4. Suitability of accounting rules as a basis for management decisions at enterprises?

1. Principles

One of the functions of accounting is to provide the enterprise’s management and board of directors with a basis for due decision-making. A non-transferable competence of the board of directors, based on Article 716a, Section 1, Item 3 of CO, is „the organisation of the accounting, financial control and financial planning systems as required for management of the company“. Decisions potentially impacting the enterprise’s financial situation can be made dutifully by the board only if it knows how these decisions influence the enterprise’s financial situation. For this, the board needs comprehensive information on the assets and financial situation, changes in it, economic performance and the enterprise’s risk capacity. This need exists always, not just in a crisis. Added to the non-transferable duties in a crisis situation is the duty to file a bankruptcy petition in the event of debt overload. This obligation, too, can be fulfilled by the board only if it knows the enterprise’s financial situation.

2. Relationship between bookkeeping, financial control and accounting

The annual financial statement is based on the company’s accounting records; the more differentiated the requirements for annual financial statements are (for example, based on IFRS standards), the more differentiated the bookkeeping must be too. The accounting rules used in the company thus also define bookkeeping requirements and, consequently, the financial control instruments available to the board of directors. Bookkeeping set up with a view to accounting as per CO may be less differentiated than a company’s bookkeeping intended for accounting as per IFRS.

3. Accounting as per CO

The accounting regulations of CO are not suitable as the basis for decisions by the management board or the board of directors. Formation of valuation groups, hidden reserves, inadequate and undifferentiated representation of risks, and the possibility of balancing assets below their value, prevent the accounting rules of CO from serving as a basis for compliant decisions at the enterprise. This is agreed in the doctrine. The board of directors must base its decisions not on the commercial balance sheet, but on effective numbers.

4. Accounting as per IFRS

The rules of IFRS are much stricter, strive for a true and fair view, and, through a principle of individual assessment, far-reaching ban on hidden reserves and mandatory depiction of corporate risks, commit the board of directors to an accounting form which is also useful as a management tool for the management and board of directors. The cogency of IFRS accounting is much greater than that of CO accounting. Increases and losses in value are shown separately, and must not be offset in compound items (such as in the CO). Risks are represented much more accurately. In IFRS accounting, negative effects of decisions cannot be disguised, but are disclosed. Because practically all decisions affect accounting, the management assesses its potential decisions considering the aspect of IFRS updates, and is thus better at detecting risks.