Legal Risks of Inappropriate Accounting

Table of Contents

Executive Summary

Table of Contents

List of Abbreviations

1 Introduction/Problem Definition

2 Objectives

3 Methods

4 Main Part
4.1 Accounting Obligations
4.1.1 Accounting Obligations under Commercial Law
4.1.2 Accounting Obligations under Fiscal Law
4.2 Principles for Orderly Accounting (POA)
4.2.1 The Principle of Accuracy, Freedom from Arbitrariness and Steadiness
4.2.2 The Principle of Clarity and Transparency (Including the Principle of Individual Evaluation)
4.2.3 The Principle of Completeness
4.2.4 The Principles of Timeliness, Documentation of Changes and Language
4.2.5 The Principle of Verifiability (Belegbarkeit und Prüfbarkeit)
4.2.6 The Principle of Economic Proportionality
4.3 Obligations of Data Retention
4.4 Relationship between the Principles of Orderly Accounting and the Bilanzrechtsmodernisierungsgesetz (BilMoG)
4.5 Consequences of Violations of bookkeeping duties

5 Conclusion

6 ITM Checklist

7 Bibliography

List of Abbreviations

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Table 1: List of Abbreviations.

1 Introduction/Problem Definition

Acting as a businessman is related to special duties regarding accounting. These non-codified rules can be summarized to the so called “Principles of orderly accounting” (“Grundsätze ordnungs-mäßiger Buchführung”). Keeping to the POA is a duty for any merchant. Violations of these principles are related to harsh penalties imposed by the legislator.

2 Objectives

The following text should give answers to a number of elementary questions concerning basic regulations for accounting:

1. What binding obligations have to be taken into consideration?
2. What is the nature of the so called “Principles for Orderly Accounting”?
3. What legal risks result from inappropriate accounting?

3 Methods

The following text is based on an intensive literature research concerning legal aspects of accounting. Basic regulations for accounting are outlined and potential legal risks in case of infringements are briefly discussed.

4 Main Part

4.1 Accounting Obligations

The obligation of keeping accounts is clearly established under commercial law (§§ 238 ff. HGB) and fiscal law (§§ 140 ff. AO).

4.1.1 Accounting Obligations under Commercial Law

According to § 238 chapter 1 sentence 1 of the HGB every merchant, especially those who are registered in the commercial register, have the duty to keep accounts and introduce transparency regarding business performance and asset position according to the Principles of Orderly Accounting.

„Die Buchführung muss so beschaffen sein, dass sie einem sachverständigen Dritten innerhalb angemessener Zeit einen Überblick über die Geschäftsvorfälle und über die Lage des Unternehmens vermitteln kann. Die Geschäftsvorfälle müssen sich in ihrer Entstehung und Abwicklung verfolgen lassen“ (Bundesminsiterium der Justiz, 2012) [Original German text].

Within an OHG all partners are affected. At the KG only partners who are personally liable have the duty to keep accounts. At an AG the duty of accounting lies with the management board. For capital companies like AGs, KGaAs and GmbHs the duty for keeping accounts starts with the commencement of business (Bieg, 2011, p.197). §241 HGB, which was redefined in the frame of the BilMoG, regulates potential exemptions from the duty of accounting.

4.1.2 Accounting Obligations under Fiscal Law

§ 141 AO regulates who has the legal obligation of keeping accounts along certain defined criteria (e.g. if the net income of business and trade, agriculture or forestry exceeds 50k€ or if the revenue (including tax-free portions) exceeds 500k€). Further obligations for keeping records relating to fiscal law result from the “Turnover Tax Act”, “excise laws”, the “Income Tax” and the “Capital Gains Tax”. §§ 143 and 144 AO comprise additional documentation duties for commercial entrepreneurs regarding incoming and outgoing goods (Bieg, 2011, p.200).

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