The investors ability in making an investment decisions on the germany's financial market-an empirical analysis

Allied Academies International Conference THE INVESTORS ABILITY IN MAKING AN
Musa Darayseh, Purdue University Calumet
Elaine Waples, Purdue University Calumet
Many U.S. companies and investors do business with German companies or own German subsidiaries. To comply with laws in both countries, American Certified Public Accountants andinvestors need to be familiar with the German accounting rules. Even though there are manysimilarities, there are some differences in the preparation of financial statements. The two main areas that influence accounting in Germany are commercial and tax laws and the accounting profession. The German commercial and tax laws are the most important influenceto accounting in Germany. Laws require every business to keep records and to provide financialstatements at the end of a 12-month period. Detailed requirements of how to keep specific accountsare not given purposely to leave room for improvement of the mechanics of bookkeeping. However,the "principles of orderly bookkeeping" give general guidelines of how to keep records. Forexample, under the principle of individual evaluation, every asset and liability is evaluatedindividually. Total value is not a valid measure. Also under the principle of caution, balance sheetitems have to be evaluated with caution. It is preferred if assets are reported low and liabilities highand not vice versa. Contingencies are to be considered, even if they become known after the balancesheet date. However, gains are not to be reported unless they are already realized on the balancesheet date. Closely related to the principle of caution is the principle of inequality(Imparitätsprinzip). Pending losses always have to be included in the balance sheet, gains that arenot realized may not be included. (Hahn and Warner 1986) Another influence to financial reporting rules is the accounting profession. The accounting profession in Germany is governed by the Wirtschaftsprüferkammer (Chamber of Accountants),which was introduced in 1971 by the law regulating the accountancy profession (Nobes and Parker,p.100). Membership is required by law. The Chamber is a self regulating body and its legal functionis to observe the professional standards and to educate accountants (Nobes and Parker, p.100).
Many times recommendations and suggestions made by the Chamber cause a change in laws in theinterest of the public (Publication of the Wirtschaftprüferkammer). In 1992, the Chamber had13,000 members, which was almost double than in 1987. Cause of this increase was a new law in1986 requiring audits not only for corporations (Aktiengesellschaften), but also for companies withlimited liability (Gesellschaft mit beschraenkter Haftung or short GmbH 2).
To help American companies and international investors in forming their expectations about the future prospects of the German companies' financial reports and the accuracy of the accounting Proceedings of the Academy of Accounting and Financial Studies, Volume 9, Number 1 Allied Academies International Conference data reported in these reports, the objective of this study is to look for evidence of the existence ofincome enhancement. In other words, the goal of this research paper is to determine if thefrequency of occurrence of second digits contained in income numbers of the German firms (annualdata) departs significantly from expectations. Proceedings of the Academy of Accounting and Financial Studies, Volume 9, Number 1


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