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Accounting in Germany

German Accounting System Overview

1. German Accounting and Country Demographics

1.1. Location

To understand the German accounting system, it is important to get the general ideas about Germany. This country occupies the Western part and the Central part of Europe. Denmark is to the north. Poland and the Czech Republic are to the east. Austria and Switzerland are to the south. France and Luxembourg are to the southwest, and Belgium and the Netherlands are to the northwest. Because of its geographical location, Germany holds a central position in Europe. From Frankfurt, many important European urban and industrial centers can be reached within a distance of approximately 600 miles. Germany’s central position in Europe, along with its communication and transportation infrastructure, makes it the number one logistics market in Europe.

1.2. Population

Accounting in Germany - Population

With a population of approximately 81 million, Germany is the largest consumer market in the European Union. In recent years, the German population has increased rapidly due to a significant rise in immigration. For thousands of immigrants from all over the world, especially southern and eastern EU countries, Germany, the largest economy in Europe, is an attractive destination. Consequently, Germany has benefited from the wave of immigrants as it brings a large number of well-qualified and trained people to Germany.

1.3. Number of Accountants and Auditors

Accounting in Germany - Number of Accountants and Auditors

According to the Federal Chamber of Accountants, the number of accountants (Wirtschaftspruefer) in Germany was 14,407 (until 1/1/2015). The number of auditors (Buchprüfer) was 3,085 (1/1/2015). Compared to the beginning of 2014, the number of accountants in Germany increased slightly (from 14,390 to 14,407), and the number of auditors decreased slightly (from 3,211 to 3,085).

1.4. Legal System

Germany has a civil law structure established on Roman law, with some references to Germanic law. Because German business law is governed by the principle of freedom of economy, business activities in Germany normally do not need a specific permit or license. In addition, German law often does not distinguish between Germans and foreign nationals concerning investments or the establishment of companies. The legal environment in Germany is stable and transparent.  The World Economic Forum ranked Germany as one of the prime countries of 144 competitors in terms of judicial independence.

Legal System

2. German Accounting and Previous Accounting Standards

2.1. German Accounting History

The origin of German accounting standards starts in the early 1300s. The earliest form of record-keeping originated with Hermann Wittenborg in 1329. Wittenborg’s son Jonathan continued to record-keeping until 1360. The books were merely solo lending and trading transactions that did not incorporate dual accounting entries.

Double-entry bookkeeping started in the early 1500s. Families began trading internationally during the Renaissance. Dual entry accounting originated in commercial parts of Italy sometime earlier. One family, the Fuggers, implemented the system. The family’s chief bookkeeper Matthaus Schwarz wrote bookkeeping instructions titled Threefold Bookkeeping.

German accounting practices originated from code law. The first General German Commercial Code was enacted in 1861 and was based on French codes. The first legal accounting obligation was the French Ordonnance De Commerce of Louis XIV in 1673. The code, known as “Code Savary,” forced journal entries and inventory records of assets, receivables, and debts, which resembles a balance sheet. The law wanted record keeping in case of bankruptcy. If no records were kept, the merchant was said to defraud creditors intentionally. The Code Savary recommended assets and liabilities to be measured at cost or sales value. The Savary influenced the General Law for Prussian states of 1784 and the French Code de Commerce of 1807.

The earliest form of German code law was enacted in 1861. The German Union formed in 1815 after the Congress of Vienna in 1814. The German National Assembly adopted uniform commercial law in 1861 through the “Allgemeines Deutsches Handelsgesetzbuch” or ADGHB, General German Commercial Code. Around 1870, the ADHGB issued regulations matching record-keeping with tax calculations, or “legal book-tax-conformity.” The code required every business to create a balance sheet and inventory records at fiscal year-end. Besides, ADGHB set laws for stock corporations (AG) and limited joint-stock partnerships (KGaA). Asset valuation was based on current values at the balance sheet date. The current value figure aimed to put a ceiling price on asset valuation. However, many German corporations failed in 1870 because companies used current values as the overarching valuation principle, not as a ceiling price.

The Stock Corporation Act was enacted in 1870. This Act, or AktG, required balance sheets and profit and loss statements for stock corporations. AktG eliminated the charter account system. Before its passing, stock companies needed a government charter and were monitored by the government.

The Reich’s Supreme Court later ruled over asset valuation in 1873. The court decided that objectivity was the main principle of asset valuation. As a result, assets had to be valued at their market price at the balance sheet date. This served as the groundwork of German accounting because it ruled that balance sheets exist to determine net assets, which is a company’s ability to meet obligations. Consequently, firms would calculate profit as the difference in net assets. In the 1920s, Eugen Schmalenbach defied the aforementioned accounting theory claiming that financial statements should calculate income to inform investors. German theorists debated the two positions during the 1920s and 1930s.

Germany later reformed asset valuation to historical cost. In 1884, the Stock Corporation Law was amended. The law mandated acquisition costs for assets and depreciation for noncurrent assets. Today, Germany still abides by the historical cost principle. The Stock Corporation Law did not cover limited liability companies. As a result, Germany superseded ADGHB with the German Code of Commercial Law, or HGB, in 1897. The code became effective on January 1, 1900, resulting in the very first GoB or German Generally Accepted Accounting Principles. The GoB set out bookkeeping rules and still exists today.

German accounting regulations changed in the 1900s. In 1931, the great depression led to the emergency decree regarding the stock corporation law, or “Aktienrechtsnotverordnung.” For the first time, German accounting required a true and fair view of financial statements. The law required specific balance sheet and income statement presentations.  In response to major accounting fraud, the law required audits for any stock corporation’s annual report. In 1937, Germany amended the law by separating it from HGB through “Aktiengesetz” or AktG, which still exists today. HGB would still be in effect for bookkeeping and financial statements. AktG and the emergency decree were enacted mainly to protected creditors. AktG required fixed assets valuation at amortized cost and current assets at lower of cost or market. Furthermore, AktG forbid capitalizing startup costs and goodwill. These standards clearly encompassed conservative principles to protect creditors.

Germany reformed AktG considerably in 1965. Before this Act, management had the ability to generate hidden reserves. The Fixwertprinzip or fixed value principle forced companies to depreciate assets using a fixed value instead of acquisition and production costs. Companies were using different rates to build up secret reserves. In addition, companies had to prepare group accounts, or consolidation, including domestic subsidiaries. This was important because German consolidation was debated from here on out.

The 1969 Disclosure Act mandated that all legal forms of companies publicly disclose financial statements. Prior to this Act, “Publizitatsgetez,” only stock corporations had to disclose financials. The law originated from the Krupp crisis, a large German steel company that suffered many losses in 1966. Krupp was not incorporated, so it did not have to disclose financial statements. Large non-incorporated companies had to prepare financials, but not publish them. German disclosure was not necessary because accounting served mostly tax purposes. Moreover, German accounting has historically resisted disclosure to avoid revealing competitive advantages. As a result, accounting law spread among commercial and corporate laws.

In 1985, Germany changed the German Code of Commercial law. The European Commission’s (EC) Fourth, Seventh, and Eighth directive were converted into German law as the Bilanzrichtliniengesetz or BiRiLig or Accounting Directives Act. The EC sought to harmonize accounting standards. However, Germany only adopted a handful of about 40 options within the Fourth Directive to maintain German accounting.

The Accounting Directives Act expanded the German Commercial Code. Originally, the Fourth Directive applied to incorporated companies. Later, the Fourth Directive expanded to limited liability companies in Germany. The Third Book of the Commercial Code reorganized other regulations from the Stock Corporation Act, and Limited Liability Companies Act into one. This was known as the HGB. HGB required a management report as well as the main principle of true and fair view accounting metrics. As a result, German group accounting was expanded closer in line with US accounting. German firms had to prepare consolidated financials with “geographically unrestricted consolidation.”

2.2. Reasons behind the German Accounting Principles

Law has historically regulated German accounting standards. Mostly, German accounting standards emerged to fulfill contractual requirements. This section covers the reasons behind contractual accounting standards.

Much of Germany’s economic growth through industrialization was made through bank loans. As a result, Germany is portrayed as a strong debt-based economy. However, Germany did have a strong equity market during the early 1900s. After World War 2, Germany relied more on debt for financing, which stifled capital market growth. Even between the years 1991 and 2010, German corporations raised more money through bank loans over shares. Many small and medium-sized German companies connect with one bank for loans, which is called their “Hausbank.”

The last section noted that AktG and the emergency decree following the great depression enacted conservative income principles. Ultimately, conservatism remained an underlying principle to protect creditors. German accounting standards strive for reliability so that accounting numbers are true and fair for creditor protection. To reach these goals, HGB mandates historical cost and stringent realization principles.

Another reason for contractual based accounting stands is firm size. In 2010, small and medium-sized firms were about 99.3% of all German companies. The European Commission defines small and medium-sized firms as less than 250 employees and 50 million in sales (in Euros). These sized firms are not generally traded publicly. As a result, many German companies do not require value-based financial information due to the lack of investors and the cost of preparing. Because firms are smaller, managers and owners work much closer together. Owners do not require in-depth financial information. Lastly, these sized firms rely heavily on bank loans, as noted above.

German accounting is contractually based due to tax reasons. In 1874, Saxony and Bremen required legal book-tax conformity. Furthermore, Prussia enacted book-tax confirmation in 1891. Thus, accounting information aimed to minimize income taxes. Fewer taxes due align with debt-based economies such as Germany. Accounting information is used to determine taxable income. As a result, companies prefer a conservative profit number. Moreover, debt-based economies such as Germany, require highly reliable accounting information so that tax authorities and companies can easily solve legal issues. As a result, contract or debt-based economies issue accounting standards that produce numbers that most people can agree on so that contracts can be enforced.

3. German Accounting and Current Accounting Standards

3.1. IFRS and German GAAP

Current German accounting standards differ for listed and non-listed companies. In 2005, the European Union (EU) mandated International Financial Reporting Standards (IFRS) for all EU listed companies’ consolidated financial statements.  All German publicly traded companies must prepare consolidated financial statements in accordance with IFRS as of 2005. Non-listed German parent companies can either use the German Commercial Code standards (HGB) or IFRS. Single financial statement issuers must use the German Commercial Code (HGB). Germany requires HGB because of the many legal and tax outcomes involved in single financial preparations. Singe issuers can only prepare IFRS statements for disclosure.

Accounting in Germany - IFRS and German GAAP

German GAAP is based on principles, which come from the bookkeeping principles of the GoB. The GoB is both codified and non-codified. Most of the codified GoB standards and other standards come from the German Commercial Code or HGB. The court’s interpretations of accounting standards make up many of the individual parts of German GAAP because legal requirements do not get into specific subjects like lease accounting. Also, the ASCG technical committees interpret German GAAP. From this origin, it is apparent why German accounting changed so much throughout its history, as noted above. German GAAP adjusted to economic needs. Consequently, German GAAP focuses more on creditor protection due to Germany’s debt-based economy.

German GAAP, or HGB, is used for separate financial statements.  These statements are used to determine profit distribution and taxes. Because Germany is debt-based, it was simple to combine tax accounting with financial reporting through HGB. This is known as the conformity principle, which states that companies prepare separate statements for taxes. Companies would prepare one balance sheet for contractual purposes, such as taxes and commercial reasons. Later, more tax laws were adopted in Germany that were separate from HGB. However, some tax specific standards made its way into HGB. For example, HGB allows for additional depreciation figures derived from lower numbers due to accelerated tax depreciation. Besides, options in HGB match tax requirements. German GAAP also has conservative principles different from IFRS, such as lower of cost or market. For example, German GAAP allows for LIFO, FIFO, or weighted average, while IFRS prohibits LIFO. German GAAP differs from IFRS in other ways. German GAAP requires land to be valued at acquisition cost. Fixed assets are valued at acquisition or manufacturing costs. IFRS allows land and fixed assets to be revalued using fair value.

3.2. Brief History of German Internationalization

German company internationalization began in the early 1990s. Daimler Genz was the first German firm to list using American Depositary Receipts on the New York Stock Exchange. At the time, Daimler Benz had to reconcile consolidated net income to US GAAP. Twenty-two German firms listed in the US in 2002, but that number decreased to less than twelve after Sarbanes-Oxley passed.

During the 1990s, a few German firms prepared dual financial statements to attract investors. For example, in 1993, Puma made consolidated accounts in a way that agrees with HGB as well as IAS financial statements. Other companies consolidated to US GAAP, as noted above. German companies needed to produce more than one set of financial statements because German GAAP was not acceptable for equity-based markets. For these reasons, Germany later allowed listed companies operating in different regions to produce financial statements using different standards.

In 1998, Germany codified two important acts in response to the lobbying of German preparers. The Corporate Sector Supervision Act as well as the Transparency Act (KonTraG) required the preparation of cash flow and owner’s equity statements. In addition, the KnoTrag required segment reporting for listed companies. Lastly, KonTrag allowed for a private standard-setting body. KapAEG allowed German public firms to prepare statements under IAS, US-GAAP, or HGB.

3.3. Recent German Accounting

IFRS in Germany is in direct response to an increase in the capital market-based accounting systems. Some argue that the rise in IFRS dominance threatens contractual based accounting systems such as HGB. Countries within the EU may begin to harmonize its standards with IFRS.

Currently, HGB remains for individual account preparation. The internationalization of accounting standards mostly concerns consolidated information. KapAEG and KonTrag kept HGB in place during the 1990s. When the EU mandated IFRS for listed companies, Germany allowed HGB for individual accounts. HGB is vital on a single financial statement level because these statements are the origin of contractual concerns. As a result, German companies can serve contractual requirements with HGB financial statements.

HGB has changed as a result of internationalization. The Accounting Law Modernization Act of 2009 (BilMoG) shifted away from traditional German accounting principles. The Act changed the prohibition of recognizing intangibles during the development stage. Recognizing the development of intangibles follows IAS 38. In addition, the Act allowed for trading securities to be measured at fair value. Historically, HGB would recognize assets at historical cost. Both changes would affect income statements prepared using HGB. These changes had to be banned for tax rules (EStG). As a result, international accounting rules intended for market-based systems changed Germany’s debt orientated Commercial Code. However, a BIlMoG memo stated that HGB statements should be used for profit and tax accounting, and principles should not be affected.

4. German Accounting and Certification

4.1. Name of Certificate

Steuerberater: German Tax Advisor

Wirtschaftspruefer: German Certified Public Accountant

4.2. Requirements for Certification

Steuerberater

There is one distinctive state examination that candidates are required to take in order to become a Steuerberater. The exam consists of three written tests and one oral examination. However, not every person is allowed to sit for the Steuerberater exam. Only those who meet at least one of the two below conditions are permitted to sit for the exam:

  • Individuals who hold a college degree in business administration, economics, or law, along with practical experience in the field of tax administration with the German state authorities
  • Individuals who had ten years of practical experience with a tax-consulting firm (there is an exception with individuals who hold additional degrees such as Steuerfachwirt or Bilanzbuchhalter. The years of experience go down from 10 to 7)

Wirtschaftspruefer

There are different ways to become Wirtschaftspruefer. The most popular approach among German students is to become Steuerberater first and then take several professional qualifying examinations before taking seven written tests. After passing all the exams, candidates are appointed as Wirtschaftspruefer and awarded a certificate issued by the Wirtschaftsprüferkammer (Chamber of Public Accountants – WPK – the private-sector body responsible for the regulation of the audit profession). Before receiving the certificate, candidates must swear the professional oath before the Wirtschaftsprüferkammer.

5. Stock Exchange

5.1. Name of Exchange

There are eight stock exchanges located in different parts of Germany: Frankfurt (largest stock exchange in Germany), Stuttgart (second-largest stock exchange), Munich (no physical presence), Dusseldorf, Hannover (defunct – merged with Hamburg), Hamburg (merged with Hanover), Bremen (defunct – merged with Berlin), Berlin (combined with Bremen).

Please refer to the map below:

Stock Exchange

Frankfurt Stock Exchange: Located in Frankfurt, the FRA is one of the largest, oldest, and most efficient stock exchanges globally. The FRA posts several indices, such as the DAX, the VDAX and the Eurostoxx 50. The owner of the FRA is Deutsche Borse, which is also the owner of other large German stock exchanges.

Stuttgart Stock Exchange: Being Germany’s second-largest stock exchange after the Frankfurt Stock Exchange, the Stuttgart Stock Exchange deals with approximately 40% of all securities trades in the country. Founded in 1860, the exchange trades in a variety of financial instruments, including equities, bonds, investment funds, and certificates of participation.

Berlin-Bremen Stock Exchange: Established in 1685, the Berlin Stock Exchange was one of the oldest stock exchanges in Germany. The Berlin Stock exchange merged with Bremen Stock Exchange in 2003, under a new name Berlin-Bremen Stock Exchange. After adopting Equiduct Trading, the exchange started to allow more foreign stock trading (with over 6,000 US companies) and to extend its product offerings.

Hamburg Stock Exchange: Established in 1558, the Hamburg Stock Exchange was the oldest in Germany. In 1999, it merged with the Hanover Stock Exchange to create the BOAG Borgen AG. Nonetheless, compared to the Frankfurt Stock Exchange, this new exchange is relatively obsolete.

Munich Stock Exchange: The physical facility of the Munich Stock Exchange was initially situated in Munich. Nowadays, the exchange operates entirely by computer without any physical facility. Users can register and access real-time information online.

Dusseldorf Stock Exchange: Apart from its original functioning as an exchange, Dusseldorf Stock Exchange also offers information and consulting services. The exchange provides the QUOTRIX trading system for securities and GEFOX for closed-end funds.

5.2. Number of Listed Firms

According to the World Federation of Exchanges, until January 2015, the German Stock Exchange (Deutsche Borse AG) has a total of 663 listed companies (587 domestic companies and 76 foreign companies). The number of listed companies in 2015 has reduced by 7.5% compared to 2014 (670 companies – 595 local companies and 75 international companies).

Stock Exchange Number of Listed Firms

5.3. Exchange Regulations

Individual stock exchanges in Germany are under the supervision of the stock exchange supervisory authorities of the Federal States. These supervisory authorities supervise whether trading on the exchanges is carried out in an acceptable manner in accordance with the Exchange Act (Börsengesetz). The major focus of stock exchange supervision is on the pricing process and on collaboration with the trade surveillance units. In addition, the authorities are in charge of supervising any multilateral trading systems operated by exchanges (off-exchange trading). On the contrary, BaFin is mainly responsible for both solvency supervision and market supervision. Under its solvency supervision (on the providers’ side), banks, financial services institutions, and insurance companies are under the control of BaFin. Under its market supervision (on the investors’ side), BaFin ensures that standards of professional conduct, which preserve investors’ trust in the financial markets, are enforced.

The securities markets in Germany are, among other things, regulated by:

  • Stock Exchange Act (Börsengesetz): The Stock Exchange Act is made up of fundamental principles concerning the organization of stock exchanges and other securities markets and the trading and listing of securities. Furthermore, the Stock Exchange Act authorizes the government to enact provisions and regulations in order to protect investors and other related parties and to guarantee the accepted conduct of securities trading.
  • Stock Exchange Admission Regulation (Börsenzulassungsverordnung): The Stock Exchange Admission Regulation consists of, among other things, listing requirements, procedures, and disclosure responsibilities.
  • Rules of Exchange (Börsenordnung): The Rules of Exchange regulate the internal organization of the respective Stock Exchange, the details of the listing procedure, the proper conduct of trade and price-fixing, and the publication of all information regarding prices and volumes. Moreover, the Rules of Exchange also govern the composition of the management of each Stock Exchange and the appointment of its members.
  • Rules for the Regulated Unofficial Market (Freiverkehrsbedingungen): These rules of each Stock Exchange provide for, in particular, the requirements of listing on the Regulated Unofficial Market, e.g., the Open Market or Entry Standard of the FWB.
  • Investment Act (Investmentgesetz): The Investment Act was adopted in 2004 and revised by an amendment (Investmentänderungsgesetz) in 2007. Investment funds in Germany work under the provisions of the Investment Act, which regulates, among other things, the activities of domestic fund management companies, the investments eligible for local funds, and the public distribution of units in foreign funds in Germany. The Investment Act was replaced by the Capital Investment Act (Kapitalanlagegesetzbuch — “KAGB”) in 2013 in an attempt to implement the European Alternative Investment Fund Managers (AIFM) Directive into Germany. The rules under the KAGB significantly go beyond the minimum requirements adopted by the AIFMD. It has a much wider reach. It provides exceeding, an integrated codification of the investment law in Germany for open-end funds as well as closed-end funds. Generally, the KAGB provides rules for all types of investment funds and their managers.
  • German Banking Act (Kreditwesengesetz): The German Banking Act creates the statutory framework for banking and financial service activities and concentrates on the protection of creditors and bank depositors.
  • Securities Trading Act (Wertpapierhandelsgesetz): The Securities Trading Act concentrates on the regulation of trading with securities, financial instruments, futures, derivatives, and similar financial products. Furthermore, it requires the obligation to disclose changes in interests in stock of corporations listed on the Regulated Market as well as other significant information relating to such listed companies (e.g., annual financial accounts, quarterly reports, or invitation and agenda of the annual general meeting). In addition, the Securities Trading Act contains certain specific provisions against insider trading and manipulation of stock exchange quotations and requires certain rules of conduct for financial service institutions providing financial services and ancillary services.
  • Securities Prospectus Act (Wertpapierprospektgesetz): The Securities Prospectus Act regulates prospectus requirements for the offering of tradable securities and the exemptions from such requirements. In addition, it requires certain principal rules as to form and compulsory content of a prospectus, prospectus approval by BaFin, and prospectus publication.
  • Security Prospectus Regulation (Prospektverordnung (EG) Nr. 809/2004): The Security Prospectus Regulation requires, especially, the details regarding compulsory content, incorporation by reference, and publication of prospectuses.
  • Act on the Prospectus for Sale Securities (Wertpapier-Verkaufsprospektgesetz): The Act on the Prospectus for Securities offered for sale applies to offers of securities in companies (e.g., closed funds, trusts) that have not issued tradable securities within the meaning of the Security Prospectus Act.
  • German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz (WpÜG): The German Securities Acquisition and Takeover Act require the form, content, procedural rules, and publication conditions regarding public takeover offers. Besides, the Act requires under which circumstances a compulsory takeover offer must be submitted. Consequently, the German Securities Acquisition and Takeover Act are only relevant with shares in stock corporations listed on the Regulated Market and securities representing such shares (e.g., options, convertibles).

6. Regulatory Body

6.1. Code Law

Historically, German accounting regulations and standards were set by statute law. The Federal Ministry of Justice (FMJ) backed the system. German law has both details and principles. Bookkeeping standards (GoB) must regulate all events for accounting and reporting. The principles of the GoB are codified in the Commercial Code (HGB). Unclear law develops principles for clarity through deductive reasoning. The principle must match the actual law and its intent over accounting. Deductive reasoning leads to judgment over bookkeeping. The Federal Fiscal Court (BFH) hears different sides in principle cases. The court has established bookkeeping principles through its rulings that are backed up by the law. Because German HGB stems from profit and tax accounting, the court’s rulings bind correct bookkeeping when there is no specific rule.

6.2. ASCG

More recently, German law established a private standard-setting board from the KonTraG of 1998. The German Accounting Standards Board (GASB) was formed in 1998. This board was the first shift towards the US private standard-setting. The Accounting Standards Committee of Germany (ASCG) governs the GASB. Before 1998, code law established accounting standards, as noted above. However, GASB has yet to develop any standard-setting expertise. The GASB mainly recommends how to apple GoB, or German GAAP. Also, the GASB advises the FMJ on accounting legal disputes and voices German concerns to international standard bodies. After GASB’s inception, it was tasked with taking IFRS rules and copying them into German Accounting Standards, or GAS. These rules clarified how to perform new preparations set out by KonTraG, such as cash flow statements.  GASB also interprets HGB requirements. However, GAS is not mandatory because they focus on group accounts only. Individual accounts are not affected by HGB. As a result, GAS does not change German standards from debt to equity-based.

Once IFRS was adopted in 2005, GASB began interpreting IFRS. Also, GASB communicates German concerns to the IASB. In 2012, the ASCG was no more. Funding went away, and support was nonexistent because the ASCG could not meet the interests of all German firms. However, the ASCG reformed a year later and had two purposes. The new board began to put together expert committees to meet its objectives. The first committee is HGB based. The members are close to the FMJ and offer expertise to the private side of German debt-based accounting. The second committee assists with IFRS rules. The committee communicates with the IASB. The new ASCG does not issue standards like the US system. Both sides seek to please different bases. Some say that this is part of the reason for having national versions of IFRS.

7. Enforcement Body

Germany uses a two-tier enforcement regime; one private and one public. The argumentation behind such a system is that the unlawful practice will be prevented by the existence of the regulatory framework, rather than taking specific actions. The regulatory body will act as a defense against illegal activities. The private entity is FREP. The first tier involves the Financial Reporting Enforcement Panel (the Panel), and the second tier includes the Federal Financial Supervisory Authority (BaFin). The BaFin is responsible for determining whether an error has occurred when the FREP’s opinion differs from that of the company.

7.1. Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)

BaFin (The Federal Financial Supervisory Authority) is a stock exchange regulator and acts as a supervisor of the FREP’s activities. BaFin has the power to re-examine a company’s financial statements at its own discretion. It supervises banks and financial services providers, insurance undertakings, and securities trading. BaFin is an autonomous public-law intuition and is subject to legal and technical oversight of the Federal Ministry of Finance. It receives funding by fees and contributions from institutions under its supervision.

BaFin operates in the public’s interest. Its primary goal is to ensure the integrity of the German financial system. With about 2365 employees working in Bonn and Frankfurt, BaFin supervises 1854 banks, 681 financial services institutions, 592 insurance undertakings, and 30 pension funds as well as 6,069 domestic investment funds and 78 asset management companies. BaFin works to ensure the ability of banks and financial services institutions to meet their payment obligations. Through supervising the market, BaFin also enforces standards of professional conduct. By doing this, BaFin preserves investors’ trust in the financial markets.

7.2. Financial Reporting Enforcement Panel (FREP)

The Financial Reporting Enforcement Panel (FREP) examines financial reporting in Germany since 2005. It is a government-appointed private organization for financial statement oversight.

The FREP has been responsible for supervising annual and consolidated financial statements and the corresponding management reports for all listed companies in Germany.  The FREP generally performs its review every four to five years for listed companies, and companies that are not listed are reviewed every 8 to 10 years. If a company is not cooperative while under examination by the FREP, and there is substantial doubt in terms of the quality of the results, the Supervisory Authority (BaFin) comes into play.

Members of this organization are typically professionals who are in either the accounting or financial reporting profession. Companies and audit firms are not allowed membership with the FREP.  Within the FREP is a governing board. The governing board consists of 3 to 5 members. The governing board is accountable for setting out the principles for the work of the FREP.  Besides, there is a Nomination Committee, which is responsible for electing the members of the Enforcement Panel. The Enforcement Panel is another division of the FREP. There at least five members in this Panel and are required to be accounting professionals.  This Panel is responsible for performing audits and reporting the results of their audit.

7.2.1. Examination Process

The Panel will initiate an examination under three general circumstances. One such case is “examination with cause” that occurs when there is concrete evidence of an infringement of financial reporting requirements. The examination may also take place at the request of BaFin when specific indications are present. Lastly, testing can occur without any concrete signs, and the test is simply based on random sampling. According to the FREP’s website, no examination with cause shall be conducted if it is not in the interest of the public. The FREP only examines financial statements if the company is willing to cooperate.  If the company s willing to cooperate, the company’s legal representatives are expected to provide accurate and complete information. In the case that the company refuses to work with FREP, the Panel shall notify BaFin, and the investigation is escalated to tier 2.

When starting the examination process, the FREP requests audit reports as well as individual or consolidated financial statements and the related management reports.  The FREP also requires a list of unadjusted audit differences. The scope of “examination with cause” is limited to each issue for which evidence of questionable accounting treatment was identified. The FREP is not prevented from expanding the scope of examination if other deviations are found. If the company is unwilling to cooperate, then the investigation is advanced to tier 2 with the BaFin. BaFin can then use its regulatory powers to demand the appropriate documents to audit the company.

At the end of the examination, the responsible FREP members report to the accountable chamber to determine whether the company’s accounting complies with existing standards. If the Panel concludes that the accounting is incorrect, it asks the company whether it concurs with the facts, error, and reasoning.  If any failure to conform with accounting standards is identified, the Panel is required to find an answer together with the organization under examination. However, if infringements or violations are discovered to have been done intentionally, the board is to notify the BaFin. The FREP is required to report to BaFin the overall volume and the results of their examinations. Beyond these regular reports, BaFin is also called upon when further actions are necessary. BaFin must take more measures if the Panel finds out violations or if there is non-cooperation.

If the firm does not consent with the error, found the investigation is escalated to tier 2, and the BaFin is now involved, BaFin is informed and orders the publication of error unless the publication process serves no public interest. If the firm does not consent with the error assertion, BaFin will initiate an enforcement examination at the second tier level and publication if needed.

8. Auditing Standards and Procedure

The standardization of accounting provisions there has been a demand for standardized audit requirements. The relevant international organizations in this process are the International Federation of Accountants (IFAC) and the International Auditing and Assurance Board (IAASB). These organizations are responsible for developing the International Standards of Accounting (ISA). The IDW has begun transforming ISA into national auditing standards.

Three organizations are responsible for Auditing in Germany (1) Institut der Wirtschaftsprüfer (2) Wirtschaftsprüferkammer (WPK) (3) Auditor Oversight Commission. Auditor oversight in Germany refers only to compliance with the rights and duties of the statutory auditors. Oversight for accounting matters applies to preparers of financial statements.

8.1. Institut der Wirtschaftsprüfer (IDW)

IDW is a private sector organization in which public auditors and auditing companies are organized voluntarily. The IDW is a privately run organization that was established to serve the goals of its members who make up both individual auditors and German public audit firms. The IDW is an authorizing member of the International Federation of Accountants (IFAC).

The Role of the IDW is to:

  • Represent the professional goals of its members at the national and international level
  • Undertake technical work related to the areas in which its participants are proactive
  • Offer training courses to support trainee auditors and providing professional development
  • Encourage members on technical

The IDW Auditing Standards are made up of the German Generally Accepted Standards on Auditing as regulated by the IDW governing the conduct of an audit of financial statements. The IDW also set forth the procedures to be performed. The IDW auditing standards generally conform to the International Standards on Auditing (ISA). Auditors are expected to follow the IDW Auditing Standards as best they can. Any deviations from these standards are to be disclosed in detail in the long-form audit report and mentioned in the auditor’s report.

8.2. Wirtschaftsprüferkammer (WPK)

The Wirtschaftsprüferkammer (WPK) is a corporation under public law, whose members are all auditors, German Auditors, and German Public Audit Firms.  The WPK is also known as the Chamber of Public Accountants. The duties of the WPK include the appointment/recognition of new members, quality assurance oversight as well as the staging of countrywide standardized aptitude test.  The WPK provides a quality assurance system in order to guarantee that the professional practice by members of the profession is subject to regular, preventive monitoring.  The auditing practice German Public Accountants must be monitored by an independent auditor for quality assurance every six years, and to the extent that they audit companies that fall under section 319a commercial code, every three years.

8.3. Auditor Oversight Commission (AOC)

The Auditor Oversight Commission added a new element of public oversight that has been incorporated in auditor oversight in Germany. The AOC has the ultimate responsibility in all areas of supervision as its competences go beyond state supervision. The system of quality assurance by the WPK is subject to the public oversight of the AOC. The system of auditor oversight has to be distinguished from the monitoring in accounting matters.  The AOC focuses on compliance with the rights and duties of statutory auditors. Any deviations from the auditor’s responsibilities found by the accounting enforcement bodies are reported to the AOC for further investigations.

9. Accounting Education

9.1. Student Correspondent

To learn more information regarding accounting education in Germany, I interviewed Arne. He is getting his master’s in accounting at FOM University of Applied Sciences for Economics. I asked him questions regarding the profession, the certification process, standards, the appropriate time to use standards, etc.

According to Arne, there are several different types of accountants in Germany, like there is here in the US. Different positions have different requirements. Unfortunately, Arne was not aware of the certification process for all the various positions. Some jobs require a college degree, whereas some positions require only a 3-year vocational training. Also, some professions do not always require official registration. Arne aspires to be a controller. Approximately 100,000 controllers are working in Germany.

Arne was also able to provide some information regarding Germany Statutory auditors. In order to qualify for the German statutory auditor examination, a university graduate requires a minimum of four years of practical experience that is related to accounting after graduating. The student must spend at least two of these four years as an employee of a German statutory auditor, German audit firm, or a cooperative auditing association. Some of the classes required for the auditing position are Auditing, Analysis of Financial statements, General Accounting, Tax Law, Information and computer systems, financial management, and economics.

IFRS has been required since 2005 for those companies that operate or trade internationally. However, Germany lacks advanced educational courses or degrees that are specific to IFRS. Additionally, most schools require courses about IFRS and US GAAP, yet only a few have particular degrees for IFRS or US GAAP. Arne believes that this is an area that could be improved in the accounting education of Germany.

9.2. Education

German law regulating the accounting profession does not mention any specific classes students must take for the accounting profession. However, a degree in business administration is a common choice.  Similar to the education here, many universities suggest students concentrate in an area related to the Wirtschaftsprüfer profession. Universities strongly recommend students choose courses related to the professional examinations for German Accountants.

A master’s degree related to accounting is beginning to gain popularity in Germany as it may provide for better training than a bachelor’s degree. The primary purpose of most accounting graduate programs is to help students prepare for the certification examination as well as working as professional accountants.  After completing the master’s program, students can sit for the professional exam immediately following graduation. In some cases, the course that students took may constitute an equivalent exam. Courses such as commercial law and business administration may be comparable to an exam.

The passage of the Eighth Directive in 1984 sets out international requirements with which education for auditors in Germany must comply to.  The minimum standards for the education of persons carrying out statutory audits are as follows: (1) pre-qualification education and training, (2) practical experience, (3) test of professional competence. Educational requirements under the Eighth directive include classes related to audit, financial statement analysis, accounting standards, auditing standards, law, tax law, and other financial economics classes.

Suggested Accounting Courses
Auditing
Analysis of Financial Statements
General Accounting
Consolidated Financial Statements
Cost and Management Accounting
Internal Control
Accounting Standards
Auditing Standards
Law
Tax Law
Information and Computer Systems
Business, General and Financial Economics
Mathematics and Statistics

9.3. Challenges for Germany Accounting Education

The internationalization process of accounting and auditing in Germany has made the accounting profession much more complicated as it has here in the US. Beyond a profound knowledge of national rules and practices, auditors are increasingly expected to be familiar with international accounting and auditing standards as well as regulations.  These trends represent a substantial challenge for accountancy education as they prepare their future auditors and accountants for such changes.

Researchers claim that the audit scope in Germany is widening due to the changing content and role of financial accounting in Germany. More and more German companies apply IAS or US-GAAP for their consolidated financial statements. Traditionally, Germany accounting has been dominated by characteristics of reliability, objectivity, and prudence. As an attempt to move towards the Anglo-American accounting approach and its implementation, German auditors face the issue of widening their scope in order to comply with different definitions and interpretations of accounting issues. The more German companies that adopt international and US GAAP accounting standards for their annual reports, the more the “Anglo-American” approach will influence accounting education in Germany.

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