Diverging paths: Accounting for corporate governance in America and Germany

Business History Review

Volumn 80, Issue 1, 2006, Pages 1-48

  Fear, Jeffrey ^a   Kobrak, Christopher ^b  

^a HARVARD BUSINESS SCHOOL   (United States)

^b ESCP EUROPE   (France)

Author keywords

[No Author keywords available]

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EID: 33745319991     PISSN: 00076805     EISSN: None     Source Type: Journal    
DOI: 10.1017/s0007680500080971     Document Type: Review

References (249)

1. This is changing dramatically. Increasingly, economists are examining financial issues in comparative, historical, and institutional terms. See, for example, Raghuram G. Rajan and Luigi Zingales, "The Great Reversals: The Politics of Financial Development in the Twentieth Century," Journal of Financial Economics 69 (2003): 5-50.
2. Mira Wilkins, "Disjunctive Sets? Business and Banking History," unpublished paper, European Banking History Conference, May 28-29, Athens, Greece. Mira Wilkins, The History of Foreign Investment in the United States to 1914 (Cambridge, Mass., 1989), 536.
3. Christopher D. McKenna, "The World's Newest Profession: Management Consulting in the Twentieth Century," Enterprise & Society 2 (Dec. 2001): 673-79;
4. Matthias Kipping, "American Management Consulting Companies in Western Europe, 1920 to 1990: Products, Reputation, and Relationships," Business History Review 73 (Summer 1999): 190-220.
5. See Harold James, The End of Globalization: Lessons from the Great Depression (Cambridge, Mass., 2001).
6. Christopher Hossfeld, "The Myth of Comparable IAS Financial Statements: The Case of European Banks," paper presented at the European Accounting Association, 27th Annual Meeting, Prague, 2004;
7. Mark T. Bradshaw and Gregory S. Miller, "Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-U.S. Firms Adopting U.S. GAAP," HBS Working Paper, Jan. 2005, www.people.hbs.edu/jsiegel/ BM_HBSINTEL VERSION.doc, accessed 25 May 2005.
8. For an excellent and thorough introduction to German accounting thought, see Hans-Ulrich Küpper and Richard Mettessich, "Twentieth Century Accounting Research in the German Language Area," Accounting, Business & Financial History 15 (Nov. 2005): 345-410.
9. The relative sophistication of managerial accounting and practices inside German firms is a major thesis argued by Jeffrey Fear, Organizing Control: August Thyssen and the Construction of German Management (Cambridge, Mass., 2005).
10. David F. Hawkins, "The Development of Modern Financial Reporting Practices among American Manufacturing Corporations," Business History Review (Autumn 1963): 135-68.
11. Paul Windolf, "Unternehmensverflechtung im organisierten Kapitalismus: Deutschland und USA im Vergleich 1896-1938," available at www.uni-trier.de/uni/fb4/soziologie/apo/ netzwerk1896.pdf, accessed 15 July 2005. Prior to 1914, U.S. firms had just as many bankers, interlocking directories, and larger boards of directors as German firms.
12. Naomi Lamoreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge, U.K., 1994);
13. Christopher Kobrak, Cooperation, Conflict, Men, and Markets: Deutsche Bank and the United States from 1870 to the Present (Cambridge, U.K., forthcoming)
14. ; Gary John Previts and Barbara Dubis Merino, A History of Accountancy in the United States: The Cultural Significance of Accounting (Columbus, Ohio, 1998), 208-23;
15. Paul J. Miranti Jr., Accountancy Comes of Age: The Development of an American Profession, 1886-1940 (Chapel Hill, 1990).
16. For a good, brief discussion of American securities law before the 1930s, see James Burk, Values in the Market-place: The American Stock Market under Federal Securities Law (New York, 1988), 167-74.
17. For post-1933 developments, see Thomas K. McCraw, Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn (Cambridge, Mass., 1984);
18. Mark Roe, "Delaware's Competition," Harvard Law Review 117 (2003): 588, on the limits of state power to determine corporate law.
19. Hawkins, "Development of Modern Financial Reporting Practices."
20. We elucidate prewar differences more precisely in Jeffrey Fear and Christopher Kobrak, "The Roots of Corporate Governance Systems: Financial Reporting and Banking in the U.S. and Germany" (forthcoming). For German accounting theory and practice before World War I, we have relied principally on Jörg Baetge et al., Bilanzen (Düsseldorf, 2001), 88-89;
21. Adler H. Düring and K. Schmalz, Rechnung und Prüfung der Unternehmen Kommentar zum HGB (Stuttgart, 1987);
22. Reinhardt Hanf, "Veröffentlichte Jahresabschlüsse von Unternehmen im Deutschen Kaiserreich: Bedeutung und Aussagewert für wirtschaftshistorische Analysen," Zeitschrift für Unternehmensgeschichte 23, no. 3 (1978): 147-51;
23. R. Fischer, Die Bilanzwerte: Was Sie Sind und Was Sie nicht Sind (Leipzig, 1905);
24. and B. Penndorf, Geschichte der Buchhaltung in Deutschland (Leipzig, 1913).
25. The most important contemporary work is Herman Veit Simon, Die Bilanzen der Aktiengesellschaften und der Kommanditgesellschaften auf Aktien (Berlin, 1899, 1st ed. 1886). Simon's work best expressed the foundational principles of German accounting.
26. See also Mark Spoerer, Von Scheingewinnen zum Rüstungsboom: die Eigenkapitalrentabilität der deutschen Industrieaktiengesellschaften, 1925-1941 (Stuttgart, 1996), 62-97;
27. Sonja Gallhofer and James Haslam, "The Aura of Accounting in the Context of a Crisis: Germany and the First World War," Accounting, Organizations and Society 16 (1991): 487-520, esp. pp. 495-99.
28. Germany's most important accounting theorist was Eugen Schmalenbach. See Max Kruk, Erich Potthoff, and Günter Sieben, Eugen Schmalenbach: Der Mann-Sein Werk-Die Wirkung, ed. Walter Cordes (Stuttgart, 1984).
29. Schmalenbach's Dynamische Bilanz (Köln/Opladen, 1962, ist ed. 1919) went through many editions. For an English book on Schmalenbach.
30. See Robert Locke, The End of the Practical Man: Entrepreneurship and Higher Education in Germany, France, and Great Britain, 1880-1940 (Greenwich, Conn., 1984).
31. For present-day analyses, see Trevor S. Harris and Salomon Brothers, Understanding German Financial Statements: Lessons from Daimler-Benz's Listing (New York, 7 Oct. 1993);
32. and Christian Leuz and Jens Wüstemann, "The Role of Accounting in the German Financial System," in The German Financial System, eds. Jan P. Krahnen and Reinhard H. Schmidt (Oxford, 2004), 450-81.
33. Finally, see Hugh B. Markus, The History of the German Public Accounting Profession (New York, 1997).
34. Julian Franks, Colin Mayer, and Hannes F. Wagner, "The Origins of the German Corporation-Finance, Ownership and Control," CEPR Early Securities Market Conference, Oct. 2004 (Mar. 2005): 8.
35. See Jonathan Barron Baskin and Paul J. Miranti Jr., A History of Corporate Finance (Cambridge, U.K., 1997), 167-209.
36. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New Brunswick, N.J., 2002; (1st ed., 1932)
37. Lisa Evans, "Auditing and Audit Firms in Germany before 1931," Accounting Historians Journal 30 (Dec. 2003): 29-66.
38. Our analysis has many points in common with her good discussion, but Evans focuses on the slow development of statutory audits and finds more parallels in the two systems up to 1931. For a focus on attitudinal differences, see Joel S. Demski et al., "Some Thoughts on the Intellectual Foundations of Accounting," Accounting Horizons 16 (June 2002): 157-69.
39. See also Mary Harston, "The German Accounting Profession-1931 and Before: A Reflection of National Ideologies," Accounting Historians Journal 20 (Dec. 1993): 139-45.
40. Heinz-Dieter Assmann, "Corporate Governance im Schnittfeld von Gesellschaftsrecht und Kapitalmarktrecht," Bankrecht und Kapitalmarktrecht in der Entwicklung, eds. Jens Ekkenga, Walther Hadding, and Horst Hammen (Berlin, 2003), 1-17;
41. Hanno Merkt, Unternehmenspublizität: Offenlegung von Unternehmensdaten als Korrelat der Marktteilnahme (Tübingen, 2001), esp. 62-73, 92-102.
42. Toni Pierenkemper, "Zur Finanzierung von Industriellen Unternehmensgründungen im 19. Jahrhundert-mit einigen Bermerkungen über die Bedeutung der Familie," in Zur Geschichte der Unternehmensfinanzierung, ed. Dietmar Petzina (Berlin, 1990), 37-55.
43. Niall Ferguson, The Cash Nexus (New York, 2001), 311-13.
44. Karl Helfferich, Georg von Siemens: Ein Lebensbild aus Deutschlands großer Zeit, vol. 2 (Berlin, 1921), 220-25.
45. See Alfred D. Chandler Jr., ed., The Railroads: The Nation's First Big Business (New York, 1965);
46. and Chandler, The Visible Hand (Cambridge, Mass., 1977).
47. Also Paul J. Miranti Jr., "The Mind's Eye of Reform: The ICC's Bureau of Statistics and Accounts and a Vision of Regulation, 1887-1940," Business History Review 63 (Autumn 1989): 469-509.
48. The key figure was Henry Carter Adams. See Henry C. Adams, American Railway Accounting: A Commentary (New York, 1918).
49. The Interstate Commerce Commission (ICC) published annually the Statistics of Railways of the United States.
50. Paul J. Miranti Jr., "Associationalism, Statism, and Professional Regulation: Public Accountants and the Reform of the Financial Markets, 1896-1940," Business History Review 60 (Autumn 1986): 438-68, esp. 447;
51. and Miranti, "Mind's Eye of Reform," 475-85.
52. Quote from a former statistician for the Lehigh Valley Railroad, quoted in J. Shirley Eaton, Handbook of Railroad Expenses (New York, 1913), quote on p. 5.
53. Adams, American Railway Accounting.
54. John Maurice Clark, Social Control of Business (Chicago, 1926), pp. 320-33.
55. Quote from William E. Hooper, Railroad Accounting (New York, 1915), 2.
56. Wilkins, History of Foreign Investment, 197-98;
57. Baskin and Miranti, A History of Corporate Finance, 146-57.
58. Rainer Gömmel, "Entstehung und Entwicklung der Effektenbörse im 19: Jahrhundert bis 1914," in Deutsche Börsengeschichte, ed. Hans Pohl (Frankfurt am Main, 1992), 144. It also listed six U.S. federal government bonds, nineteen bonds of U.S. states, and twenty U.S. municipal bonds.
59. Wilkins, History of Foreign Investment, 169.
60. Peter Tufano, "Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U.S. Railroads in the Nineteenth Century," Business History Review 71 (Spring 1997): 1-40 (figure, p. 2).
61. Also J. Bradford De Long, "Did J.P. Morgan's Men Add Value?" in Inside the Business Enterprise: Historical Perspectives on the Use of Information, ed. Peter Temin (Chicago, 1991), 205-49;
62. Slason Thompson, Cost Capitalization and Estimated Value of American Railways: An Analysis of Current Fallacies (Chicago, 1908).
63. For specifics, see "Reorganization of the Northern Pacific Company, Plan of Reorganization," HADB (Haupt Archiv Deutsche Bank), A-1149;
64. and "Reorganization of the Northern Pacific Company, Announcement by the Reorganization Committee," HADB, A-1149.
65. Also see Kobrak, Cooperation, Conflict, Men, and Markets (forthcoming).
66. For a first-rate history of the German audit industry, see Reiner Quick, "The Formation and Early Development of German Audit Firms," Accounting, Business & Financial History 15 (Nov. 2005): 317-43.
67. Miranti, "The Mind's Eye of Reform," 469-509;
68. Adams, American Railway Accounting;
69. William Z. Ripley, Railroads: Rates and Regulations (New York, 1920), 487-521, 557-79.
70. Tufano, "Business Failure, Judicial Intervention, and Financial Innovation." See Tufano for a description of financial innovations that included contingent-charge securities, deferred coupon debt, or voting trusts.
71. Also Clark, Social Control of Business, 334-47.
72. "Registered securities" means that the names of the individual owners are recorded; collection depends on the identity of the owner. "Bearer shares" means that the person holding the certificate can collect. Rainer Fremdling, Eisenbahnen und deutsches Wirtschaftswachstum 1840-1879 (Dortmund, 1985), 132-63; figures from pp. 22-34.
73. See Lothar Gall and Manfred Pohl, Die Eisenbahn in Deutschland: Von den Anfängen bis zur Gegenwart (Munich, 1999);
74. Volker Then, Eisenbahnen und Eisenbahnunternehmer in der Industriellen Revolution: Ein Preussisch/'Deutsch-Englischer Vergleich (Göttingen, 1997).
75. Then also examines the social structure of railway shareholders. See also Gömmel, "Entstehung und Entwicklung der Effektenbörse," in Deutsche Börsengeschichte, 138-63.
76. See Fritz Stern, Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire (New York, 1977), 209-18.
77. Kurt Schmaltz, Bilanz- und Betriebsanalyse in Amerika (Stuttgart, 1927), 11.
78. Herman E. Krooss and Martin R. Blyn, A History of Financial Intermediaries (New York, 1971), 130.
79. Continental European antitrust thinking is still oriented toward protecting competitors from more powerful companies that might promote economic efficiencies to lower customer prices. See David S. Evans, "The New Trustbusters: Brussels and Washington May Part Ways," Foreign Affairs (Jan./Feb. 2002): 14-20;
80. Tony Freyer, Regulating Big Business: Antitrust in Great Britain and America, 1880-1990 (Cambridge, U.K., 1992);
81. and Fear, Organizing Control, 235-60.
82. Baskin and Miranti, History of Corporate Finance, 167-209.
83. See especially the work of Steffen Eube, Der Aktienmarkt in Deutschland vor dem Ersten Weltkrieg-Eine Indexanalyse (Frankfurt am Main, 1998).
84. See also Richard Tilly, "Public Policy, Capital Markets, and the Supply of Industrial Finance in Nineteenth-Century Germany," in The State, the Financial System and Economic Modernization, eds. Richard Sylla, Richard Tilly, and Gabriel Tortella (Cambridge, U.K., 1999), 134-57;
85. Richard Tilly, "An Overview on the Role of the Large German Banks up to 1914," in Finance and Financiers in European History, 1880-1960, ed. Youssef Cassis (Cambridge, U.K., 1992), 93-110.
86. Eube, Der Aktienmarkt, 30, 175;
87. and Rajan and Zingales, "The Great Reversals," 12-17. Rajan and Zingales recently demonstrated that the stock-market capitalization of most countries in 1913 was generally not equaled until 1990. Stock-market capitalization of Austria (76 percent), Belgium (99 percent), France (78 percent), the Netherlands (56 percent), Sweden (47 percent), and Switzerland (58 percent) were all higher than Germany's. Equity as a proportion of gross fixed-capital formation was 23 percent in Belgium, 14 percent in France, 38 percent in the Netherlands, and 14 percent in Britain. The number of listed companies per million inhabitants was 108.7 in Belgium, 13.29 in France, 6.32 in Italy, 65.87 in the Netherlands, and 47.06 in Britain. See also Deutsche Aktien-Institute (DAI), 2004.
88. Eube, Der Aktienmarkt in Deutschland, 188;
89. Tilly, "An Overview on the Role of the Large German Banks," 93-110, esp. p. 102;
90. Franks, Mayer, and Wagner, "The Origins of the German Corporation."
91. For a review of the literature, see Caroline Fohlin, "Universal Banking in Pre-World War I Germany: Model or Myth?" Explorations in Economic History 36 (1999): 305-43;
92. and "The History of Corporate Ownership and Control in Germany," in The History of Corporate Governance around the World: Family Business Groups to Professional Managers, ed. Randall Morck (Chicago, 2005)
93. available as an NBER paper (2004). While we can discern the broad magnitude, researchers still need to gather key variables for one or both markets, especially the number of shareholders, turnover, distribution of shareholdings, and breakdown of internal bank versus market exchanges. Problems with the accuracy of contemporary data and their statistical comparability still exist.
94. Quick, "Formation and Early Development of German Audit Firms," 320-39.
95. Quoted in Eube, Der Aktienmarkt in Deutschland, 36;
96. on the important 1896 Exchange Act, see 43-49. For prewar developments, see Fear and Kobrak, "Origins of German and American Accounting and Corporate Control";
97. Henry Crosby Emery, "The Results of the German Exchange Act of 1896," Political Science Quarterly 13 (1898): 286-320;
98. Caroline Fohlin, "Regulation, Taxation and the Development of the German Universal Banking System, 1884-1913," European Review of Economic History 6 (2002): 221-54;
99. Otto Glagau, Der Börsen und Gründungs-Schwindel in Deutschland (Leipzig, 1877);
100. and Max Weber, Börsenwesen, Schriften und Reden 1893-1898, ed. Knut Borchardt (Tübingen, 1999).
101. Volker Berghahn, Modern Germany (Cambridge, U.K., 1982), 287.
102. Calculated from the tables in Deutsches Geld- und Bankwesen in Zahlen, 1876-1975, ed. Deutsche Bundesbank ((Frankfurt am Main, 1976), 274.
103. Theo Balderston, The Origins and Course of the German Economic Crisis (Berlin, 1993). 203-14, quote from p. 212.
104. K. v. Reibnitz, "Der international Effektenkapitalismus und Deutschlands Wiederaufbau," Der Wirtschaftsprüfer (May 1932): 185-87.
105. Franks, Mayer, and Wagner, "Origins of the German Corporation," Table 11.
106. Berle and Means, The Modern Corporation and Private Property, figures from pp. 52-58. Estimates of the number of shareholders differ.
107. Baskin and Miranti, History of Corporate Finance, 167;
108. Kroos and Blyn, History of Financial Intermediaries, 130.
109. See Alfred Reckendrees, Das "Stahltrust"-Projekt: Die Gründung der Vereinigte Stahlwerke A.G. und ihre Unternehmensentwicklung 1926-1933/34 (Munich, 2000), 278-91, 471-507.
110. Such pyramiding was not completely unheard of in the United States, especially in Utilities. See James C. Bonbright and Gardiner C. Means, The Holding Company: Its Public Significance and its Regulation (New York, 1932).
111. Previts and Merino, History of Accountancy in the United States, 250.
112. Michael E. Parrish, Securities Regulation and the New Deal (New Haven, 1970), 31-34.
113. On the prewar state of the profession, see Previts and Merino, History of Accountancy in the United States;
114. Miranti, Accountancy Comes of Age.
115. Quote from Miranti, Accountancy Comes of Age, 129.
116. See also Miranti, "Associationalism, Statism, and Professional Regulation," 448-57.
117. Previts and Merino, History of Accountancy in the United States, 237-41.
118. See Robert H. Montgomery, Auditing, Theory and Practice (New York, 1912), 80-130.
119. Montgomery provided one of the standard works and had already made many of these points; it went through numerous editions. See especially, Schmaltz, Bilanz- und Betriebsanalyse in Amerika, 3-30;
120. and Previts and Merino, History of Accountancy in the United States. The authors have also examined sixty German financial statements of fifteen firms, for example. Only one showed gross profit.
121. For a good, brief discussion of American securities law before the 1930s, see James Burk, Values in the Marketplace: The American Stock Market under Federal Securities Law (New York, 1988), 167-74.
122. For post-1933 developments, see McCraw, Prophets of Regulation.
123. See Mark Roe, "Delaware's Competition," Harvard Law Review 116 (2003): 588, on the limits of state power to determine corporate law.
124. Henning, "Die externe Unternehmensprüfung," 17-18.
125. Bankmann, "Entwicklung des Wirtschaftsprüferstandes," 174-75.
126. Markus, History of the German Public Accounting Profession, 1-6.
127. Schmaltz, Bilanz- und Betriebsanalyse in Amerika, 21-23.
128. Hugh B. Markus, "Der Wirtschaftsprüferberuf: Eine geschichtliche Kurzfassung," Wirtschaftsprüferkammer Mitteilungen 31 (Feb. 1992): 1-10;
129. Markus, History of the German Public Accounting Profession, 12-17;
130. Previts and Merino, History of Accountancy, 175-234.
131. Heike Franz, "Kulturelles Milieu und Disziplinbildung: Die Entstehung der Betriebswirtschaftslehre in Deutschland 1900 bis 1933," in Wissenschaftsgeschichte Heute, eds. Jürgen Büschenfeld, Heike Franz, und Frank-Michael Kuhlemann (Bielefeld, 2001), 251-77.
132. On universities and business economics, see Heike Franz and Alfred Kieser, "Die Frühphase der Betriebswirtschaftslehre an Hochschulen (1898-1932): Von der Handelstechnik zur Betriebswirtschaftslehre als Wissenschaft," in Entwicklungen der Betriebswirtschaftslehre: 100 Jahre Fachdisziplin-zugleich eine Verlagsgeschichte, eds. Eduard Gaugler and Richard Köhler (Stuttgart, 2002), 60-85, esp. 71-76.
133. On Schmalenbach, see Kruk, Potthoff, Sieben, Eugen Schmalenbach, 50-57.
134. On accounting and business economics, see Küpper and Mattessich, "Twentieth Century Accounting Research in the German Language Area," 346-47.
135. Previts and Merino, History of Accountancy, 256.
136. Markus, History of the German Public Accounting Profession, 1-62;
137. Hugh Markus, "British and U.S. Accounting Firms in Germany," unpublished manuscript, 3.
138. According to Jörg Bankmann, in "Entwicklung des Wirtschaftsprüferstandes," 178
139. by 1934 Germany had 770 public chartered accountants (defined in the narrowest sense) and 92 auditing companies. See American Institute of Accountants, 1929 Year Book of the American Institute of Accountants (1929), 56-101;
140. New York State Society of Certified Public Accountants, Year-book (Nov. 1930), 11-69.
141. In both cases, the U.S. count was estimated by taking the number of asterisked names (CPAs) on sample pages and multiplying by the total pages. See also Mark Stevens, The Big Eight (New York, 1981), 4.
142. Quote from Previts and Merino, History of Accountancy in the United States, 239.
143. Also see Miranti, "Mind's Eye of Reform," 485-93.
144. On the politics of conferring this professional certification, see Miranti, Accountancy Comes of Age, 48-85.
145. On "fair return" and "fair value," see James C. Bonbright, Railroad Capitalization: A Study of the Principles of Regulation of Railroad Securities (New York, 1920), quote from p. 53 on the impact of stock-watering.
146. Clark, Social Control of Business, esp. 334-47; see his assessment on p. 345.
147. Miranti, Accountancy Comes of Age, 128-29.
148. Previts and Merino, History of Accountancy, 251-53;
149. and Miranti, "Associationalism, Statism, and Professional Regulation," 459-60.
150. Bonbright, Railroad Capitalization, 82-88.
151. Previts and Merino, History of Accountancy in the United States, 261.
152. Quote from Miranti, "Associationalism, Statism, and Professional Regulation," 465.
153. For further discussion of these developments, see Miranti, Accountancy Comes of Age, 146-77.
154. Also see Thomas K. McCraw, "With the Consent of the Governed: SEC's Formative Years," Journal of Policy Analysis and Management 1 (Spring 1982): 346-70;
155. and Parrish, Securities Regulation and the New Deal.
156. In many national accounting systems, the distinction between what belongs to third parties and what belongs to the holders of common equity is still not absolutely clear. The elementary accounting equation in most continental countries is still expressed as assets = passives. To be sure, accountants in all countries understand the distinction, but the authors have discussed this point with several practicing accountants, who agree that enshrining the distinction in the basic accounting equation reinforces it in the minds of students and professionals alike.
157. Küpper and Mattessich, "Twentieth Century Accounting Research in the German Language Area," 345-410.
158. Franz and Kieser, "Frühphase der Betriebswirtschaftlehre," 76-79;
159. Küpper and Mattesich, "Twentieth Century Accounting Research," 357-59.
160. Gerald Feldman, The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914-1924 (Oxford, 1993), 299, 581.
161. Dieter Lindenlaub, Maschinenbauunternehmen in der Deutschen Inflation 1919-1923: Unternehmenshistorische Untersuchungen zu einigen Inflationstheorien (Berlin, 1985).
162. Feldman, Great Disorder, 842-43.
163. For an excellent analysis of the profits of German companies from their tax records, see Spoerer, Von Scheingewinnen zum Rüstungsboom, 146-67. Spoerer's analysis confirms the poor profitability of German firms in the 19205.
164. Carl Wirtz, "Der Betriebsverglich dargestellt unter Berücksichtigung des Schrifttums," Annalen der Betriebswirtschaft 2 (1928): 434-55, quote from p. 437;
165. and "Unternehmungsvergleich, dargestellt auf Grund des deutschen und amerikanischen Schrifttums," Annalen der Betriebswirtschaft 2 (1928): 525-30.
166. On the role of banks in promoting good accounting standards, see Schmaltz, Bilanz- und Betriebsanalyse in Amerika, 16-21.
167. Schmaltz, Bilanz- und Betriebsanalyse in Amerika, 31-65, 87-96, 137-39, quote on p. 91
168. from Gilman, p. 138. Schmaltz relied on Stephen Gilman, Analyzing Financial Statements (New York, 1925), Introduction.
169. Merkt, Unternehmenspublizität, 71-72
170. with literature cited; Günter Wöhe, Bilanzierung und Bilanzpolitik (Munich, 1987), 55-59;
171. Brigitte Eierle, "Differential Reporting in Germany-A Historical Analysis," Accounting, Business & Financial History 15 (Nov. 2005): 286.
172. Günter Sieben, "Schmalenbachs Auffassung von der Unternehmensbewertung," in Betriebswirtschaftliche Forschung und Praxis: 100 Jahre Betriebswirtschaftslehre-125 Jahre Eugen Schmalenbach (Herne, 1998), 189-203.
173. See also Jörg Baetge and Thomas Beermann, "Die Bilanzierung von Vermögenswerten in der Bilanz nach International Accounting Standards und der dynamischen Bilanztheorie Schmalenbachs," in the same volume, 154-68;
174. Potthoffund Sieben, "Das wissenschaftliche Werk Schmalenbachs," in Eugen Schmalenbach, 303-34;
175. Locke, End of the Practical Man, 164-68;
176. David Forrester, Eugen Schmalenbach and German Business Economics (New York, 1993), 113-17;
177. Markus, History of the German Public Accounting Profession, 81, 273-75, 285;
178. Fear, Organizing Control, 585-86;
179. Küpper and Mattesich, "Twentieth Century Accounting Research," esp. 354-57. Küpper and Mattesich are more skeptical than mainstream analysts about Schmalenbach's stress on the income statement.
180. Merkt, Unternehmenspublizität, 94-96.
181. Anecdote from Kruk, "Leben und Wirken Schmalenbachs," Eugen Schmalenbach, 102-5;
182. Leuz und Wüstermann, "Role of Accounting," 456-57.
183. Forrester, Eugen Schmalenbach, 117.
184. Wilhelm Osbahr, Die Bilanz vom Standpunkt der Unternehmung (Berlin, 1918)
185. quoted in Forrester, Eugen Schmalenbach, 148-49.
186. Quoted in Merkt, Unternehmenspublizität, 94.
187. From Julius Flechtheim, "Vom Aktienwesen in den Vereinigten Staaten," Zeitschrift für ausländisches und internationales Privatrecht 3 (1929): 101-19.
188. Schmalenbach's chart of accounts proved immensely successful throughout Europe, even in Japan. Unfortunately, it also proved useful in the Soviet Union and Nazi Germany because it enhanced control over enterprises under fixed-price regimes. The Nazi regime made his uniform chart of accounts mandatory after 1939 and introduced it to their conquered countries. The Soviet Union and its satellite countries in Eastern Europe kept using it in its purest form into the 1990s. Most German businesses also utilize a revised form of Schmalenbach's chart of accounts to this day. See Eugen Schmalenbach, "Der Kontenrahmen," Zeitschrift für handelswissenschqftliche Forschung 21 (1927): 385-402, 433-75;
189. Marcell Schweitzer, "Eugen Schmalenbach as the Founder of Cost Accounting in the German-Speaking World," in Studies in Accounting History: Tradition and Innovation for the Twenty-First Century, eds. Atsuo Tsuji and Paul Garner (Westport, Conn., 1995), 29-43;
190. Erich Potthoff, "Betriebswirtschaftslehre in der Zeit des Nationalsozialismus (1933-1945) bei politischer Gleichschaltung und staatlicher Wirtschaftslenkung," in Entwicklungen der Betriebswirtschaftslehre: 100 Jahre Fachdisziplin-zugleich eine Verlagsgeschichte, eds. Richard Köhler and Eduard Gaugler (Stuttgart, 2002), 87-110;
191. Hanns Martin Schoenfeld, "Eugen Schmalenbach," 515-16;
192. Gottfried Bahr and Wolf F. Fischer-Winkelmann, Buchführung und Jahresabschluss (Wiesbaden, 1998), 5;
193. Locke, End of the Practical Man, 178-86.
194. On Schmalenbach's role in the Vereinigte Stahlwerke, see Fear, Organizing Control, 584-93;
195. Küpper and Mattessich, "Twentieth Century Accounting Research in the German Language Area," 360-65.
196. Miranti, Accountancy Comes of Age, 128-42, quote from p. 134.
197. Related in Wirtz, "Der Betriebsvergleich," 455.
198. William C. McNeil, American Money and the Weimar Republic (New York, 1986), 18-19.
199. Dr. Otto Frielinghaus, quoted in Markus, History of the German Public Accounting Profession, 14.
200. Price Waterhouse report to Phoenix AG, 13 Feb. 1926, Mannesmann-Archiv: P 5 25 29.
201. The Thyssen discussion is based on Fear, Organizing Control, 489-506.
202. Leuz and Wüstemann, "The Role of Accounting in the German Financial System";
203. Hollis Ashbaugh and Terry D. Warfield, "Audits as a Corporate Governance Mechanism: Evidence from the German Market," Journal of International Accounting Research 2 (2003): 1-21. This disconnect between sophisticated insider information and thin disclosure to outsiders became prevalent by the late twentieth century. Highly sophisticated, state-of-the-art audit reports played a crucial role in German corporate governance, but these were often made available only to the executive and the supervisory board.
204. Fear, Organizing Control, 584-606, 651-58;
205. Heinrich Dinkelbach, "Das Wesen und der Aufbau der industriellen Konzernbilanz," Zeitschrift für Handelswissenschaftliche Forschung 35 (1941): 55-66.
206. In the United States, when a parent company has less than 20 percent ownership, the cost method is utilized. Investment stays at cost and dividends are recorded as income. At 20 to 50 percent of equity, investment is recorded at cost. A percent share of income is recorded as income, then added to value of investment. Dividends are added to cash, which reduces book value of investment. At over 50 percent, full consolidation is utilized, and all assets and liabilities are added with the parent; minority interest is recorded as liability; and income less minority owners' portion is recorded as an expense. The basics of these rules existed already by the 19205 and 19303, although standards were still debated and did not have the force of law until the late 19305. LAS standards are similar to those of the United States, with some minor differences. In the absence of American auditors, German firms almost always used the cost method, even if ownership was 100 percent. Therefore, one could not know what a subsidiary was worth and how it contributed to the Konzern, even in accounting terms, unless one had its financial statements in hand. In 1986, under EC guidelines, Germans changed the rules to conform with American standards.
207. Vereinigte Stahlwerke AG, 1933/34 Annual Report, Mannesmann-Archiv (MA): R 1 40 35.1.
208. Reiner Quick, "Die Entstehungsgeschichte der Aktienrechtlichen Pflichtprüfung in Deutschland," Zeitschrift für Unternehmensgeschichte, no. 1 (1990): 229.
209. Economist, 19 Oct. 1929, 721.
210. Markus, History of the German Public Accounting Profession, 27-34;
211. quote from pp. 27-28; "ghastly" from p. 34.
212. Merkt, Unternehmenspublizität, 96-98.
213. Dr. Bernhard Brockhage, Geleitwort, Der Wirtschaftsprüfer 1, no.1 (Jan. 1932): 1-2.
214. Dr. Alfred Weiss, "Stille Reserven und ihre Auflösung nach der Aktienrechtsnovelle vom 19 September 1931," Der Wirtschqftspüfer 1, no. 2 (Jan. 1932): 35-39;
215. in the same issue, see Dr. Otto Keinzle, "Die Gewinn- und Verlustrechnung nach dem geänderten Handelsgesetz," 243-44.
216. Dr. Fritz Mezger, "Die amerikanischen Accountants und der deutsche Wirtschaftsprüfer," Der Wirtschaftsprüfer 1, no. 10 (May 1932): 191-93.
217. McCraw, Prophets of Regulation, pp. 189-92.
218. See discussions of Accounting Research Bulletins (ARBs) in Jan R. Williams, GAAP Guide (New York, 2000).
219. Quick, "Entstehungsgeschichte," 122-41;
220. Eierle, "Differential Reporting in Germany," 286-87. During the nineteenth and twentieth centuries, German accounting principles were alternately embodied in corporate law or commercial law statutes, or sometimes in some combination of the two.
221. See esp. Spoerer, Von Scheingewinnen zum Rüstungsboom, 62-95. In the 19205 especially, tax authorities influences American accounting developments, but financial reporting and tax reporting were never required to be identical in all statements. One current requirement, however, requires identical treatment for inventory flows.
222. Gerald D. Feldman, "Foreign Penetration of German Enterprises after the First World War: The Problem of Überfremdung," in Historical Studies in International Corporate Business, eds. Alice Teichova et al. (Cambridge, U.K., 1989), 87-111.
223. Otto Antrick, general manager, Chemische Fabrik (Vormals. E. Schering): memo to file, 11 Dec. 1919, Schering Archiv B2/122.
224. Bernard Köhler, "Nationalsozialistische Rationalisierung," Zeitschrift für Organisation 10 (25 May 1936): 173-77.
225. Markus, History of the German Public Accounting Profession, 14-15, 53;
226. Quick, "Entstehungsgeschichte," 228.
227. Markus, History of the German Public Accounting Profession, 50.
228. Potthoff, "Schmalenbachs Leben und Wirken," 142;
229. Kruk, Potthoff, and Sieben, Eugen Schmalenbach, 150-53.
230. Markus, History of the German Public Accounting Profession, 64-70, 78, 83-93.
231. Markus delineates the ideological positions taken by the Institut in support of the new regime between 1934 and 1937, as well as discussing the Jews who were expelled from the Institut. Roughly nine percent of the Institut's members were Jewish (nearly half of these had served on the front line in World War I). By comparison, 16 percent of Germany's lawyers were Jewish, but they could practice their profession only under severe constraints. See Saul Friedländer, Nazi Germany and the Jews (London, 1997), 29.
232. Dr. Otto Mönckmeier, "Der unabhängige Wirtschaftstreuhändler," in Der Wirtschaftstreuhändler 5, no. 1 (Jan. 1936): 1-2;
233. Potthoff, "Betriebswirtschaftslehre im Nationalsozialismus."
234. Merkt, Unternehmenspublizität, 9711341.
235. Except for the "leadership principle," which was clearly of Nazi origin, there is still some debate over how Nazified this law was. Many reforms, like, for instance, the organization and principles of financial statements, were discussed in the 19205. See Peter Hayes, Industry and Ideology (Cambridge, U.K., 1987), 168;
236. and Christopher Kobrak, "Politics, Corporate Governance, and the Dynamics of German Managerial Innovation: Schering AG between the Wars," Enterprise & Society 3 (Sept. 2002): 421-61.
237. Christopher Nobes and Robert Parker, Comparative International Accounting (London, 1998), 221-23;
238. Eierle, "Differential Reporting in Germany," 290.
239. Walter Cordes, "Die Bedeutung des Konzernabschlusses für die Konzernführung," in Wirtschaft und Wirtschaftsprüfung, ed. Konrad Mellerowicz and Jörg Bankmann (Stuttgart, 1966), 50-68;
240. Merkt, Unternehmenspublizität, 98-113.
241. Rajan and Zingales, "The Great Reversals," Table 3. For similar arguments as well as present practices
242. see Erich Potthoff and Karl Trescher, Das Aufsichtsratsmitglied: Ein Handbuch der Aufgaben, Rechte und Pflichten (Stuttgart, 2003), 327-84;
243. and Ashbaugh and Warfield, "Audits as a Corporate Governance Mechanism."
244. Mark Währisch, The Evolution of International Accounting Systems (Frankfurt am Main, 2001), 35-54.
245. Eierle, "Differential Reporting in Germany," 296-97.
246. Jörg Baetge, Hans-Jürgen Kirch, and Stefan Theil, Bilanzen (Düsseldorf, 2001), 12-25.
247. Nobes and Parker, Comparative International Accounting, 310-11.
248. This distinction between an economic and a legalistic conception of the firm became a major problem for tax law in Germany during the 19205 due to the growth of Konzerne, multisubsidiary operations. A body of case law built around the theory of corporate agency (Organschaftstheorie) developed. See Fear, Organizing Control, ch. 12.
249. See Anthony Giddens, "Time and Social Organization," in his Social Theory and Modern Sociology (Stanford, 1987), 140-65.