestellt unter Berücksichtigung des Schrifttums,” Annalen der Betriebswirtschaft 2 (1928): 434–55, quote from p. 437Google Scholar; and “Unternehmungsvergleich, dargestellt auf Grund des deutschen und amerikanischen Schrifttums,” Annalen der Betriebswirtschaft 2 (1928): 525–30Google Scholar. On the role of banks in promoting good accounting standards, see Schmaltz, Bilanz– und Betriebsanalyse in Amerika, 16–21.

76 Schmaltz, Bilanz– und Betriebsanalyse in Amerika, 31–65, 87–96, 137–39, quote on p. 91, from Gilman, p. 138. Schmaltz relied on Gilman, Stephen, Analyzing Financial Statements (New York, 1925)Google Scholar, Introduction.

77 Merkt, Unternehmenspublizität, 71–72, with literature cited; Wöhe, Günter, Bilanzierung und Bilanzpolitik (Munich, 1987), 55–59Google Scholar; Eierle, Brigitte, “Differential Reporting in Germany—A Historical Analysis,” Accounting, Business & Financial History 15 (Nov. 2005): 286CrossRefGoogle Scholar.

78 Sieben, Günter, “Schmalenbachs Auffassung von der Unternehmensbewertung,” in Betriebswirtschaftliche Forschung und Praxis: 100 Jahre Betriebswirtschaftslehre—125 Jahre Eugen Schmalenbach (Herne, 1998), 189–203Google Scholar. See also Jorg Baetge and Thomas Beermann, “Die Bilanzierung von Vermogenswerten in der Bilanz nach International Accounting Standards und der dynamischen Bilanztheorie Schmalenbachs,” in the same volume, 154–68; Potthoff und Sieben, “Das wissenschaftliche Werk Schmalenbachs,” in Eugen Schmalenbach, 303–34; Locke, End of the Practical Man, 164–68; Forrester, David, Eugen Schmalenbach and German Business Economics (New York, 1993), 113–17Google Scholar; Markus, History of the German Public Accounting Profession, 81, 273–75, 285; Fear, Organizing Control, 585–86; Küpper and Mattesich, “Twentieth Century Accounting Research,” esp. 354–57. Küpper and Mattesich are more skeptical than mainstream analysts about Schmalenbach's stress on the income statement.

79 Merkt, Unternehmenspublizitdt, 94–96. Anecdote from Kruk, “Leben und Wirken Schmalenbachs,” Eugen Schmalenbach, 102–5; Leuz und Wüstermann, “Role of Accounting,” 456–57.

80 Forrester, Eugen Schmalenbach, 117.

81 Osbahr, Wilhelm, Die Bilanz vom Standpunkt der Unternehmung (Berlin, 1918)Google Scholar, quoted in Forrester, Eugen Schmalenbach, 148–49.

82 Quoted in Merkt, Unternehmenspublizität, 94. From Flechtheim, Julius, “Vom Aktienwesen in den Vereinigten Staaten,” Zeitschrift für ausländisches und Internationales Privatrecht 3 (1929): 101–19Google Scholar.

83 Schmalenbach's chart of accounts proved immensely successful throughout Europe, even in Japan. Unfortunately, it also proved useful in the Soviet Union and Nazi Germany because it enhanced control over enterprises under fixed–price regimes. The Nazi regime made his uniform chart of accounts mandatory after 1939 and introduced it to their conquered countries. The Soviet Union and its satellite countries in Eastern Europe kept using it in its purest form into the 1990s. Most German businesses also utilize a revised form of Schmalenbach's chart of accounts to this day. See Schmalenbach, Eugen, ‘Der Kontenrahmen,” Zeitschrift für handelswissenschaftliche Forschung 21 (1927): 385–402Google Scholar, 433–75; Schweitzer, Marcell, “Eugen Schmalenbach as the Founder of Cost Accounting in the German–Speaking World,” in Studies in Accounting History: Tradition and Innovation for the Twenty–First Century, eds. Tsuji, Atsuo and Garner, Paul (Westport, Conn., 1995), 29–43Google Scholar; Potthoff, Erich, “Betriebswirtschaftslehre in der Zeit des Nationalsozialismus (1933–1945) bei politischer Gleichschaltung und staatlicher Wirtschaftslenkung,” in Entwicklungen der Betriebswirtschaftslehre: 100 Jahre Fachdisziplin—zugleich eine Verlagsgeschichte, eds. Köhler, Richard and Gaugler, Eduard (Stuttgart, 2002), 87–110Google Scholar; Hanns Martin Schoenfeld, “Eugen Schmalenbach,” 515–16; Bahr, Gottfried and Fischer-Winkelmann, Wolf F., Buchführung und Jahresabschluss (Wiesbaden, 1998), 5CrossRefGoogle Scholar; Locke, End of the Practical Man, 178–86. On Schmalenbach's role in the Vereinigte Stahlwerke, see Fear, Organizing Control, 584–93; Küpper and Mattessich, “Twentieth Century Accounting Research in the German Language Area,” 360–65.

84 Miranti, Accountancy Comes of Age, 128–42, quote from p. 134.

85 Related in Wirtz, “Der Betriebsvergleich,” 455.

86 McNeil, William C., American Money and the Weimar Republic (New York, 1986), 18–19Google Scholar.

87 Dr. Otto Frielinghaus, quoted in Markus, History of the German Public Accounting Profession, 14.

88 Price Waterhouse report to Phoenix AG, 13 Feb. 1926, Mannesmann–Archiv: P 52529.Google Scholar

89 The Thyssen discussion is based on Fear, Organizing Control, 489–506.

90 Leuz and Wüstemann, “The Role of Accounting in the German Financial System”; Ashbaugh, Hollis and Warfield, Terry D., “Audits as a Corporate Governance Mechanism: Evidence from the German Market,” Journal of International Accounting Research 2 (2003): 1–21CrossRefGoogle Scholar. This disconnect between sophisticated insider information and thin disclosure to outsiders became prevalent by the late twentieth century. Highly sophisticated, state–of–the–art audit reports played a crucial role in German corporate governance, but these were often made available only to the executive and the supervisory board.

91 Fear, Organizing Control, 584–606, 651–58; Dinkelbach, Heinrich, “Das Wesen und der Aufbau der industriellen Konzernbilanz,” Zeitschrift jür Handelswissenschaftliche Forschung 35 (1941): 55–66Google Scholar.

92 In the United States, when a parent company has less than 20 percent ownership, the cost method is utilized. Investment stays at cost and dividends are recorded as income. At 20 to 50 percent of equity, investment is recorded at cost. A percent share of income is recorded as income, then added to value of investment. Dividends are added to cash, which reduces book value of investment. At over 50 percent, full consolidation is utilized, and all assets and liabilities are added with the parent; minority interest is recorded as liability; and income less minority owners’ portion is recorded as an expense. The basics of these rules existed already by the 1920s and 1930s, although standards were still debated and did not have the force of law until the late 1930s. IAS standards are similar to those of the United States, with some minor differences. In the absence of American auditors, German firms almost always used the cost method, even if ownership was 100 percent. Therefore, one could not know what a subsidiary was worth and how it contributed to the Konzern, even in accounting terms, unless one had its financial statements in hand. In 1986, under EC guidelines, Germans changed the rules to conform with American standards.

93 Vereinigte Stahlwerke AG, 1933/34 Annual Report, Mannesmann–Archiv (MA): R 140 351.

94 Quick, Reiner, “Die Entstehungsgeschichte der Aktienrechtlichen Pflichtprüfung in Deutschland,” Zeitschriftfür Unternehmensgeschichte, no. 1 (1990): 229Google Scholar.

95 Economist, 19 Oct. 1929, 721Google Scholar.

96 Markus, History of the German Public Accounting Profession, 27–34; quote from pp. 27–28; “ghastly” from p. 34.

97 Merkt, Unternehmenspublizität, 96–98.

98 Brockhage, Dr. Bernhard, Geleitwort, Der Wirtschaftsprüfer 1, no.1 (Jan. 1932): 1–2Google Scholar.

99 Weiss, Dr. Alfred, “Stille Reserven und ihre Auflösung nach der Aktienrechtsnovelle vom 19 September 1931,” Der Wirtschaftspüfer 1, no. 2 (Jan. 1932): 35–39Google Scholar: in the same issue, see Dr. Otto Keinzle, “Die Gewinn– und Verlustrechnung nach dem geänderten Handelsgesetz,” 243—44.

100 Mezger, Dr. Fritz, “Die amerikanischen Accountants und der deutsche Wirtschaftsprüfer,” Der Wirtschaftsprüfer 1, no. 10 (May 1932): 191–93Google Scholar.

101 McCraw, Prophets of Regulation, pp. 1 89–92. See discussions of Accounting Research Bulletins (ARBs) in Williams, Jan R., GAAP Guide (New York, 2000)Google Scholar.

102 Quick, “Entstehungsgeschichte,” 122–41; Eierle, “Differential Reporting in Germany,” 286–87. During the nineteenth and twentieth centuries, German accounting principles were alternately embodied in corporate law or commercial law statutes, or sometimes in some combination of the two.

103 See esp. Spoerer, Von Scheingewinnen zum Rüstungsboom, 62–95. In the 1920s especially, tax authorities influences American accounting developments, but financial reporting and tax reporting were never required to be identical in all statements. One current requirement, however, requires identical treatment for inventory flows.

104 Feldman, Gerald D., “Foreign Penetration of German Enterprises after the First World War: The Problem of Überfremdung,” in Historical Studies in International Corporate Business, eds. Teichova, Alice et al. (Cambridge, U.K., 1989), 87–111CrossRefGoogle Scholar.

105 Antrick, Otto, general manager, Chemische Fabrik (Vormals. E. Schering): memo to file, 11 Dec. 1919, Schering Archiv B2/122.Google Scholar

106 Köhler, Bernard, “Nationalsozialistische Rationalisierung,” Zeitschrift für Organisation 10 (25 May 1936): 73–77Google Scholar.

107 Markus, History of the German Public Accounting Profession, 14–15 53; Quick, “Entstehungsgeschichte,” 228.

108 Markus, History of the German Public Accounting Profession, 50.

109 Potthoff, “Schmalenbachs Leben und Wirken,” 142; Kruk, Potthoff, and Sieben, Eugen Schmalenbach, 150–53

110 Markus, History of the German Public Accounting Profession, 64–70, 78, 83–93. Markus delineates the ideological positions taken by the Institut in support of the new regime between 1934 and 1937, as well as discussing the Jews who were expelled from the Institut. Roughly nine percent of the Institut's members were Jewish (nearly half of these had served on the front line in World War I). By comparison, 16 percent of Germany's lawyers were Jewish, but they could practice their profession only under severe constraints. See Friedlônder, Saul, Nazi Germany and the Jews (London, 1997), 29Google Scholar.

111 Mönckmeier, Dr. Otto, “Der unabhängige Wirtschaftstreuhändler,” in Der Wirtschaftstreuhôndler 5, no. 1 (Jan. 1936): 1–2Google Scholar; Potthoff, “Betrtiebswirtschaftslehre im Nationalsozialismus.”

112 Merkt, Unternehmenspublizitdt, 97n341. Except for the “leadership principle,” which was clearly of Nazi origin, there is still some debate over how Nazified this law was. Many reforms, like, for instance, the organization and principles of financial statements, were discussed in the 1920s. See Hayes, Peter, Industry and Ideology (Cambridge, U.K., 1987), 168Google Scholar; and Kobrak, Christopher, “Politics, Corporate Governance, and the Dynamics of German Managerial Innovation: Schering AG between the Wars,” Enterprise & Society 3 (Sept. 2002): 421–61.CrossRefGoogle Scholar

113 Nobes, Christopher and Parker, Robert, Comparative International Accounting (London, 1998), 221–23Google Scholar; Eierle, “Differential Reporting in Germany, 290.

114 Cordes, Walter, “Die Bedeutung des Konzernabschlusses für die Konzernführung,” in Wirtschaft und Wirtschaftsprüfung, ed. Mellerowicz, Konrad and Bankmann, Jörg (Stuttgart, 1966), 50–68Google Scholar; Merkt, Unternehmenspublizitat, 98–113.

115 Rajan and Zingales, “The Great Reversals,” Table 3. For similar arguments as well as present practices, see Potthoff, Erich and Trescher, Karl, Das Aufsichtsratsmitglied: Ein Handbuch der Aufgaben, Rechte und Pflichten (Stuttgart, 2003), 327–84Google Scholar; and Ashbaugh and Warfield, “Audits as a Corporate Governance Mechanism.”

116 Währisch, Mark, The Evolution of International Accounting Systems (Frankfurt am Main, 2001), 35–54Google Scholar

117 Eierle, “Differential Reporting in Germany,” 296–97.

118 Baetge, Jorg, Kirch, Hans-Jürgen, and Theil, Stefan, Bilanzen (Düsseldorf, 2001), 12–25Google Scholar.

119 Nobes and Parker, Comparative International Accounting, 310–11. This distinction between an economic and a legalistic conception of the firm became a major problem for tax law in Germany during the 1920s due to the growth of Konzerne, multisubsidiary operations. A body of case law built around the theory of corporate agency (Organschaftstheorie) developed. See Fear, Organizing Control, ch. 12.

120 See Giddens, Anthony, “Time and Social Organization,” in his Social Theory and Modern Sociology (Stanford, 1987), 140–65Google Scholar.