The European Accounting Review 1996, 5:3,413-434

Accounting and the business economics

tradition in Germany
Walther Busse von Colbe
Ruhr-Universitdt Bochum

ABSTRACT
Erom the German point of view, accounting is a very important part of business
economics. However, in order to understand the theoretical development of
accounting in Germany during tbe twentieth century, it is necessary to identify the
influences of the social, economic and legal environment on business economics
in general and accounting in particular. Much business economics bas emphasized
microeconomic tbeory, but this ignores the problems of organization, and tbe
institutional aspects of the business world. Financial accounting in particular
cannot be understood in Germany without reference to legal rules and tradition.
Although theorizing about accounting may have been the main root of the
business economics tradition in Germany, other aspects of business economics
have developed, and it has not been possible to construct a common theoretical
foundation covering all aspects of business economics. Hence, it is necessary to
study the development of German accounting theory and practice on its own
terms.

INTRODUCTION
From the German point of view accounting (Rechnungswesen) is a very
important part of business economics (Betriebswirtschaftslehre). When
dealing with relationships between accounting and other parts of business
economics as well as with the development of accounting it is necessary to
look at the development of the social, economic and legal environment in
Germany on the one hand and at other parts of business economics on the
other hand. I shall try to point out some main aspects of the development of
accounting and accounting research in Germany in the light of its socio-
economic framework. The socio-economic system is a major determinant of
the structure and the development of business economics and especially of a

Address for correspondence

Eakultat fiir Wirtschaftswissenschaft Ruhr-Universitat Bochum D-44780 Bochum,
Germany

© 1996 European Accounting Association 0963-8180

414 The European Accounting Review

country's accounting system (Busse von Colbe, 1984a). In particular, the

development of firms influences accounting. I shall select a few influencing
factors, mainly the rate of inflation, the growing number of business
combinations and tbe growing internationalization of German firms. I
emphasize that my analysis is a personal one.
After a short review of the development of accounting in the first half of
the twentieth century I shall try to demonstrate the influence of selected
determinants on financial accounting, empirical research and managenient
accounting in Germany within the last three decades, beginning with the end
of the 1950s. Forming the legal rules of financial accounting is like a game
in which different parties participate: representatives of industiy. of the
auditing profession, of labour unions, and also academic accountants.
In the following, when I use the word 'accounting', 1 am referring to the
ideas and practices that might be described as 'West German accounting'. In
the former East Germany (DDR), accounting was shaped by a completely
different political and economic system. With the fall of socialist economic
systems, this socialistic accounting is no longer of any interest.

THE EVOLUTION OF BUSINESS ECONOMICS AND

ACCOUNTING DURING THE FIRST HALF OF THE
TWENTIETH CENTURY

The birth of business administration in Germany

At the turn of the centuiy business economics (or business administration, if
the more pragmatic aspect is emphasized) as an academic discipline came
into being in the German-speaking countries (for the history of business
administration see Albach (1990), for the history of book-keeping and
annual accounts from its origins sec Schneider (1993b), and for German
financial accounting in the 19th century see Schroer (1993)). Its birthplaces
were the business schools (Wirtschaftshochschulen, Handelshochschulen).
As a result of the private initiative of business firms and chambers of
commerce, six Wirtschaftshochschulen were founded in Germany, Austria
and Switzerland within three years: Leipzig, Aachen, St Gallen and Vienna
in 1898, Frankfurt and Cologne in 1901. Some others followed in Berlin
(1906), Mannheim (1908) and Munich (1910) within the first decade of the
twentieth century (Busse von Colbe, 1962).
The foundation of these institutions was a consequence of the industrial
revolution. In the universities economics was taught, but the problems of the
growing industrial enterprises were not analysed and discussed from the
firm's point of view. There was an obvious gap between industry's demand
for higher education and its supply. The task of the early Wirtschaftshoch-
schulen was education for the functions of middle management. Therefore,
in the first phase two-year courses were offered with book-keeping.
 The business economics tradition in Germany 415

commercial law, general economics and foreign languages as the main

subjects of teaching. However, very soon business research developed.
At the beginning of a new discipline the first task is the description of its
objects. The outstanding business administration scholars in the first
generation were Johann Friedrich Schar (1846-1924), Leon Gomberg
(1866-1935), Joseph Hellauer (1871-1956) and Friedrich Leitner
(1874-1945), because of their books on financial accounting, management
accounting and commercial business (Handelsbetriebslehre). Schar, who
was Professor at Zurich University from 1903 to 1906, and at the Handels-
hochschule Berlin from 1906 to 1919, developed the first theory of book-
keeping. Hellauer, Professor in Frankfurt, tried to work out a first systematic
approach to enterprises beyond a mere description of commercial tech-
niques. Leitner, Professor at the Handelshochschule Berlin (1906-1938),
created a cost accounting system and extended book-keeping to an
instrument for analysing and controlling business enterprises (Potthoff,
1993).

Accounting as the starting point of business administration

At the same time, Eugen Schmalenbach (1873—1955) was teaching business
administration in Cologne, and had been doing so almost since the
foundation of the Cologne Handelshochschule, which was converted into a
full university after the First World War. He was probably (Kruk et al.,
1984) the best known representative of the new discipline, with a broad field
of research interests. During his thirty years at Cologne, the institution
became the centre of business administration in Germany. Schmalenbach
endeavoured to give accountancy theoretical foundations. He developed a
system of cost accounting on the basis of the theory of the firm. His main
field of interest was the dependency of cost on production volume. On this
topic he published his first article in 1899 (Schmalenbach, 1899). He
particularly emphasized the problem of fixed cost in expanding industrial
plants.
Scbmalenbacb's main attention, bowever, was directed towards a theory
of financial accounting. His interpretation of annual accounts as a so-called
dynamic balance sheet, published in 1920, determined the discussion on the
aims of financial accounting in Germany during the 1920s and 1930s
(Schmalenbach, 1920). Schmalenbach's view was that the annual accounts
should show the result of the accounting period, not the value of the firm's
assets and liabilities at the end of the year. The annual profit should on the
one hand guide the firm's management to effective actions and on the other
hand serve as an instrument for accountancy in the owners' interest. The
'dynamic' interpretation of annual accounts has influenced both the German
generally accepted accounting principles (Grundsatze ordnungsmdfiiger
Buchfuhrung) and German commercial law, as far as accounting is
416 The European Accounting Review

concerned, up to the present day. However, Schmalenbach was not purely a

theorist, but a scholar with an excellent understanding of accounting
problems in the business world. From that point of view the 'dynamic
theory' is more an approach oriented towards real business life than a theory
in the narrow sense.

The debate on inflation accounting

The greatest challenge to accounting was the hyperinflation in Germany at
the beginning of the 1920s. Historical cost accounting lost its ability to
measure the value of assets, equity and liabilities as well as the annual profit.
Schmalenbach developed a concept for annual accounts on the basis of the
constant purchasing power of money, in order to control the maintenance of
equity in real terms. A profit should only be shown if the equity is main-
tained in real monetary units. A general price index should be used to define
equity and profit.
At the same time Fritz Schmidt (1882-1950) advocated the maintenance
of assets measured by replacement prices, under the condition of equiva-
lence between nominal assets and liabihties. The annual profit should be
computed on a current cost basis without being influenced by the revaluation
of assets (Schmidt, 1921). Other distinguished scholars such as Ernst Walb
(1921), Walter Mahlberg (1921) and Erwin Geldmacher (1923) participated
in the controversy over the different approaches to inflation accounting.
The development of different financial accounting systems that are based
on constant purchasing power of money or on replacement costs has been
considered the most important achievement of German business administra-
tion during the first half of the twentieth century (Schneider, 1993b). These
methods of controlling capital maintenance have also been appreciated
internationally (Graves et al., 1990), and are still significant sixty years
later. It has been said that by working on the problems of elimination of
price level changes from financial and cost accounting in the early 1920s,
business administration became a science (Gutenberg, 1957).
After the end of the hyperinflation following the currency reform in 1923,
however, there was no necessity to implement methods of inflation
accounting into the law or into practice permanently. During the 1930s and
1940s, Germany was under governmental price regulation with the
consequence of almost constant prices. Nevertheless, inflation accounting
remained an issue to which academics devoted their attention in later years
(for example Hax, 1957; Schildbach, 1979), and which received more
general attention as soon as the rate of inflation rose above a level of 5 or 6
percent (Schildbach, 1990).
Despite the fact that German scholars had developed different inflation
accounting theories at a very early time and that this topic was a central
feature of academic debate in Germany during the 1920s and again in the
 The business economics tradition in Germany 417

1950s and 1960s, the accounting rules specified by German commercial law
(Handelsgesetzbuch) have been strictly oriented towards historical cost
since the currency reform of 1948. Since that time the main task of the
German Bundesbank has been to maintain the stability of the purchasing
power of money as far as possible. Almost any kind of price indexation is
strictly forbidden by law. Consequently, no method of inflation accounting
or revaluation in financial accounting or tax accounting is permitted. Tbe
firm's accounting system, it is argued, should not provide a way for the
inflation bacillus to enter the economy. Because of very big losses of
monetary assets, caused by the hyperinflation at the beginning of the 1920s,
people in Germany fear inflation more than other economic disadvantages.
Germany prospered with this economic policy.

The effects on accounting of the economic crisis and state planning

system of the 1930s
Two other contributions of Schmalenbach should be mentioned. The first
one has to be seen in connection with the world economic crisis at the
beginning of the 1930s. The collapse of some large companies was the
reason for introducing compulsory auditing of the annual accounts of
corporations (Aktiengesellschaften - AG). Schmalenbach was one of the
important promoters of the inclusion of auditing in the corporation law of
1931 and of the establishment of the auditing profession.
Schmalenbach's second contribution of lasting importance was the
development of the chart of accounts (Schmalenbach, 1927). His systematic
order integrated the accounts of financial accounting and cost accounting
and became the basis of the official industrial chart of accounts, which was
compulsory for all industrial enterprises from the 1930s until 1945. This
obligation was an instrument of state economic planning in Germany.
However, the idea of such an integrated uniform system of accounts seemed
to be attractive to other countries, too. Some of these introduced similar
regulations, for instance France and Spain.
The state planning system also led to the promotion of the industrial cost
accounting system, in particular the calculation of prices on a full cost basis.
A uniform procedure to compute costs was first introduced in order to
determine the administrated prices when supplying the state. That procedure
included depreciation on a replacement cost basis and interest on assets, and
it is still used in many firms.

Bridging the gap between business administration and

microeconomic theory
After the end of the Second World War and the 1948 currency reform
Germany developed the social market economy. Enterprises came under the
418 The European Accounting Review

pressure of competition and had to be controlled in a market-oriented rather

than production-oriented way. Step by step the product market and later on
capital markets became international. Accounting lost its dominant position
in business administration. Other parts of business economics, in particular
marketing, finance, taxation, organization and general management gained
an important role in the following decades.
Erich Gutenberg (1897-1984), a successor to Schmalenbach's chair at
Cologne University, tried to work out a comprehensive system of the
enterprise, based on the input—output relations. He bridged the gap between
business administration and microeconomic theory, refining the classical
theory of the firm and bringing it nearer to a reflection of the different
processes in the firm. For instance, he deduced cost functions depending on
the adjustment measure to volume variations implemented in the plant, as
well as a twice kinked demand curve in oligopolistic markets. Gutenberg's
three-volume work on the foundations of business economics (covering
production theory (1951), market theory (1955) and later on finance
(1969)), shaped the thinking of a generation of academics within the
discipline. His cost theory, derived from production theory, served as a
basis for standard and marginal cost accounting systems, elaborated for
instance by his former research assistant Wolfgang Kilger (1961). Guten-
berg's counterpart in terms of economic theory was Erich Schneider,
Professor at Kiel University. Both scholars were receptive to microeconomic
theories, partly developed in Anglo-American countries.
However, the microeconomic approach ignores the problems of organiz-
ation and the behaviour and personal interests of the people in the firm and
their personal relationships to people outside the firm, which are well known
today under the general heading of principal-agent relationships. Further-
more, microeconomic theory neglects the institutional aspects of the
business world. Financial accounting is influenced to a great extent by legal
rules and tradition, like generally accepted accounting principles. Therefore,
in the following sections, I shall try to analyze in more detail the develop-
ment of accounting in the light of changes in the socio-economic and legal
environment, particularly with reference to changes in the commercial law
within the last three decades.
Possibly in contrast to the US and some Anglo-Saxon countries within the
last two or three decades, a main concern of academic accountants in
Germany is interpretation of the existing accounting regulations and
participation in their improvement through publications and contributions to
the hearings of government and parliament. Academic accountants took
part, for instance, in the implementation of the EEC directives into the
German commercial law (Busse von Colbe, 1992).
 The business economics tradition in Germany 419

THE DECADE 1961-70

Legal framework of financial accounting

During the 1960s, financial accounting practice and financial accounting
research in Germany were mainly influenced by the reform of the Stock
Corporation Law (Aktiengesetz) in 1965. In the years before 1965 the
problem of hidden reserves in company accounts, created by highly
conservative valuations, had been discussed. One effect of this discussion
was the codification of the so-called 'fixed value principle' (Fixwertprin-
zip), which to a certain extent restricted the undervaluation of assets below
historical cost.
Moreover, in the Stock Corporation Law of 1965, the preparation of
group accounts was codified for the first time. Consolidated statements
became a main subject of the accounting literature (Busse von Colbe and
Ordelheide, 1993). In these consolidated accounts only German subsidiaries
were required to be included, but foreign subsidiaries can be excluded. The
foreign transactions of German firms were rather small in this decade (as an
example, German foreign direct investment in 1960 was only 6.5 per cent of
foreign direct investment in 1986). Accordingly, there was or seemed to be
no need for the German legislature to demand the inclusion of foreign
subsidiaries in group accounts. After 1965 the foreign engagements of
German firms increased rapidly. For example, between 1965 and 1970 the
German direct investments tripled from DM1.1 billion per annum to DM3.5
billion, and reached DM16.5 billion in 1986.
Another change of the German legal system occurred in 1969, when the
Disclosure Law (PublizitHtsgesetz) was enacted. This law required very
large unincorporated firms and large groups (employees exceeding 5,000,
balance sheet total exceeding DM125 million, sales exceeding DM250
million) to disclose their financial statements and to draw up consolidated
accounts, irrespective of their legal form. Under the Stock Corporation Law
of 1965 only parent companies in the legal form of corporations had to
publish annual accounts including group accounts. A contemporary factor
underlying the legislature's enacting of the Disclosure Law was the crisis
concerning the Krupp group which suffered heavy losses in 1966. This crisis
had negative effects on many suppliers, customers, and employees of
Krupp, most of whom did not know about the risky situation because Krupp
— as a non-incorporated finn - was not at that time required to publish
financial statements.
Funds statements had been discussed in Germany as early as the 1920s
(Bauer, 1926). In the 1960s they again became a subject of interest (Busse
von Colbe, 1966; Kafer, 1967) when large corporations voluntarily
introduced funds statements step by step. However, form and content
differed widely (as they still do today). The recommendation of the Institut
420 The European Accounting Review

der Wirtschaftsprufer (IdW - Institute of Auditors) in 1978 to standardize

them was unsuccessful (HFA des IdW, 1978). There is still no legal
requirement to disclose funds statements, not even for quoted corporations.
Discussion in the accounting literature therefore continues (for example
Dellmann and Kalinski, 1986; Chmielewicz and Caspari, 1985; Busse von
Colbe, 1990a, 1993a). As a result of this discussion and in particular as a
consequence of the revised IASC Statement 7 (1992), the
Hauptfachausschufi (HFA — Supreme Committee of Experts) of the
Institute of Auditors and the Schmalenbach-Gesellschaft issued a joint
recommendation on cash flow statements (1995). This time the recommen-
dation was followed voluntarily, initially by large corporations listed on the
stock exchanges in Germany and abroad.

First steps to empirical research in financial accounting

In the 1960s, empirical accounting research in Germany stood at its
begiruiing. The type and extent of published information about planned
items, such as investments and dividend payouts, was, for instance, the
subject of an empirical investigation (Busse von Colbe, 1968), and a study
concerning the methods of consolidation applied in the group accounts of
126 German companies was published (von Wysocki, 1969). Empirical
research was not as popular in Germany as in the United States during the
1960s. One reason was probably that the data base of firms was rather poor,
perhaps owing to the fact that the capital market was less developed than for
instance in the USA; another reason may be that the use of computers for
economic research was relatively rare in Germany at that time.

Development of management accounting and capital budgeting

In the field of management accounting the 1960s were characterized by a
lively discussion concerning the methods of dii-ect and maiginal costing,
particularly the different systems of standard marginal costing which were
developed, partly based on Gutenberg's concepts, into practicable pro-
cedures. Wolfgang Kilger (1961) and Paul Riebel (1972) may be named as
pioneers who contributed very much to this approach in that decade as well
as later. At that time there was a discrepancy between theoretical discussion
and the practice adopted by firms. Nearly all firms were using full cost
methods in their internal accounting systems, which, as mentioned above,
had been developed, standardized and applied in Germany during the 1930s.
When locating questions in capital budgeting within accounting in a
broader sense, some significant German studies in that field should be
mentioned. A one-period model concerning the simultaneous planning of the
investment and the financing programme (Albach, 1962), and a variation of
Weingartner's model (1963) were published, the latter suggesting a multi-
 The business economics tradition in Germany 421

period model for the simultaneous planning of the capital and financing
programme (Hax, 1964). Another multi-period simultaneous investment and
production planning model was intended to find optimal solutions in the case
of joint production or multi-stage production (Jacob, 1964). These studies
were based on Gutenberg's approach to a general theory of business
economics. They all assumed that outcomes were certain and used linear
programming methods. However, the practical implementation of such
models seemed to be almost impossible or too expensive. Therefore, this
branch of research was not developed further.

THE DECADE 1971-80

Changes in the economic and legal environment of financial

accounting
The 1970s were influenced by an increasing number of business combina-
tions and the growing internationalization of German firms. The number of
large business combinations reported to the German antitrust office (Bericht
des Bundeskartellamtes 1974-86) doubled from 316 in 1974 to 635 in 1980.
Therefore, it is not surprising that a part of accounting research focused on
problems of tbe preparation of group accounts, for example the different
methods of elimination of intercompany accounts and the treatment of
goodwill at the date of purchase of shares ('capital consolidation').
Furthermore, questions of international group accounts became more and
more important owing to the increasing internationalization of German
firms. The inclusion of foreign subsidiaries and the problem of foreign
currency translation in group accounts became a subject of discussion and
accounting research. The temporal principle of translation was suggested
simultaneously and independently in the United States and Germany in
1972. As a result of the growing internationalization some German
multinational corporations voluntarily began to publish international group
accounts in which the foreign subsidiaries were included.
Another main topic of discussion was caused by the increasing rate of
inflation during the 1970s. The rate of inflation climbed from about 2 per cent
in the 1960s to reach its peak at 7 per cent in 1973/74. Having experienced the
hyperinflation of the 1920s, Germans are more sensitive about inflation than
people in other countries. This explains the fact that several researchers
worked on different concepts of inflation accounting. The concept of 'equity
capital maintenance', a type of current cost accounting restricted to owners'
equity, was developed (Seicht, 1968; Sieben and Schildbach, 1973; Pohl-
mann, 1981). Some large corporations disclosed information on the extent of
retained earnings that was necessary to realize this concept.
In the mid-1970s the problem of the EEC-wide harmonization of
accounting rules was taken up in the German accounting literature. Its
422 The European Accounting Review

consequences for future German accounting were especially discussed after

the enactment of the Fourth EEC Directive in 1978, one main point being
the impact of the Fourth EEC Directive's 'true and fair view' concept on the
new German company law (Busse von Colbe, 1984b). Another issue was
the question whether the cost of sales way of presentation of the profit and
loss account allowed by the Fourth Directive should be introduced into
German law. The authors who were concerned with group accounts often
dealt with the methods of equity accounting for investments in associates
and pro rata consolidation, which were new for Germany.

Growth of empirical research in flnancial accounting

Empirical research was extended during the 1970s (Albach, 1971). For
instance, a study concerning the usefulness of accounting data for predicting
the growth of firms was published (Perlitz, 1973). This study revealed that a
combination of ratios based on data from funds statements and annual
accounts proved to be important for the discrimination between growing and
non-growing firms. Several academics worked empirically on the usefulness
of accounting information for predicting bankruptcy (Beermann, 1976).
These studies concerning large corporations, as well as several studies
concerning small and medium sized firms, showed that bankruptcy can be
anticipated with the help of accounting information. A different study came
to the conclusion that the stricter legal requirements of the 1965 Stock
Corporation Law concerning hidden reserves have decreased the predictive
ability of accounting data (Gebhardt, 1980). Other empirical studies dealt
with accounting policies, especially the income smoothing policies of
German corporations (Schmidt, 1979; Halbinger, 1980). The increasing rate
of inflation during the 1970s influenced empirical research as well. An
investigation was carried out into whether inflation-adjusted earnings were
reported in annual reports and how aware German managers were of
inflation accounting problems (Mertens et al., 1977). But the problem of
inflation accounting only played a minor role in German empirical research.

Stagnation in management accounting

In the field of management accounting there was little progress compared to
the 1960s. Most firms still used full cost methods, and direct costing
approaches dominated in the accounting literature. The question arose
whether cost and revenue accounting could be integrated. The influence of
different factors on revenues and costs, for example the influence of
different production processes or quality levels on costs, was analysed
(LaBmann, 1981).
 The business economics tradition in Germany 423

THE DECADE 1981-90

European harmonization of financial accounting

During the 1980s the number of large business combinations increased
again. In 1975, there were only 445 business combinations, whereas in 1981
the annual number increased to 618. Only six years later 802 mergers of
firms took place in Germany. The internationalization of German firms,
measured by the increase in German foreign direct investment, doubled
again (1980; DM8.2 billion; 1986; DM16.5 billion). In accounting research,
this led to a growing interest in international comparisons of accounting
rules. The EEC-wide harmonization of accounting rules was especially
important for German academics and company representatives.
In 1985, the Fourth, Seventh and Eighth EEC Directives were imple-
mented into German commercial law. The accounting rules codified in this
law differ significantly from the rules of the Stock Corporation Law of 1965.
The rules were extended to limited liability companies (Gesellschaften mit
beschrankter Haftung - GmbH), now more than 500,000 in number. The
interpretation of the new accounting rules is still a major field of accounting
research in Germany. Several innovations concerning annual accounts have
frequently been discussed in recent accounting literature, for example the
impact of the 'true and fair view' concept, the recording in the balance sheet
of expense anticipation accruals, and the requirement to accrue in full future
pension obligations. The newly introduced requirements to carry pension
obligations as liabilities on tbe balance sheet were also a consequence of the
crisis of AEG, for decades the second largest German electrical firm. In the
years before 1982, AEG made only partial use of the previous option of
recording pension obligations in the balance sheet, otherwise AEG would
have been forced to report losses much earlier. In 1982, AEG had to apply
for court protection from creditors and could not meet its pension obliga-
tions. Thus a pension guarantee association, financed by all Geiman firms
with pension obligations, has had to pay a part of AEG's current pension
obligations since that time.
The innovations for group accounts have been even more significant
(Busse von Colbe, 1987a, 1990b, 1993b);
1 Private limited liability companies are now required to draw up
consolidated accounts if they have subsidiaries and if they exceed
certain limits concerning the number of their employees, balance sheet
totals, and sales.
2 Although the new German commercial law prescribes the preparation
of worldwide financial statements, the question how to translate foreign
currency financial statements remains open (Busse von Colbe, 1993b).
3 Another important innovation for consolidated statements is the
introduction of the principle of uniform valuation methods within the
424 The European Accounting Review

group. The new principle permits an autonomous group accounting

policy uninfluenced by German tax laws. German companies can use
the principle of uniform valuation metbods in order to increase equity in
the balance sheet and partially to avoid the handicap of a lower equity
ratio when international comparisons are made.
4 Even according to the rules of the new German company law, group
accounts are only instruments of information for stockholders, lenders
and other interested persons. In Germany, group accounts are still not
the basis for the distribution of dividends and the computation of taxes.
The importance of group accounts will, however, increase in Germany
as the new consolidation techniques, the inclusion of foreign sub-
sidiaries and the valuation of investments in associated companies in
accordance with the equity method will lead consolidated accounts to
offer higher information value.
5 Shareholders, creditors, customers, suppliers, and employees will
probably more and more regard group accounts as the most important
reporting system for firms organized as groups of affiliated companies.
In the long run the functions of group accounts which are required by
law will be affected by this. Early signs of this development are already
emerging. According to Section 58 of the Stock Corporation Law, at
least 50 per cent of a company's annual profit must be paid out as
dividends to shareholders. In groups, the management is able to retain
more than 50 per cent of the group profit by accumulating profits in
subsidiaries, particularly abroad. Therefore, the question whether the
obligation of paying out dividends by parent companies should be based
on individual or group accounts has been discussed in the German
literature for a few years (Busse von Colbe, 1987b). So far, tax
legislation does not refer to group accounts. This could change, as
group accounts become used widely and as methods of valuation and
disclosure within group accounts differ more and more from those for
individual accounts.
Further European influences on accounting can be observed. In 1982, the
Fifteenth EEC Directive on interim reports was issued. Since July 1988,
corporations quoted at a German stock exchange are required not only to
publish annual reports, but also to draw up semiannual interim reports
(according to Section 44 (b) of the Stock Exchange Act (Borsengesetz) and
Sections 55ff. of the Stock Exchange Regulations
[Borsenzulassungsverordnung)). Owing to the fact that these legal rules can
be interpreted in different ways, the field of interim reports is going to be a
specific point of interest in German accounting research.
After the issue of EEC directives on the annual accounts of credit
institutions and insurance companies German commercial law was adapted
accordingly.
 The business economics tradition in Germany 425

In the European Community the legal structure of corporations is a subject

matter for further tendencies towards harmonization. A Fifth EEC directive
on the structure of corporations and a Ninth directive on corporate legal
structure are being prepared in Brussels and are also being discussed by
academic accountants in German accounting journals (Verband der
Hochschullehrer 1987). The EEC council has published a pre-draft on the
harmonization of tax accounting rules (Kreile, 1988). On the way to the
uniform European Market of the future the harmonization of taxes will be a
further, very important step with consequences for financial accounting in
Germany.
The reunification of the two German states in 1990 brought a special
accounting problem into focus; the treatment of contaminated sites, and
primarily the measurement of provisions for them.

Revival of accounting theory

In Germany the valuation of firms, apart from their quotation on the stock
exchange, is regarded as an important part of accounting theory, because of
the minor role of the stock exchanges compared to that in the Anglo-Saxon
countries. Therefore, from Schmalenbach's time until today, books and
articles have been published on this subject (Busse von Colbe and Coenen-
berg, 1992). Valuation of firms is a rather complex capital budgeting
problem. The shareholder value discussion and the free cash flow concept
can at least partly be found in this literature.
In the 1980s German accounting theory was influenced by the same
developments as in the United States. Agency theory has not only flooded
American literature, but has also been taken up by Geiman academics
(Ewert, 1986; Hartmann-Wendels, 1986). Quite often the agency theory is
praised as a new, revolutionary idea. While it is the case that accounting
theorists have begun to develop principal-agent models during the last few
years, the discussion of the relationship between owners of firms and their
employed managers or their creditors has a long tradition in German
accounting theory (Schneider, 1993a).

Extension of empirical research into financial accounting

The 1980s were characterized by a further increase of empirical studies in
Germany. For example, a study on the relationship between balance sheet
ratios and shareholders' securities risks came to the conclusion that balance
sheet ratios contain information about these risks faced by shareholders
(MoUer, 1986). Another study dealt with the effects of deliberate changes in
accounting and valuation methods (Coenenberg et al., 1983). Based on
German data, this study found that shareholders are able to abstract from
profit manipulations by the management and that the reactions of
426 The European Accounting Review

shareholders of manager-controlled firms were more erratic than those of

shareholders of owner-controlled firms. Further studies on the basis of more
than 40,000 financial statements over three years proved that discriminant
analysis techniques and neural networks can be used for the early recogni-
tion of firm crises (Niehaus, 1987; Baetge et al., 1994). Empirical research
into the usefulness of consolidated accounting data showed that the
assessment of companies differs if group accounts instead of individual
accounts are analysed. The joint analysis of individual and group accounts
allows a more accurate forecast of the development of future returns than the
analysis of annual accounts of a group's parent company (Pellens, 1989). A
recent overview on empirical research has been provided by Coenenberg and
Haller (1993).
Compared to the United States, there is still a deficit in empirical research
in Germany. However, there is a good chance that this will change with the
establishment of a data base similar to the American CRSP (Center for
Research in Security Prices), sponsored by the German Science Foundation
(Deutsche Forschungsgemeinschaft). This data base contains share prices
for Gentian corporations since 1960, quotations of loans, and the accounting
data of around 470 corporations since 1967. The first results of empirical
capital market research with the help of these data banks have recently been
published (Biihler et al, 1993).

Some new approaches to management accounting

Regarding management accounting practice, most firms still use full costing
methods, with only a relatively small number of firms also working with
contribution margin techniques (Mannel, 1988). An explanation for this
astonishing fact has recently been given. There seem to be some reasons
from the principal-agent point of view for using full cost methods in order to
prevent over capacities (Pfaff, 1993).
In the German accounting literature some new tendencies can be observed
over the last few years. For example, in the mid-1980s a proposal was made
to integrate capital budgeting and cost accounting (Kupper, 1985). For
planning purposes cost accounting should be based on the methods of capital
budgeting in order to provide decision-relevant information.
Some other authors suggest that the existing techniques of internal
accounting should be adapted to firms' new requirements. Because of the
increasing significance of research and development for the competitiveness
of firms, it is suggested that both cost estimates and accounting for research
and development projects should be improved (Kupper, 1985). There is a
demand for a modification of the traditional internal accounting techniques
into efficient instruments of controlling (Kupper, 1985). Controlling
concepts are now a main subject of interest for academic and professional
accountants (Horvath, 1992; Reichmann, 1988).
 The business economics tradition in Germany All

Moreover, in future it will become more and more important to integrate

accounting information into business planning activities. Internal accounting
should not only assist operational planning, but also strategic planning
(Coenenberg and Baum, 1987; Coenenberg, 1992; Ewert and Wagenhofer,
1993).

THE PRESENT SITUATION

Internationalization of financial reporting

In the early 1990s, the growing globalization of capital markets led some
large German stock corporations to adapt their group accounts, as far as was
compatible with commercial law, step by step to the international standards
set by the International Accounting Standards Committee (IASC). A widely
known example is the 1994 annual report of Bayer AG, whose shares are
listed on several stock exchanges in Europe and Asia. This development was
triggered off by tbe application in 1993 of Daimler Benz AG, the biggest
German industrial group, to have their shares quoted on the New York Stock
Exchange (NYSE). The Securities and Exchange Commission (SEC) was
not satisfied with the company's German group accounts, but demanded
from Daimler Benz an annual reconciliation of the group's equity and profit
in accordance with Form 20-F. The tremendous differences between the
figures according to German regulations on the one hand and those of the
FASB on the other hand shocked the accounting profession and confused
analysts and shareholders.
The first step towards adopting international accounting standards is to
extend the information contained in group accounts voluntarily beyond what
is required by German law, in particular to include cash flow statements, as
mentioned above, and segment reporting beyond the requirements of the EU
directives and the commercial law respectively. That involves mainly
segmenting profit and investing activities. The next step is to make use of
the valuation options offered by German law to comply with international
standards, for example with respect to translation methods, recognition of
goodwill with depreciation over its useful life or recognizing overheads for
the valuation of inventories (Busse von Colbe, 1995).
Tbere are, however, provisions in German commercial law which are not
compatible with international standards and US generally accepted
accounting principles, respectively. Thus, for example, under German
commercial law, production costs of intangible assets are not permitted to be
recognized in the balance sheet, and no valuation of assets beyond historical
cost is allowed. Disclosing the differences is insufficient as a solution.
Therefore the question arises, whether the legal rules at least for group
accounts should be changed accordingly.
428 The European Accounting Review

Shareholder value orientation of accounting

Internationalization of group accounts is not only a consequence of global
capital markets but also an expression of a growing shareholder value
orientation on the part of financial reporting in Germany. According to the
so far widely held Bilanz im Rechtssinne (annual accounts in a legal sense)
concept, the main function of annual accounts is to determine distributable
profits (Moxter, 1984) under the restrictions of creditor protection
(Gldubigerschutz), and at the same time to provide the basis for the taxation
of the firm's profits (Working Group 1995).
In contrast to Germany and to other Central European countries, the
prevailing conception held in Anglo-Saxon countries is that the main
function of annual accounts is to provide useful information for shareholders
and creditors. Though an empirical study has shown that the infomiation
contained in German group accounts is not necessarily inferior to that
contained in American ones (Hams et al., 1994), it appears that US financial
reporting is more appropriate for giving information to shareholders.
Furthermore, worldwide accounting harmonization would make it easier
to compare the performance of companies from different countries. Some
German companies look at the IASC or US standards as a benchmark for
shareholder value oriented accounting, even if they do not intend to be listed
on the NYSE. If financial reporting to shareholders is to become more
shareholder value oriented, then international reporting should aim in the
same direction. Recently, some large companies have changed their
international accounting systems accordingly. They manage their sub-
sidiaries and business units using shareholder value oriented accounting
tools (Siegert, 1995).
That development is to be observed with some large corporations, more
often listed ones. However in Germany only 600 out of 3,500 corporations
(besides more than half a million GmbHs and about one million unincoipor-
ated companies, mostly with a small number of owners) are quoted. The
economic importance of listed companies is much smaller in Germany than
in other West European countries and the USA, even though going public
has been gaining in attractiveness recently. It is hard to imagine, therefore,
that on account of a few hundred listed companies the legal accounting
regulations should be changed for all firms. It seems more probable that the
legislature will introduce different accounting rules for group accounts,
possibly for listed companies only, and for financial statements of individual
companies (Busse von Colbe, 1995).

SUMMARY AND CONCLUSIONS

At the beginning of my paper I pointed out that in Germany accounting is
seen as an important part of business economics. According to Gutenberg
 The business economics tradition in Germany 429

and the opinion of many other scholars, accounting was the main root of
business economics. In the second half of this century other parts of business
economics have been developed and have gained growing significance.
Between accounting and related parts like auditing, controlling, taxation and
finance there exists a close relationship, to be seen, for instance, in
managerial accounting as a controlling instrument, in tax accounting or in
capital market studies on accounting data.
Towards other parts the bridges are rather rare. The different parts of
business economics do not have a common theoretical foundation. The
approaches of some authors to building up a comprehensive theory
explaining the statements of the different parts from a single principle have
been too one-sided and therefore not convincing (see the overview by von
Stein, 1993). That holds for Gutenberg's approach basing a general theory
on input-output relations, Heinen's attempts to found business economics
on decision theory (Heinen, 1976) or the recent approach by Schneider
(1993a). As a result, textbooks on general business economics (Allgemeine
Betriebswirtschaftslehre) consist merely in a description of the different
fields of business economics (Wohe, 1990) or are restricted to the theory of
the firm (Betriebswirtschaftstheorie). That is the reason why I have
concentrated my paper on the development of accounting itself.
In the 1920s the German hyperinflation influenced accounting, in the
1930s it was the state planning system. Changes in the socio-economic and
legal environment of the firm have affected accounting in Germany. As to
recent history, a close connection between the internationalization of firms
and the growing importance of international aspects of financial accounting
practice and financial accounting research in Geiinany can be demonstrated.
The increasing number of business combinations during the last three
decades has also influenced German financial accounting. Even the crises of
some large firms had a considerable impact on financial accounting as they
led to the introduction of new legal rules.
Furthermore, it should be remarked that the direction of German research
activities has changed during the last thirty years. Although the interpreta-
tion of accounting regulations still is a special point of interest to German
academics, empirical accounting research has become more important.
Management accounting has reacted as well. Changing economic
conditions have created a need to modify internal accounting techniques
used as tools of control. Up to now this has mainly been recognized in the
accounting literature, while most firms still use their traditional full cost
methods. Two approaches have recently been discussed in the literature;
activity based costing and target costing (IFUA Horvath & Partner, 1991;
Seidenschwarz, 1993). These approaches have also been implemented in
certain firms.
Recently some large corporations, mostly listed ones, have changed their
accounting philosophy from stakeholder value orientation to more of a
430 The European Accounting Review

shareholder value orientation. That holds for external reporting as well as

internal management of the group. The reason is not only the globalization
of capital markets but also the transfer of production and research activities
from Germany to other countries, as a consequence of growing worldwide
competitive pressure, coupled with the high level of wages and social costs,
heavy tax burden and overregulation of firms' activities in Germany.
Adapting financial reporting of groups can be achieved to a great extent
within the limits of present legal regulation. However, some international or
US standards are not compatible with German law and possibly with the
Seventh EU Directive as well. If the opinion that international accounting
standards are more appropriate to serve shareholders' and the creditors'
needs is successful, it would be necessary to revise German accounting
regulations at least as they apply to the group accounts of listed companies.
Such a different accounting would improve the comparability of annual
accounts worldwide, but paradoxically would restrict it within Germany
itself.

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