Comparative Tax Jurisprudence: Germany and Japan 9780814737774

Citation preview

Comparative Ta x Jurisprudence: Germany an d Japan

Comparative Ta x Jurisprudence: Germany and Japan Takeshi Iizuka , Ph.D. , J.D., C.P.A . Chairman, Th e TKC National Federatio n of Public Accountant s

n

New York University Pres s New York and Londo n

NEW YOR K UNIVERSIT Y PRES S New Yor k an d Londo n Copyright © 199 3 by Ne w Yor k Universit y All right s reserve d Library o f Congress Cataloging-in-Publicatio n Dat a Iizuka, Takeshi , 1918 — Comparative ta x jurisprudence : Germany an d Japa n / Takesh i Iizuka. p. cm . Includes bibliographica l reference s an d index . ISBN 0-8147-3755- 2 (acid-fre e paper ) 1. Taxation—La w an d legislation—Germany . 2 . Taxation—La w an d legislation—Japan. I . Title . K4460.4.I38 199 3 343.4304—dc20 92-4220 7 [344.3034] CI P New Yor k Universit y Pres s book s ar e printed o n acid-fre e paper , and thei r binding material s ar e chosen fo r strength an d durability . Manufactured i n th e Unite d State s o f Americ a c1 0 9 8 7 6 5 4 3 2 1

Contents

Preface vi i Part One 1. Th e Essence of the Concept o f the Principles of Regular Accounting 3 2. Th e Principles of Regular Accounting Viewed as Mora l Obligations of a Positive La w 1 3 3. Th e Principle of "Timeliness" 2 9 4. Th e Principle of "Materiality" and Its Criticism 3 6 Part Tw o 5. Erroneou s Theorie s of Dr. Kotaro Tanaka 5 1 6. Critica l Revie w of the Opinions of Respectable Japanes e Scholars: Part I 5 7 7. Critica l Revie w of the Opinions of Respectable Japanes e Scholars: Part I I 7 3 8. Fai r Accounting Practic e i n the Commercial Cod e of Japan 8 7 v

vi Content s Part Three 9. Calculatio n Regulation s i n the Federal Republi c of Germany: Part I 10 5 10. Calculatio n Regulation s i n the Federal Republi c of Germany: Part I I 12 2 11. Calculatio n Regulation s i n the Federal Republi c of Germany: Part III 13 4 12. Th e Formation o f an Especiall y Close Connectio n between Civi l Law and th e Tax Laws 15 2 13. Th e Calculation Regulation s i n the United State s an d England 18 0 Part Four 14. Th e Problems of the Fourth E C Guideline and th e Seventh E C Guideline 19 7 15. Problem s Relatin g t o Union Europeenne de s Expert s Comptables, Economiques et Financiers (U.E.C.) 22 8 16. Th e Problem of the "Declaration o f Completeness" 24 0 17. Principle s of Regular Bookkeeping and Electroni c Data Processing 25 0 References 26 1 Index 27 1

Preface

The nucleu s o f thi s boo k wa s m y previou s monograp h entitled : "Verifiable Bookkeepin g Records/ ' whic h wa s serialize d i n twenty six part s ove r th e cours e o f thre e year s (Jun e 197 9 t o Jun e 1982 ) in th e Japa n Societ y o f Accounting' s journal , Accounting, pub lished i n Toky o b y Moriyam a Shoten . Sinc e tha t time , I hav e added som e materia l an d don e som e rewriting , an d th e presen t book is the fruit o f those labors . I would lik e to acknowledge tha t th e publication o f the origina l monograph i n Accounting wa s entirel y dependen t o n th e goo d offices, encouragement , an d kin d guidanc e o f Dr . Kiyosh i Kuro sawa, wh o holds a doctorat e i n Busines s Economics , has bee n a n honorary professo r a t Yokoham a Nationa l University , an d ha s assumed th e pos t o f th e Highes t Advise r o f th e TK C Nationa l Federation o f Public Accountants. Approaching Dr . Kurosawa wa s suggested t o m e b y m y respecte d teacher , th e lat e Professo r Tsu nejiro Nakamura . H e wa s a Docto r o f Economic s an d a forme r professor a t Fukushim a Highe r Commercia l Colleg e an d th e Uni versity of Tokyo. This monograph originate d i n December 1962 , however, when I was ordere d t o writ e a doctora l thesi s i n ta x jurisprudenc e b y Masaaki Katsumoto , an honorar y professo r o f Tohoku University , a forme r Dea n o f th e Facult y o f Jurisprudence o f Sensh u Univer sity, and a Docto r of Laws. Through th e good offices o f Dr. Katsu moto, i n Apri l 1963 , I enrolle d i n th e lat e Professo r Katsujir o Tanaka's postgraduat e lectur e course . Dr. Tanaka wa s also a Docvii

viii Prefac

e

tor o f Laws , a forme r professo r o f th e Facult y o f Jurisprudence , Senshu University , an d a forme r la w advise r t o th e Nationa l Ta x Administration Agency . Although I continued t o be enrolled i n th e course of law at th e Faculty of Jurisprudence an d Literatur e o f the Tohoku Imperia l University , I rarely attende d th e designate d lec ture classe s an d wa s on e o f th e unworth y students . However, Dr . Katsumoto wa s kin d enoug h t o recommen d m e t o a n America n lawyer name d J . B . Anderson a s a n advise r o n ta x jurisprudence . Later, Dr . Katsumot o als o recommende d m e fo r th e positio n o f adviser i n charg e o f auditin g fo r th e America n Presiden t Lines , which wa s the n th e larges t shippin g compan y i n th e world . I f i t were no t fo r th e goo d office s an d kin d guidanc e offere d b y th e scholars mentioned above , this book would not have been written . A human bein g has th e essential qualitie s to live independentl y so lon g a s h e i s lef t alon e t o d o so . In th e worl d o f scholarship , however, on e canno t progres s unti l on e absorb s an d digest s th e work o f previous scholars . Contrary t o th e expectation s o f Profes sors Nakamur a an d Katsumoto , I was irregula r i n attendin g lec tures, not onl y a t Fukushim a Highe r Commercial Colleg e but als o at Tohok u Imperia l University . Th e reaso n fo r thi s wa s tha t th e pursuit o f th e principl e o f ho w t o lea d m y lif e wa s th e larges t problem o f m y younge r days . Fo r a time , I ha d give n mysel f u p entirely t o th e asceti c practic e o f Zazen (sit-i n meditation ) unde r the cordia l tutoria l guidanc e o f th e Reveren d Yoshi o Uek i o f th e Ungenji Templ e i n Mt . Nas u an d th e Reveren d Shote n Miur a o f the Zuiganji Templ e in Matsushima . In m y persona l reminiscence s a s th e Presiden t o f th e TK C Na tional Federation , whic h i s composed o f mor e tha n five thousan d Certified Publi c Accountant s an d License d Ta x Practitioner s an d is a nationwid e organizatio n du e t o it s us e o f computerize d ac counting systems , I acknowledge tha t th e sourc e o f m y energ y i n completing thi s monograph , i n th e mids t o f th e pressur e o f othe r work, ca n b e foun d i n th e disciplin e give n m e b y th e Reverend s Yoshio Uek i an d Shote n Miura . Befor e writin g thi s monograph , I planned t o consul t approximatel y five thousan d volume s o f for eign literatur e fro m Grea t Britain , th e Unite d States , Germany , France, and s o forth. I t wa s m y hop e t o surpas s th e fea t o f Kuka i Kobodaishi, who, 165 0 years ago, wrote th e spiritual hook Ju-Jyu-

Preface i x Shin-Ron a t th e ag e o f sixt y an d afte r h e ha d looke d a t ove r si x hundred foreig n references . I regret t o say tha t I had t o stop afte r consulting less than one-twentieth o f the references I had intende d to look at. I tried m y best, but m y achievement ha s fallen fa r shor t of that o f Kukai Kobodaishi , who has no equal i n history . In thi s monograph , I was anxiou s t o pose counterargument s t o the opinions of several hundred note d scholars , not only in Japan , but als o i n Europ e an d America . Th e reaso n fo r thi s wa s tha t I have been greatl y inspire d b y th e word s of Professor Gusta v Rad bruch, th e professo r o f th e Philosoph y o f Jurisprudenc e a t th e University of Berlin who said: "The personality is developed throug h selfless objectivity/' A t the same time, Zen requests the experienc e of conclusiv e evidenc e o f th e non-rea l existenc e o f "ego " a s th e fixed rea l existence . Ther e i s a lin e o f connectio n betwee n thes e two theories, and the y are th e underpinnings o f this monograph. I was pleased whe n Mr . Heinz Sebiger , on e of the senio r managin g staff o f th e Ta x Jurisprudenc e Learne d Societ y i n th e Federa l Republic o f Germany , informe d m e i n Octobe r 198 2 tha t C . H . Beck Company , th e larges t publishin g compan y i n th e Federa l Republic of Germany, was going to publish m y monograph . Finally, I mus t remin d m y reader s tha t ta x jurisprudenc e ha s been emergin g a s mor e interdisciplinary , extendin g eve n t o th e study o f administrativ e laws , th e state , an d th e philosoph y o f jurisprudence, t o sa y nothin g o f accounting , busines s economics , bookkeeping, and th e study of commercial law . For th e completio n o f thi s book , I a m greatl y indebte d t o th e assistance o f Mr. Koume, the Editor-in-Chief, an d Mr . Tsuchiya of Moriyama Shoten . Moreover , Mr . Eiich i Tanak a an d Mr . Keisuk e Matsumoto, wh o belon g t o th e TK C International Division , wer e kind enoug h t o compile th e lis t o f references an d a n inde x an d t o do al l th e proofreading . I woul d lik e t o expres s m y profoun d ap preciation b y citing, in particular, thei r names here. TAKESHI IIZUKA At a temporary abod e in Shonan are a

Part One

1 The Essenc e o f th e Concep t o f th e Principle s of Regula r Accountin g

It wa s i n Prussia , i n th e eighteent h century , tha t th e concep t o f "orderly books " wa s introduce d int o la w fo r th e firs t tim e i n history. Th e concep t o f "regula r accountin g principles, " however , came o n stag e i n th e for m o f a la w fo r th e firs t tim e a s Articl e 3 8 of th e Germa n Commercia l Cod e o f 1897 . I t i s ove r eight y year s since th e concept , whic h establishe d th e standar d fo r a merchant' s responsibility t o kee p accounts , appeare d i n histor y cla d i n to day's attire . A t thi s stage , however , i t i s necessar y fo r u s t o ascer tain th e tru e characte r o f thi s concept . The reaso n i s tha t Japan' s Corporat e Accountin g Principle s a n d the Enforcemen t Regulation s fo r th e Incom e Ta x La w hav e use d the Germa n ter m jus t a s i t is , afte r translatin g i t literall y int o Japanese. N o problem wil l aris e whe n th e literall y translate d ter m is use d i n Japan , i f th e ter m ha s th e sam e meanin g a s th e ter m used i n Germany . If thi s i s no t so , ther e i s a seriou s problem . Needless t o say , th e civilizatio n i n an y on e countr y i s th e produc t of variou s internationa l exchange s betwee n tha t countr y an d oth ers. Therefore , t o detai l th e characteristi c cultur e o f on e countr y will occasionall y revea l muc h tha t i s of archaeologica l interest. 1 The poin t i s tha t on e shoul d hav e n o objectio n t o an y importe d concept a t all . When a n importe d concep t doe s no t hav e th e sam e meaning i t h a d i n it s countr y o f origin , however , i t shoul d b e use d only afte r a persuasiv e explanatio n o f w h a t wa s adde d t o it . Whe n 3

4 Th e Essenc e o f th e Concep t this i s neglected , th e resul t i s simila r t o tha t o f "t o cr y win e an d sell vinegar/ ' o r "t o cr y bee f an d sel l hors e meat. " Wha t i s th e essence o f "regula r accountin g principles" ? I thin k i t i s proper t o restrict th e essence to the following attributes : 1. I t i s a collectiv e concep t tha t i s th e histori c standar d o f th e bookkeeping tha t shoul d b e performe d b y a merchan t i n a broad sense . 2. I t i s a concep t whos e limit s hav e bee n clarifie d b y a se t o f specified lega l standard s wheneve r th e flow of history ha s bee n cut i n a slic e a t a fixed poin t i n tim e an d it s cros s sectio n reviewed. 3. I t i s the concept unde r which , when al l its formal an d substan tial necessar y condition s hav e bee n met , book s o f account dis play th e function b y which the y are accepted a s having eviden tial power t o government an d municipa l ta x offices . In Japan a t present , limitin g th e concept i n this way may , I think , be take n a s a n uncommo n an d unprecedente d conceptua l regula tion. As far a s I hav e bee n abl e t o ascertain , however , thi s i s th e concept o f "th e principle s o f regular bookkeeping " i n th e Federa l Republic of Germany—a concep t with a threefold structure . First o f all, there i s the practical activit y o f bookkeeping tha t i s conducted b y a merchant. As it is an activity conducted i n society , it i s subjec t t o variou s restrictions , suc h a s economi c an d socia l conditions. This practica l activit y i s a sociall y oriente d one , so i t can be said tha t i t is also a historical one . The fact o f the existenc e of such a practical activit y ca n b e formed int o an ide a by separat ing it fro m th e law . Such a fact constitute s th e very foundation o f the law, and i t occasionally goe s ahead o f the law historically . When history is viewed macroscopically, it is natural for huma n beings t o bring fort h variou s principle s a s autonomous standard s from suc h practica l activities . A t th e sam e time , suc h a socia l phenomenon i s naturally subjecte d t o the participation o f the law . In thi s way , "th e principle s o f regula r bookkeeping " becom e a legal concept . Needless t o say , th e scop e o f thes e tw o principle s i s no t th e same. Th e forme r ca n b e describe d a s "variou s principle s fo r or derly bookkeeping, " whil e th e latte r ma y b e define d a s "variou s

The Essenc e o f th e Concep t 5 principles fo r prescribe d regularit y i n bookkeeping. " Essentiall y speaking, as an actual fact ha s a character tha t i s the source of the law, 'Variou s principle s fo r regula r bookkeeping " ca n b e graspe d from tw o sides: actual fac t an d th e law . The principles hav e com e to includ e variou s standard s an d a grou p o f principle s wit h th e passage of history. For example , accordin g t o th e theor y o f Dr . Ulric h Leffson , i n "Principles o f Documentation, " ther e ar e th e forma l principle s and th e principl e o f completenes s regardin g accounting . I n The Principles of Regular Accounting, th e followin g principle s hav e bee n included: correctness nonarbitrariness clarity completeness classification o f things according t o time perio d valuation unde r th e assumptio n o f th e unlimite d continuatio n o f the busines s classification b y mean s o f inventory valuatio n an d cos t an d profi t valuation Walb's 2 rational profi t an d los s accountin g retail metho d o f valuation , nonparity , verifiability , consistency , explaining inconsistencies , th e elimination/segregatio n o f abnor malities, caution etc. 3 In the explanation o f the principles of regular bookkeeping con tained i n th e Dictionary of German Tax Jurisprudence, whos e au thor, Dr . Klaus Bierle, is senior lecture r a t th e Universit y o f Saar land, Saarbriicken , th e "principl e o f vouchers " i s adde d t o th e principles above . Dr. Leffson o f Minister University , however , di d not includ e th e principl e o f voucher s a s a principl e o f regula r bookkeeping i n hi s ow n book . H e i s als o th e autho r o f "Variou s Principles o f Regula r Bookkeeping, " whic h i s containe d i n th e Dictionary of Business Economics. Accordin g t o hi s explanation ,

6 Th e Essenc e o f th e Concep t he divide s th e principle s o f documentatio n int o five categories , and he cites the principle of vouchers as the fourth principle. 4 The principles o f documentation Dr . Leffson detail s i n th e Dictionary of Business Economics are : a systemati c set-up of accountin g verification o f the completeness of the account s complete and comprehensibl e record s vouchers (no entry without a voucher ) verification o f the dependability an d th e regularity of the account ing by means of an interna l checkin g syste m In hi s ow n book , especiall y i n hi s explanatio n o f th e forma l prin ciples, he only touches lightly on the principle of vouchers. 5 Dr. Leffson states , however: "Th e proof tha t an y particular rul e is a good accounting principle , can never depen d upo n laws , ordinances, o r officia l guidelines. " I t i s quit e natura l tha t h e demon strates that th e regular accounting principles that originated fro m Article 3 8 o f th e Germa n Commercia l Cod e no t onl y functio n a s the source of the law but also, at the same time, have the characte r of a lawful standar d tha t ha s the force o f law. 6 It seems to me tha t his demonstration i s worthy of special attention i n Japan . Dr. Heinric h Wilhel m Kruse , Privatdozen t i n Wiirzburg , wh o wrote a book with the same title as Dr. Leffson's an d relied heavil y on Dr . Leffson's work , wrot e hi s Principles of Regular Bookkeeping from th e standpoin t o f juridical methodology . In regard t o Article 208 of th e forme r RAO (Imperia l Ta x Code) , he discusse s th e pur pose of documentation, whic h i s Section V of his concluding chap ter: "Articl e 20 8 admitte d th e probativ e forc e o f accoun t books , the judicial evaluatio n o f proof (records) " and i t emphasize d "th e function o f accoun t book s a s evidence. " A great dea l o f attentio n should b e pai d t o thi s poin t o f hi s argument. 7 I n hi s attemp t t o define th e principles of regular bookkeeping, Dr. Kruse also quotes the followin g sentenc e fro m th e famou s Income Tax Law (p . 653), which wa s writte n b y Dr . Eberhar d Littmann , th e Directo r Gen eral of Germany's Federal Finance Court (BFH): "Good accountin g

The Essenc e o f th e Concep t 7 principles contai n a n undetermined concep t of law. They are lega l propositions/' 8 I conten d tha t a n understandin g tha t goo d accountin g princi ples ar e lega l propositions , as Dr . Littmann asserte d an d Dr . Krus e quotes, and a n understandin g o f "the bookkeepin g proo f o f book s of account, " whic h logicall y derive s fro m th e first concept , hav e generally bee n lackin g i n Japan . Throug h wha t I have writte n s o far, I hope I have establishe d tha t th e principle s o f regula r book keeping ar e als o principle s o f positiv e law . Th e nex t questio n t o be aske d i s what practica l standar d structur e d o the principles o f regular bookkeepin g require ? Tha t i s to say, what typ e of practic e does th e la w cal l fo r definitel y regardin g th e bookkeepin g o f a merchant? A Correction Earlier, I wrote tha t i t wa s i n Articl e 3 8 of th e Germa n Commer cial Cod e o f 189 7 tha t th e "principle s o f regula r accounting " ap peared i n th e for m o f la w fo r th e first time . M y reference o n thi s matter wa s th e origina l tex t o f th e Germa n Commercia l Code , which appeare d i n a boo k entitle d The Development of German Balance Sheet Law (Vol . 1 , p. 247) , written b y Dr . Kun o Bart h o f Tubingen University. 9 I now mus t say , however, that a s a practical businessma n I find it har d t o devot e m y lif e wholl y t o a scholasti c work . I foolishl y overlooked th e content s o f th e Appendi x i n th e secon d volum e o f this book . Volume 1 is devoted t o commercial law , while Volum e 2 is devoted t o ta x law . Dr. Barth trace s th e historical progres s of the Germa n law s on th e balance shee t fro m th e tw o viewpoints — commercial la w and ta x law . In th e Appendix t o Volume 2 (p. 102) , the full tex t o f Paragrap h 8 o f Articl e 1 9 o f th e Genera l Incom e Ta x La w o f th e Hessia n Provincial Government , enacte d o n June 25, 1895, appears. In thi s Hessian la w ca n b e foun d th e phras e "accordin g t o regula r ac counting principles" ; thi s was tw o years before th e appearanc e o f the Germa n Commercia l Cod e o f 1897 . The Hessia n ta x la w ha d already bee n perfected an d used thi s particular concept . Consequently, th e genera l understandin g i n Japan that , fro m a

8 Th e Essenc e o f the Concep t historical viewpoint , th e concept of the principles of regular book keeping originate d i n th e Germa n Commercia l Cod e ha s bee n i n error. The truth o f the matter i s that th e concept originated i n th e Hessian Incom e Ta x Law . Wit h respec t t o m y ow n error , I mus t apologize.10 The "principle s o f regula r bookkeeping " ca n b e looke d a t a s a concept that has evolved; they reflect th e historical progress of the standards o f practice o f tradespeopl e regardin g bookkeeping . Another interestin g subjec t is : What kin d o f developmen t di d book keeping g o throug h i n German y befor e i t becam e th e contempo rary system ? Needles s t o say , thi s i s no t th e mai n subjec t I a m concerned wit h i n thi s monograph . Som e insigh t ca n b e gained , however, by looking into the subject . There are various viewpoints on this matter. For instance, ther e are book s suc h a s The History of Accounting in Germany b y B . Penndorf an d Dictionary of German History of Law b y H . Kellen benz o f Cologn e University . Th e latte r boo k make s a poin t o f describing Germa n bookkeepin g i n term s o f th e histor y o f law , and, moreover , i t i s brief an d t o th e point . Kellenben z state s tha t "a wester n techniqu e o f accountin g develope d durin g th e cours e of th e Middl e Ages , as writte n record s cam e int o us e i n commer cial establishments." 11 H e als o report s tha t th e "o n documen t basis calculation " wa s alread y i n existenc e i n th e commercia l centers o f th e Mediterranea n Se a i n th e tent h centur y an d tha t various differen t kind s o f approache s ha d bee n combine d int o a sort o f integrated syste m o f classification no t late r tha n 140 0 A.D. Such being th e case, "a Franciscan , Luc a Paccioli, collected what ever ha d develope d i n practic e an d presente d i t fo r th e first tim e in a theoretical work (Summa di arithmetica, geometria, proportioni e proportionality, Venic e 1494 , as a textbook." It can safely b e said that Shakespear e closel y resemble s Luc a Pacciol i i n that on e wh o has made an intensive compilation of traditional culture is greatly honored. Mr. Kellenben z furthe r report s tha t "th e developmen t i n Ger many ca n b e trace d bac k t o th e las t thir d o f th e thirteent h cen tury," an d tha t th e oldes t boo k o f accoun t preserve d i n souther n Germany wa s "th e debi t ledge r o f the maker s o f wooden shoe s of Nuremberg," whic h ha d bee n kep t fro m 130 4 t o 130 7 an d ha d

The Essenc e o f the Concep t 9 been writte n i n Latin . I t wa s aroun d th e en d o f th e fourteent h century tha t th e language of books of account change d fro m Lati n to German. It is interesting t o note that doctor s in the present-da y Federal Republi c o f German y stil l mak e notation s o n chart s i n Latin. The double-entr y bookkeepin g principl e wa s alread y i n us e i n northern Germany by the sixteenth century. Furthermore, in 1518, a residen t o f Nurember g name d Heinric h Schreibe r publishe d Accountbook, Chapte r 1 of whic h wa s entitle d "Bookkeepin g b y Journal 'Kaps, ' an d debi t ledge r b y al l businesses. " I n 1594 , a book writte n b y Passchie r Goesse n wit h th e lon g titl e Accounting summarized in brief and conceived in the method of the Italians wa s published. Also i n th e sixteent h century , th e boo k Exemplary Accounting was distribute d b y a person name d Mattau s Schwar z wh o was i n charge o f th e book s o f accoun t o f a wealth y merchan t firm, th e Fugger Company . A double book s o f accoun t system— a journa l book an d th e origina l registe r o f asset s an d liabilities , providin g the side-by-side feature o f a ledger—had bee n introduced. Emerg ing from a journal book and for the purpose of an individual entry , a separat e entr y fo r bot h credit s an d debit s ha d bee n made . Thi s era als o sa w th e divisio n o f personne l account s an d inventor y accounts, th e separatio n o f mai n book s an d subsidiar y books , th e emergence o f cashbooks (i n preparation fo r cas h incom e an d cas h expenditures), th e us e of notebooks an d memorandu m books , bil l ledgers, cartag e books , journeymen' s book s fo r transaction s o f branch firms, fustia n books , cooper books , silver books , and eve n black books and secretbooks. 12 In 1741 , a directory fo r single-entry bookkeepin g was publishe d by a perso n name d Flugel . A s fa r a s th e divisio n o f a ledge r i s concerned, meritoriou s busines s result s wer e achieve d b y th e fol lowing: a Frenchma n name d d e l a Port e i n th e latte r par t o f th e seventeenth century , a resident o f Nuremberg name d J . G. Schoap p at th e beginnin g o f th e eighteent h century , th e aforementione d Flugel, and , lastly , anothe r Nuremberge r name d Johan n Michae l Leuchs at th e beginning o f the nineteenth century . In 1804 , the Frenchman Eduar d Degrang e introduced America n accounting, throug h whic h a journa l boo k an d majo r book s o f

10 Th e Essenc e o f the Concep t account bega n t o be combined. The same way of thinking resulte d in the production o f Mr. Philippson's work entitled Letter Concerning Commercial Accounting (1813) . In 1832 , a perso n name d C . D. Fort i n Dresde n and , i n 1974 , a perso n name d Schumache r i n Mainz achieve d goo d results i n thei r respectiv e ne w proposals fo r the simplificatio n o f th e entry , i n America n bookkeeping . Thei r introduction o f th e revolvin g credi t lin e becam e th e mos t impor tant feature o f their respective new proposals . In th e twentiet h century , bookkeepin g i n German y wa s greatl y affected b y industrialization . A t a tim e whe n th e hitherto system atic classificatio n ha d t o face th e necessit y o f refinement, Schma lenbach's Charts of Accounts and Schedule of Accounts mad e it s appearance. As a result, continuous account books and index card s appeared, requirin g transfe r accountin g an d th e techniqu e o f car bon copies . Finally , ke y punc h car d machine s an d electroni c ap paratus appeared . Mr . Kellenbenz writes : "Thi s developmen t mad e it necessar y fo r th e stat e t o la y dow n provision s concernin g ac counting an d auditing . In 193 7 guidelines fo r th e standardizatio n of accounting wer e laid dow n for th e entire economy." 13 I thin k Kellenbenz' s conclusio n contain s a n error , however . I have n o objectio n t o th e notio n tha t bookkeepin g an d th e prepa ration o f balanc e sheet s resulte d i n thei r bein g combine d wit h positive la w standard s i n th e histor y o f th e law . Bu t i t wa s i n 1919, not i n 1937 , as Mr . Kellenben z states , tha t th e deman d fo r the unificatio n o f th e bookkeepin g syste m i n th e econom y a s a whole wa s legalize d a s th e positive law . In 1927 , Schmalenbach' s Charts of Accounts cam e t o th e forefront . However , bot h Articl e 162 o f th e Imperia l Ta x Code , b y whic h th e la w a s a unifie d management standar d wa s applie d t o the bookkeeping o f all mer chants i n Germany , an d Articl e 208 , which acknowledge d a deci sive evidentia l valu e fo r incom e calculatio n i n th e book s o f ac count tha t wer e prepare d accordin g t o th e unifie d managemen t standard, wer e include d i n th e ne w Ta x Code—th e Fundamenta l Taxation La w (AO), which wa s drafte d b y Enn o Becker , a highl y gifted schola r on the law of taxation, and was enacted i n 1919 . This wa s eigh t year s befor e th e appearanc e o f Schmalenbach' s work. Whe n Charts of Accounts wa s published , th e nationwid e unified standard s fo r bookkeepin g ha d alread y bee n enacte d a s

The Essenc e o f the Concep t 1 1 law. I t wa s nearl y twent y year s befor e th e Enforcemen t Regula tion appeare d i n 193 7 as th e authoritativ e explanator y regulatio n for Article 5 of the Hessian Income Tax Law. There may be no help for Mr. Kellenbenz, because his specialty i s not ta x jurisprudence . Dr. Klau s Tipk e o f Cologn e University , i n hi s textboo k o n ta x jurisprudence, discusse s "th e proo f o f accounts " i n book s o f ac count b y quoting th e Commercial Code , Stock Law, German taxa tion law , and , especially , Articl e 15 8 o f th e ne w Ta x Cod e i n connection wit h Germa n taxatio n law. 14 Wha t happene d t o Mr . Kellenbenz? Di d he not communicate wit h Dr . Tipke? The same is also applicabl e t o Schmalenbac h wh o wa s als o a professo r a t Cologne University . Mr. Schmalenbach , i n hi s majo r work , The Bases of Dynamic Accounting!Auditing Principles, touche d o n "th e principle s o f reg ular bookkeeping " si x time s an d discusse d "th e principle s fo r preparing a regula r balanc e sheet " eigh t times . Nevertheless , h e examined thes e principle s onl y fro m th e technica l standpoin t o f bookkeeping. Moreover , fro m a historica l viewpoint , h e faile d t o point ou t tha t thes e concepts originate d i n th e ta x laws. 15 He als o mistakenly asserte d tha t whe n he wrote his book, the principles of regular bookkeepin g ha d alread y bee n forme d a s a par t o f th e German Positiv e Law s Standard s System . I n vie w o f Mr. Schma lenbach's continue d influenc e ove r junio r scholars , hi s mistake s are not trifling. 16 Notes 1. I n m y student days , I attended a lecture give n by a foreign profes sor name d E . V . Getenby , wh o emphasize d th e imitativ e peculiarit y o f the Japanese . I spok e up , saying: "Al l right . I will as k yo u a question . I s there anythin g i n our civilizatio n whic h i s peculiar t o the British? " Afte r a lon g silence, the professor replied , blushing a bit, that "i t migh t be only cricket and th e Parliamentary System, " His answer provoked a great dea l of laughter amon g the students who were present . 2. H e is the author of Finanzwirtschaftliche Bilanz. 3. Ulric h Leffson , Die Grundsatze ordnungsmafiiger Buchfuhrung, 4 Auflage, 1976 . 4. Dictionary of Business Economics, Vol . 1, p. 1014. 5. Ibid. , p. 86.

12 Th e Essenc e o f the Concep t 6. Ibid. , p. 12. 7. Dr . Heinric h Wilhel m Kruse , Grundsatze ordnungsmafiiger Buchfiihrung, 3 Auflage, 1978 , S. 199-200 . 8. Ibid. , p. 6. 9. I n an Appendix, Dr . Barth reproduce d th e original text s of relate d laws i n Germany , England , France , etc. , rangin g fro m Vorschriften uber BuchfiXhrung t o Vorschriften uber die Revision des Jahresabchlusses, an d classified b y period , law , an d country . Also included wer e th e Gutachten der Industrie- und Handelskammer Berlin in General Provision, 1s t Section, 1st Chapter, "Professional Section " of Wirtschaftsprufer—Handbuch (1973) , which wa s publishe d b y th e Institut e o f Chartere d Accountant s i n Germany; th e ful l tex t o f th e opinio n whe n th e announcemen t o f th e first enactment wa s made ; th e ful l tex t o f Die Berichtigung des Gutachtens i n 1928; and th e full tex t o f Die Erganzung des Gutachtens, th e first mad e i n 1929 and th e second in 1930 . This is an excellent reference book . 10. Dr . Kun o Barth , The Development of German Audit Law, The Tax Law Volume, App., p. 102. 11. Mr . H. Kellenbenz, i n Dictionary of German History of Law, Vol. 1 (Erich Schmidt Verlag , 1971) , p. 530. 12. Afte r thes e development s i n accountin g i n th e cours e o f th e six teenth century , n o significant addition s wer e mad e i n German y unti l th e beginning of the nineteenth centur y (p. 532). 13. Kellenbenz , Dictionary of German History of Law, p. 534. 14. Dr . Klaus Tipke, Tax Law: A Systematic Outline, 6th ed., p. 198. 15. A s stated earlier , th e concep t originate d i n Paragrap h 8 of Articl e 19 of the Hessian Income Tax Law, which was enacted on June 25, 1895. 16. Refe r t o The Bases of Dynamic Accounting/Auditing Principles, 12t h ed., trans. Masazo Doki (Moriyama Shoten) , pp. 8, 13, 15, 150, 214, 233, 9, 84, 93, 150 , 194, 199, 207, and 214.

2

The Principle s o f Regula r Accounting Viewe d as Moral Obligation s o f a Positive Law

In regar d t o the concept o f the principles o f regular accountin g a s moral obligation s i n positiv e laws , Dr . H . W. Krus e o f Wurzbur g University wrote : ''Thi s principl e wa s first codifie d i n th e empir e by 16 2 II AO 1919/1931 . However, i t ha d alread y bee n considere d valid fo r centuries." 1 Thi s description , however , i s no t correct . The reason i s that i n Article 60 6 of the Prussia n Genera l Commo n Law o f 179 4 th e followin g provisio n ca n b e found : "Thi s occur s specifically whereve r th e merchant ha s committed error s in book keeping, which ar e to his advantage. " In othe r words , th e principl e o f "truthfulness " regardin g ac counting records , to the best o f my knowledge, arose i n Prussia i n the eighteent h century . Furthermore , i n Articl e 2 8 of th e Genera l German Commercia l La w o f 1861 , the followin g substantiv e en actment appeared : "I t i s th e dut y o f ever y merchan t t o kee p ac counts, i n whic h hi s busines s transaction s an d th e stat e o f hi s assets can b e seen completely." That i s to say, the principle o f th e "completeness" o f th e entr y i n book s o f accoun t wa s codifie d b y this commercial cod e as a positive law . As far a s thi s matte r i s concerned, I must conclud e tha t Profes sor Kruse's Principles of Regular Bookkeeping wa s incorrect. Article 162 of Reichsabgabenordnung (th e Imperia l Ta x Code) , enacted i n 1919, dictate s tha t i n a n entr y i n a boo k o f account , a livin g language shoul d b e used. It i s interesting t o note tha t th e ter m " a 13

14 Th e Principle s o f Regular Accountin g living language " had alread y bee n use d i n th e first par t o f Articl e 32 o f th e Genera l Commercia l Code , whic h wa s enacte d i n Ger many i n 1861 , especially becaus e thi s indicate s tha t th e traditio n of th e ide a o f positiv e law s an d th e term s regardin g merchants ' calculation syste m wer e already held i n high esteem . Early on , French ta x law s permitted th e use of foreign term s i n accounting records. 2 However , th e Fundamenta l Accountin g Pla n (Plan Comptable General), which wen t int o effec t o n Apri l 4 , 1946 , immediately afte r Worl d Wa r II , mandated th e us e o f th e Frenc h language i n accounting records. 3 Also in France, remarkable prog ress was made i n 195 8 when th e French Suprem e Court of Administrative Litigatio n delivere d a decisio n tha t "i n accountin g rec ords, a 'cod e number / ' a symbol / an d ' a mark ' tha t canno t b e understood withou t th e cooperatio n o f taxpayer s coul d no t b e acknowledged, becaus e the y ha d n o valu e o f verifiabilit y i n th e determination o f income/' 4 About te n year s afte r I opene d m y first accountin g office , I accepted a pos t a s a n advise r fo r a n internationa l tradin g com pany in Holland. One day the office wa s inspected b y the Japanes e Tax Administratio n Agency . Book s o f accoun t i n th e Frenc h lan guage wer e foun d an d th e inspectio n official s seeme d extremel y embarrassed. I los t n o tim e clearin g mysel f b y sayin g tha t i n Japan's Commercia l Cod e and ta x laws, there were no substantiv e enactments tha t prescribed th e language to be used for accountin g records. As a result , th e inspectio n cam e t o a n uneventfu l end . I t seems to me that specifyin g th e language to be used i n accountin g records is reasonable and should be a legislative matter. I was als o once informe d b y a n executiv e office r o f th e Nurember g Associa tion o f th e Ta x Practitioner s i n German y tha t th e livin g languag e that ha d bee n prescribe d b y Article 16 2 of th e Imperia l Ta x Cod e should also include "ordinar y Arabic numerals. " For a lon g time , I hav e bee n dissatisfie d wit h suc h matter s a s the ambiguit y o f limitin g th e scop e o f a responsibl e perso n fo r making an entry in our Commercial Code , the lack of "comprehen siveness" o f th e calculatio n principl e an d it s logica l indigence , and th e lac k o f a lin k betwee n th e calculatio n provision s i n ou r commercial code and the tax and other laws, and so forth. I cannot help bu t wonde r whethe r ther e i s a person , o r persons , wh o ma y

The Principle s o f Regula r Accountin g 1

5

have ha d th e sam e apprehensions , amon g thos e governmenta l officials wh o ar e i n charg e o f legislativ e matter s i n J a p a n . Especially i n regar d t o th e Corporat e Accountin g Principles , I have lon g wondere d wh y a radica l refor m ha s no t bee n planned , leaving th e error s i n th e fundamenta l theor y o f th e Principle s untouched fo r thirt y years . Fo r instance , i n Germa n legislation , the concep t o f th e principle s o f regula r bookkeepin g i n Articl e 3 8 of th e Germa n Commercia l Cod e o f 189 7 ha s bee n quote d a s als o applicable t o th e Federa l Bankin g Law , whos e Articl e 2 6 substan tively enact s tha t "th e accountin g o f th e Federa l Ban k mus t con form t o th e goo d principle s o f accounting." 5 Tha t i s t o say , i n th e Federal Republi c o f Germany , th e concep t o f th e principle s o f regular accountin g i n Articl e 3 8 o f th e Germa n Commercia l Code , unlike th e concep t o f " a fai r habitua l practic e i n a c c o u n t i n g / ' which wa s prescribe d b y Articl e 3 2 o f th e Japanes e Commercia l Code, has bee n applie d repeatedl y t o variou s laws , for example : i n the Incom e Ta x Law , t o 5-(l) EstG; i n th e Corporatio n Ta x Law , to 7-(4) KStG; i n th e Stoc k Law , t o 149-(1), (2)-l AktG] i n th e Limited Compan y La w t o 41 GmbHG; i n th e Unio n Law , t o 33 GenG; an d i n th e Fundamenta l Ta x Law , t o 141-(1) AO. As a consequence , thi s concep t o f principl e functions , irrespec tive o f th e categor y an d scal e o f th e mai n constituen t o f a corpora tion, i s a n individua l operationa l an d officia l calculatio n principl e that i s th e final uni t o f th e nationa l economy . Thi s i s on e primar y cause fo r th e toughnes s i n individua l managemen t tha t i s the basi s of th e nationa l econom y i n th e Federa l Republi c o f Germany . I regret tha t circumstance s hav e brough t i t abou t tha t irrespectiv e of th e categor y an d scal e o f th e m a i n constituen t o f a corporation , a comprehensiv e legalizatio n o f a n officia l calculatio n syste m fo r individual managemen t ha s neve r bee n realize d i n Japan , simpl y because th e concep t o f th e principle s o f regula r bookkeepin g wer e misinterpreted a s a concep t importe d fro m German y a t th e begin ning o f th e enactmen t o f th e Corporat e Accountin g Principle s i n Japan. At th e present , w h a t doe s m y reade r fee l abou t th e ta x evasio n that ha s becom e deepl y roote d amon g th e masse s o f th e peopl e i n this country ? On e o f th e reason s thi s ha s happene d i s tha t w e lac k an ideolog y b y whic h th e calculatio n syste m o f merchant s shoul d

16 Th e Principle s o f Regula r Accountin g be positione d a s th e lega l standar d t o b e strictl y followe d b y th e nation as a whole, the principles that should be legislated in Japa n and shoul d b e an importan t facto r i n th e formatio n o f the societ y of Japan . Mr. Spangemacher , th e presidin g judg e o f th e Federa l Financ e Court i n th e Federa l Republi c o f German y wrot e i n hi s book , General Theory of Law, tha t ther e i s a tendenc y tha t "ta x la w follows it s ow n pat h [i s independent] , whereve r a n attemp t i s made t o evade taxation b y abuse of possible interpretations o f th e law/' 6 H e also states: "There still exists a special interna l connec tion betwee n civi l la w an d ta x law . I n 191 8 Enn o Becke r ha d t o solve the problem o f defining (wit h th e Imperial Ta x Code amon g other things ) th e lega l relationshi p betwee n th e stat e a s th e ta x creditor an d th e citizen as the taxpayer. " As w e hav e seen , th e histor y o f th e formatio n o f th e interna l associative relationshi p betwee n civi l la w an d th e ta x law s i n th e Federal Republi c o f German y i s no t s o old . Mr . Spangemache r was quite insightful t o know of Enno Becker's historically merito rious dee d i n thi s poin t i n particular . Thi s ma y hav e bee n du e t o the fact tha t Spangemacher , lik e Becker, was a judge who specialized in the tax laws. It grieves me that th e internal an d associativ e relationship betwee n civi l la w an d th e ta x law s ha s no t bee n established i n thi s country . In other words , the interna l an d com prehensive relationship between these two law systems, compared with Germany's , ma y b e sai d t o have falle n behin d b y mor e tha n sixty years. Through Enn o Becker , th e principle s o f regula r bookkeepin g had a profoun d effec t o n legislatio n a s a whol e i n th e Federa l Republic o f Germany. The articles tha t becam e it s principal axe s are Paragrap h 1 of Article 16 0 of the former AO and Article 14 0 of the ne w AO. Spangemache r state s tha t "accordin g t o 14 0 AO, accounting accordin g t o business la w i s also th e dut y o f account ing for ta x la w wit h al l th e tax-relate d consequence s whic h resul t therefrom." 7 Accordin g t o his opinion , for instance , Article 15 8 of the ne w AO, whic h prescribe s verifiabl e bookkeepin g record s o f books of account, is a logical conclusion of Article 140 . Article 140 , to m y surprise , contain s s o muc h relate d materia l tha t I woul d like to introduce i t later on .

The Principle s o f Regula r Accountin g 1 7 In an y case , sinc e I inten d t o reconside r fundamentall y thi s country's accounting system an d th e tax law as positive law in m y search fo r th e concep t o f th e principle s o f regula r bookkeeping , I must inevitabl y ask , wha t i s th e law , wha t ar e it s objectives , function, an d limit ? Early Philosoph y o f Socia l La w The German economist Werne r Sombar t wrot e a voluminous study , six volumes in all, the title of which was Modern Capitalism. I n th e long run, however , h e felt th e nee d t o return t o his original point , the view s tha t ha d forme d th e ver y basi s o f his learning . He also , therefore, wrot e a boo k entitle d About People, hi s stud y o f th e "mental, scientifi c huma n race, " a clos e examinatio n o f th e hu man view s o f a tota l o f twenty-fiv e philosophers , fro m Plat o an d Aristotle throug h Kant , Goethe , an d Schopenhauer , t o Nicola i Hartmann, an d Al . Carrel . H e reviewe d thei r respectiv e huma n views as well a s studying th e attitude s b y which thei r view s wer e formed. Plato, wh o wa s a n ancien t Gree k philosophe r an d who , i t i s said, lai d th e foundation s fo r th e syste m o f constitutional govern ment fo r age s t o come , wrot e i n hi s late r year s a boo k entitle d Laws, whic h i s his final monumenta l work . Nowhere i n thi s volu minous work , however , ca n b e foun d a definitio n o f th e law . I n "644D, Vol. 1, " the followin g appears : "I n th e cas e whe n i t i s th e 'common opinion ' o f a State , i t i s name d 'Laws. ' " Th e definitio n of "th e law " wa s give n b y hi m i n othe r books . Ther e i s on e i n Minos (314B) : "Afte r all , viewe d collectively , th e la w i s th e thin g which wa s decided upon b y a State." The other definitio n i s foun d only i n Definitions (415B) , which i s presume d t o hav e bee n take n down by Plato's nephew Speusippus , who became the second president o f Plato' s Academy : "Law , whos e limi t o f tim e i s none, i s a political decisio n which i s made by the masses. " As to th e "objective " o f th e law , i t i s statp d i n Laws: "Som e o f the laws are intended fo r thos e good persons to instruct the m ho w to associat e wit h other s mutuall y s o tha t the y ar e abl e t o lea d a life wit h th e feelin g o f affection, " an d tha t "other s o f th e la w ar e made fo r thos e person s wh o ha d evade d education , namel y fo r

18 Th e Principle s o f Regula r Accountin g those person s wh o ten d t o plo t evi l o f al l kinds " (Vol . 9 , 880E) . Plato state s tha t "th e goa l enactin g th e la w i s virtue" (Laws, Vol. 3, 688B). Regarding tru e laws , he concludes tha t "thos e law s whic h have not bee n enacted fo r th e interests of the public in a state as a whole ar e no t tru e laws " (Laws, Vol . 4, 715B) . Moreover, h e als o states tha t "i t i s absolutel y necessar y fo r a huma n bein g t o enac t a law , unde r whic h w e hav e t o liv e i n accordanc e wit h th e law , otherwise ther e wil l b e no t a bi t o f differenc e betwee n a huma n being and th e most ferocious animals " (Laws, Vol. 9, 875A). Although th e abov e expressio n i s a n indirec t one , h e observe s the functio n o f th e la w therein . A s t o th e limi t o f th e law , h e advocates tha t "i t i s th e bes t o f al l t o contro l b y intellect, " how ever, suc h a ma n o f competenc e actuall y canno t b e found . There fore a s "th e nex t best " step , control b y th e la w ha s t o be selecte d (Laws, 875CD). What dre w my attention i s as follows: "Any person found guilt y of disobeying a legal regulation whic h provides that 'on e must no t render servic e i n hope s o f obtainin g a present / shoul d b e pu t t o death" (Laws, Vol . 12 , 955D). And a s t o a tax , Plat o assert s tha t "each person' s propert y shoul d b e properl y assessed, " an d tha t "each person' s amoun t o f gain s mad e i n eac h yea r shoul d b e declared i n writin g t o th e loca l peac e preservatio n office r con cerned" (Laws, 955DE) . I t i s indee d a ver y refreshin g opinion . Furthermore, h e state s tha t th e la w shoul d ad d th e "persuasio n and recommendation " i n the form o f a preamble t o the text of th e law (Vol . 4, 722B), and h e assert s "th e three-instances " syste m i n justice an d conclude s tha t "i n an y stat e wher e a cour t i s no t established properly , i t canno t b e sai d a t al l t o b e a stat e i n an y sense" (Vol . 6 , 766D) . Thi s conclusio n i s extremel y striking . I n general, Plato' s opinion s ar e creative an d simple , which make s u s feel tha t the y are well founded . In The Metaphysics of Morals Kant give s a definition o f the law : "Therefore la w i s th e quintessenc e o f th e condition s unde r whic h the arbitrarines s o f on e perso n ca n b e unite d wit h th e arbitrari ness o f anothe r accordin g t o a genera l la w o f freedom." 8 Thi s definition ha s als o bee n quote d b y Jiirge n Baumann , a Professo r at th e University of Tubingen, in his book Introduction to Jurisprudence (5t h ed. , Par t I , General , p . 4) . Rudol f Stammle r (1856 -

The Principle s o f Regula r Accountin g 1

9

1938), who belonge d t o th e Ne w Kan t school , clearl y indicate s th e origin o f hi s theor y i n Kant' s The Metaphysics of Morals. Hi s defi nition o f th e la w i s a s follows : ''Therefor e th e concep t o f la w i s a concept o f unconditiona l universa l validity." 9 Touchin g o n i t ver y briefly i n th e Introductio n o f hi s book , h e discusse s th e concep t o f the la w i n forty-eigh t page s i n Book One: The Concept of Law. A s his discussio n i s to o lon g t o recoun t here , I will introduc e onl y hi s description o f th e essenc e o f th e law : Law mean s a specia l wa y t o conduc t huma n lif e together . It s essenc e must therefor e b e to elucidate by labeling the thought processes, in whose unity the unique composition o f the judicial intentio n consists . Therefore, we must consider the possibility of exactly this standardization critically , if one i s t o determin e th e conceptua l differenc e betwee n la w a s oppose d to other ways of the life of society. 10 Stammler's descriptio n o f th e essenc e o f th e la w i s beyon d m y comprehension. Th e reaso n i s tha t th e ter m "judicial, " whic h i s the concep t t o b e clarified , ha s als o bee n include d i n hi s descrip tion. A s t o w h a t i s mean t b y th e wor d "judicial, " h e state s a s follows: "Th e unconditiona l validit y o f th e concep t o f law : Th e idea o f 'judicial ' signifie s a stipulate d wa y t o determin e certai n behavior" (p . 24). He understand s th e concep t o f la w a s a concep t that ha s originate d i n "unlimite d fairness, " instea d o f acceptin g i t as on e intellectua l syste m o f public order . Mr. Radbruc h criticize d Stammler' s philosoph y o f law , assert ing tha t i t wa s no t " a building, " eve n thoug h i t wa s a valuabl e "framework." A defense o f S t a m m l e r depend s o n ho w t o describ e the principa l proble m o f th e philosoph y o f law . Accordin g t o Sta mmler, th e principa l proble m o f th e philosoph y o f la w i s ho w t o clarify th e concept s o f th e la w an d it s idea. 11 Fro m thi s viewpoint , I thin k Radbruch' s criticis m i s simpl y a transcendenta l on e fro m a differen t standpoint , an d tha t i t canno t b e sai d t o b e a n intrinsi c one. Radbruc h write s a s follows : The concep t o f la w i s a cultura l concept , tha t i s t o say , th e concep t o f a reality based on values, of a reality which intend s t o serve a value. Law is the reality , whic h intend s [t o serve? ] th e valu e o f law , th e ide a o f law . Therefore, th e ide a of law can only be that o f justice. We are also entitle d to conside r justic e t o b e a n ultimat e startin g point , fo r wha t i s "just " i s

20 Th e Principle s o f Regula r Accountin g an absolute, like Goodness, Truth, or Beauty, that is a value which can be derived from no other (value).12 Following Aristotle , Radbruc h divide s th e concep t o f justic e into tw o kinds : on e i s equalizin g o r compensator y justice , whil e the othe r i s dispense d justice . Th e former , fo r instance , i s th e justice that exist s between thos e persons having equal rights, such as betwee n labo r an d wages , or betwee n damag e an d compensa tion, while th e latte r i s the justice, for instance , that govern s "th e taxation t o be based on one's taxable capacity," or "the assistanc e to be give n i n proportio n t o one's leve l o f poverty." H e conclude s that compensator y justic e i s th e justice o f private law , while dis pensed justic e i s th e justice o f public law . He als o concludes tha t dispensed justic e i s th e basi c for m o f justice . H e states : "I n thi s we hav e foun d th e ide a (essence ) o f justic e towar d whic h th e concept la w must b e oriented. " Furthermore, i n summarizin g th e essenc e o f lega l discipline , Radbruch writes : "W e ca n summariz e th e essenc e o f th e judicia l order b y sayin g tha t i t i s o f a positiv e an d a t th e sam e tim e normative socia l and genera l nature , in this sense specify tha t la w is th e quintessenc e o f th e genera l directio n fo r huma n corporat e life (i n community order)." 13 Radbruch, wh o was enriched i n culture an d ha d advocate d thi s philosoph y o f law base d o n th e rela tivism o f value, has lef t bi s opinio n onl y i n hi s summarizatio n o f the legal discipline . Sir Pau l Gavrilovic h Vinogradof f (1854-1925) , a Russian-bor n jurist wh o late r wen t t o Englan d wher e h e becam e a Professo r o f Jurisprudence a t Oxfor d University , wrot e a wor k entitle d Common Sense in Law, whic h i s said to be a classic of English law. The second editio n o f thi s wor k wa s publishe d i n 194 5 b y Oxfor d University. In this book, Vinogradoff criticize d one definition afte r another, suc h a s th e definitio n formulate d b y Ulpian , wh o wa s a jurist i n Rome, and thos e of Hobbes, Austin, Kant, Jhering, and s o forth. Afte r tha t h e states , a s follows , hi s ow n definitio n o f th e concept o f law : "Therefor e la w ma y b e define d a s a se t o f rule s imposed an d enforce d b y a societ y wit h regar d t o th e attributio n and exercis e o f power ove r person s an d things." 14 He asserts tha t all laws , rangin g fro m ancien t time s u p t o th e present , mus t b e taken accoun t o f i n th e definition , wit h n o exception s a t all , an d

The Principle s o f Regula r Accountin g 2 1 that th e physica l characteristi c tha t al l thes e definition s hav e i n common i s "the existence of a specified wil l that restricts others. " Opposed t o Vinogradoff' s opinio n i s a boo k writte n b y Georg e Whitecross Paton , entitle d A Textbook of Jurisprudence (Oxfor d University Press , 2 d ed. , 1951) . Pato n conclude s i n Chapte r 3 of Volume 1 , under th e subjec t "Th e Definitio n o f Law/ ' tha t "i t i s futile t o attempt t o be exhaustive, but a n analysi s of a few typica l definitions i s a useful approac h t o the problem." And he prescribe s the concep t o f la w i n a n Englishman-lik e styl e o f expressio n o f relativism, a s follows : "La w ma y b e define d firstly b y it s basi s i n nature, reason , religion , o r ethics ; secondly , b y it s source , i n cus tom, precedent , o r legislation ; thirdly , b y it s effect s o n th e lif e o f society; fourthly, by the method of its formal expressio n or author itative application; fifthly, b y the ends that i t seeks to achieve." 15 My reader ma y thin k i t strang e tha t I have mad e m y wa y int o the spher e o f th e philosoph y o f la w i n thi s study , bu t i t i s no t strange a t all . Professor Eric h Kosio l o f Berlin University , wh o i s ranked a s on e o f th e mos t authoritativ e scholar s i n present-da y business economic s circle s i n Germany, has written a voluminou s book o f mor e tha n a thousan d pages , entitle d Pagatory Balance Sheet (Berlin : Buncke r & Humbolt, 1976) , in which h e has quote d twice (a t page s 7 3 an d 1013 ) fro m a boo k b y Heinric h Nicklisc h (1876-1946), Business Administration (7t h ed. , Stuttgart , 1932) , a classic i n Germa n busines s economics . Professo r Kosio l speak s very highl y o f Nicklisch' s bringin g u p a proble m o f principl e i n business economics . It i s well known tha t Nicklisc h ha d absorbe d a grea t dea l o f Germa n idealisti c philosoph y befor e formulatin g his fundamental concept s of business economics . Moreover, recentl y Dr . Klausjiirgen Berge r published A Critical Analysis of Normative Elements in the Study of Business Administration. O n page 40 of this book, he quotes from Wittgenstein' s Cam bridge Universit y work , Tractatus logico-philosophicus (1922) , and under th e subjec t o f "Th e Relationshi p o f Language , Reality , an d the Transcendenta l i n Wittgenstein' s 'Tractatus / " h e first o f al l discusses th e bases. It can be viewed a s a good example that thos e who formulate fundamenta l theor y in business economics seek th e basis for organizing theor y even in ontology i n philosophy . In thi s book , furthermore , I hav e frequentl y quote d variou s

22 Th e Principle s o f Regula r Accountin g works lik e Hegel' s Phenomenology of the Spirit (1807 ) an d Kant' s Critique of Pure Reason. Thi s practic e ha s als o bee n observe d b y Professor R . K . Maut z o f Illinoi s University . I n The Philosophy of Auditing (America n Accountin g Association , 1961) , he quote s ap proximately thirt y work s o f philosophy , on e o f whic h i s Kant' s Critique of Pure Reason, translate d int o Englis h b y J . M . D . Meiklejohn. My copy of Kant's Critique was translated int o English b y Norman Kem p Smit h o f Edinburg h University . I t i s m y opinion , however, tha t a translated boo k should no t be used fo r exhaustiv e scholastic discussion , becaus e o f th e nuance s tha t ma y b e los t i n the proces s o f translation . A t an y rate , I a m sur e m y attitud e i s hardly a surprise . The Moral Obligations of a Positive La w In Chapte r 9 o f hi s fourteen-hundred-pag e collectio n o f article s entitled Paregra und Paralipomena, Arthu r Schopenhaue r (1788 1860) discusse s th e concep t o f th e la w unde r th e headin g "Z u Rechtslehre un d Politik. " H e states : "Whoeve r start s fro m th e preconceived opinio n tha t th e concept o f 'right' mus t b e 'positive ' and no w undertake s t o defin e it , will no t mak e anythin g o f it; fo r he i s tryin g t o gras p a shadow , pursue s a ghost , an d look s fo r a nonens. Th e concept o f 'right,' lik e tha t o f 'freedom,' i s 'negative' ; its content i s a mere negation." 16 Someone wh o ha s advocate d a theor y tha t i s akin t o Schopen hauer's i s Kar l Engisc h (1899 - ) , who i s a n authorit y i n present day circles of German jurisprudence. In Chapter 6 of his Introduction to Judicial Thought (7t h ed. , 1977) , whe n h e discusse s th e "legal right , concep t o f la w whic h i s impossibl e t o b e decide d upon, standar d concept , genera l condition , an d fre e statement, " he states : "B y a n 'indefinite ' concep t w e understan d a concep t whose contents an d rang e i s largely uncertain . Absolutely define d concepts occur seldom withi n th e realm o f law." 17 And he lists, as follows, th e name s o f thos e scholar s an d thei r work s wh o hav e expressed opinion s similar t o his: 1. Wolff , Administrative Law, 8 Aufl., 31. 2. K. Larenz, Study of Methods (1960) p. 222; 2d ed., 1969, p. 268 f;3ded., 1975, p. 279 f.

The Principle s o f Regula r Accountin g 2 3 3. Pietzonka , The Indefinite Concept of Law in the Administrative Law (1954), p. 1965. 4. Lukowsky , Der unbestimmte Begriffusw., Verw . Arch. 53, 1962, S. 25 ff . 5. H . Muller-Tochtermann, NJW1962, S . 1238 f . 6. G . Dahm, German Law, 2 d ed., 1963 , p. 63 ff . 7. K . Kuchinke, Grenzen der Nachprufbarkeit tatrichterlicher Wurdigung, 1964 , S. 73 ff., 7 5 ff . 8. P . Seel , Unbestimmte und normative Tatbestandsmerkmale usw., Munich, diss., 1965. 9. H . E . Henke , Die Tatfrage. Der unbestimmte Begriff im Zivilrecht, 1966 , insbes. S. 54 ff . 10. H . Bogs, Die verfassungskonforme Auslegung, 1966 , S. 13 7 ff . 1 1 . 0 . Bachof , Jura 1966, S. 441 f . 12. M . Fellner, Der unbestimmte Rechsbegriff usw., DVerBl . 1966 , S. 16 1 ff . 13. F . Czermak, ibid., p. 366. 14. H . Schima , Der unbestimmte Rechtsbegriff, Anz. osterr. Akademie derwiss. Philosoph.-Histor. Kl. 1968, S. 19 7 ff . 15. W . Hartz , Gestzliche Generalklauseln und Richterrecht, Steuer, und Wirtschaft 1968, S. 245 ff. unter II und V. 16. Th . Vogel, Zur Praxis und Theorie der richterlichen Bindung an dasGesetz, 1969,S.32ff . 17. D . C. Goldner, Verfassungsprinzip u. Privatrechtsnorm, 1969 , S. 38 ff . 18. G . Kohlmann , Der Begriff des Staatsgeheimnisses und das verfassungsrechtl Gebot der Bestimmtheit von Strafvorschriften, 1969, S. 14 9 ff . 19. H . P. Lemmel, Unbestimmte Strafbarkeitsvoraussetzungen usw., 1970. 20. G . Patzig, Sprache undLogik, 1970 , S. 27 f . 21. U . Schrot h i n A . Kaufman n (Hrsg.) , Rechtstheorie, 1971 , S . 108 f. 22. D . Leenen, Typus u. Rechtsfindg., 1971 , S. 34 ff . 23. K . O. Opp, Sozioi im Recht, 1973 , S. 11 6 ff . 24. H . Soell, a.a.o. (Anm, 115a), 1973, S. 16 3 ff . 25. H . Dubs, Die Forderung der optimalen Bestimmtheit belastender Rechsnormen, 100 Jahre (schweizer.) Bundesverfassung, 1974 , S. 223 ff .

24 Th

e Principle s o f Regula r Accountin g

26. H . B . Griiber , Zur Anwendung der Soziologie in der Jurisprudent Jurz 1974, S. 665 fi. 27. H . J . Koch , Der unbestimmte Begriff im Verwaltungsrecht, in Jurist. Methodenlehre usw., 1976 , S. 18 6 ff. 18 I mus t prais e th e intensit y o f Kar l Engisch' s scholarship , a n intensity tha t manifest s th e tenacit y o f hi s purpose . Dr . Kyoj i Funada, wh o wa s a juris t specializin g i n Roma n la w an d formerl y a Professo r a t Kei o Imperia l University , visite d m e abou t fou r o r five year s afte r th e en d o f Worl d Wa r II . Whe n ou r conversatio n touched upo n th e scholarshi p o f Germans , h e expresse d hi s dee p admiration fo r th e breadt h o f Germa n scholarship . Now , wit h Karl Engisch' s boo k i n fron t o f me , I canno t hel p bu t recal l th e deep admiratio n Dr . Funad a expresse d ove r thirt y year s ago . En gisch's Introduction to Judicial Thought i s 32 0 page s i n all , how ever, th e sectio n containin g hi s specia l article s extend s t o pag e 197, an d th e res t o f th e book—12 3 pages—contain s note s o n hi s references. Furthermore , th e typ e siz e use d fo r th e note s i s fa r smaller tha n tha t use d fo r th e articles . Thu s th e lengt h o f th e article sectio n an d tha t o f th e note s ar e nearl y th e same . The boo k is a wonderfu l referenc e work . I n thi s particula r respect , i t ma y b e that m y attitud e ha s bee n to o lenien t indeed . Hans Kelse n write s i n General Theory of the State (1925) , i n Chapter 7 of Volume 3 , The Creation of the Order of the State, unde r the headin g "Th e Concept s o f th e Law : Th e Genera l (Abstract ) Norm": In usin g th e wor d "law " on e think s onl y o r a t leas t primaril y o f genera l or abstrac t norms . And i f on e i n essenc e identifie s la w makin g wit h th e creation o f law , the n thi s i s becaus e on e ha s conceive d o f la w itsel f a s a sum of general norms, because one has predicated th e concept of law only in genera l abstrac t form . I t wil l presentl y b e demonstrate d tha t thi s concept of law is clearly too narrow and therefore mus t lead to unsolvable contradictions. 19 What h e wanted t o say was tha t abstrac t norm s materializ e through , and ar e shape d by , th e decision s o f justice. This ca n b e understoo d by reviewin g th e argumen t tha t follows . Kelse n states : "B y n o means i s this , a s i s commonl y assumed , onl y give n i n th e for m o f law, onl y i n th e stag e o f genera l norms . Th e 'law ' i s neithe r th e

The Principle s o f Regula r Accountin g 2

5

only, no r th e highes t stag e o f th e orde r o f l a w . " 2 0 Hi s formulatio n of thi s earl y lega l concep t manifeste d th e uniqu e an d intens e char acteristics o f hi s Pure Theory of Law (1934) , whic h wa s publishe d ten year s later . In m y possessio n ar e th e first editio n o f thi s book , whic h wa s translated b y Dr . Kisabur o Yokota , published b y Iwanam i Shoten , and first printe d i n Apri l 1935 , and th e secon d edition , whic h wa s published b y Fran z Duetick e Pres s (Vienna ) i n 1960 . Unhappily , I do no t hav e th e origina l Germa n tex t o f th e first edition . Com pared wit h m y first edition , th e secon d editio n i s mor e tha n twic e the size . (Th e origina l tex t o f th e secon d editio n ha s 44 4 pages , and th e translate d versio n o f th e first editio n i s 23 3 page s i n length.) Th e secon d editio n ha s expande d abou t 7 0 percent . It s fundamental assertion , however , remain s essentiall y th e same . The structur e o f th e theor y o f th e la w wa s clarifie d a t th e outse t in Kelsen' s Prefac e t o th e first edition . H e state s tha t h e intend s t o "develop a pur e judicia l theory , i.e. , cleanse d o f al l politica l ideol ogy an d scientifi c elements , consciou s o f it s uniqu e propertie s du e to observanc e o f th e law s inheren t i n it s object. " Therefor e h e asserts tha t th e "objec t o f l a w " exist s onl y i n "lega l relationship s as th e objec t o f a lega l decision. " I n othe r words , h e formulate s that, a s it s "object, " " l a w " i s t o searc h fo r somethin g tha t i s judicial an d ca n b e comprehende d b y a lega l standard. 2 1 H e com pares th e concep t o f justic e a s a n absolut e valu e t o "th e thin g i n itself," whic h h a d bee n discusse d b y Kan t i n The Critique of Pure 22 Reason.22 H e als o compare s thi s concep t t o "th e ide a o f th e abso lute Good, " whic h Plat o discusse d i n PoliteiaP 23 H e assert s tha t th e justice i n thes e item s canno t b e absolutel y attaine d b y a rationa l perception. H e conclude s tha t a s th e materia l t o be use d fo r actua l perception, onl y positiv e la w ha s bee n given , an d tha t i n thi s particular instance , "justice " onl y indicate s th e relativ e valu e t o be calle d "respectability, " an d tha t "t o b e righteous " i s anothe r phrase fo r "lawful. " I n thi s way , The Pure Theory of Law, whic h aims a t becomin g th e scienc e o f law , part s fro m th e concep t o f justice. In th e secon d editio n o f hi s book , Kelse n specificall y provide s a separate chapte r a t th e end , entitle d "Th e Proble m o f Justice, " i n which h e spend s abou t ninet y page s i n exhaustiv e discussio n o f

26 Th e Principle s o f Regula r Accountin g this particular matter . He argues tha t whethe r i t is as an absolut e value, or a relativ e value , th e concep t o f justice shoul d b e distin guished fro m law . Thi s assertion , tha t "th e scienc e o f a positiv e law shoul d b e distinguishe d fro m th e philosophica l principl e o f justice" ha s bee n evaluate d a s "perhap s th e mos t importan t tas k of th e 'pure ' theory " b y Georg e C . Christie , Professo r o f La w a t Duke University. 24 Presumably , a s Kelse n himsel f says , th e logi c of placing la w an d justic e i n th e sam e categor y justifies th e give n order of society just a s it is. The given order of society, however, is a politica l one , not a scientifi c one . Consequently, a s th e resul t o f withdrawing al l heterogeneou s thing s fro m th e concep t o f law , Kelsen cam e t o presen t th e unparallele d propositio n tha t "lega l propositions ar e hypothetica l judgments." 25 I n thi s proposition , he mentione d tha t inheren t laws , to which h e had referre d i n th e Introduction t o hi s first edition , ar e include d a s a for m b y whic h laws an d regulation s combin e th e require d conditio n o f la w wit h the effectiveness o f law. In regar d t o Radbruch' s attitud e towar d Kelsen' s doctrine , h e quoted Kelsen' s General Theory of the State as often a s twelve time s in The Philosophy of Law. As to Kelsen's Pure Theory of Law (1934), however, Radbruch di d no t touc h o n it at all . I must wonde r why . Erik Wolf, the compiler and publisher of Radbruch's Philosophy of Law, wrot e a n Introductio n o n "th e lif e an d achievement s o f Gustav Radbruch " whic h extende d t o sixty page s a t th e beginnin g o f Radbruch's book . At th e sam e time , i n th e eight h editio n o f Rad bruch's book , Mr . Wol f adde d fifteen page s o f referenc e materia l at th e end , unde r th e headin g "Note s an d Comments. " I n thi s added referenc e material , Mr. Wolf describes Han s Kelsen : "Han s Kelsen (1881-1972) , Professo r i n Vienna , Cologne , an d Geneva , teacher o f stat e la w an d th e philosoph y o f law , develope d th e theory of the identity of the state and law in his work The Sociological and Juristic Concept of the State (2 d ed. , 1928) , an d i n hi s General Theory of the State, 1925. " Just a s Radbruch di d not touc h on Kelsen' s "pur e theor y o f law, " Mr . Wol f di d no t writ e eve n a single wor d o n Kelsen' s theor y o f law . Thes e tw o scholar s migh t have ha d opinion s directl y oppose d t o each othe r i n regard t o th e relevant proble m betwee n la w and justice. Earlier I quoted Radbruch' s statement : "Th e personalit y i s de-

The Principle s o f Regula r Accountin g 2

7

veloped [on e become s a person ] b y mean s o f selfles s objectivity. " I think , however , tha t th e fac t tha t Radbruc h m a d e n o mentio n a t all o f Kelsen' s Pure Theory of Law, whic h hold s view s regardin g the concep t o f justic e tha t ar e oppose d t o Radbruch's , indicate s the los s o f Radbruch' s objectivity . I als o thin k i t simpl y indicate s Radbruch's negatio n o f his ow n character . Viewed fro m thi s particula r point , I thin k th e America n Profes sor Christi e i s mor e unreserve d an d refreshin g tha n thes e tw o scholars. Professo r Christi e devote s seventee n page s t o Kelse n i n his boo k Jurisprudence: Text and Readings on the Philosophy of Law. I n th e fou r page s i n whic h h e deal s wit h Pure Theory of Law, Professor Christi e no t onl y introduce s Kelsen' s theor y bu t als o criticizes it . Spac e doe s no t permi t m e t o detai l al l th e citicism s here, bu t I wil l cit e on e example . O n pag e 631 , Professor Christi e writes a s follows : In th e secon d editio n o f The Pure Theory, however, Kelse n clearl y admit s that, i f one reject s th e concep t o f a singl e absolut e syste m o f moral s an d accepts instea d th e relativity o f morals, then th e lega l order, a s a norma tive order, tha t is , as an order of ought propositions, is by that ver y fact a type of moral order. Under this view, a conflict betwee n la w and moralit y is n o longe r a conflic t betwee n th e norm s o f tw o epistemologicall y dis tinct an d noncomparabl e socia l order s bu t a conflic t betwee n th e norm s of two different mora l orders . Professor Christi e point s ou t tha t whil e Kelse n ha d trie d t o distin guish, strictl y an d analytically , betwee n la w an d moralit y i n th e first editio n o f Pure Theory of Law, h e h a d change d hi s wa y o f thinking i n th e secon d edition . What I hav e writte n s o fa r i s s o roug h tha t i t canno t b e sai d t o constitute a genera l view . Regardin g wha t i s law , an d ho w th e concept o f la w i s t o b e defined , ther e hav e bee n variou s theorie s divided i n on e wa y o r another . Thes e theorie s canno t b e formu lated wit h a singl e meaning . N o on e seem s t o dispute , however , that la w i s th e orde r o f nor m tha t anticipate s th e specifie d action s of h u m a n beings . Whe n on e violate s th e law , a sociall y organize d compelling powe r ca n b e exercise d upo n one . We wh o ar e engage d in actua l busines s practic e mus t tak e a n interes t i n ho w la w i s created an d legislated . A t thi s juncture , I mus t acknowledg e th e proposition Plat o formulate d i n th e wor k tha t i s sai d t o b e hi s

28 Th

e Principle s o f Regula r Accountin g

most important . I n Laws (Vol . 4, 714B) , Plat o states : "La w whic h has no t bee n enacte d fo r th e publi c benefi t o f th e stat e a s a whol e is no t a rea l law. " Thi s i s simple , strong , an d sturdy , an d i t hit s the mark , althoug h i t ha s bee n roughl y sketched . Contrar y t o ou r expectations, trut h ma y li e conceale d behin d a simpl e expression .

Notes 1. Dr . Heinric h Wilhel m Kruse , Grundsatze ordnungsmdpiger Buchfiikrung, 3 Auflage, 1978 , S. 40. 2. Code General des Impots, 54. 3. Consei l National d e la Comptabilite. Plan Comptable General, 68. 4. Conseil d'Etat 1958, n. 36330. 5. Dr . Hans E. Biischgen, Bankbetriebslehre (Wiesbaden, 1972) , S. 603. 6. Ger d Spangemacher, Allgemeines Recht, 5 Auflage, 1978 , S. 50. 7. Ibid. , p. 284. 8. Immanuel Kants Werke, Band VII, Die Metaphysik der Sitten (Hil desheim: Verlag Dr. H. A. Gerstenberg, 1973) , S. 31. 9. Lehrbuch der Rechtsphilosophie von Rudolf Stammler, 3 Auflag e (Berlin and Leipzig) , S. 2. 10. Rudol f Stammler, Erstes Buck, Der Begriff des Rechtes, pp. 53-54. 11. Ibid. , Sec. 9, p. 15. 12. Rechtsphilosophie, 1973 , pp. 119-20 . 13. Ibid. , p. 124. 14. Si r Paul Gavrilovich Vinogradoff, Common Sense in Law, p. 44. 15. Georg e Whitecross Pa ton, A Textbook of Jurisprudence, pp. 51-52. 16. Arthu r Schopenhauer , Sdmtliche Werke, Band V: Paregra und Paralipomena II (Cott a Insel-Verlag, 1965) , S. 285. 17. Kar l Engisch , Einfuhrung in das juristische Denken, 7 Auflage, 1977 , p.108. 18. Ibid. , pp. 257-58. 19. Han s Kelsen, Allgemeine Staatslehre, Vol. 3, Drittes Buck. Die Erzeugung der Staatsordnung, 1925 , p. 232. 20. Ibid. , p. 234. 21. Han s Kelsen, Reine Recktslekre, 2 d ed., 1960 , p. 104. 22. Ibid. , p. 72. 23. Ibid. , p. 398. 24. Georg e C. Christie, Jurisprudence: Text and Readings on ike Pkilosopky of Law, 1973 , p. 620. 25. Han s Kelsen, Reine Recktslekre, p . 73.

3

The Principl e o f "Timeliness "

No one will deny the fact tha t th e Corporate Accounting Principle s and it s explanatory note s have misplaced th e principle o f "timeli ness" somewhere . Why hav e th e scholar s o f Japan no t advocate d the establishmen t o f th e principl e o f "timeliness " i n accountin g records? Fo r instance, the latter par t o f Paragraph 1 of Article 14 6 of AO (Ta x Code ) prescribe s th e following : "Cas h receipt s an d disbursements mus t b e recorded daily. " Thi s provision, i n partic ular, wa s th e outcom e o f th e extensiv e revisio n undertake n i n 1977, i n whic h provision s wer e rearrange d an d th e languag e o f various provisions was modified. Befor e thi s revision, Paragraph 7 of Articl e 16 2 ha d th e followin g stipulation : "Cas h receipt s an d disbursements shoul d b e recorde d a t leas t dail y durin g th e con duct o f business. " Therefore , i t i s prescribe d that , irrespectiv e o f the nonoccupational deliver y an d receip t o f money, as far a s business i s concerned , monetar y receipt s an d disbursemen t and , henceforth, a dail y outstandin g balance , ar e t o b e recorded , a s a minimum demand , o n a dail y basis . Th e titl e o f Articl e 16 2 o f the forme r AO wa s "Accountin g Regulations : Boo k an d Busi ness Audits. " Th e titl e o f Articl e 14 6 o f th e ne w AO i s "Regula tions o f Orde r fo r Accountin g fo r Recor d Keeping. " Althoug h th e title ha s bee n changed , ther e i s n o noticeabl e chang e i n wha t i s said. As mentione d earlier , however , th e accumulatio n o f judicia l precedents has always existed i n Germany, so that ther e are man y facts unde r whic h th e expression s o f lega l provision s hav e gradu 29

30 Th e Principl e o f "Timeliness " ally been modified . I n his voluminous boo k Income Tax Law (12t h ed.), Dr. Eberhard Littmann , wh o was adjunc t presidin g judg e a t the Federal Finance Court (BFH), lists five judicial precedents tha t have been set since 196 7 and states: "According to this, the factua l weight o f th e deficienc y i s decisiv e i f ther e exist s a deficienc y i n the inventory , th e cas h accounting , an d th e chronologica l post ing." l Furthermore , a s t o th e importanc e o f bookkeeping regard ing th e recor d o f receipt s an d disbursement s o f cash , h e writes : "Proper (doubl e entry ) cas h accountin g i s o f th e utmos t impor tance for regularity i n accounting. If there is no cash account boo k at all , the n th e entir e accountin g ca n n o longe r b e considere d proper." 2 Needles s t o say , th e "accuracy " o r "properness " o f a cashbook, i n thi s particula r instance , hinge s o n "th e timeliness " of the entry. In Decembe r 1978 , Karl-Heinz Mittelsteiner , m y frien d and th e president o f the Association o f Licensed Ta x Practitioner s in Hamburg , sen t m e a cop y o f hi s book . I n i t h e expresse s th e same opinion : "Th e timel y postin g o f cash receipt s an d disburse ments i s no t sufficient . Th e require d dail y balancin g o f th e cas h on han d i s onl y possibl e i f cas h receipt s an d disbursement s ar e recorded daily." 3 From a macroscopi c viewpoint , wha t constitute s th e ver y basi s for the principles of regular bookkeeping is the principle regardin g entries i n a cashbook, an d wha t constitute s th e very essenc e of a n entry i s timeliness , togethe r wit h th e "perfectibility, " "truthful ness," and "orderliness " of the record . Therefore, i t i s not enoug h that entrie s hav e bee n mad e sequentially ; makin g entrie s o n a daily basi s ha s bee n demande d a s th e practica l standar d i n th e law. Furthermore, i f I ma y us e th e actua l phrasin g o f a judicia l decision of the German Federa l Financ e Court, just a s it is: "Good accounting principle s basicall y requir e th e notatio n o f ever y in dividual cas h receip t an d disbursement." 4 I t mus t b e sai d tha t it wa s a mistak e fo r m e t o tr y t o uncove r problem s onl y b y ex amining sentence s an d term s i n th e Corporat e Accountin g Prin ciples, t o develo p m y stud y o f relate d literature . A s a scholar , there i s no reason a t al l fo r m e t o limit th e literatur e onl y t o tha t of m y ow n country . W e canno t overloo k th e fac t tha t misunder standings an d negligenc e o n th e par t o f scholar s i n Japa n hav e

The Principl e o f "Timeliness " 3 1 been reflecte d i n th e tax laws , related laws , and regulation s o f th e nation. For instance, in Separat e Shee t No . 20 of the Enforcement Reg ulations for th e Corporation Ta x Law, Item 1 , "Matters relatin g t o the receip t an d disbursemen t o f cash/ ' direct s tha t "th e matter s to b e entered " shoul d b e th e dat e o f th e transaction , th e reason , the othe r part y t o who m receipt s o r disbursement s wer e made , the sum, and the daily balance. At first sight, the expression "dail y balance" seems to legalize the principle of "timeliness." The trut h of thi s matter , however , i s entirel y different . Th e reaso n i s tha t "daily balance," in this particular instance , indicates only that th e entry o f th e cas h balanc e int o th e book s o f accoun t shoul d b e conducted sequentially , and i t does not include the practical stan dard unde r whic h th e mentione d item s shoul d b e entere d dail y and realistically . Regardin g thi s point , ther e ar e n o indication s that th e Financ e Ministr y ha s give n consideratio n t o plannin g laws an d regulation s t o establis h a practica l standar d regardin g "timeliness." I t seem s tha t non e o f ou r scholar s hav e eve r mad e an argument abou t thi s matter . As a consequence , w e wh o ar e ou t o f office mus t follow , a s ou r final line of defense, the judicial precedents regarding the meanin g of "th e entr y o f dail y transactions " i n ou r Commercia l Code . Regarding thi s point , luckil y o r unluckily , th e Cour t o f Cessation i n Japan hande d dow n it s decisio n i n 1923 : "I t i s no t require d t o record dail y transaction s b y followin g closel y a calenda r day. " Therefore, i t i s judged tha t ther e ha s bee n n o standard o f the la w under whic h th e balanc e o f dail y cas h transaction s shoul d b e entered b y sticking to the date on a calendar . It seem s t o m e tha t i n pointin g ou t th e retrogressiv e characte r of th e Financ e Ministr y authoritie s i n th e formatio n o f law s an d regulations, ou r scholar s shoul d tr y t o provid e a rationa l an d constructive directio n t o th e wor k tha t need s t o b e don e b y th e staff o f th e Ministr y o f Finance . I t seem s t o m e tha t th e "timeli ness" o f entrie s int o book s o f accoun t ha s neve r bee n state d o r discussed i n an y literatur e i n Japa n concernin g variou s account ing regulations, commercia l law , ta x jurisprudence, busines s eco nomics, accounting , o r th e stud y o f bookkeeping . Th e reaso n fo r this phenomeno n ma y b e th e attitud e o f understandin g o f ou r

32 Th e Principl e o f "Timeliness " scholastic circle s an d th e Financ e Ministr y authorities , wh o ma y not car e a bi t whethe r o r no t th e "entry " itsel f i s mad e a t one' s convenience; tha t thi s i s done i s not a problem o f any importanc e to them . I feel, however , tha t th e trut h o f th e matte r ma y no t b e so; the y ma y hav e conducte d themselve s o n th e taci t assumptio n that, afte r all , i t woul d b e desirabl e fo r th e accountin g recor d t o be entered i n a timely manner . As fa r a s Pena l Cod e scholar s ar e concerned , wha t on e say s passes t o anothe r subject . Fo r instance , unde r th e headin g "Evi dential Capabilit y o f Other Documents, " Item No . 2 of Paragrap h 1 of Article 323 of the Code of Criminal Procedur e i n Japan ha s a n expressly stipulate d enactmen t t o th e effec t tha t "a n accoun t Book , a voyag e log, and othe r document s prepare d i n the regular cours e of busines s ma y b e use d a s evidenc e i n crimina l justice. " Thi s i s the articl e tha t state s tha t a n accoun t boo k an d other s i n whic h timely entrie s hav e bee n mad e ca n posses s evidentia l valu e i n criminal justice. This article seems to acknowledge the logic of the recognition o f "th e proo f o f books " o f suc h book s o f accoun t i n which th e "timelines s o f entry " ha s evidentl y bee n brough t int o focus. A s a consequence , t o tel l th e truth , i t canno t b e sai d tha t there i s no lega l standar d a t al l i n Japanes e legislatio n tha t take s seriously th e vie w o f th e "timelines s o f entry. " Thi s country' s scholars o f accounting, bookkeeping, business administration , ta x jurisprudence, and commercial law have failed, however, to notice the actua l existenc e o f th e tex t o f regulation s tha t attac h impor tance t o th e timelines s o f entr y int o book s o f accoun t an d other s in the tota l syste m o f the legislativ e standar d i n Japan, provision s which, i n turn , actuall y constitut e on e of the importan t element s of the principles of regular bookkeeping i n the Federal Republic of Germany. Testing for Tax-Advising Professions (11t h ed. , 1978) , written b y Professor Adol f Grass, is comprised o f about a thousand pages an d is divide d int o tw o sections : "Materia l fo r th e Ora l Exam " an d "Material fo r th e Writte n Exam. " Th e book contain s mode l ques tions an d answer s fo r eac h subjec t th e tw o exam s ma y cover . An outline of Section On e follows :

The Principl e o f "Timeliness " 3 Subject Tax Code, Tax Court Code 1. 2 3 4 5 6 7

Income Ta x Corporation Ta x Sales Tax Appraisal La w and Property Ta x Business Tax, License Tax Professional La w

Total

3

Number of questions 213 396 120 260 229 106 100 1,424

Section Two , "Materia l fo r th e Writte n E x a m , " i s similar , bu t I will omi t it s content s here . I n th e first sectio n unde r th e subjec t "Income Tax, " ther e i s a mode l questio n an d answe r o n th e "time liness o f th e accountin g record " amon g a serie s o f question s re garding th e principle s o f regular bookkeeping . Question 89: Wha t i s mean t b y "current/timel y recordin g o f busines s transactions"? Answer: Th e timel y recordin g o f busines s transaction s require s (i n th e case o f cas h transactions ) dail y notatio n i n th e registe r (journal) . Fo r practical reason s i t i s permissibl e t o recor d credi t transaction s onl y pe riodically. Therefor e i t i s not objectionabl e t o record al l th e credi t trans actions of one month i n the register before th e end of the following mont h (Paragraph 29 , Sec . 2 , No . 2 , EStR). However , on e mus t tak e organiza tional precaution s t o insur e tha t th e accountin g document s ar e no t los t before bein g recorded. 5 As it i s a mode l answer , i t i s brie f an d t o th e point . As we hav e seen , cas h transaction s shoul d b e entere d o n a dail y basis i s recommende d b y Paragrap h 1 o f Articl e 14 6 o f th e Ta x Code. However, th e timelines s o f th e entr y o f w h a t w e cal l "trans fer transactions, " o r "credi t transactions " unde r Germa n law , i s limited t o les s tha n on e mont h fro m th e tim e th e sai d transaction s occurred b y Articl e 2 9 o f th e Enforcemen t Regulation s fo r th e Income Ta x Law . Th e titl e o f Articl e 2 9 i s "Regula r Accounting. " It ha s alread y bee n state d tha t thi s Article 2 9 together wit h Articl e 162 o f th e forme r Ta x Cod e ar e th e mai n provision s prescribin g the content s o f "th e principle s o f regular bookkeeping. " In evaluatin g th e literatur e o n ta x jurisprudenc e i n th e Federa l Republic o f Germany , i t seem s t o m e that , a s fa r a s th e Ta x Cod e

34 Th e Principl e o f "Timeliness " and Ta x Cour t Cod e ar e concerned , th e commentar y b y Hubsch mann, Hepp , an d Spitaler , Commentary on the Tax Code and Tax Court Code (7th ed. , 1979) , has th e highes t authority . I t wa s com piled b y a staf f o f writer s wh o wer e chose n b y th e thre e well known scholars. The writers are professors holdin g lectureship s i n tax jurisprudenc e i n fou r Germa n universitie s a t Nuremberg , Damstadt, Wiirzburg, and Munich, and five justices in the Federa l Finance Court. This book devotes thirty pages to an explanation of Articles 14 6 an d 14 7 o f th e ne w Ta x Cod e (presente d i n Vol . 2), which prescribe "th e principles of regular bookkeeping. " In th e section o n Article 146 , moreover, i t i s noted tha t "timeli ness o f entry " ha s bee n explained . Considerin g th e tex t o f thi s article, quoted above , it is self-evident tha t th e principle of timeliness o f entry , especiall y amon g "th e principle s o f regula r book keeping," has bee n give n a grea t dea l o f importance b y thi s com mentary. I t states : "Al l busines s transaction s ar e t o b e poste d i n registers i n a timel y an d orderl y manner . Th e timel y postin g o f business transactions—wit h th e exceptio n o f cash transactions — does no t requir e dail y posting . However , ther e mus t exis t a tem poral relationshi p betwee n th e transaction s an d thei r postin g i n account books " (BFH VI 154/6 3 U. v. 5.3.65, BStBl II I 1965, 285 = StRKEstG 1 0 dR.29). Particular attentio n shoul d b e paid t o the fact tha t th e Germa n word "samtliche " i s use d i n th e phras e translate d "al l transac tions," and tha t i t ha s a stronge r meanin g tha n th e Englis h wor d "all." I t shoul d b e understoo d tha t th e wor d "samtliche " mean s "all" i n a strict sens e under whic h n o exceptions o r omissions ar e allowed. It seem s t o m e tha t th e emphasi s place d o n " a tempora l relationship" i n th e tex t o f thi s taxatio n decisio n ma y hav e bee n the fundamenta l facto r tha t cause d th e establishmen t o f th e ex planatory standar d fo r the limit tha t has been prescribed b y Para graph 2 o f Articl e 2 9 o f th e Enforcemen t Regulation s fo r th e In come Ta x Law : "Th e postin g o f credi t transaction s o f one mont h takes plac e befor e th e en d o f th e followin g month. " Th e reaso n i s that th e first par t o f Paragrap h 2 o f thi s articl e quote s th e ver y text of the above Federal Finance Court decision itself, just as it is, and i t indicate s clearl y th e sourc e b y adoptin g th e dat e o n whic h the decision wa s made an d eve n indicate s th e pages of the Official Gazette on which th e decision was recorded .

The Principl e o f "Timeliness " 3

5

It i s interestin g t o not e tha t i n th e Federa l Republi c o f Ger many, ther e hav e bee n a surprisin g n u m b e r o f instance s i n whic h the Enforcemen t Regulation s concernin g taxatio n law s hav e adopted a direc t quotatio n fro m th e tex t o f a Federa l Financ e Court decision , eve n a s t o th e dat e o f th e decisio n an d th e page s o f the Official Gazette enterin g th e decisio n i n th e tex t o f th e provi sions. This write r ha s observe d thi s Germa n practic e a s th e typica l manifestation o f th e concep t o f th e principl e o f lawfu l administra tion. I t i s m y hop e tha t th e authoritie s o f th e Japanes e Financ e Ministry wil l mak e a n effor t t o lear n fro m Germany' s example , i n order t o creat e a J a p a n tha t wil l wi n th e respec t o f th e worl d i n the spher e o f ta x law s an d als o i n th e spher e o f ta x jurisprudenc e as Japan' s syste m o f socia l science .

Notes 1. Eberhar d Littmann , Einkommensteuerrecht, 1 2 Auflage, 1978 , p. 313. 2. Ibid. , p. 320. 3. Karl-Hein z Mittelsteiner an d Harald Schaumburg , Abgabenordnung 1977, Materialen Zusammengestellt und bearbeitet von Karl-Heinz Mittelsteiner, 2 Auflage, 1977 , S. 240. 4. BFH-Urtei l vom 12 . 5. 1966 - BStBl III , S. 371. 5. Adol f Grass , Die Prufung der steuerberatenden Berufe, 1 1 Auflage , 1978, p.130.

4

The Principl e o f " Materiality" an d Its Criticis m

In Chapte r 3 , ''Syste m o f th e Principle s o f Regula r Accounting/ ' under th e headin g "Materiality, " Ulric h Leffso n write s a s follows : "From th e ide a o f accountability , t o giv e informatio n t o thos e entitled t o i t a s a basi s fo r thei r decisions , on e ca n deriv e th e principle tha t i s establishe d a s th e principl e o f 'materiality ' i n American balanc e shee t discussion s an d i s best calle d 'Prinzi p de r Wesentlichkeit' i n German." * In explainin g thi s matter , h e quote s fro m a n articl e b y S . M . Woolsey, "Objectiv e Bas e fo r Makin g Materialit y Decisions, " i n the bulleti n The Accountant, whic h i s issue d b y th e Institut e o f Chartered Accountant s i n Englan d an d Wale s (th e I.C.A.) : "An y item i n betwee n th e tw o limit s coul d b e considere d materia l o r immaterial, dependin g upo n th e surroundin g circumstances . A n accountant woul d b e expecte d t o follo w th e recommende d guide lines unles s h e coul d justif y departur e fro m t h e m . " H e als o quote s the followin g fro m Jame s L . Dohr' s articl e "Materiality—Wha t Does I t Mea n i n Accounting?, " which wa s publishe d i n th e Journal of Accountancy (th e bulleti n o f th e AICPA) : A statement, fact , o r ite m i s material , i f givin g ful l consideratio n t o th e surrounding circumstances, as they exist at the time, it is of such a natur e that it s disclosure , o r th e metho d o f treatin g it , woul d b e likel y t o influ ence or t o "make a difference " i n th e judgment an d conduc t o f a reason able person . Th e sam e test s als o appl y t o suc h word s a s "significant, " "consequential," or "important. 2 36

The Principl e o f "Materiality' ' an d It s Criticis m 3 7 Originally, thi s principl e wa s include d i n th e concep t o f th e principles o f regula r bookkeepin g i n Germany . I t i s wort h notin g that i n the principle of "materiality/' ther e is a difference betwee n "quantitative materiality " an d "qualitativ e materiality. " Fo r in stance, whe n th e possibilit y exist s o f th e omissio n o f mentione d items, i t i s regarded tha t ther e i s a "materia l thing." 3 To the bes t of m y knowledg e th e concep t o f "materiality " originate d i n Arti cles 1 1 and 2 4 o f th e U.S . Securities Ac t o f 1933 . Like th e princi ples o f regula r bookkeepin g i n th e Federa l Republi c o f Germany , the concep t o f "materiality" i s not a fixed one, but i t evolve s ove r time. Moreover, although i t may seem a trivial thing, I wish to correct one thin g fro m th e viewpoint o f the pursuit o f truth. In th e "Post script b y th e Editor " (pp . 192-93 ) o f the Septembe r 197 9 issue of Accounting, whic h wa s compiled b y the Japan Societ y of Accounting an d publishe d b y Moriyam a Shoten , ther e i s a critica l articl e by Dr . Kurosawa , "Th e Principle s o f Regula r Bookkeeping. " Dr . Kurosawa i s th e mos t renowne d accountin g schola r i n Japan an d a "nationa l treasure. " H e ha s bee n recognize d a s suc h b y all . T o criticize hi s articl e embarrasse s m e an d prompt s m e t o expres s my deep regrets t o him. We wh o liv e i n thi s time , however , an d hav e bee n brough t u p in an Easter n cultur e have to consider th e teachings of Mencius i n China wh o preache d tw o thousan d year s ag o tha t "i f on e give s one's credi t t o al l th e books , on e i s non e th e bette r tha n th e on e who ha s n o boo k a t all. " I n thi s sense , therefore , I sincerel y wis h the genera l reade r t o allo w m e t o pas s judgmen t o n Dr . Kurosa wa's criticism . Dr. Kurosaw a state s i n hi s critica l sentenc e tha t "a t th e tim e Dr. Tanaka's Logic of the Laws Concerning Balance Sheet was writ ten, ther e wer e n o provisions concernin g th e principles o f regula r bookkeeping i n th e Germa n Stoc k Law , excep t thos e i n Genera l Principle, Articl e 38. " Hi s statement , however , i s i n error . Th e target o f hi s commen t i s a sentenc e o n pag e 3 6 o f th e reprinte d edition o f Dr . Tanaka' s book , issue d i n Jun e 1946 . On thi s page , Article 3 8 of th e Germa n Commercia l Cod e and Articl e 12 9 of th e German Stoc k La w an d a n explanatio n o f thes e quote d law s ac tually appear . A s Dr . Tanak a himsel f actuall y quote d fro m an d

38 Th e Principl e o f "Materiality" an d It s Criticis m discussed Articl e 12 9 of the Germa n Stoc k Law , one cannot clai m that a t tha t tim e there was no such law . The German Stoc k Law that served as the basis for Dr. Tanaka's quotation wa s th e one that wa s revised i n 1937 . What wa s Articl e 129 a t tha t time , however , becam e Articl e 14 9 o f th e Germa n Stock La w whe n i t wa s revise d i n 1965 . Regardin g th e circum stances o f thi s matter , pleas e refe r t o pag e 30 6 o f Auditing (197 7 edition), written b y Dr . Ulrich Leffson , Professo r o f Business Eco nomics, Miinster University , or t o page 87 2 of Volume 1 of Corporate Law (4t h edition , 1971) , whic h wa s writte n b y Freiher r vo n Godin i n collaboratio n wit h Han s Wilhelmi . The forme r boo k ex plained, vi a negativ e proposition , tha t th e chang e i n th e Germa n Stock La w fro m Articl e 12 9 to Article 14 9 had no t simpl y bee n of a declaratio n character . Th e latte r explained , vi a positiv e propo sition, tha t "th e regulatio n correspond s t o tha t o f 12 9 AktG. Onl y the expansio n o f Sectio n 1 , Pag e 2 i s new." 4 Tha t i s t o say , th e latter par t o f Paragraph 1 establishes an d add s ne w standard s o n how t o indicat e th e propert y an d circumstance s o f th e gain s o f a corporation. In eithe r case , it i s a clear fac t tha t bot h th e former Articl e 12 9 and th e ne w Articl e 14 9 include th e expressio n "th e principle s o f regular accounting. " If we take a look at the text of Paragraph 2 of the new Article 149 , this matter wil l be much clearer. Paragraph 2 states: "A s lon g a s nothin g els e i s prescribe d i n th e followin g regulations, th e regulation s o f th e fourt h paragrap h o f th e first book o f th e Commercia l La w Boo k (Code ) concernin g busines s records ar e applicable. " Th e reaso n i s tha t Claus e 4 of Volum e 1 of th e Germa n Commercia l Cod e i s compose d o f a tota l o f te n articles, one o f which, Article 38 , is the tex t tha t define s th e prin ciples o f regula r bookkeeping . A s a consequence , thi s write r can not help but stat e tha t i t was a mistake on Dr . Kurosawa's par t t o say tha t onl y Article 3 8 of th e Genera l Principl e wa s i n existence . The tex t o f th e provision s tha t wer e include d i n Claus e 4 o f Volume 1 wer e not include d i n the General Principle . Dr. Kurosawa als o wrote tha t "Dr . Tanaka's theory , which wa s buttressed b y Radbruch' s Philosophy of Law, migh t hav e bee n justified i n it s own wa y a t tha t time. " It shoul d b e acknowledge d that Dr . Radbruc h wa s on e o f th e greates t scholar s o f contempo -

The Principl e o f "Materiality' ' an d It s Criticis m 3 9 rary Germany . Dr . Heinrich Henkel , former Professo r Emeritu s of Salzburg University and currently Professo r of the Faculty of Law, Hamburg University , has written a book of about 57 0 pages, Introduction to the Philosophy of Law (2 d ed. , 1977) , an d ha s quote d Radbruch's Philosophy of Law sixty-on e times . I believ e tha t Dr . Henkel acknowledge s th e authorit y o f Professo r Radbruch' s the ory an d has , therefore , quote d Philosophy of Law s o ofte n i n hi s own book . At the beginning of Chapter 2 , Radbruch declares : "In tha t cas e the philosophy o f law would be the evaluative vie w of law, the . . . theory of correct justice." In Paragraph 7 of Chapter 3, "The Directions of the Philosophy of Law/' Radbruc h praise s Rudolf Stammle r highly: "Th e reestablishin g o f th e philosoph y o f law , th e restora tion o f th e independenc e o f th e valu e o f law , i n additio n t o th e exploration o f judicial practic e o n th e basi s o f th e dualis m o f th e methods of Kantian philosophy was Rudolf Stammler' s grea t con tribution." A t th e sam e time , however , Radbruc h indicate s th e limit o f th e "theor y o f th e righ t law " (Stammler ) b y concludin g that "th e theor y of the right la w neither trie s to nor can develo p a single judicial proposition , which coul d be proven t o have univer sal validity." Furthermore, Radbruch give s Stammler th e coup d e grace b y saying : "I t sacrifice s th e universalit y o f it s concept s i n exchange fo r it s purel y forma l character. " Dr . Radbruc h coura geously cut s dow n Stammler' s theor y b y stating tha t i t i s only " a logic o f th e philosoph y o f law " rathe r tha n "th e philosoph y o f law," an d that , therefore , "th e theor y o f th e righ t law " is , s o t o speak, th e valuabl e " 'framework ' o f th e philosoph y o f law, " bu t not the " 'building ' of the philosophy of law." 5 Criticism o f Professo r Radbruc h I would lik e to speak very highly of Dr. Radbruch's farsightednes s and courage . However , a t thi s point , I cannot hel p bu t appea l t o my reader. I must le t you know tha t eve n Radbruch himsel f mad e a decisiv e erro r i n th e boo k I have just quoted . A t th e openin g o f Section 3 o f Chapte r 3 o f The Philosophy of Law K by seizin g o n Hegel's famou s expressio n "Whateve r i s rational , i s actual , an d what i s actua l i s rational, " Radbruc h conclude d tha t "Hege l ha s

40 Th e Principl e o f "Materiality" an d It s Criticis m wrapped 't o be' and 'shoul d be ' into one" by putting togethe r "th e concept o f reason i n Hegel " and "th e concep t o f 'Sollen' " (whic h means "mora l obligation, " or "what shoul d be"). 6 This conclusion is a mistake, and it is a shallow and misdirecte d judgment. I f I could spea k t o Professor Radbruch , I would sa y th e following: "M y dea r Professo r Radbruch : I t i s tru e tha t Hege l made frequen t errors , bu t I wis h t o tel l yo u tha t yo u mus t no t make a foo l o f Hege l a s a perso n wh o i s poo r i n theory , an d i t i s very impolit e o f yo u t o d o so. " It i s tru e tha t a t th e beginnin g o f Section 5 of Fundamentals of the Philosophy of Right (Berlin , 1821), Hegel wrote what Radbruc h quoted . However, I maintain tha t th e true meanin g o f Hegel' s expressio n canno t b e understoo d unles s one read s further . A t th e en d o f th e firs t paragrap h o f Sectio n 6 , Hegel says: "Here i s the rose, dance thou here" (trans. T. M. Knox, in Preface t o G. F. W. Hegel's Philosophy of Right [London : Oxford , 1967], p. 11) , and o n th e nex t pag e h e writes : "T o recogniz e Rea son as the rose in the cross of the present" (ibid., p. 12). 7 That i s t o say , i n thi s particula r work , Hege l describe s huma n reason by comparing i t to a rose. I would lik e to point ou t tha t th e idea o f depictin g huma n reaso n figurativel y a s a ros e wa s culti vated b y Hege l fo r mor e tha n te n years . In th e secon d sentenc e of Chapter 6 , "The Spirit, " o f th e secon d editio n o f his Phenomenology of Spirit (1807) , writte n b y Hege l whe n h e wa s thirty-seve n years o f age , ther e ha d alread y appeare d a descriptio n o f reaso n as a rose. I must regretfull y sa y tha t Radbruc h faile d t o grasp th e versatility an d dept h o f Hegel's concept of reason. Phenomenology of Spirit i s Hegel' s mos t importan t work . H e became s o attache d t o i t tha t h e wa s busil y engage d i n mino r revisions o f i t fo r severa l week s prio r t o hi s death . Th e lates t edition o f thi s book , whic h I kee p a t m y elbow , i s th e fifty-sixt h (Hamburg: Verla g vo n Feli x Meiner , 1952) . I n Chapte r 5 , "Rea son," Hege l devote d 13 8 pages t o a discussio n o f reason. I n othe r chapters, Hege l als o energeticall y discusse d reaso n fro m variou s viewpoints. H e wrote , fo r example : "Self-consciousnes s i s Rea son." 8 A t anothe r time , h e stated : "Reaso n i s th e certaint y o f consciousness tha t i t is all reality" (G. W. F. Hegel, Phenomenology of Spirit, trans . A . V. Mille r [Oxford : Clarendo n Press , 1977] , S . 233, p . 140) , o r "Reaso n i s th e consciou s certaint y o f bein g al l

The Principl e o f "Materiality " an d It s Criticis m 4 1 reality" (G . W. F. Hegel, The Phenomenology of Mind, trans . J. B . Bailie [N.Y. : Macmillan , 1931] , p . 273) , an d s o forth. 9 H e mad e various statements o f this sort . To sum up , Hegel neve r thought o f human reaso n onl y in term s of it s function . Togethe r wit h Schopenhauer , Hegel , wh o wa s strongly influence d b y the Upanisha d philosoph y o f ancient India , held a basi c belie f tha t reaso n a s a rose , namely , "th e absolut e Essence" 10 could be perceived i n such a thing that coul d be calle d "Actual Cross " o r "Rea l Life " i n "Seve n Flower s & Eigh t Shat tered Pieces " (whic h i s a ter m i n Buddhis m tha t implie s tha t a thing i s shattere d int o fine pieces) . I t seem s t o m e tha t Hege l compared hi s concep t o f reaso n wit h th e concep t o f "th e Worl d Will" tha t wa s use d b y Schopenhaue r i n his representativ e work , The World As Will and Imagination. Hege l ofte n calle d reaso n "th e World reason, " an d positione d th e concep t o f reaso n a s an arena in whic h a ma n trie s t o comprehend , wit h dee p understanding , "the absolute Essence " through "pur e insight." 11 In this particula r instance, however, "to be" should not be considered identica l wit h "what shoul d be, " bu t th e concep t o f "reason " i s graspe d an d constructed a s an arena where "the absolute Essence " is perceived in "to be." Therefore, Radbruc h mad e an irredeemable erro r whe n he took Hegel's concept o f "reason" as "what shoul d be. " I hav e a hig h regar d fo r Radbruch' s skil l a t literar y embellish ments, whic h shoul d b e calle d hi s wor k o f art . A s to th e rigo r o f his intellect , however , I cannot hel p bu t sa y tha t h e i s no t ye t a n expert. (The expression "specia l expert" is found i n the Analects o f Confucius.) However , I als o canno t hel p bu t as k mysel f whethe r the remnant s o f ou r admiratio n o f Wester n Europ e i n th e spher e of socia l scienc e ar e no t responsibl e fo r remark s lik e "Tanaka' s theory was buttressed b y Radbruch's Philosophy of Law." Further more, i n regar d t o criticism s lik e "Tanaka' s theor y migh t hav e had justificatio n i n it s ow n wa y a t tha t time, " o r "I t ma y no t necessarily b e appropriate t o attack i t simply from th e standpoin t of judgment a t presen t i n defianc e o f history, " I thin k suc h criti cism ma y b e considere d th e first-rate criticis m o f thos e scholar s who would not break thei r respective sonorous attitudes . If m y reade r ha s bee n kin d enoug h t o follo w th e thrus t o f m y argument, composedl y an d strictly , I am sur e h e wil l understan d

42 Th e Principl e o f "Materiality " an d It s Criticis m that ther e i s no t a trac e o f "reproach " i n it , an d tha t ther e exist s only on e indicatio n tha t a n erro r i n Dr . Tanaka' s metho d a s a scholar i n social scienc e has caused th e mistake i n his conclusion . I hope th e reader fathoms that , in the past when th e restoration of "direct imperia l rule " wa s establishe d i n th e perio d o f Kemm u (133-1335), a Japanese samura i name d Masashig e Kusunok i clearl y expressed tha t "whe n on e cuts off a forked though t o f doubt a t th e same time , on e i s abl e t o enjo y lookin g a t a swor d sparklin g an d piercing i n mid-air. " I am sur e th e reader wil l b e able t o compre hend his frame o f mind a t that time . I a m onl y a believe r i n th e Ze n sect , however , an d a ma n o f business wh o seek s neithe r fam e no r wealth . I woul d lik e t o ad d here tha t th e basi s fo r writin g earlie r tha t "Hege l wa s strongl y influenced b y the Upanishad philosoph y o f ancient India " was th e book The Thirteen Principal Upanishads Translated from the Sanskrit, by Robert Ernest Hume (Oxford Universit y Press, 2d rev. ed., 1931), p. 70. Criticism o f Professo r Schmalenbac h I audaciousl y wrot e earlie r tha t "Schmalenbach' s mistake s ar e not trifling, " a statemen t base d o n m y knowledg e o f th e boo k Dynamic Balance Sheet (12t h ed.) , translate d b y Masaz o Doki . I t was no t th e fifth editio n o f Schmalenbach' s book , whic h wa s re ferred t o b y Dr . Tanaka . Throug h a Germa n bookseller , I place d an orde r fo r bot h th e fifth an d th e twelft h edition s o f Schmalen bach's book , bu t I wa s informe d tha t bot h wer e unavailable , be cause they were out of print. Through th e good offices o f Mr. Shiro Yoshikawa, th e Executiv e Directo r o f Fujitsu , Ltd. , wit h who m I have been on intimate term s for a long time, via Fujitsu's Residen t Office i n Germany , I was abl e t o obtain copie s o f th e fifth editio n of Schmalenbach' s boo k an d th e secon d editio n o f Enn o Becker' s exegesis o f th e Imperia l Ta x Cod e o f Decembe r 13 , 1919 , both o f which wer e owne d b y Munic h University . Th e fifth editio n o f Schmalenbach's Dynamic Balance Sheet ra n 37 6 pages , an d it s contents an d man y o f it s detail s wer e considerably differen t fro m those o f th e twelft h edition . Enn o Becker , wh o ha d drafte d th e Imperial Ta x Code, had written a voluminous boo k of 731 pages.

The Principl e o f "Materiality " an d It s Criticis m 4 3 The fifth editio n o f Schmalenbach' s Dynamic Balance Sheet was publishe d i n 1931 , twelve year s afte r th e enactmen t o f th e Imperial Ta x Code . Th e first editio n o f Dynamic Balance Sheet was publishe d earl y i n 1919 , s o thi s boo k wa s als o twelv e year s old. Among th e works published durin g thos e years, the followin g are quote d b y Schmalenbac h i n hi s Introductio n t o th e fifth edi tion. 1. Schmalenbach , Basics of Cost Accounting and Pricing Policy (3d ed., Leipzig, 1926) , p. 4. 2. Walb , "The Profit an d Los s Statement o f Cameralistics," Journal for Commercial Research, Vol. 19, 1925, p. 17. 3. Weber , A., "Cost Estimatio n i n Agriculture/' Journal for Commercial Research, Vol. 18, 1924, p. 51. 4. Prof . Krieger, "Necessit y an d Essenc e o f Forestry Accountin g in 'Waldheil, ' " Almanac for German Foresters and Hunters, 1926, p.53. 5. Hausendorf , R. , "The Succes s of the Forestry Industry? " (Ber lin, 1926) , p. 54. 6. Leonhard , A. , The Historical Development of Dynamic Balance Sheets (1921) , p. 62. 7. Ferner , A. , "Th e Developmen t o f Bookkeepin g an d Balanc e Statements durin g th e Sixteent h Century, " The Enterprise, Vol. 1,1921/22, p . 62. 8. Walb , "The Theor y o f Profit an d Los s Accounting," Journal of Commercial Research, Vol . 17 (1923), p. 71. 9. Lehmann , On the Theory of Industrial Cost Accounting, 1920 , p. 73. 10. Schmidt , Prof . F., Die organische Bilanz im Rahmen der Wirtschaft. Betriebs- und finanzwirtschaftliche Forschungen. Leip zig, 1921 , 1922, S. 80. 11. Bauckner , Der privatwirtschaftliche Einkommensbegriff. 1921 , S.86. 12. Schanz , Der Einkommensbegriff und die Einkommensteuergesetze. Finanzarchiv. 13 . Jahrg, 1920 , S. 87. 13. Strutz , "Th e Incom e Tax, " Handbook of the Imperial Tax Law (Berlin, 1924) , p. 88. 14. Liipke , Journal of Commercial Research, Vol. 18 (1924), p. 112.

44 Th e Principl e o f "Materiality" an d It s Criticis m 15. Morgenroth , W. , "Indexziffern" im Handworterbuch der Staatswissenschaften, 1923 , S. 227. 16. Business and Statistics, 1922 , 1923 , p. 22 8 (n o author' s nam e was given; this is a magazine—au.) . 17. Statistical Yearbook for the German Empire, Vol . 44, 1924-25 , p.231. 18. Dr . Hermann, Die Ausschaltung von saisonmafiigen und sdkularen Schwankungen aus Wirtschaftskurven, Vierteljahrshefte zur Konjunkturforschung, herausgegeben vom Institut fur Konjunkturforschung, 1 . Jahrgang, 1926 , Erganzungshet 1 , S. 295. 19. Stern , Buchhaltungslexikon, 2 Aufl., Leipzig, 1923 , S. 309. These ar e th e material s I overlooke d a t th e beginning . Thi s wa s because th e yea r o f publicatio n wa s lackin g i n eac h cas e i n th e annotation o f the quoted literature . In additio n t o th e above , ther e wer e mor e quotation s fro m several kinds of magazines, such as Commercial Research, but thei r respective publicatio n year s ar e no t known . I n th e literatur e whos e year of publication i s unknown, there are more quotations t o page 355 of Volume 1 of Lutz, Anlagenbank, an d Ehrenberg , Handbook of. . . Commercial Law. Th e lis t abov e i s a n approximatio n o f th e literature so quoted . I thin k Schmalenbach' s achievement s i n th e broa d spher e o f business economics were highly admirable, especially i n regard t o the balanc e sheet , whic h h e positione d a s a n auxiliar y ste p fo r profit an d los s accounting . B y overturnin g long-standin g genera l opinion wit h hi s Dynamic Balance Sheet, h e established , fo r th e first tim e i n history , moder n accountin g thought . Th e Dictionary of Business Economics quote s Schmalenbach' s nam e an d hi s the ory 16 5 times i n it s fou r volumes . The only scholar s quote d mor e often are : E . Kosio l (21 6 times) , E. Gutenberg (19 9 times), and E . Grochla (19 8 times) . Hi s recor d allow s u s t o se e ho w grea t hi s achievements i n thi s field were. In m y personal opinion , however , this work by Schmalenbach als o had a momentous defect . In th e first place , th e positiv e la w standar d tha t ha d specia l particulars regardin g th e principle s o f regula r bookkeepin g wa s enacted i n German y whe n hi s wor k wa s published , namel y i n 1919. Despite th e passag e o f twelv e year s sinc e th e first publica tion of this book, not a single word referring t o the existence of th e

The Principl e o f "Materiality " an d It s Criticis m 4 5 Imperial Ta x Cod e appears anywher e i n th e 37 6 pages o f the fifth edition. This i s a conspicuous defec t i n th e wor k o f a schola r wh o must rende r ever y possible service to truth . Secondly, it was in May 193 1 when th e fifth editio n o f this book was published . Durin g th e whol e perio d fro m th e publicatio n o f the first editio n t o th e publicatio n o f th e fifth, however , th e Fed eral Financ e Cour t (BFH ) hande d dow n judicia l decisions , whic h bridged th e ga p betwee n busines s economic s an d ta x jurispru dence, in a total o f twenty-nine case s from BFH vom 13. 1. 1920. 1 A 232119 to BFH vom 24. 3. 1931. 1 A 235/30. 12 Th e fifth edition , however, di d no t quot e eve n on e case fro m th e abov e twenty-nin e cases, and Schmalenbac h discontinue d hi s further examinatio n of the judicial precedent s tha t wer e hande d dow n u p t o 1918. 1 cannot hel p bu t conclude , therefore , tha t Schmalenbach' s scholasti c attitude i s extremely irresponsible , irrespectiv e o f th e reason s fo r the above interruption . Among th e twenty-nin e precedents , i t ha s bee n note d tha t th e following seve n juridica l precedents , se t b y th e Federa l Financ e Court, are considered th e ones that restric t legall y and directly th e meaning o f the principles of regular bookkeeping : 1. 11. 11. 1925—VIA 491/25—amtl. Slg. Bd. 17, S.332: Concernin g the posting of pending transactions . 2. 16. 4. 1930—W.A 339/30—StW 1930/601: Concerning th e amoun t of depreciatio n whe n a machin e i s t o b e use d i n it s remainin g life only as a backup . 3. 6. 5. 1930—1 e A 888/29—StW 30/677. 4. 21. 3. 1930—III A 224/29—StW 30/678. 5. 27. 3. 1930—III A 444/29—StW 30/679: Concerning th e under valuation of a mortgage claim with low interest rate s and othe r reasons for an undervaluation . 6. 11. 3. 1931—VI A 118/31—StW 1931/440: Concerning th e esti mation o f th e amoun t o f reserve s accordin g t o th e merchant' s subjective expectations . 7. 17. 3. 1931—IA 479/30—StW 1931/517: Erwartete Forderungsausfdlk konnen nicht unberucksichtigt bleiben. 13 In thi s connection , I wis h t o recal l Radbruch' s word s i n Chapte r 7, "The Purpos e o f Law," of his Philosophy of Law: "Personlichkeit auf wissenschaftlichen Gebiet hat nur der, der rein der Sache dient." 14

46 Th

e Principl e o f "Materiality " an d It s Criticis m

He als o said : "Zur Personlichkeit wird man durch selbstvergessene 15 believ e tha t thos e engage d i n th e stud y o f learn Sachlichkeit."15 I ing wh o rende r servic e t o trut h withou t discardin g thei r " e g o / ' are reall y thos e person s wh o hav e los t thei r respectiv e originalit y of character . Thirdly, i t i s o f grea t importanc e tha t Schmalenbac h m a d e th e following statement : These rules , resultin g fro m exper t opinion , ar e no t purel y artisti c rule s without juristic meaning. Rather, the law tries to apply these very artisti c laws universally ; the y ar e a lega l requirement . A n accounting statemen t that doe s no t confor m t o exper t opinio n i s no t onl y unprofessional , i t i s also legall y wrong , since that which is professionally correct is the legal norm.16 I mus t as k yo u whethe r o r no t th e passag e abov e suggest s t o you th e existenc e o f a detaile d an d specia l treatis e o n lega l provi sions, namel y th e Imperia l Ta x Code , regardin g th e principle s o f regular bookkeeping ? Dr . Tanak a wa s a t a los s here , especiall y i n the las t passage . Fo r Dr . Tanaka , wh o di d no t notic e tha t thi s indirect descriptio n suggeste d th e existenc e o f th e Imperia l Ta x Code a s a positiv e law , thi s descriptio n wa s th e sourc e o f th e perplexity tha t cause d hi s misunderstanding. 1 7 Is i t possibl e t o sa y that , a s a schola r i n Japan , Dr . Tanaka' s misunderstanding coul d no t b e helped ? I firmly believe , however , that thi s ver y misunderstandin g brough t abou t a chai n reactio n o f further misunderstandin g amon g scholar s o f commercia l la w an d accounting i n J a p a n . Thi s intentionall y obliqu e description , o r this unscholarl y description , constitute d th e basi c reaso n fo r th e national misunderstandin g tha t resulte d i n a seriou s intellectua l loss, whic h laste d fo r severa l decade s i n thi s country' s circle s o f accountants, eve n a seriou s defec t i n thi s country' s accountin g system, whic h wa s no t confine d onl y t o th e los s o f accountants . Can yo u no w understan d th e reaso n fo r m y assertio n tha t Schma lenbach's mistake s ar e no t trifling ? Notes 1. Ulric h Leffson, Principles of Regular Accounting, 4t h ed., 1976. 2. Jame s L. Doer, Journal of Accountancy (Jul y 1950) , p. 60.

The Principl e o f "Materiality " an d It s Criticis m 4

7

3. Le e J . Seidle r an d D . R. Carmichael , Accountants' Handbook (6t h ed., 1981) , Vol. 1, pp. 10 and 34. 4. "Th e regulation " mean s Articl e 149 , while "pag e 2 " refer s t o th e latter part . 5. Gusta v Radbruch , The Philosophy of Law, 8t h ed., 1973 , pp. 11 2 ff . 6. Ibid. , p. 197. 7. Hegel , Rechtsphilosophie, Editio n Iltin g 2 (Stuttgart-Bad Constatt : Friedrich Fromman n Verla g Gunther Holzboog KG, 1974), S. 70 ff . 8. Hegel , Phanomenologie des Geistes, p. 175. 9. Ibid. , p. 176. 10. Ibid. , p. 413. 11. Th e sam e vie w a s tha t o f thi s write r o n thi s particula r poin t ca n be found i n lin e 3 of an annotatio n a t p . 271 of the completely translate d book published i n 1931 , Phanomenologie des Geistes, 184 1 ed., trans. J. B. Baillie (Leeds: The University). 12. Gunte r Wohe , Professor o f Business Administration a t th e Univer sity of Saarland, Tax Theory for Business Administration, Vol . 1, 5th ed., p. 797. 13. Leffson , Principles of Regular Accounting, 4t h ed., p. 17. 14. Radbruch , Philosophy of Law, p. 144 15. Ibid. , p. 149. 16. Schmalenbach , Dynamic Balance Sheet, 12t h ed., p. 362; emphasi s mine. 17. Tanaka , Logic of the Laws Concerning Balance Sheet, p. 61, n. 23.

5

Erroneous Theorie s o f Dr . Kotaro Tanak a

Referring t o the concept of "the principles of regular bookkeeping " for the first time in Logic of the Laws Concerning Balance Sheet, Dr . Tanaka write s tha t th e Germa n la w prescribe s tha t th e adjust ment o f books of account shoul d follo w regula r accountin g princi ples, namely , "th e principle s o f regula r bookkeeping " (Articl e 3 8 of th e Germa n Commercia l Cod e an d Articl e 12 9 o f th e Germa n Stock Law). 1 It i s extremely unclea r wha t th e phras e "th e princi ples o f regula r bookkeeping " means . Afte r all , legislator s shoul d acknowledge tha t ther e has been a principle for practical busines s that ha s generally bee n practiced b y businessmen, an d asid e fro m the cas e whe n th e la w itsel f prescribe s regulation s fo r specifi c occurrences, th e la w itsel f onl y establishe s th e "provisio n o n a clean slate, " th e detail s o f whic h hav e bee n entruste d b y th e la w to customar y practic e i n business . In thi s case , i n particular , th e author state s tha t th e contents o f the entrusted practica l busines s is to have a legal character . Furthermore , under Sectio n 2 : "Rela tionship between Law and the Principles of Regular Bookkeeping, " the autho r comment s a s follows : "Th e la w considere d i t a wise r measure t o accep t regula r accountin g technique s s o a s t o tak e i t into la w itsel f comprehensively , an d t o entrust th e determinatio n of its details to the practice and th e commonsense judgment o f the enterpriser i n each instance." 2 In th e Commercia l Cod e i n Japan , th e legislators , unlik e thos e in Germany, have not prepared suc h provisions "on a clean slate, " either in the revised la w or prior to the revision. As a consequence , 51

52 Erroneou s Theorie s o f Dr . Kotar o Tanak a the actua l busines s regardin g th e preparation o f balance sheet s i s to be totally incorporated int o the legal system of this country, th e result o f which i s tha t th e actua l busines s i s t o have, naturally, a legal force . Fro m th e viewpoin t o f our lega l system , however , th e above actio n shoul d no t b e acknowledged . A s a result , i t i s ques tionable whethe r th e actua l busines s ha s t o remai n a s a mer e technique tha t wil l hav e n o legal restrictiv e powe r ove r business men in general . It i s very appropriat e fo r ou r legislativ e polic y t o acknowledg e the existence o f one article o f the general regulation s lik e those i n German law . Eve n fro m th e viewpoin t o f ou r curren t laws , how ever, it is unthinkable tha t th e same conclusion a s that i n Germa n law cannot b e acknowledged fro m a n interpretativ e viewpoint . As a matte r o f fact , i n Japan' s Commercia l Code—an d especiall y s o in th e ne w revise d law—whe n th e regulation s regardin g mer chants i n general and thos e regarding incorporated companie s ar e considered comprehensively , eac h concep t an d th e regulatio n i n each provisio n canno t b e understoo d unles s th e existenc e o f sys tematic bookkeepin g an d accountin g technique s ar e acknowl edged a s underlying thes e fragmentary regulations . It shoul d thu s be acknowledge d tha t eve n i n ou r Commercia l Code , "the princi ples of regular bookkeeping" have been incorporated int o the lega l system i n this country . I admit tha t my discussion of this point has been rather lengthy , however, I must stat e frankl y tha t th e reason Japan' s present-da y scholars i n ta x jurisprudence , it s author s o f book s o n accountin g for taxation , an d it s scholar s i n accountin g o r th e Commercia l Code have committe d error s originate s i n Dr . Tanaka's logic . When we immers e ourselve s i n thi s logic , th e followin g applies . I n th e first place , th e principle s o f regula r bookkeepin g tha t hav e bee n prescribed b y Article 3 8 of the German Commercia l Cod e are onl y regulations "o n a clean slate " that hav e entruste d thei r detail s t o the customar y practic e o f actua l business . Secondly , eve n i n th e case of the Commercial Cod e in Japan, i t should b e acknowledge d that th e principles of regular bookkeeping have been incorporate d into th e syste m o f th e la w i n Japan . T o be sure , when w e adop t a clear-cut attitud e t o th e principle s o f regula r bookkeepin g tha t have bee n prescribe d b y Articl e 3 8 o f th e Germa n Commercia l

Erroneous Theorie s o f Dr . Kotar o Tanak a 5 3 Code a s th e regulation s o n a clea n slate , i t ca n b e acknowledge d that th e principles of regular bookkeeping have been incorporate d into th e lega l syste m o f our Commercia l Code ; th e Germa n Com mercial Cod e can be viewed as "the mothe r law " for th e Commer cial Code of this country. 3 The ground s o f Dr . Tanaka' s argumen t ar e a s follows : "Fo r instance, i n ou r Commercia l Code , ther e i s n o direc t provisio n that prescribe s tha t th e su m o f capita l shal l b e state d i n th e column 'Liabilit y o f Balance Sheet ' of a corporation. This particu lar matter canno t b e brought fort h fro m Article s 33 and 3 4 regarding merchant s i n general. 4 Thi s fac t show s tha t thi s particula r matter i s brought fort h fro m th e principles of regular bookkeepin g in general." 5 I t i s doubtfu l tha t w e ca n sa y tha t thi s subjectiv e inevitability i n th e organizatio n o f Dr . Tanaka' s theor y assume s objective universalit y a t th e sam e time . However , a s thi s poin t digresses fro m th e subjec t o f thi s chapter , an d a s I a m no t a scholar o f th e Commercia l Code , I will refrai n fro m furthe r refer ence to this point . What i s problematic i s Dr. Tanaka's "theor y o f a provision o n a clean slate " an d hi s "theor y o f commitmen t t o actua l busines s practices." Wher e d o thes e tw o theorie s com e from ? Th e answe r to this questio n ca n b e found b y reviewing i n detai l th e literatur e on which Dr . Tanaka base d his discussion o f the general characte r of th e balanc e shee t i n Chapte r 2. 1 thin k tha t ther e i s a goodwil l error i n th e scop e o f Dr . Tanaka's research . Th e quoted literatur e is as follows : 1. Schmalenbach , Dynamic Balance Sheet, 5 Aufl., 1931. 2. Adler-Penndorf , i n Dictionary of Political Science, Vol . III. 3. Ma x Weber, History of Business, 1923. 4. Sombart , The Order of Business Life, 1925 . 5. Gomberg , Basis of Balance Science, 1908 . 6. Sombart , Modern Capitalism, Vol . II, 1921. 7. Carvalh o de Medonca, Tratado de direito commercial brasileiro, Vol.11, 1937. 8. Mtiller-Frzbach , Germa n Commercial Law, 1921 . 9. Passow , The Accounting of Private and Public Enterprises, Vol . I, 3ded., 1921.

54 Erroneou s Theorie s o f Dr . Kotar o Tanak a 10. Hein , Tax and Commercial Law, 1928 . 11. Sewering , Standard Accounting, 1925 . 12. Fisher , in Ehrenbergs Handbook of Commercial Law, Vol. III. 13. Simon , The Statements of the Stock Corporation, 4th ed., 1910 . 14. Rehm , Statements of Stock Corporations, 2 AufL, 1914 . 15. Wieland , Commercial Law, Vol. I. 16. W . Schmidt, In Stock Law (Commentar y prepare d b y Gadow , Heinichen, Schmidt, and Weipertz), 1939. 17. Behrend , Commercial Law. 18. Juliu s von Gierke, Commercial Law, 5 AufL, 1938. What I foun d wit h surpris e wa s tha t althoug h Dr . Tanak a ha s written s o decisivel y o n "th e principle s o f regula r bookkeeping " in Germa n laws , i t i s noteworth y tha t h e ha s neve r read , o r a t least has never quoted, even a single book out of the many entitle d The Principles of Regular Bookkeeping tha t hav e grapple d wit h th e above principles. 6 1 have no intention at all of blaming Dr. Tanaka for his failure t o read books by the authors who have distinguishe d themselves i n Germa n academi c circle s sinc e 1970 , authors suc h as Ulric h Leffson , Heinric h Wilhel m Kruse , an d Kar l Peter . Th e reason i s tha t suc h readin g wa s physicall y a n absolut e impossi bility. What I mus t poin t out , however , i s tha t Dr . Tanak a ha s no t quoted a singl e boo k o f referenc e wit h th e phras e "regula r ac counting principles " i n it s title , o f whic h severa l wer e publishe d in Germa n academi c circle s an d take n not e o f te n year s earlie r than 1944 , th e dat e o f th e publicatio n o f th e firs t editio n o f Dr . Tanaka's book. The books included i n this category ar e as follows : 1. K . Hast, Regular Accounting Principles for Fixed Assets, 1934 . 2. A . Krause , Regular Accounting Principles for Pension Obligations, 1935 . 3. E . Streit, Regular Accounting Principles for Reserves, 1936. 4. K . Welland, GoB fur Wechsel, Schecks undAkzepte, 1936 . 5. N . Dietzen, Regular Accounting Principles for Hidden Assets, 1937. 6. H . K. Vellguth, Regular Accounting Principles for Pending Transactions, 1937 . A second poin t o f surprise wa s that , a s far a s literatur e regard ing ta x jurisprudence i s concerned, Dr . Tanaka rea d onl y a singl e

Erroneous Theorie s o f Dr . Kotaro Tanak a 5 5 book, o r a t leas t quote d onl y on e book , Tax and Commercial Law, written b y Mr . Hei n i n 1928 . Nevertheless, a n objectiv e clu e ap peared before Dr . Tanaka's very eyes. Dr. Tanaka wrote: "Mr. Hein has indicate d tha t regula r bookkeepin g i s no t onl y ' a concep t o f fact/ bu t als o ' a concep t o f law ' a t th e sam e time." 7 I t i s note worthy tha t Mr . Hein' s boo k wa s publishe d nin e year s afte r th e enactment o f the German Fundamenta l Taxatio n La w (AO). What is more, Dr. Tanaka even quoted the fifth editio n of a book entitled Dynamic Balance Sheet, in which Mr . Schmalenbach state d that th e la w demanded tha t "artificia l rules " that ha d bee n calle d regular bookkeeping would be applied generally , and that "profes sional" wa s elevate d t o becom e " a lawfu l norm." 8 Thes e argu ments mad e b y Mr . Hein an d Mr . Schmalenbach , a s wa s pointe d out late r b y Mr . H. Kellenben z o f Cologne University , wer e mad e against th e backgroun d o f th e circumstance s o f th e times , durin g which a n epoch-makin g phenomeno n occurred—th e legalizatio n of a nationwid e unifie d standar d o f bookkeepin g technique s re sulting i n a far-reachin g advanc e o f bookkeeping i n regar d t o th e problem o f industrializatio n o f Germany . I wonder wh y Dr . Tan aka failed t o visualize th e point mentione d above . The Fundamenta l Taxatio n La w (AO), drafted b y Enn o Becker , had bee n enacte d a lon g tim e befor e (1919) . Dr. Tanaka, however , did no t notic e tha t th e concep t o f th e principle s o f regula r book keeping was embodied i n th e German Commercia l Code , and tha t these principle s wer e reall y thos e tha t ha d originate d i n th e ta x law. I t seem s t o me , therefore , tha t Dr . Tanaka, wh o wa s sincer e in this respect, might have speeded up his theoretical organizatio n by makin g almos t n o us e o f variou s work s o f scholarshi p regard ing "proper" ta x jurisprudence. Dr . Tanaka, who just misse d seein g the truth o f the matter unde r his nose, failed t o notice the positio n of his standing an d had t o make an about-face. The actual circum stances o f th e inmos t motive s tha t cause d Dr . Tanak a t o mak e such a n about-fac e canno t b e ascertaine d an y more , becaus e h e passed away a long time ago. If th e reade r i s kin d enoug h t o allo w m e t o surmise , i t seem s that Dr . Tanak a probabl y ha d t o revers e himsel f becaus e o f th e restricted situatio n h e wa s in , a situatio n cause d b y hi s ow n sub jectivity. I n othe r words , h e ha d bee n restricte d subjectivel y b y

56 Erroneou

s Theorie s o f Dr . Kotar o Tanak a

the description s regardin g th e judicia l precedent s relatin g t o th e principles o f regular bookkeepin g tha t h a d bee n m a d e befor e 1918 , all o f whic h wer e containe d i n Schmalenbach' s book . H e wa s restricted b y th e logi c o f th e description s regardin g th e judicia l precedents tha t h a d bee n mad e u p t o th e yea r befor e th e Funda mental Taxatio n La w (AO) wa s enacted , unde r whic h th e nationa l unification o f th e standar d o n th e technique s o f bookkeepin g wa s legalized. I assume , therefore , tha t i t migh t hav e bee n th e trut h o f th e m a t t e r tha t a s a resul t o f Dr . Tanaka's condition , describe d above , he faile d t o conduc t a n inquir y int o man y o f th e BFH' s judicia l precedents regardin g th e limitatio n o f th e content s o f th e princi ples o f regula r bookkeepin g mad e durin g th e perio d o f twenty-fiv e years fro m 1919 , whe n th e AO wa s enacted , t o 194 4 whe n Dr . Tanaka's boo k wa s first published . Dr . Tanak a di d no t refe r a t al l to twenty-fiv e years ' wort h o f judicia l precedent s regardin g Ger m a n taxation , m a d e durin g th e perio d fro m 191 9 t o 1944 . It i s m y firm conviction , therefore , tha t i f Dr . Tanak a migh t hav e ha d a chance t o loo k ove r th e variou s work s o f scholarshi p I liste d ear lier, alon g wit h th e judicia l precedent s regardin g Germa n taxa tion m a d e fo r th e pas t twenty-fiv e years , hi s theor y undoubtedl y would no t hav e bee n limite d b y subjectiv e self-restrictio n an d i t would hav e bee n a n entirel y differen t one .

Notes 1. Kotar o Tanaka, Logic of the Laws Concerning Balance Sheet (reprint , June 1946) , p. 36. 2. Ibid. , pp. 37-38. 3. Ibid. , pp. 38. 4. Articl e 3 3 was th e provisio n regardin g th e obligatio n o f preparin g "a lis t o f property" an d "balanc e sheet, " whil e Articl e 3 4 was th e provi sion regarding "metho d o f entry" for " a lis t of property." 5. Tanaka , Logic of the Laws, p. 61. 6. "Th e principle s o f regular bookkeeping " ar e abbreviate d "GoB" i n German literature . 7. Tanaka , Logic of the Laws, p. 145. 8. Schmalenbach , Dynamic Balance Sheet, p. 362.

6 Critical Revie w o f th e Opinion s o f Respectable Japanes e Scholars : Part I

In the Zen sect i n Japan, ther e is a legend of an ide a of reason tha t has bee n hande d dow n fro m generatio n t o generation : "Whe n a disciple's opinion exceed s that o f his master, he is worthy o f being recognized fo r th e firs t tim e a s a full-fledge d man. " Thi s legen d means tha t whe n a disciple' s opinio n excel s that o f his master , h e is worthy o f being sanctione d fo r th e firs t tim e a s a n independen t man. I believe that we who are out of office an d are free profession als gro w b y receivin g ou r deb t i n learnin g fro m th e direc t an d indirect guidance s of many scholars. Only when we can exceed th e opinions of our respected teachers , can we come of age for th e first time. The n w e ca n repa y ou r indebtednes s i n learnin g t o thei r kind services . The above opinion, however, may be a self-involved conception , because I hav e bee n brough t u p breathin g th e sever e an d clea n atmosphere o f the Zen sect. At any rate, I would lik e to move on t o a review of the subject matte r below . On account o f limited space , I wil l no t mentio n mos t o f th e honorar y title s o f th e scholar s mentioned hereafter . New Theory of a Balance Sheet by Michisuk e Ueno , Vol. 1 , 11t h ed. , 1942 , published b y Yuhi Kak u In thi s boo k Uen o label s th e principle s o f regula r bookkeepin g that wer e prescribe d b y Articl e 3 8 o f th e Germa n Commercia l 57

58 Opinion s o f Respectabl e Japanes e Scholars : Par t I Code "orderl y bookkeepin g principles/ ' an d h e write s tha t "or derly bookkeepin g herei n mean s double-entr y bookkeeping." 1 A n understanding tha t th e said principles o f regular bookkeepin g ar e also the principles of the law and a n understanding o f said princi ples' relatio n wit h verifiabl e bookkeepin g record s ar e completel y lacking. Laws Concerning Accounting for Taxation by Saich i Ch u (Professor , Niho n University , an d Lawyer) , 6th ed . Chu state s tha t th e ter m " 'th e principle s o f regular bookkeeping ' only indicate s th e technica l directio n o f bookkeepin g du e t o th e nature o f the provisions, and that , therefore , i t i s difficult t o inter pret tha t th e term goe s beyond that." 2 A s he bases his work on th e same understandin g tha t Uen o does, he can als o receive th e sam e criticism a s Ueno. New Accounting by Dr . Koichi Sato , 21st ed. , 196 7 Sato states : "Th e interpretatio n o f thes e principle s ha s bee n as signed t o civilia n scholar s an d a ma n o f business . Consequently , these principle s unde r th e Germa n law s shoul d b e interprete d i n the wider sense that thes e principles are the method of accountin g management whic h ha s generall y bee n practice d i n busines s a s a custom." 3 Moreover , Sat o confesse s tha t th e threefol d structur e that i s embodie d i n th e principle s o f regula r bookkeepin g i s be yond hi s comprehension . Sato' s statemen t i s a fallac y tha t i s ou t of the question . Theory of Financial Accounting Principles by Katsuj i Yamashita , a reprint , 195 7 Yamashita state s tha t fro m th e abov e interpretation , i t ha s t o b e concluded tha t "th e so-called principle s of regular bookkeeping i n the German Commercial Code have, in themselves, no definite con tents, an d that , i n a manne r o f speaking , thes e principle s shoul d be admitte d a s th e all-inclusiv e principle s tha t exer t actio n o n

Opinions o f Respectabl e Japanes e Scholars : Par t I 5 9 bookkeeping an d th e preparation o f a balance sheet." 4 Yamashit a further state s tha t "wha t i s actually mean t b y th e ter m 'th e prin ciples of regular bookkeeping ' i s that the y ar e actuall y th e princi ples that guarantee that bookkeeping has to have verification power — 'verification power ' fo r business transaction s mad e i n the past. " Yamashita propose s a change , moreover , i n th e wordin g o f th e principle wit h th e statemen t tha t "i t i s no t necessaril y appro priate t o us e th e expressio n 'th e principle s o f regula r bookkeep ing,' and I think it more appropriate t o express it as 'the principle s for "orderly " bookkeeping. ' " I n s o saying, Yamashit a propose s a change i n th e title . Yamashit a end s hi s explanatio n i n twelv e pages i n Chapte r V , "Principle s o f Regula r Bookkeeping, " wit h this statement: "I t i s a mistake t o accept th e perfunctory interpre tation tha t onl y double-entr y bookkeepin g ha s bee n consisten t with orderly bookkeeping principles. " It i s a startlin g misunderstandin g tha t gainsay s th e trut h fo r Yamashita t o conclude tha t th e principle s o f regular bookkeepin g in the German Commercial Cod e have no definite conten t i n them selves. I thin k ther e i s n o need , therefore , fo r m e t o giv e mor e proof o f Yamashita' s misunderstandin g o f thi s matter . I woul d like t o tak e m y ha t off , however , t o Yamashita' s declaratio n tha t "since th e Germa n Commercia l Cod e o f 1897 , ther e ha s bee n n o mistake tha t th e principle s o f regula r bookkeepin g hav e bee n adopted." To be exact , i n th e first hal f o f th e origina l tex t o f Article 3 8 of the Germa n Commercia l Code , whic h wa s enacte d o n Ma y 10 , 1897, th e expressio n "regula r bookkeeping " wa s definitel y indi cated, and Article 38 of the German Commercia l Cod e of 190 0 was a mer e successo r t o Article 3 8 of the Germa n Commercia l Cod e of 1897.5 Modern Accounting by Dr . Kiyosk i Kurosaw a (Professo r Emeritus , Yokoham a National University) , 6t h rev . ed., 197 8 Under th e subjec t "Critica l Revie w o f th e Principle s o f Regula r Bookkeeping," Kurosawa quote s the opinion of Dr. Kotaro Tanak a concerning th e principle s o f regula r bookkeepin g an d state s tha t

60 Opinion s o f Respectabl e Japanes e Scholars : Par t I "there i s a bit o f legal scholasti c prejudice abou t hi s opinion." H e also writes : "Dr . Tanak a ha s acknowledge d th e logica l syste m only in the law, and he has taken for granted tha t accountin g is no more tha n a technical system. " Kurosawa furthe r state s tha t Tan aka's "self-complacen t vie w i s excessivel y lega l an d scholastic , and tha t accountin g als o has it s own logica l syste m whic h i s on a level with th e law's, just a s the law is organized b y both logi c an d techniques/' I hav e foun d wit h kee n pleasur e that , unde r th e pretex t o f criticizing Dr . Tanaka , Kurosaw a seem s t o hav e vente d th e long harbored ange r o f accountin g scholar s agains t scholar s o n juris prudence. A s on e o f a crow d o f curiou s spectators , I welcom e Kurosawa's criticis m wit h cheers . However , Kurosawa' s conclu sion tha t "i n thi s way , 'th e principle s o f regula r bookkeeping ' under German la w is a clean slate which cannot be defined legally , and tha t i t has become clear tha t i t merel y means th e comprehen sive commitmen t o f th e la w t o actua l busines s practice s i n ac counting" is nonetheless an error . The principle s o f regula r bookkeepin g ar e a concep t foun d i n the Germa n Commercia l Code , an d thes e principle s ar e no t onl y in accountin g bu t als o i n Germa n ta x jurisprudence . Tha t thes e principles ar e a concept o f German ta x jurisprudence i s evidence d by th e existenc e o f Article 5 of the Germa n Incom e Ta x La w an d Article 2 9 of the Enforcemen t Regulations , which wer e create d a s explanatory regulation s fo r Articl e 5 . It i s als o show n b y th e fac t that sinc e th e enactmen t i n 191 9 o f th e Fundamenta l Taxatio n Law (AO), which wa s drafted b y Enno Becker, who was not only a justice of the BFH but als o a representative schola r of tax laws, its Article 208 has prescribed "Regula r Bookkeeping, Proof of Books," and it s Articl e 16 2 has definit e provision s regardin g th e content s of the principles of regular bookkeeping. It is also incontrovertibl e that ther e hav e bee n numerou s judicia l precedent s regardin g th e contents of the principles of regular bookkeeping . Scholars o f civi l an d commercia l law s ten d t o loo k dow n o n taxation a s merel y a "procedural " law . Thi s academi c attitude , however, i s onl y arrogance , jus t lik e a bubbl e floating o n th e surface o f water. Why do the scholars of commercial laws in Japa n conclude tha t i t i s th e regulation s tha t canno t b e define d fro m a

Opinions o f Respectabl e Japanes e Scholars : Par t I 6 1 legal viewpoint , disregardin g o r neglectin g th e provision s o f ta x laws tha t hav e bee n enforce d continuousl y fo r som e ten s o f year s since they were enacted? May the reason fo r thei r doing so be tha t they would not dare to recognize the tax law as a law? Or did the y fail t o notic e th e ver y existenc e o f suc h law s i n th e spher e o f taxation law ? Whateve r th e reason , th e resul t i s tha t the y d o no t view the legal standards i n one country a s a whole. Among thos e wh o practice Ze n i n thi s country , th e wor d "Tan ban-kan," whic h appear s i n th e boo k Denkoroku, i s well-known . This wor d specificall y indicate s a perso n wh o ca n se e onl y on e side o f a thin g becaus e o f hi s carryin g a piec e o f board . I think , therefore, tha t scholar s o f accountin g al l togethe r shoul d no t de pend on the erroneous theor y of "Tan Ba n Kan " as truth . An Introduction to the New Accounting by Tetsuz o Oht a an d Masutar o Ara i (Professor , Seike i University), 9t h ed. , 197 8 Ohta and Arai maintain tha t i n the regular bookkeeping principle s of th e Germa n Commercia l Code , the phras e "th e principle s tha t have a fixed order " i s used , however , "th e Germa n Commercia l Code does not mak e its contents clear." 6 There is no "Daijodan-no-kamae" a t all, which is literally trans lated "holdin g a swor d ove r one' s head, " concernin g thes e Ger man laws . The y d o no t touc h a t al l o n whethe r o r no t ther e ar e any definit e an d detaile d lega l standards . Thi s attitud e ma y b e a tactic by which errors can be avoided by "nonperformance. " Theory of Financial Accounting by Dr . Toshio lin o (Professor , Chu o University) , 36t h ed. , 197 9 lino states : "Th e principle s o f regula r bookkeepin g ar e thos e re garding th e whol e accounting " an d the y hav e th e sam e meanin g as "th e principle s regardin g regula r bookkeepin g an d th e prepa ration o f 'financia l statements ' i n Germa n laws." 7 Moreover , lin o says the y hav e th e sam e meanin g a s "impartia l accountin g prac tices." It i s not clear , however, whethe r lin o understands tha t th e principles o f regular bookkeepin g hav e a "threefold structure. " I n

62 Opinion s o f Respectabl e Japanes e Scholars : Par t I particular, lin o state s tha t th e principle s i n th e Germa n law s ar e "the term s tha t ar e foun d i n th e regulations o f the Germa n Stoc k Law," however, h e fail s t o indicat e th e number s o f the article s of that regulation . My researc h indicate s tha t amon g th e regulation s i n th e Ger man Stoc k Law , thos e tha t contai n th e ter m "regula r accountin g principles" ar e Article s 149 , 154 , 155 , an d s o forth . Ther e i s n o term "th e principle s fo r th e preparatio n o f financial statements " in thes e articles , however; ther e i s only th e ter m "yearl y balanc e sheet an d th e profi t an d los s statement s a t year' s end " i n Articl e 148. Therefore , I thin k tha t lino' s statemen t tha t "th e term s . . . are foun d i n th e regulation s o f th e Germa n Stoc k Law " i s no t appropriate. Moreover, th e origi n o f th e principle s o f regula r bookkeeping , as a general perception, should consistently be noted as Paragrap h 1 o f Articl e 3 8 o f th e Germa n Commercia l Code . However , lin o failed t o poin t thi s out . O n th e contrary , lin o trie s t o explai n th e concept b y offerin g th e ide a tha t th e Stoc k La w i s on e o f th e sources tha t ha s bee n quote d i n variou s law s an d branche d ou t therefrom. I woul d lik e t o as k lin o whethe r h e woul d maintai n that th e principl e o f regula r bookkeepin g ha s nothin g t o d o wit h merchants wh o do not fall unde r th e scope of the Stock Law ? Please allo w m e t o digres s her e fro m th e mai n subjec t fo r a while. I woul d lik e t o dra w th e reader' s attentio n t o th e boo k Bookkeeping and Tax Accounting (subtitle d Text and Workbook for Business and Fiscal Officials), which was written by Harald Schmidt , a governmenta l directo r an d councillo r o f th e governmen t o f th e Federal Republi c of Germany. This i s a reference boo k tha t seem s appreciative o f those who are engaged i n actual busines s practic e as I am . Schmid t make s th e followin g statement : "I t ca n b e sai d that th e principle s o f regula r bookkeepin g hav e bee n constitute d by th e custo m i n commerce. " Furthermore , thes e principle s hav e been i n existenc e a s th e la w tha t ha s bee n codified . Fo r instance : "The goo d accountin g principle s coul d hav e resulte d fro m com mercial practice . They can even be codified b y a law. Examples of creating lega l norm s concernin g accountin g principle s ar e Sec tions 2 through 7 of 16 2 of the Tax Code. The courts are also bound by this (Article 20, Section 3, GG)."8

Opinions o f Respectabl e Japanes e Scholars : Par t I 6 3 When th e lega l syste m o f th e Federa l Republi c o f German y i s examined fro m a comprehensiv e viewpoint , i t i s foun d tha t th e Commercial Cod e itself , i n Articl e 38 , has mad e i t clea r tha t th e principles o f regula r bookkeepin g ar e th e standard s o n whic h a merchant shoul d perfor m hi s obligatio n t o mak e a n entry . Th e major conten t o f thes e principles , however , ha s bee n th e syste m under whic h th e realizatio n o f thes e content s ha s bee n entruste d to othe r law s o r lega l standards . Therefore , whe n anyon e wh o i s an authorit y i n Japa n cease s hi s pursui t afte r checkin g onl y th e German Commercia l Cod e an d exclaims , "N o definit e provision s have been found a t all ! It i s a blank paper!, " wha t happen s nex t i s that th e hono r o f th e senio r grea t scholar s mus t b e saved . I t ha s been a virtu e o f scholar s an d th e custo m i n Japa n t o d o this . I t thus seem s t o m e tha t a curiou s phenomeno n begin s t o occu r i n which "on e do g barks a false alar m an d a thousand other s take u p the cry. " I firmly believe , however , tha t ther e i s n o advanc e o f civiliza tion at all unless there is a breakdown i n the commonsense knowl edge tha t ha s bee n hande d down , an d tha t ther e i s no progress i n learning whe n ther e i s n o critica l analysi s o f th e theorie s pro pounded b y ou r senio r scholars . Among thos e wh o practic e Zen , there i s a traditiona l concep t o f "Kininozomitewa-shi-nimo-yu zurazu"—in th e presenc e o f a n opportunit y t o d o otherwise , a disciple canno t defe r t o hi s master' s opinion . Ther e ha s bee n a tradition i n Ze n practice , therefore , tha t a discipl e take s advan tage o f such a n opportunit y an d give s a punch t o his master , wh o is then extremely pleased wit h his disciple's action . Those wh o confin e themselve s t o th e "ivor y tower " ar e i n a position i n which the y are expected t o direct an d influence , throug h their disciples , th e consciousnes s o f man y million s o f peopl e o f a nation. Therefore, I sincerely wis h tha t thes e ivory-tower dweller s would lea d a moderate , asceti c lif e i n th e practic e o f Ze n unti l they coul d finally b e spirituall y awakened . The y could the n writ e their books and b e engaged i n education wit h a mental attitud e i n which thei r innermos t heart s hav e no t a spec k o f egotism . The y could follo w th e exampl e o f th e ex-Empero r o f Hanazon o (1297 1348) wh o onc e exclaime d tha t "ther e shoul d b e n o soli d eart h that ha s ha d no t a spec k o f dus t o n it. " Incidentally , I thin k i t

64 Opinion s o f Respectabl e Japanes e Scholars : Par t I worth ou r clos e attentio n tha t Haral d Schmid t quote d "i n paren theses1 ' Paragraph 3 of Articl e 2 0 of th e Fundamenta l La w o f th e Bonn Constitution . Th e reason i s that, irrespectiv e o f his positio n as one of the directors of those persons who are engaged i n admin istration, he expressly quote d thi s Paragraph 3 of Article 20 of th e Bonn Constitutio n tha t ha s prescribe d th e grea t principle s o f th e doctrine o f th e administrativ e laws . His attitud e i s a specia l one , however, an d ha s n o precedent amon g simila r authors . I am deepl y impressed onc e agai n wit h thi s person' s seriousnes s an d modest y as a public servan t i n th e eye s of the law . My digression ha s gon e on long enough, and w e should retur n t o our main subject . Basic Accounting by Dr . Yasuichi Sakamot o (Professor , Osak a Gakui n University) , 20th ed. , 197 9 Sakamoto state s tha t "a s regard s a certai n kin d o f propert y tha t was deal t wit h b y th e principle s o f regular bookkeeping , i t some times happen s tha t i n spit e o f th e rea l existenc e o f such propert y on th e dat e o n whic h it s balanc e shee t wa s actuall y made , it s 'book-value' turn s ou t t o b e zero." 9 I n thi s way , Sakamot o use d the principle s o f regula r bookkeepin g onl y wit h regard s t o whe n the existenc e o f the "off-boo k asset " wa s admitted . Tha t i s to say , he ha s give n th e impressio n tha t h e ha s ende d hi s explanatio n by skimming ove r only on e side o f the principles o f regular book keeping. New Edition of Accounting by Dr . Shinkich i Minemur a (Professor , Kei o Gijuku University) , 1976 ed . Regarding th e principle s o f regula r bookkeeping , Minemur a re peats th e phrases , exactl y a s the y ar e state d i n th e firs t genera l principles o f Corporat e Accountin g Principles , tha t provid e tha t "financial accountin g shoul d mak e correc t book s o f accoun t re garding al l transaction s mad e i n accordanc e wit h th e principle s of regula r bookkeeping." 10 Minemura , moreover , ha s no t adde d even a syllabl e o f hi s ow n opinio n regardin g th e wordin g men -

Opinions o f Respectabl e Japanes e Scholars : Par t I 6 5 tioned above . Therefore , i t seem s t o m e tha t th e definitio n o f th e principles of regular bookkeeping wil l become a problem again . Modern Financial Accounting by Dr . Kyojir o Somey a (Professor , Wased a University) , rev . 55t h ed., 197 9 Someya state s tha t th e principle s o f regula r bookkeepin g origi nated i n th e principle s o f regula r bookkeepin g tha t wer e pre scribed b y th e Germa n Stoc k Law . The principles unde r th e Ger man law , however , hav e mean t th e comprehensiv e applicatio n o f the law t o business accountin g practice. 11 Someya furthe r state s tha t th e principle s o f regula r bookkeep ing in Corporate Accountin g Principles , on th e contrary, have ha d the definite meanin g tha t signifie s tha t th e above-mentioned prin ciples prescribe th e procedure throug h which a transaction recor d and a financial statemen t shoul d be prepared, an d th e said princi ples constitute th e very basis on which the "principle of accuracy " should b e based . I would lik e to counter Someya' s view s with th e following points : First, the proposition tha t th e principles of regular bookkeepin g originated i n th e principle s o f regular bookkeepin g tha t wer e pre scribed b y th e Germa n Stoc k La w indicate s a n insufficien t recog nition o f a historica l fac t o n Someya' s part . A s has alread y bee n explained, th e abov e propositio n originate d i n Articl e 3 8 o f th e German Commercia l Code . Secondly, i n regar d t o Someya' s propositio n tha t "th e sai d principles hav e mean t th e comprehensiv e applicatio n o f th e la w to business accounting practice," some persons may think that th e discussion o f thi s propositio n wil l diffe r fro m on e perso n t o an other. I t i s a fact , however , tha t i n th e Federa l Republi c o f Ger many, th e Commercia l Cod e an d othe r law s an d lega l standard s are prescribe d fa r mor e definitely , minutely , an d strictl y tha n those in Japan . In th e thir d place , th e propositio n tha t Japan' s Corporat e Ac counting Principle s hav e allowe d th e principle s o f regula r book keeping i n Japan t o take definite meanin g contrar y t o the Germa n laws onl y manifest s th e fac t tha t Japan' s Corporat e Accountin g

66 Opinion s o f Respectabl e Japanes e Scholars : Par t I Principles use s th e ter m "th e principle s o f regula r bookkeeping " in a wa y tha t suffer s fro m a distortio n fro m a theoretica l view point of history. And this has not been discovered yet . Finally, Someya' s conclusion—tha t wha t i s mean t b y th e pre scription o f th e procedur e fo r th e preparatio n o f a transactio n record an d a financial statement , an d th e laying of the foundatio n of the "principle o f accuracy" ar e th e very reasons Japan's Corpo rate Accounting Principles have "definite meaning " in compariso n with Germa n laws—canno t b e accepted , becaus e i t gainsay s th e actual fact . Accounting by Nobuichir o Nakamur a (Professor , Kona n University) , 1st ed., 197 9 Nakamura state s tha t i n th e genera l principle s o f th e Corporat e Accounting Principle s i n Japan , th e "principle s o f regula r book keeping" ar e prescribed , an d tha t th e principle s o f regula r book keeping ar e considere d t o b e concerne d wit h th e "principl e o f clarity" an d th e "principle s o f objectivity." 12 Furthermore , Naka mura explain s tha t th e principles o f regular bookkeepin g deman d that financial accountin g shoul d mak e correc t book s o f accoun t regarding al l transaction s made , that is , recording i n the book s of account shoul d b e carried ou t in an orderly manne r i n accordanc e with verifiable evidenc e regarding all the economic phenomena t o be recorded . In th e first place , Nakamura fail s t o point ou t tha t th e concep t of th e principle s o f regula r accountin g i s a litera l translatio n o f Article 38 of the current Germa n Commercia l Cod e from th e viewpoint o f the theory o f evolutionary history . Also, Nakamura enter tains th e idea of considering th e principles of regular bookkeepin g as onl y on e o f th e genera l principle s o f thi s country' s Corporat e Accounting Principles . Secondly, Nakamura understand s thi s concept in a surprisingl y narrow sense as "comprehensiveness," "possibility of verification," and "orderliness of accounting record." Finally, Nakamura adopt s only an ambiguou s expressio n abou t th e strength o f "orderliness " or standardization. As far a s I can determine , it can safel y b e sai d that Nakamur a fail s t o grasp th e outline of this concept .

Opinions o f Respectabl e Japanes e Scholars : Par t I 6 7 Theory of Bookkeeping by Dr . Kazu o Takamats u (Professor , Sok a University) , new rev . ed., 4th ptg. , 197 8 Takamatsu writes : "A s th e accountin g syste m i n a n enterprise , plural method s o f accountin g hav e no t bee n carrie d ou t i n paral lel, bu t on e calculatio n orde r ha s bee n forme d wit h bookkeepin g as its center in combination wit h al l other methods of accounting , and thi s accounting order has become the customary practice tha t has bee n generall y accepte d i n industria l circles . For thi s reason , bookkeeping i s called 'regula r bookkeeping ' whe n it s contents ar e represented b y a comprehensiv e accountin g syste m wit h double entry bookkeeping a s its center." 13 My criticis m o f Takamatsu' s opinio n i s a s follows . I n th e firs t place, Takamatsu say s "regular bookkeeping/ ' but he does not sa y "the principle s o f regula r bookkeeping/ ' Ther e ca n b e n o doubt , however, tha t h e indicate s th e latter . I f thi s i s so , i t i s a seriou s error whe n Takamats u conclude s tha t "bookkeeping " i s equa l t o "regular bookkeeping. " Th e reaso n i s tha t a s a factua l problem , "bookkeeping" i s i n n o way equa l t o "regula r bookkeeping. " I t i s generally recognized tha t th e "principles of regular bookkeeping, " which originate d i n th e Germa n Commercia l Code , is a collectiv e term fo r th e principles regardin g bookkeepin g tha t hav e th e char acter of historical development . For example, the legal standard s regardin g "entry " tha t signif y "principles fo r double-entr y bookkeeping, " includin g "derivativ e laws," di d no t exis t a t al l befor e 1954 ; these standard s cam e int o existence late r throug h th e decision s o f Germany' s Federa l Fi nance Court (BFH). 14 Systematic Theory of Financial Statements by Dr . Tadahiro Yamamas u (Professor , Kei o Gijuk u University ) and Mr . Tsuyoo Shimamur a (Professor , Meij i Gakui n University), Theory Sec , rev . ed., 197 8 Yamamasu an d Shimamur a stat e tha t sinc e th e en d o f th e nine teenth century , th e German Commercia l Cod e has demande d tha t "a merchan t hav e a n accoun t boo k i n whic h hi s business activit y and propert y conditio n i s entere d clearl y i n accordanc e wit h th e

68 Opinion s o f Respectabl e Japanes e Scholars : Par t I principles o f regular bookkeeping/' 15 The y als o stat e tha t "i n th e same way , in th e Germa n Stoc k Law , it i s required tha t th e docu ments regarding th e annual settlemen t o f accounts be prepared i n accordance wit h th e principles of regular bookkeeping. " Furthermore, Yamamas u an d Shimamur a dra w th e conclusio n that a s fa r a s th e Germa n Commercia l Cod e i s concerned , fro m the outset , th e definit e content s o f th e principle s o f regular book keeping are hardly show n i n the law. They assert tha t th e Germa n Commercial Cod e abstains fro m indicating , of its own accord , th e details of the definite content s of the principles of regular account ing b y takin g th e ste p o f committin g th e interpretatio n o f thes e principles t o the financial wa y of thinking, to the customary prac tices i n accountin g tha t ar e accepte d t o b e fai r an d adequat e among tradespeople . Yamamasu an d Shimamur a als o conclude that th e principles of regular bookkeepin g tha t ar e foun d i n th e Germa n Commercia l Code have a character that is akin to the provision on a clean slate for th e purpos e o f givin g comprehensive approval to variou s type s of standard s tha t hav e bee n generall y accepte d t o b e fai r an d adequate i n financial accounting . Th e principles , i n themselves , do no t hav e a characte r tha t i s enoug h t o b e positione d a s th e fundamental principl e of taking the form o f a record that support s accuracy.16 Yamamasu an d Shimamura' s descriptio n i s contradictor y i n my vie w fo r th e reaso n mentione d earlier . Thei r descriptio n i s "the quoted portion " of the provisions of Paragraph 1 o f Article 38 of th e Germa n Commercia l Cod e an d thos e o f Paragrap h 1 o f Article 14 9 o f th e Germa n Stoc k Law . Th e provisio n o f th e first part o f Paragrap h 1 of Articl e 14 9 of th e Germa n Stoc k La w ha s prescribed tha t "th e annual statemen t mus t comply with th e prin ciples o f regular bookkeepin g (goo d accountin g principles). " Thi s particular provisio n i s not, therefore, differen t fro m th e purport of these authors ' explanation. Th e problem, however, lie s in th e por tion following th e provisions quoted above . In th e first place , why i s it possibl e fo r Yamamas u an d Shima mura t o reason that , a s th e law , the Germa n Commercia l Cod e of its ow n accor d keep s fro m directin g th e detail s o f th e principle s and adopt s a measur e b y which th e la w entrust s th e principles t o

Opinions o f Respectabl e Japanes e Scholars : Par t I 6 9 financial thinking , o r th e customar y practice s i n accounting ? I n the Federa l Republi c o f Germany , ther e ar e man y book s whos e titles includ e "th e principle s o f regula r bookkeeping. " Th e Ger man Dictionary of Tax Law and Tax Studies, 17 7th e Germa n Dictio8 nary of Business Economics, 18 th e Germa n Dictionary of Account19 202 ing, th e Germa n Dictionary of Economics, an d th e Germa n Dictionary of Financial Economy 21—all thes e dictionarie s devot e many page s t o explanation s o f th e "principle s o f regula r book keeping." I presum e tha t m y reade r i s alread y awar e tha t a s th e laws i n Germany , detaile d regulation s hav e bee n mainl y pre scribed b y code s othe r tha n th e Commercia l Cod e an d b y lega l standards. The secon d poin t i s Yamamas u an d Shimamura' s conclusio n that a s thes e principle s hav e a characte r tha t i s aki n t o "th e provision o n a clea n slate " fo r th e purpos e o f givin g comprehen sive approval, the y do not have the character t o be positioned a s a fundamental principl e i n th e for m o f a record tha t support s accu racy. In Ma y 1979 , I receive d a cop y o f Income Tax Law (12t h ed. , 1978), written b y Eberhar d Littmann , wh o wa s th e Directo r Gen eral o f th e BFH . Th e boo k ha d bee n revise d an d enlarge d t o a three-thousand-page volume , twice th e siz e of earlier editions. Dr. Littmann devote d forty-si x page s (Vol . 1, pp. 295-341) t o the clar ification o f "the principle s o f regular bookkeeping. " This enlarge d edition wa s set i n such a small typ e size that a magnifying glas s is required t o read it . The authors o f Systematic Theory of Financial Statements woul d be surprise d i f the y looke d a t th e ful l particular s o f th e tex t re garding th e "principle s o f regula r bookkeeping " i n th e Germa n laws and th e legal standards. They would find tha t th e contents of said tex t an d standard s ar e compose d o f positiv e la w standard s whose quantity fa r an d awa y exceeds the full tex t of the Corporat e Accounting Principle s i n Japan. I believe tha t th e groundles s con clusions arrive d a t b y thes e Japanes e scholar s shoul d b e abso lutely avoided for th e advancement o f learning . My third point is that, in the material quote d above, Yamamasu and Shimamur a hav e delete d th e Japanes e ter m "Kigyo-kaikei " (financial accounting ) from th e phrase "the standards for financial

70 Opinion s o f Respectabl e Japanes e Scholars : Par t I accounting tha t hav e generall y bee n accepte d t o b e fai r an d ade quate " tha t ha s bee n indicate d i n Articl e 1 of th e Regulation s o n Financial Statement s an d in Article 4 of the Ministerial Ordinanc e Regarding Audi t Certificates . The y have added , however , th e Jap anese ter m "Kaku-shu-no " (various) . Judging fro m th e contex t o f these authors' statements, they have hinted indirectl y a t an d use d the concep t o f financial accountin g standard s tha t hav e generall y been accepte d a s fai r an d adequate . Th e proble m is , therefore , that the y hav e positione d th e concep t eithe r a s th e concep t o f th e "principle o f regula r bookkeeping, " whic h wa s prescribe d b y Ar ticle 5 7 of th e Enforcemen t Regulation s fo r th e Incom e Ta x Law , or a s th e concep t tha t ha s nearl y th e sam e denotatio n a s tha t o f the concept i n the Corporate Accounting Principle s i n Japan . If thes e author s wer e i n a positio n t o mak e a positiv e demon stration tha t th e phras e "financia l accountin g standar d tha t ha s generally been accepted t o be fair and adequate" is not a Japanes e translation o f th e provision o f "generally recognize d principle s of accounting," whic h i s prescribe d b y Articl e 44 6 o f th e Unite d States Interna l Revenu e Cod e (IRC) , that woul d alte r th e case . If they wer e t o admi t instea d tha t th e phras e i n questio n i s th e Japanese translatio n o f the exac t phras e i n Article 446 of the IRC, the matter woul d becom e more serious instead. The reason i s tha t the provisions o f this code prescribe onl y four kind s of accountin g methods, namely : 1 ) "Incurred Basis, " 2 ) "Cas h Basis, " 3 ) "Pro duction Method, " an d 4) "Mixed Basis," and th e provisions estab lish no other standards tha n th e above four methods. 22 This mean s that , a s fa r a s Unite d State s law s ar e concerned , there i s n o accountin g standar d tha t ha s pu t th e restrain t upo n the Unite d State s a s th e law . Thi s i s du e t o th e fac t tha t variou s standards, othe r tha n th e above-quote d fou r accountin g method s in th e Unite d State s regardin g th e "entry " an d "settlemen t o f accounts," have al l been entruste d t o what thes e authors describ e as "the customary practice s i n accounting i n merchants' circles." It i s no t Germa n laws , therefore , bu t Unite d State s law s tha t have bee n entruste d t o th e customar y practice s i n accountin g i n merchants' circles . Th e concep t o f "generall y recognize d princi ples o f accounting " unde r th e America n law s is , moreover , a s these author s state , th e concep t tha t "ha d th e characte r tha t i s

Opinions o f Respectabl e Japanes e Scholars : Par t I 7

1

akin t o th e provisio n o n a clea n slat e fo r th e purpos e o f givin g a comprehensive approval. " Whe n thi s concep t i s reviewe d a s "th e denotation" o f th e concep t itself , th e Unite d States' s concep t i s broader tha n tha t o f Japan' s Corporat e Accountin g Principle s o r the concep t o f th e principle s o f regula r bookkeepin g tha t ar e pre scribed b y Articl e 5 7 o f th e Enforcemen t Regulation s fo r th e In come Ta x Law . As for th e Germa n Stoc k La w (AktG) quote d b y thes e author s i n their book , I hav e a cop y o f th e Stoc k La w o f Septembe r 6 , 1965 , with commentar y b y Baro n vo n Godi n an d Dr . Han s Wilhelm i (4th ed. , 1971) , whic h i s nearl y twenty-tw o hundre d page s long . Touching o n th e principle s o f regula r bookkeeping , th e author s state: Good accountin g principle s ar e i n essenc e unwritte n law , i n whic h th e commercial experienc e of centuries has been collected, a law which is not yet complete d today , but rathe r i s constantly developing . In mor e recen t times, it has als o been influence d b y court decision s and busines s admin istration science. Books which outwardly conform t o the law are assume d to be kept in a regular way. 23 At thi s stage , th e reade r shoul d hav e a n understandin g o f wh y th e concept o f th e principle s o f regula r bookkeepin g ha s a threefol d structure.

Notes 1. Se e p. 378. 2. Seep . 27. 3. Seep . 125. 4. Se e p. 55. 5. Se e Kun o Barth , The Development of German Balance Sheet Law, Vol. 1, p. 247, for the original tex t of the former Commercia l Code of 1897. 6. Se e p. 23. 7. Se e p. 41. 8. Se e p. 69. 9. Se e p. 214. 10. Seep . 175. 11. Seep . 32. 12. Se e p. 99. 13. Seep . 10.

72 Opinion

s o f Respectabl e Japanes e Scholars : Par t I

14. Se e Federal Tax Sheet, 1954 , III, S. 298. 15. Seep . 107. 16. Italic s mine . 17. Se e Dictionary of Tax Law and Tax Studies, 2 d ed., Vol. I, pp. 714 ff . 18. Se e Dictionary of Business Economics, 1974 , pp. 1011 ff . 19. Se e Dictionary of Accounting, 2 d ed., pp. 702 ff . 20. Se e Dictionary of Economics, Vol . 2, pp. 69 ff . 21. Se e Dictionary of Financial Economy, 1976 , p. 1477. 22. Se e IRC, Sec. 446-C. 23. Se e p. 486.

7

Critical Revie w o f th e Opinion s o f Respectable Japanes e Scholars : Part I I

Revised Accounting by Mr . Shir o Tajim a (Professor , Komazaw a University) , published b y Kunimot o Shobo , 4th ed. , June 15 , 1977 Under th e headin g "Th e Principle s o f Regula r Bookkeeping/ ' Ta jima take s th e stan d tha t thes e principle s ar e th e one s tha t hav e been expresse d thus : "Corporat e Accountin g shoul d mak e correc t books o f accoun t regardin g al l th e transaction s mad e i n accor dance with th e principles of regular bookkeeping/' H e quotes, just as i t is , th e ver y wordin g o f th e provision s fro m Paragrap h 2 , General Principl e 1 of Corporate Accounting Principles. 1 I think , however , tha t Tajima' s explanatio n doe s not constitut e an explanatio n o f this matte r logically , becaus e ther e i s a ter m i n his explanatio n tha t ha s t o b e explained . A t th e sam e time , ther e is n o evidenc e t o suppor t Tajima' s theor y tha t "th e principle s o f regular bookkeeping," which have been indicated i n the Corporat e Accounting Principle s o f thi s country , ar e a concep t base d o n a n illusion. Tajima concludes , however, that "ther e is no such kind of bookkeeping known by the name of 'regular bookkeeping.' " Article 2 9 of th e Guidelines , whic h i s th e authoritativ e regula tion regardin g "th e principle s o f regular bookkeeping " prescribe d by Article 5 of the Hessia n Incom e Ta x Law , has a provision wit h the title "Regular Bookkeeping," whereby the variety of bookkeeping i s specificall y limited . I wonder ho w Tajim a view s thi s poin t 73

74 Opinion s o f Respectabl e Japanes e Scholars : Par t I I in particular. Moreover, he concludes tha t "i t doe s not necessaril y mean double-entr y bookkeeping/ ' Fro m th e theoretica l viewpoin t of evolutionar y history , thi s provisio n di d no t mandat e double entry bookkeeping; however, the judicial precedent o f the Germa n Taxation Cour t ha s no w establishe d tha t i t mean s th e principle s of double-entr y bookkeepin g includin g th e "mixe d method." 2 I cannot hel p bu t say , therefore , tha t Tajim a ha s als o faile d t o notice thi s fact . Finally, the author has tried to position the term "the principle s of regular bookkeeping" as the Japanese equivalent o f the Germa n term "Grundsatz e ordnungsma/Sige r Buchfuhrung " ("regula r ac counting principles"). He asserts that thi s is not only the principl e regarding entrie s i n book s o f accoun t bu t als o th e principl e tha t constitutes th e ver y basi s fo r th e preparatio n o f financial state ments. I f thi s i s so , I fee l th e autho r shoul d follo w th e rightfu l method o f usin g th e correspondin g ter m i n German . I hav e no t noticed any indication o f this, however. Tajima seem s t o hav e faile d t o notice , moreover , th e fac t tha t the principle s o f regula r bookkeepin g hav e a threefol d structur e and tha t thes e principles ar e subject t o the strict limitatio n o f th e outline o f principle s b y th e positiv e law . I t ca n safel y b e said , therefore, tha t th e las t sentenc e i n Tajima' s boo k i s onl y barel y correct: "I n thi s sense, it can safely b e said that regula r bookkeep ing is a 'compound principle ' instead o f a simple principle. " A Textbook of Accounting by Dr . Yoshio Numat a (Professor , Komazaw a University) , 8t h rev. ed., 1978 , 10t h ptg. , published b y Dobu n Ka n Under th e headin g "Principle s o f Regular Bookkeeping, " Numat a states tha t "th e principle s o f regular bookkeeping " i s a ter m tha t has bee n newl y coine d b y th e Corporat e Accountin g Principles , and tha t "th e sai d principle s hav e bee n created , t o a certai n ex tent, b y th e advocat e fo r th e Corporat e Accountin g Principles." 3 No explanation abou t thi s particula r matte r ha s eve r been given , however. A s a genera l theory , thes e principle s hav e nearl y th e same meanin g a s "the principles of 'orderly bookkeeping' tha t ar e prescribed b y the German Commercial Code, and . . . they are sai d

Opinions o f Respectabl e Japanes e Scholars : Par t I I 7 5 to mea n tha t 'th e entr y shal l b e mad e systematicall y an d clearly ' as prescribe d b y Articl e 3 3 of thi s country' s revise d Commercia l Code." With th e abov e view s in mind , I would lik e to make th e follow ing comments . First , i n regar d t o Numata' s conclusio n tha t '"th e principles o f regula r bookkeeping ' i s a ter m tha t ha s bee n coine d by th e Corporat e Accountin g Principles, " i t ma y safel y b e sai d that th e abov e expressio n wil l b e a startlingl y precis e on e whe n we venture t o decide without hesitatio n tha t th e term "th e princi ples o f regula r bookkeeping " i s no t a Japanes e versio n o f th e German ter m "Grundsatz e ordnungsma/3ige r Buchfuhrung " ("regular accountin g principles") , whic h i s prescribe d i n Articl e 38 of the German Commercia l Code . Secondly, th e sam e i s als o tru e i n th e cas e o f th e conceptiona l regulation abou t whic h Numat a sai d tha t i t had bee n created, "t o a certai n extent , b y th e advocat e fo r th e Corporat e Accountin g Principles." Ther e i s n o wa y o f inquirin g int o Numata' s leve l o f understanding o f thi s concep t regardin g th e Germa n laws , be cause h e onl y remain s withi n th e bound s o f introducin g com monly accepte d theories , an d h e himsel f ha s no t develope d an y substantial theorie s regardin g th e principles o f regular bookkeep ing in the German Commercia l Code . It i s an illusion , a s I have explaine d before , tha t th e concep t o f "the principle s o f regula r bookkeeping " i n thi s country' s Corpo rate Accountin g Principle s i s th e Japanes e versio n o f th e Germa n term "Grundsatz e ordnungsma/3ige r Buchfuhrung " ("regula r ac counting principles") i n the German Commercia l Code . When thi s premise i s eliminated , therefore , th e statemen t tha t th e ter m i s newly coine d b y th e Corporat e Accountin g Principle s an d tha t i t was created, t o a certain extent , by the advocate for th e Corporat e Accounting Principles i s sharply an d admirabl y asserted . Numata ha s pointe d out , moreover , tha t "th e Corporat e Ac counting Principle s hav e take n car e no t t o mentio n th e relation ship betwee n book s of account an d financial statements." 4 I n thi s connection, I fee l tha t Numata' s characteristi c logica l acutenes s emerges. I have t o admit , therefore , tha t th e propositio n tha t th e term "th e principle s o f regula r bookkeeping " i s no t th e Japanes e version o f th e Germa n ter m prescribe d b y Articl e 3 8 o f th e Ger -

76 Opinion s o f Respectabl e Japanes e Scholars : Par t I I man Commercia l Code , o n whic h thi s autho r ha s tacitl y place d his premise, will be a littl e difficul t fo r u s t o understand fro m th e viewpoint o f this country's history o f accounting. Theory of Financial Accounting by Dr . Kiyomits u Ara i (Professor , Wased a University) , publishe d by Chu o Keiza i Sha , 45t h enlarge d ed. , Februar y 197 9 Arai state s th e following : "Th e principle s o f regula r bookkeepin g are thos e tha t deman d that : 1 ) for th e sak e o f formality , th e re cording of books of account shal l be conducted i n accordance wit h fixed necessar y conditions , an d 2 ) a s a substantia l principle , th e organic connectio n betwee n book s o f accoun t an d financial state ments, an d betwee n mutua l financial statement s shal l b e main tained/' I n thi s connection , th e phras e "fixe d necessar y condi tions" i n th e first stipulatio n indicates : a ) "all-inclusiv e character, " b) "verifiability" c ) "orderliness," etc. That is to say, the principle s of regula r accountin g deman d tha t al l accountin g transaction s should: a ) b e mad e i n on e accountin g period , b ) b e base d o n th e fact o f actual transactions , o r o n othe r verifiabl e evidence , an d c ) be recorded continuousl y an d systematically . The phras e "organi c connectio n betwee n book s o f account an d financial statements , an d tha t betwee n mutua l financial state ments" i n th e secon d stipulatio n indicate s tha t financial state ments shoul d b e inductivel y prepare d fro m book s of account tha t meet th e conditions deeme d necessary . In regard t o mutual financial statement s and , especially , incom e statement s an d balanc e sheets, the latter shoul d be "a connectin g ring" with th e former i n accordance wit h th e "doctrine of derivative method. " As an expla nation dependin g o n reason , i t ma y safel y b e sai d tha t Arai' s i s generally well organized . The problem i s that whe n bot h th e accountin g standar d tha t i s generally recognized as fair an d appropriate, prescribed by Article 4 o f th e Ministeria l Ordinanc e Regardin g Audi t Certificates , an d the accountin g standar d tha t i s generall y recognize d a s fai r an d appropriate, prescribe d b y Paragrap h 4 o f Articl e 2 2 o f th e Cor poration Ta x La w i n thi s country , ar e suppose d t o mea n th e Cor porate Accountin g Principles , i t ma y b e justifie d t o regar d th e Corporate Accountin g Principle s a s havin g th e characte r o f th e

Opinions o f Respectabl e Japanes e Scholars : Par t I I 7 7 source o f law . Th e Corporat e Accountin g Principle s onl y state , however, tha t "corporat e accountin g shoul d prepare accurat e book s of account concernin g al l th e transaction s i n accordanc e wit h th e principles of regular bookkeeping/ ' However carefull y th e phrase s tha t hav e bee n describe d i n th e Principles ar e analyze d i n detail, it ma y no t b e possible t o deduc e how Arai's explanation, cited above , can be fully covered . In othe r words, Arai trie s t o logically outlin e her e a summary o f the struc ture of the principles o f regular bookkeepin g i n Germany. What i s important here , however, i s tha t h e fail s t o touc h o n th e proble m of "timeliness' ' i n makin g a n entry . Paragrap h 1 of Article 14 6 of the Germa n Fundamenta l Taxatio n La w (AO), Paragraph 2 of Article 4 3 o f th e Germa n Commercia l Code , an d Articl e 2 9 o f th e Enforcement Regulation s fo r th e Income Ta x Law—al l thes e provisions stipulate thi s particular poin t accuratel y an d strictly . Arai doe s no t understan d tha t thi s particula r poin t i s utterl y different fro m "timeliness " i n th e Unite d States' s Accountin g Principles. I n vie w o f th e threefol d structur e o f th e principle s o f regular bookkeeping , however , eve n thoug h Ara i ca n generall y describe th e principle s tha t hav e evolve d historicall y i n mer chants' customar y bookkeeping , ho w abou t hi s inquir y int o th e principles o f regular bookkeepin g especiall y i n regard t o the posi tive law standard ? Why doe s Ara i no t fee l th e reaso n fo r advocatin g "th e lac k o f the law" in this country? Furthermore, since the author grasps th e fact tha t bot h Articl e 13 0 of th e Corporatio n Ta x La w an d Articl e 155 o f th e Incom e Ta x La w hav e acknowledge d th e "verifiabl e bookkeeping records " o f book s o f account , wh y i s h e unabl e t o declare tha t thi s constitute s th e ver y "connotation " o f th e princi ples of regular bookkeeping ? I n thi s sense , we must conclud e tha t this autho r stil l onl y partiall y understand s th e principles o f regu lar bookkeeping . New Theory of Financial Statements by Dr . Tatsuo Inou e (Professor , Chu o University , C.P.A.) , published b y Chu o Keiza i Sha , 72 d rev . ed., 197 8 According t o Inoue , th e principle s o f regula r bookkeepin g origi nated i n th e "regula r accountin g principles " prescribe d b y th e

78 Opinion s o f Respectabl e Japanes e Scholars : Par t I I German Commercia l Cod e (Article s 3 8 an d 129) . The "principle s of regula r bookkeeping " hav e substantia l contents , includin g ac counting principles. Acknowledging th e existence of the principle s in customary business practices in corporate accounting, the Commercial Cod e has mad e a comprehensiv e commitment , unde r th e name "regula r accountin g principles/' t o the customary practice s in general . This Germa n practic e ca n b e though t t o approximate th e phras e "fair practice s i n accounting " i n th e provision s o f Paragrap h 2 of Article 32 , which wa s prescribe d whe n Japan' s Commercia l Cod e was revised i n April 197 4 and provides that "concernin g th e inter pretation o f the regulation s regardin g th e preparation o f books of account, 'fai r practice s i n accounting ' shal l b e take n int o consid eration." Th e principle s o f regula r bookkeepin g tha t ar e pre scribed b y Japan's Corporat e Accountin g Principles , however, ar e different fro m thos e in the Commercial Cod e in Japan. The Corporate Accountin g Principle s stat e tha t th e principle s o f regula r bookkeeping deman d tha t "i n accordanc e wit h verifiabl e evi dence, all th e transactions shal l be recorded completel y an d accu rately i n systemati c book s o f account, " an d tha t th e recor d o f books o f accoun t shal l b e pu t i n orde r o n a generalize d basi s through th e periodic measuremen t an d classificatio n whereb y th e financial statement s "shoul d b e prepared. " In regar d t o Inoue' s explanation , I would lik e t o mak e th e fol lowing comments . First , ther e ma y b e a misprint . Articl e 12 9 of the Germa n Commercia l Cod e ha s nothin g t o d o wit h th e princi ples o f regula r bookkeeping . Th e titl e o f Articl e 12 9 i s "Defens e Objectives o f th e Corporat e Membe r (Partner) " an d no t "Princi ples o f Regula r Bookkeeping. " Secondly , althoug h i t i s a triflin g matter, ther e i s no word "der " i n the wording o f the principles of regular bookkeepin g containe d i n th e provision s o f th e Germa n Commercial Code , from whic h th e term "regula r accountin g prin ciples" ha s come . Thi s remind s m e o f "Edo-sen-ryu " ( a short , satirical poem ) tha t implie s tha t "Uguisuno-hitokoemo-nen-o irenikeri" (literall y translated , " A voice fro m a Japanes e nightin gale make s u s thin k i t i s necessar y t o pa y carefu l attentio n t o everything we hear"). Thirdly, the theory of comprehensive commitment ha s been "a n

Opinions o f Respectabl e Japanes e Scholars : Par t I I 7 9 oral traditio n o f misunderstanding " regardin g th e principle s o f regular bookkeeping , whic h clearl y show s tha t Inou e ha s bee n simply usin g hearsa y o r th e groundles s theorie s o f othe r person s for hi s ow n convenienc e a s fa r a s "th e principle s o f regular book keeping" are concerned. Fourthly, as Inoue has said, what is stated in tw o o f th e genera l principle s i s th e principl e o f record . There fore, wh y ca n i t b e sai d b y Inou e tha t i t mean s tha t thereb y th e financial statement s "shoul d b e prepared? " On e ca n accep t th e proposition tha t "ther e ha s bee n a characteristi c theor y o f book keeping an d accountin g whic h i s peculia r t o Bookkeepin g an d Accounting." I t shoul d no t b e understoo d b y us , however, tha t i n the above theory an y intermediary principle s cannot b e shown . Reviewing Inoue' s theor y i n this way, it seem s that a s he state s that "th e principle s o f regular bookkeeping prescribe d b y the Corporate Accountin g Principle s ar e differen t fro m this, " h e seem ingly recognize s tha t th e principle s o f regular bookkeepin g i n th e German Commercia l Cod e ar e differen t fro m thos e prescribe d i n the Corporat e Accountin g Principles . I t ma y b e conclude d tha t Inoue wil l no t b e able t o indicate th e real difference s betwee n th e principles i n Japan an d i n the German laws . The reason i s that al l the procedural principle s regardin g thi s author' s statement , quote d earlier, u p t o wher e h e say s "ar e differen t fro m this " an d "i t means tha t i t shoul d b e prepared " hav e al l bee n include d i n th e principles of regular bookkeeping a s a current lega l concept i n th e German laws . Accounting by Dr . Yoshio Aida (Professor , Kei o Gijuk u University) , 197 6 ed. , published b y Kunimot o Shob o Aida state s tha t "th e Provisio n i n Genera l Principle s 2, " whic h prescribes tha t "Corporat e Accounting should prepare correc t book s of account with respect t o all the transactions mad e in accordanc e with th e principle s o f regula r bookkeeping, " i s wha t w e cal l th e principles o f regula r bookkeeping. 5 Fro m a logica l viewpoint , however, thi s statemen t i s no t a n explanatio n becaus e "t o b e explained" has also been included i n Aida's explanation . It seem s t o m e tha t Aida take s th e stan d tha t th e principle s o f

80 Opinion s o f Respectabl e Japanes e Scholars : Par t I I regular bookkeepin g mentione d b y th e Germa n law s an d thos e prescribed b y th e Corporat e Accountin g Principle s ar e entirel y different. Furthermore , Aid a examine s th e "principle s o f regula r bookkeeping" i n tw o ways : i n bot h broa d an d narro w senses . Under th e headin g "Th e Principle s o f Regula r Bookkeeping " h e states that , i n the broad sense , the principles o f regular bookkeep ing ten d t o b e synonymou s wit h "fai r busines s practice s i n ac counting/' I t sometime s happen s tha t th e principle s ar e under stood t o have the same meaning a s the term "fai r an d appropriat e accounting standards. " Furthermore , Aid a state s tha t th e princi ples ar e generally understoo d literall y a s th e principles regardin g "the entry. " He furthe r state s tha t thos e wh o understan d th e principle s a s an accountin g standar d ten d t o b e o f th e opinio n tha t thi s i s demanded i n th e provision s o f th e Corporat e Accountin g Princi ples. I think Aida tries t o explain th e principles i n the broad sens e by introducin g variou s opinion s o n thi s particula r matter . A t th e end o f hi s explanation , Aid a say s tha t i t ca n b e considere d prob lematic whether "th e accounting standard tha t has been generall y recognized a s fai r an d appropriate " shoul d b e considered t o hav e the same meaning as that of the principles of regular bookkeeping . Where the phrase "generally recognized principles of accounting," stipulated b y Articl e 44 6 o f th e Unite d States' s Interna l Revenu e Code (IRC) , i s suppose d t o b e th e origina l tex t o f th e accountin g standard generall y recognize d a s fai r an d appropriat e (thi s i s th e expression o f Paragrap h 4 o f Articl e 2 2 o f th e Corporatio n Ta x Laws), th e "connotation " o f th e accountin g standar d i s differen t from tha t o f the principle s o f regular bookkeepin g i n th e Germa n laws. The reason i s that th e latte r doe s not acknowledg e account ing throug h th e "mixe d method " tha t ha s bee n acknowledge d b y the former . The principles of regular bookkeeping, which ar e different fro m those i n Germany , will—unlik e Articl e 44 6 o f th e IRC—no t ac knowledge th e "mixe d method. " (Thi s mean s tha t sale s an d pur chase shoul d b e mad e b y "actua l basi s accounting " an d tha t oth ers shoul d b e conducte d b y "cas h basi s accounting." ) I n hi s explanation o f the principles of regular bookkeeping in the narro w sense, Aid a state s tha t i n orde r t o b e "regular " th e followin g

Opinions o f Respectabl e Japanes e Scholars : Par t I I 8

1

characteristics ar e required : "all-inclusiv e c h a r a c t e r / ' "verifiabil ity," an d "orderliness. " Furthermore , h e state s that , eve n i n th e case o f "singl e entr y bookkeeping/ ' i f th e entr y i s kep t i n goo d order, i t ca n fal l unde r th e principle s o f regula r bookkeeping . H e also state s that , a t th e sam e time , th e principle s o f regula r book keeping mea n th e doctrin e o f "mixe d method. " I thin k tha t Aida' s understanding i s ful l o f subjectiv e reasoning . Ther e i s n o indica tion tha t h e understand s "th e threefol d structure. " Commentary on Accounting Principles by Dr . Shigeyosh i Kimur a (Professor , Sok a University) , 8t h ed. , June 1963 , published b y Chu o Keiza i Sh a Kimura make s th e followin g statement : The regulation tha t i s equivalent t o this provision [Genera l Principl e 2 of the Corporat e Accountin g Principles ] ha s bee n i n existenc e i n Japan' s Commercial Code , an d it s Articl e 3 2 prescribe s tha t " a merchan t shal l provide book s o f accoun t i n whic h dail y transaction s an d al l othe r mat ters affecting propert y shall be entered therei n systematically and clearly . . . ." [Paragrap h 1 was quoted , omittin g it s "provisos"] . Paragrap h 1 of Article 3 8 o f th e Germa n Commercia l Cod e i s equivalen t t o th e abov e provision o f the Commercial Cod e of Japan. As to the item "t o be entere d systematically an d clearly, " th e Germa n counterpar t provide s tha t i t i s to be made evident accordin g t o the principles of regular bookkeeping. In view o f th e correspondenc e o f th e term s an d expression s used , i t ma y safely b e sai d tha t Genera l Principl e 2 o f ou r Commercia l Cod e an d Article 3 8 o f th e Germa n Commercia l Cod e ar e o f th e sam e purport . I n other words, General Principl e 2 , Article 3 2 of our Commercial Code , and Article 3 8 o f th e Germa n Commercia l Cod e prescrib e nearl y th e sam e matter. 6 Under th e headin g "Stud y o f Relate d Literature, " Kimur a states , moreover, tha t th e so-calle d principle s o f regula r bookkeepin g ar e among th e principle s whos e content s ar e th e mos t unclea r i n th e Corporate Accountin g Principles . The majo r problemati c point s i n the principle s o f regular bookkeepin g are : 1. Wha t i s reall y mean t b y "th e principle s o f regula r bookkeep ing"? Tha t i s t o say , ar e the y th e principle s tha t dictat e th e form o f recordin g i n accounting , o r ar e the y thos e tha t dictat e even th e "contents " o f th e record ?

82 Opinion s o f Respectabl e Japanes e Scholars : Par t I I 2. Wha t i s indicate d b y th e ter m "th e for m o f recording" ? I n conjunction wit h "th e for m o f bookkeeping/ ' doe s thi s ter m indicate a specific for m o f bookkeeping (i.e. , double entry book keeping), o r doe s i t indicat e a fixed necessar y condition , irre spective o f th e for m o f bookkeeping ? Moreover , wha t i s th e necessary condition ? Dr. Kimur a the n review s th e theorie s advocate d b y th e followin g professors: Dr . Katsuj i Yamashit a (Kob e University) , Dr . Yoshi o Numata (Komazaw a University) , Dr. Toshio lino (Chu University), Dr. Kiyosh i Kurosaw a (Yokoham a Nationa l University) , Dr . Ya suichi Sakamot o (Osaka-Gakui n University) , Dr . Minor a Emur a (Tokyo University) , th e lat e Dr . Koich i Sat o (Wased a University) , Dr. Tatsuo Inou e (Chu o University) , an d th e lat e Shoich i It o (Komazawa University) . The reader shoul d pa y carefu l attentio n t o the point tha t i n th e first par t o f Kimura' s theory , quote d i n thi s chapter , Kimura' s intention wa s t o explai n Genera l Principl e 2 o f th e Corporat e Accounting Principles . An explanation o f th e concep t o f th e prin ciples of regular bookkeepin g itsel f wa s not intende d a t all . At th e end o f th e first par t o f th e quote , i t i s ver y importan t t o note , however, tha t Kimur a concludes : "Genera l Principl e 2 , Article 3 2 of ou r Commercia l Code , an d Articl e 3 8 of th e Germa n Commer cial Code prescribe nearl y the same matter. " In thi s concludin g statement , th e autho r reveal s hi s ow n leve l of understanding o f the principles of regular bookkeeping. Kimur a describes the concept of the principles of regular bookkeeping a s a single, self-inclusive concep t tha t has a complete meaning in itself by indicating tha t th e principles o f regular bookkeepin g o f Article 38 o f th e Germa n Commercia l Cod e ar e a singula r for m o f " a principle" an d tha t i t ha s prescribe d th e sam e thin g a s Article 3 2 of our Commercia l Code . In other words , this autho r ha s faile d i n his understandin g o f thi s concep t a s a collectiv e ter m o f a grou p of principles regarding bookkeeping, which continuousl y develop s from a historical perspective. 7 In this respect, therefore, Kimur a make s his first error. Next, a s if h e ha s take n th e positio n o f a spectator , Kimur a propose s a problem wit h th e statemen t tha t th e so-calle d principle s o f regu -

Opinions o f Respectabl e Japanes e Scholars : Par t I I 8 3 lar bookkeepin g ar e amon g th e principle s whos e content s ar e th e most unclea r i n th e Corporat e Accountin g Principles . Further more, he treats th e concept of "the principles of regular bookkeep ing/' whic h appear s i n Genera l Principl e 2 , a s i f i t i s a concep t that constitute s a part o f the "Grand Cod e of Laws" that will be in effect forever . It i s a n unshakabl e historica l fac t tha t numerou s scholar s i n Japan, t o say nothing of Kimura, have translate d th e term "Grun dastze ordnungsma/3ige r Buchfuhrung, " whic h wa s prescribed b y Article 38 of the Germa n Commercia l Code , as "various principle s of regular bookkeeping/ ' o r " a principl e o f regular bookkeeping. " Considering tha t our Corporate Accounting Principles were draw n up as an "Interim Report " on July 9, 1949, by the Countermeasur e Investigation Committe e fo r th e Corporat e Accountin g Syste m o f the Economi c Stabilizatio n Board , i t i s extremel y irrationa l t o conclude that th e concept "th e principles of regular bookkeeping, " which appear s i n th e Genera l Principl e o f our Corporat e Account ing Principles , i s th e uniqu e creatio n o f Japanes e scholar s an d unexpectedly i n accord with th e terms of Article 38 of the Germa n Commercial Code . As state d earlier , i n vie w o f th e fac t tha t Dr . Kotar o Tanaka , Japan's leadin g schola r o n th e Commercia l Code , positione d th e German Commercia l Cod e a s "th e mother " o f th e Commercia l Code in Japan, i t shoul d b e sai d tha t th e exten t o f the unreasona bleness o f suc h a conclusio n ca n b e known . A s a consequence , a t this junctur e I wis h t o dra w th e followin g conclusion . Th e Japa nese scholars who were engaged in the preparation o f the "Interi m Report" di d no t kno w tha t a t tha t time , th e principle s o f regula r bookkeeping o f Articl e 3 8 o f th e Germa n Commercia l Cod e wer e already a historical realit y i n Germany—th e definitiv e lega l stan dard regardin g bookkeeping—an d tha t thi s standar d included , i n addition t o the Commercial Code , many principles amon g variou s positive laws and judicial precedents . The reason I am confiden t tha t thi s deductio n i s correct i s tha t it ca n b e prove d b y a historica l fact . Amon g accountin g scholar s in Japan, almos t non e have pointed ou t th e real existenc e an d th e many-sided characte r o f th e definit e positiv e la w standard s tha t exist regarding th e principles o f regular bookkeepin g i n Germany .

84 Opinion s o f Respectabl e Japanes e Scholars : Par t I I This i s really th e basis fo r m y argument an d th e assertions I have made so far tha t th e concept o f the principles of regular bookkeeping, foun d i n Japan' s Corporat e Accountin g Principles , ha s bee n used on the basis of a sort of an illusion . At any rate , on Jul y 14 , 1954 , the Deliberativ e Counci l fo r Cor porate Accountin g o f th e Financ e Ministr y mad e publi c a docu ment entitle d "Partia l Revisio n o f the Corporate Accountin g Prin ciples an d th e Standin g Rul e o f Financia l Statements, " i n whic h the Council stated tha t "i t has begun to be admitted tha t i t will b e necessary t o correc t th e inadequac y o f th e term s used , th e dis united wording , an d othe r points. " I n s o doing , th e Counci l con firmed publicl y tha t th e Corporat e Accountin g Principle s shoul d not b e treate d a s " a canon " o f everlastin g fame , an d th e Counci l also conclude d b y sayin g tha t "thes e explanator y note s wer e adopted a s a tentativ e conclusio n a s th e resul t o f thi s Council' s investigative deliberation. " The Counci l mad e a declaratio n tha t on e o f th e fundamenta l characteristics o f th e explanator y note s regardin g th e Corporat e Accounting Principle s wa s thei r provisiona l character . Th e Coun cil ende d it s conclusio n wit h th e statemen t tha t "thes e note s ar e to be further supplemente d an d modified b y cautious research an d study i n th e futur e . . . and i t i s schedule d t o presen t thes e note s for widespread criticis m by the public in general." In view of these facts an d circumstances , i t doe s not follo w tha t "th e Deliberativ e Council for Corporate Accounting of the Finance Ministry also had the understandin g tha t ou r Corporat e Accountin g Principles , i n a broad sense , ar e eternall y unchangeabl e principle s upo n whic h modifications o r corrections shoul d no t be carried out. " If such is the case, it must be said that under th e subject "Stud y of Relate d Literature, " i t i s a n erro r fo r Professo r Shigeyosh i Ki mura t o tak e th e positio n o f tryin g t o discove r problem s onl y i n the explanatio n o f give n sentence s an d terms . Fo r instance , th e author pose s th e questions : Wha t i s reall y mean t b y "th e princi ples of regular bookkeeping" ? Wha t i s indicated b y th e ter m "th e form o f recording"? What i s the necessary condition? In Germany , for example, in the Fundamental Taxatio n La w (AO), which i s one of th e law s an d regulation s prescribin g th e conten t o f th e princi ples of regular bookkeeping , namely, in Paragraph 1 of Article 14 6

Opinions o f Respectabl e Japanes e Scholars : Par t I I 8 5 of th e AO, th e followin g stipulatio n appears : "Th e posting s an d other require d entrie s ar e t o b e don e completely , accurately , or derly, and on time. " It i s quit e natura l tha t accountin g record s shoul d hav e th e characteristics o f "perfectibility, " "truthfulness, " an d "orderl y clarity." However , hav e ou r scholar s eve r discusse d tha t th e de mand fo r "timeliness " i s als o on e o f th e importan t principle s o f regular bookkeeping ? An Outline of Accounting by Dr . Shige o Aok i (Professor, Wased a University , President , Th e Japan Societ y o f Accounting), published Marc h 20 , 1978 , by Chuo Keizaish a Aoki states that , lik e th e "principle s o f regular bookkeeping " pre scribed i n Genera l Principl e 2 for Corporat e Accounting , i t i s th e principle o f regular bookkeepin g tha t dictate s tha t "regardin g al l the transaction s made , Corporate Accountin g shoul d prepar e cor rect book s of account i n accordance wit h th e principles o f regula r bookkeeping." 8 Th e autho r als o assert s tha t th e principl e o f "truthfulness" (th e principl e o f "regula r accuracy" ) mentione d earlier, when i t is connected wit h thes e principles of regular book keeping, ca n b e technicall y substantiated . H e states , moreover , that th e principles o f regular bookkeepin g dictat e tha t th e histori cal recor d o f transaction s shoul d b e conducte d i n goo d orde r an d systematically i n accordanc e wit h a fixed rule . Th e principle s o f regular bookkeeping , however , d o no t alway s indicat e "double entry bookkeeping. " I t ma y b e considered , Aok i writes, tha t dou ble-entry bookkeeping i s the most typica l regular bookkeeping . In regar d t o Aoki' s statement s I mus t commen t a s follows . I n the first place , i t ha s bee n repeatedl y pointe d ou t tha t th e abov e statements mad e b y Aok i d o no t constitut e a logica l explanation , because th e ter m t o b e explaine d i s include d i n th e explanatio n Aoki make s concernin g th e concep t o f th e principle s o f regula r bookkeeping. Secondly , a s Aok i mad e n o statement s a t al l o n th e circumstances o f th e evolutionar y historica l theor y regardin g th e concept o f th e principl e o f regular bookkeeping , I have n o way of gauging his understanding o f whether thi s concept was created b y

86 Opinion s o f Respectabl e Japanes e Scholars : Par t I I this country' s scholars , or whethe r i t i s an importe d concep t tha t originated i n th e Germa n ta x la w an d wa s popularize d generall y by adoptio n int o th e Germa n Commercia l Code , Stoc k Law , an d so forth . Thirdly, i t seem s t o m e tha t Aok i tacitl y explaine d tha t th e concept o f the principle s o f regular bookkeepin g i n thi s country' s Corporate Accountin g Principle s i s entirel y differen t fro m th e principles o f regular bookkeepin g i n th e Federa l Republi c o f Ger many. This is clear from hi s opinion tha t th e principles o f regula r bookkeeping shoul d technicall y substantiat e th e principl e o f "accuracy." I n th e Federa l Republi c o f Germany , th e principl e o f "accuracy" ha s bee n n o more tha n a principle tha t constitute s a n important substanc e o f th e principle s o f regula r bookkeeping. 9 Finally, ther e i s n o wa y fo r m e t o kno w whethe r o r no t Aok i ha s really understoo d th e threefol d structur e embodie d i n th e princi ples o f regula r bookkeeping , whic h I hav e maintaine d s o far , be cause Aok i ha s no t mad e a singl e statemen t abou t a "threefol d structure." Notes 1. Se e p. 26. 2. Federa l Tax Sheet 1954, S. 298. 3. Se e p. 34. 4. Se e p. 35. 5. Se e p. 69. 6. Se e p. 23. 7. Dictionary of Tax Law and Tax Studies, Vol. 1, 1972, p. 543. 8. Se e p. 75. 9. Ulric h Leffson , Principles of Regular Accounting, 4 Auflage , 1976 , S.104.

8

Fair Accounting Practic e i n th e Commercia l Code of Japa n

Critical Revie w o f Scholar s Representin g th e Universit y o f Tokyo, Tohoku University , an d Kyot o Universit y The 197 4 revisio n o f th e Commercia l Cod e o f Japa n adopte d fo r the first tim e i n histor y th e ter m ''fai r accountin g practice " (Arti cle 3 2 [2 ] o f th e Commercia l Cod e i n Japan) . Viewe d fro m th e context o f th e law , i t wa s a concep t tha t mad e it s appearanc e abruptly, a ter m tha t canno t b e foun d i n book s previousl y pub lished b y accountin g scholar s i n Japan . I assume tha t it s appear ance cam e abou t becaus e th e member s o f th e Commercia l Cod e section o f th e Legislativ e Counci l o f th e Ministr y o f Justic e ha d taken th e article s a t th e beginnin g o f Chapte r 5 , "Book s o f Ac count," int o consideration an d ha d decide d tha t i t would b e justifiable an d i n keepin g wit h th e styl e o f th e Germa n Commercia l Code, th e "mothe r law " o f th e Commercia l Cod e i n Japan , t o include th e tex t o f th e provisio n "obligatio n o f bookkeeping " o f Article 38, placed a t th e opening of Chapter 4, "Commercial Books, " of the German Commercia l Code , which i s a general an d inclusiv e regulation tha t prescribe s "accordin g t o goo d accountin g princi ples." Why wa s th e expressio n "i n accordanc e wit h th e principle s o f regular bookkeeping," which is similar to Article 38 of the Germa n Commercial Code , not adopte d jus t a s i t is ? As a ma n o f busines s who is not part o f the government, ther e i s no way for m e to know 87

88 Fai r Accountin g Practic e the real reaso n fo r thi s particular matter . My opinion is , however, that a s mos t o f the committe e member s wer e lawyers , they coul d not gras p th e farsighte d wishe s o f th e accountin g scholar s an d they faile d t o catc h th e tren d o f thos e simila r phrase s tha t ar e scattered throughou t th e given literature . Some example s o f thes e phrase s follow : "Th e standar d o f cor porate accountin g tha t i s generall y accepte d a s fai r an d appro priate " (Articl e 4 o f th e Ministeria l Ordinanc e Regardin g Audi t Certificates); "th e standar d o f accountin g tha t i s generall y ac cepted a s fai r an d appropriate " (Articl e 2 2 o f th e Corporat e In come Tax Law); "in accordance with th e principle of double-entr y bookkeeping" (Articl e 5 3 of Enforcement Regulation s fo r th e Cor poration Ta x Law) ; "i n accordanc e wit h th e principle s o f regula r bookkeeping" (Articl e 5 7 o f Enforcemen t Regulation s fo r th e In come Ta x Law) . Moreover, a s th e so-calle d Corporat e Accountin g Principles ar e generall y understoo d a s th e principle s o f account ing i n a joint-stoc k corporation , thes e committe e member s ma y have decide d tha t th e ter m "Corporat e Accountin g Principles " could no t b e use d a s a unifie d an d inclusiv e regulatio n fo r mer chants i n general. As a result, I suppose, the term "fai r accountin g practice" may have been expediently coined . What d o Japanese scholar s of the Commercial Cod e think of the term "fai r accountin g practice? " Professo r Tsune o Ootor i o f th e University o f Tokyo , fo r example , state s tha t a practic e ca n b e described a s a fai r accountin g practic e i f i t i s i n accor d wit h th e objective o f preparin g book s o f account , tha t is , if i t i s i n accor d with the purpose of clarifying th e conditions of a merchant's prop erty an d los s an d profi t i n business . H e furthe r state s tha t th e Corporate Accountin g Principle s ar e th e outcome o f summarizin g what ha s bee n generall y accepte d a s fai r an d appropriat e i n rou tine practic e i n accountin g an d tha t i t ca n b e considere d a s suc h in th e inclusiv e regulatio n o f Paragrap h 2 o f Articl e 3 2 o f th e Commercial Code. 1 According t o Professo r Eiz o Hattor i o f Tohok u University , moreover, a "fai r practic e i n accounting, " prescribe d b y Para graph 2 of Articl e 32 , means a practic e tha t i s considere d appro priate an d reasonabl e i n view of the objective o f books of accoun t to clarif y th e financial status , o r operatin g results , o f a n enter -

Fair Accountin g Practic e 8 9 prise. I n thi s connection , th e Corporat e Accountin g Principles , mainly i n regar d t o joint-stock companies , hav e bee n understoo d as "th e summarizatio n o f wha t i s generall y accepte d a s fai r an d appropriate fro m amon g thos e practices that hav e been develope d as routine practice in the actual business of corporate accounting. " As fa r a s a joint-stoc k compan y i s concerned , therefore , compli ance wit h th e Corporat e Accountin g Principle s wil l mea n adher ing to a fair accountin g practice. Hattori also states that, in regar d to enterprises othe r tha n joint-stock companies , "it i s conceivabl e that there are many instances in which these enterprises may hav e no difficulty i n applying, for the most part, the Corporate Account ing Principles. "2 Kenichiro Osumi , a n honorar y professo r a t Kyot o University , states: "Th e regulation s o f Paragrap h 2 of Article 3 2 o f th e Com mercial Cod e hav e bee n establishe d fo r th e purpos e o f adjustin g the Commercial Code and the Securities and Exchange Act. Therefore, fo r thi s purpose , ther e i s a preconditio n tha t th e Corporat e Accounting Principles , whic h for m th e basi s fo r th e regulatio n o f financial statement s i n accordanc e wit h th e Securitie s an d Ex change Act, are recognized tentatively as fair accounting practice. " He state s furthe r tha t "amon g thos e [practices ] tha t hav e bee n developed a s routin e i n corporat e accounting , th e Corporat e Ac counting Principle s ar e a summar y o f wha t ha s bee n generall y accepted a s fai r an d appropriate . Fro m thi s i t ca n b e understoo d that th e so-calle d fai r accountin g practic e i n Paragrap h 2 of Article 3 2 of the Commercial Cod e includes th e Corporate Accountin g Principles i n regard t o accounting an d book s of account i n huma n society." 3 I d o no t hav e an y doubt s a t al l tha t th e Corporat e Accountin g Principles, a s th e audi t standar d fo r certifie d publi c accountants , has becom e widesprea d an d permanentl y fixed. I thin k i t woul d be good , fo r th e mos t part , fo r th e thre e scholar s jus t mentione d to positio n th e Corporat e Accountin g Principle s a s constitutin g the contents o f "fair accountin g practice, " as shown i n Paragrap h 2 of Article 32 of the Japanese Commercial Code . I wish to raise a n objection, however , t o th e poin t thes e thre e scholar s argu e a s th e mediation principle , th e view tha t "fro m amon g thos e [practices ] that hav e bee n develope d a s routin e i n th e actua l busines s o f

90 Fai

r Accountin g Practic e

corporate accounting , th e Corporat e Accountin g Principle s ar e a s u m m a r y o f w h a t i s generall y accepte d a s fai r an d appropriate. " This propositio n i s n o mor e tha n th e uncritica l transfe r o f th e proposition foun d i n No . 2 o f th e writin g mad e publi c i n Concerning the Establishment of the Corporate Accounting Principles, whic h was announce d simultaneousl y wit h th e Corporat e Accountin g Principles a s a n interi m repor t o f th e Corporat e Accountin g Sys tem Countermeasur e Investigatio n Commissio n o f th e Economi c Stabilization Boar d i n Jul y 1949 . It i s a kin d o f fantas y t o sa y tha t th e Corporat e Accountin g Principles ar e a s u m m a r y o f wha t ha s bee n generall y accepte d a s fair an d appropriat e i n actua l accountin g practice . Th e first piec e of evidence i s clear whe n w e tak e a loo k a t th e following : As th e corporat e accountin g syste m i n thi s country , a s compare d wit h those i n Europ e an d America , has had enoug h roo m fo r furthe r improve ment, an d ha s bee n extremel y disorganized , . . . i t i s a n urgen t proble m in thi s countr y t o improv e an d unif y Japan' s corporat e accountin g sys tem. Therefore , i t i s intende d t o establis h an d maintain , firs t o f all , th e Corporate Accountin g Principle s s o as to provide a scientific basi s for th e democratic an d health y developmen t o f th e nation' s econom y i n thi s country. That is , th e Corporat e Accountin g Principle s hav e bee n formu lated throug h a politica l intentio n throug h which , fo r th e purpos e of improvin g an d unifyin g th e accountin g syste m i n existence , a n accounting standar d wa s t o b e establishe d t o provid e th e ver y basis fo r th e soun d developmen t o f th e Japanes e economy . The secon d proo f ca n b e foun d i n th e variou s statement s "Re garding th e Partia l Revisio n o f th e Corporat e Accountin g Princi ples," mad e b y th e Corporat e Accountin g Council . Th e statemen t m a d e i n Novembe r 196 3 indicated tha t "th e partia l revisio n o f th e Corporate Accountin g Principles , thi s tim e . . . was primaril y in tended t o mak e a revisio n s o a s t o cop e wit h th e revisio n o f th e calculation regulatio n i n th e revise d Commercia l Code, " an d thu s acknowledged tha t th e partia l revisio n thi s tim e h a d nothin g a t all t o d o wit h a s u m m a r y o f actua l busines s practic e i n account ing. Furthermore , th e provisio n "fai r practic e i n accountin g shoul d be take n int o consideration " wa s newl y provide d fo r i n Paragrap h 2 of Article 3 2 of th e Commercia l Code , and a statemen t regardin g

Fair Accountin g Practic e 9

1

the audi t o f bi g enterprise s b y certifie d publi c accountants , whic h was m a d e i n Augus t 1974 , said tha t ''i n preparatio n fo r th e devel opment o f suc h circumstance s . . . a s show n unde r separat e sheet , it i s decide d t o carr y ou t th e partia l revisio n o f th e Corporat e Accounting Principles. " For th e thir d piec e o f evidence, w e ca n loo k a t th e writin g o f Dr . Kurosawa, wh o personall y participate d i n drawin g u p th e Corpo rate Accountin g Principles . I n No . 1 2 o f hi s serie s "Historica l Material: Th e Accountin g Syste m i n J a p a n , " h e states : "Wha t i s referred t o here a s 'thi s Commission' s Recommendation ' indicate s the Corporat e Accountin g Principles , whic h wer e m a d e publi c a m o n t h an d a hal f earlie r tha n th e Report on Japanese Taxation b y the 'Shou p Mission. ' . . . I n th e beginning , ou r conceptio n o f in tending t o establis h th e Corporat e Accountin g Principle s wa s sur rounded b y th e voice s o f foe s o n al l sides , th e succes s o r failur e o f which wa s nothin g othe r tha n a n a d v e n t u r e . " 4 I fee l i t i s a com mon Japanes e malpractic e t o patc h u p th e fact s wit h apparentl y made-up storie s i n officia l document s release d b y governmenta l agencies. I believ e that , knowingl y o r unknowingly , t o ente r suc h m a t t e r i n a textboo k i s not a n appropriat e scholasti c action .

The Formulatio n o f th e Unite d State s Corporat e Accounting Principle s In compariso n wit h th e abov e exampl e i n Japan , th e corporat e accounting principle s tha t hav e bee n publishe d b y th e America n Institute o f Certifie d Publi c Accountant s (AICPA ) see m t o b e hon est an d straightforward . Th e corporat e accountin g principle s i n America ar e calle d Generally Accepted Accounting Principles. The y were m a d e publi c i n Octobe r 1970 . A t th e beginnin g o f thes e principles, referrin g t o th e natur e o f th e America n accountin g principles, th e followin g appears : Generally accepte d accountin g principle s incorporat e th e consensu s a t a particular tim e as to which economic resources and obligations should b e recorded a s asset s an d liabilitie s b y financial accounting , whic h change s in assets and liabilities should be recorded, when thes e changes should b e recorded, ho w th e asset s an d liabilitie s an d change s i n the m shoul d b e

92 Fai

r Accountin g Practic e

measured, wha t informatio n shoul d b e disclose d an d ho w i t shoul d b e disclosed, and which financial statement s shoul d be prepared. 5 I fee l thi s statemen t ma y b e th e ver y trut h i n th e accountin g principles. It shoul d particularl y b e note d tha t thes e corporat e accountin g principles, a s announce d b y AICPA , hav e bee n approve d b y Accounting Series Release No. 4, issue d b y th e Securitie s an d Ex change Commissio n (SEC) . Notificatio n No . 4 states : "Th e AICP A Special Committe e o n Opinion s o f th e Accountin g Principle s Boar d defines generall y accepte d accountin g principle s a s thos e 'havin g substantial authoritativ e s u p p o r t / " Th e Securitie s an d Exchang e Commission i n Americ a ha s bee n grante d stron g authorit y fo r establishing regulations , b y Articl e 1 9 of th e Securitie s Ac t (1933) , by Articl e 1 1 of th e Securitie s an d Exchang e Ac t (1934) , an d espe cially—in regar d t o accountin g record s an d financial statement s —by Articl e 1 7 of th e Securitie s an d Exchang e Act : Anyone wh o violate s th e abov e law s an d provisions , unde r Articl e 2 4 of the Securities Act, will be subject t o imprisonment fo r a term of less tha n five years, or a fine of not mor e than $5,000 , or both, and unde r Article 32 of the Securitie s an d Exchang e Act, imprisonment fo r a ter m o f less tha n two years , o r a fine o f $10,000 , o r both , an d i n th e cas e o f specialize d traders in securities exchange, a fine of not mor e than $500,000 . The reade r ma y alread y know n tha t th e Unite d State s Securitie s and Exchang e Commissio n mandate s sever e penalties . Accordin g to On Corporations, writte n b y Henr y Winthro p Ballantine , a pro fessor a t th e Universit y o f California , th e reaso n fo r grantin g suc h authority fo r establishin g regulation s an d fo r th e enactmen t o f th e Securities Ac t an d th e Securitie s an d Exchang e Act , whic h hav e severe pena l provisions , wa s tha t durin g th e Grea t Depressio n (1929-1933), th e investin g publi c suffere d a sever e los s amountin g to a tota l o f $2 5 billio n du e t o unlawfu l accountin g practice s an d illicit manipulatio n i n securitie s transactions. 6 Th e reade r ca n thus se e tha t th e Generally Accepted Accounting Principles tha t were establishe d b y th e AICP A incorporate d th e consensu s an d that th e "generall y accepte d accountin g principles " ar e supporte d by authoritativ e powe r an d hav e a normativ e bindin g power , jus tified b y th e Accounting Series Release No. 4 issue d b y th e Securi ties an d Exchang e Commission .

Fair Accountin g Practic e 9 3 I do not inten d t o say that , even i n the case of an "incorporate d general consensus/ ' i t i s th e outcom e o f th e simpl e decisio n o f a majority vote , which has often bee n observed i n the Association of Tax Practitioner s i n present-day Japan . Dr . Carl S . Shoup, touch ing on th e Corporate Accountin g Principle s o f Japan, state d i n th e Shoup Mission' s Report on Japanese Taxation tha t "thei r strengt h lies in the calibre of the personnel an d th e quality of their work." 7 He is of the opinion tha t th e natur e o f the effectiveness o f Japan' s Corporate Accountin g Principle s i s affecte d b y th e calibe r o f th e individual specialis t wh o participated i n th e establishmen t o f th e Corporate Accountin g Principle s an d th e qualit y o f hi s achieve ments i n the academic circles of accounting . Needless t o say , th e Corporat e Accountin g Principle s i n thi s country ar e no t law s an d ordinances . Consequently , the y d o no t have th e characte r o f the sourc e o f the law . I think, however, tha t only Article 4 of the Ministerial Ordinanc e Regardin g Audit Certif icates bega n t o pursu e conformit y t o "th e standar d o f corporat e accounting tha t i s generall y accepte d a s fai r an d appropriate. " A governmental agency , th e Corporat e Accountin g Syste m Counter measure Counci l of the then Economi c Stabilizatio n Board , whic h was late r transferre d t o th e Corporat e Accountin g Counci l o f th e Ministry o f Finance , prescribe d tha t th e Corporat e Accountin g Principles begi n wit h " a summar y o f wha t ha s bee n generall y accepted a s fai r an d appropriate. " I think th e Corporat e Account ing Principles of Japan becam e a semi-statute syste m of standard s and the n a secondary sourc e of the law . As I have said, the Corporate Accounting Principles in this country ar e no t law s an d ordinances , and , fo r th e sak e o f formality , they d o not hav e th e character o f the sourc e o f the law . From thi s particular viewpoint i t may safely b e said that, compared with th e American Generally Accepted Accounting Principles, which have th e support o f publi c powe r b y th e Accounting Series Release o f th e Securities an d Exchang e Commissio n tha t ha s a n independen t authority fo r establishin g regulations , Japanes e accountin g prin ciples ar e inferio r t o th e America n one s a s fa r a s respectabilit y goes. The Report on Japanese Taxation b y th e Shou p Missio n recom mended tha t th e Revie w Counci l shoul d b e change d t o "a n inde -

94 Fai r Accountin g Practic e pendent commissio n establishe d unde r th e genera l jurisprudenc e of th e Ministr y o f Finance, " and , furthermore , th e repor t stated : "We als o urge tha t th e Securitie s Exchang e Commissio n exercis e strongly it s substantial power s t o bring abou t a n improvemen t i n the accountin g method s o f busines s firms." 8 A t th e presen t time , the Revie w Counci l ha s bee n reduce d t o a n orga n o f th e Ministr y of Finance , th e sol e missio n o f whic h i s investigation s an d th e performance o f examination s (Th e Certifie d Publi c Accountant s Law, Articles 35-42). The Securities Exchange Commission change d its nam e t o th e Securitie s an d Exchang e Council ; i t to o ha s be come a n orga n o f th e Ministr y o f Finance , and it s onl y missio n i s deliberation an d investigatio n o f securitie s (Securitie s an d Ex change Act, Articles 165-70) . It i s t o b e regrette d b y th e stat e an d th e peopl e that , contrar y to th e fai r directio n tha t ha d bee n expecte d fro m th e Shou p Mis sion, suc h degradatio n an d degeneratio n cause d a n erro r i n plac ing th e rol e o f dealin g wit h bi g nationwid e problems—suc h a s the concentratio n o f powe r i n th e hand s o f th e bureaucrats , de velopment o f th e Certifie d Publi c Accountants ' system , an d im provement i n th e accountin g method s o f busines s firms—in th e hands o f th e Japanes e bureaucrats . Fro m th e poin t o f vie w o f accounting i n regar d t o suc h case s a s th e Fuji Sash Co. case, th e KDD cas e (Kokusa i Denshin-Denw a Co. , Ltd.) , o r th e Denden Kosha cas e (th e Nippo n Telegrap h & Telephon e Publi c Corpora tion), i f th e Securitie s an d Exchang e Commissio n i n Japa n ha d been give n stron g authorit y alon g wit h th e directio n tha t wa s initially recommende d b y th e Shou p Mission , i t i s no t difficul t to imagin e tha t thes e case s woul d no t hav e occurre d a t all , o r i f they di d occur , th e circumstance s woul d hav e bee n considerabl y different. The scop e o f th e authorit y fo r establishin g regulation s regard ing accounting by the Securities and Exchang e Commission i n th e United State s o f Americ a i s extended , no t onl y t o th e politica l parties, but also even to United State s governmental agencies . The scope o f th e authorit y o f th e principle s o f regular bookkeepin g i n the Federa l Republi c o f Germany , lik e thos e i n America , i s als o extended, eve n t o th e method s o f accountin g record s t o b e mad e by th e federa l agencies . As I have already touche d o n thi s point , I will omit a repetition o f the explanation here .

Fair Accountin g Practic e 9 5 British Accountin g Principle s It ma y safel y b e sai d tha t i n regar d t o thei r orderliness , th e Cor porate Accountin g Principle s o f Japan ar e aki n t o th e Recommendations on Accounting Principles, whic h wer e establishe d b y th e Institute o f Chartere d Accountant s i n Englan d an d Wales . Th e copy I have i s the 197 5 edition, the full tex t o f which i s comprise d of 15 1 pages . Lik e th e Corporat e Accountin g Principle s o f Japan , the provision s regardin g th e preparatio n o f book s o f accoun t ar e hardly containe d i n th e Britis h recommendations , an d almos t al l the provision s ar e restricte d t o th e condition s require d fo r financial statements, the methods of indication, the form an d the exten t of informatio n t o b e release d t o th e publi c i n general , an d s o on . What i s particularl y t o b e note d i n regar d t o th e Britis h Recommendations i s as follows: Articles 15 1 and 15 7 of AktG (Stock Law ) in th e Federa l Republi c o f Germany hav e mad e th e standar d form s of balanc e shee t an d profi t an d los s statement s statutory . Japa n also prescribe s standar d form s o f balanc e sheet s an d profi t an d loss statement s i n Nos . 1 and 2 o f th e ''Standar d Forms " o f th e Regulation o n Financial Statements . In contrast, however , th e British Recommendations on Accounting Principles hav e conclude d tha t ''suc h standar d form s ar e no t the ver y thin g t o b e desired. " Th e Recommendations reason s a s follows: "Businesse s ar e s o varied i n thei r natur e tha t ther e mus t be flexibility i n th e manne r o f presentin g accounts . A standar d form t o sui t ever y industria l an d commercia l undertakin g i s nei ther practicabl e no r desirable . Thi s i s recognize d i n th e Compa nies Act of 1948." 9 Moreover, i n regar d t o a "tru e an d fai r view, " as prescribe d b y Articl e 14 9 o f th e Companie s Ac t o f 1949 , i t i s said tha t n o standard for m ha s ever been provided. As a matter of fact, Paragrap h 2 of Articl e 14 9 has prescribe d onl y tha t th e bal ance shee t an d th e statemen t o f los s an d profi t shoul d bot h b e i n accord with th e essential factors o f "Schedule 8 " of the Companie s Act of 1948 . The "Schedule 8 " in question was changed t o "Sched ule 2 " b y th e Companie s Ac t o f 1967 ; however, n o standar d for m was prescribed. Th e reader shoul d pa y particula r attentio n t o th e fact tha t i n "Schedul e 2 " of the Companie s Ac t of 1967 , the seve n sections i n parenthese s hav e bee n replace d i n th e Companie s Ac t of 197 6 by "Schedule 2. "

96 Fai r Accountin g Practic e The Substance o f Fai r Accounting Practic e The concep t o f a fai r practic e i n accountin g a s prescribe d b y Paragraph 2 o f Articl e 3 2 o f th e Commercia l Cod e o f Japa n is , unlike th e example s below , simpl y a genera l an d comprehensiv e regulation fo r th e merchant i n a broad sense : • Th e concept o f a fai r accountin g practice , as dictate d b y Articl e 38 o f th e Germa n Commercia l Code , ha s th e powe r o f "prope r order'' i n al l fields tha t ar e i n nee d o f accounting record s i n th e Federal Republi c of Germany . • Th e Securities Act of 193 3 in the United State s claims, as a lega l standard, "completeness " an d "truth " o f books of account, irre spective o f th e siz e o f a n enterprise , th e differenc e betwee n a corporation an d a n individua l person , or th e differenc e betwee n a political part y an d a state agency . Moreover, th e corporat e accountin g principl e tha t ha s bee n in cluded i n the concept of "fair accountin g practice" is the principl e in accountin g tha t actuall y exercises , substantially, it s normativ e power, i n regar d t o a joint-stoc k company , especiall y onl y i n re gard t o a large-scal e joint-stock company . The calculation regula tions i n the Commercia l Cod e (precisely speaking , th e regulation s regarding a joint-stoc k company' s balanc e sheet , los s an d profi t statement, an d schedule ) ar e th e lega l standard s i n accountin g that hav e bee n applie d t o a joint-stoc k compan y an d a limite d company (Article s 43 and 14 6 of the Limite d Responsibilit y Com pany Law) . When i t come s t o th e above , therefore , a proble m ma y aris e i n regard t o the accounting standar d tha t shoul d apply i n the case of a non-joint-stoc k compan y o r a limited company . Needless t o say, from th e tex t o f th e law , i t i s a simpl e matte r t o sa y tha t "i t i s a fair accountin g practice. " I wonder, however, what th e Councilor , Civil Affair s Bureau , o f th e Ministr y o f Justic e i n Japa n woul d answer, i f he were aske d th e question . What woul d b e th e answe r of those persons i n the sectional meetin g of the Commercial Code , the Judicia l Syste m Council , o f th e Ministr y o f Justice? I suspec t they would be perplexed . The reason is that th e concept of a "fair practice in accounting, " as prescribed b y Paragraph 2 of Article 32 of the Commercial Cod e

Fair Accountin g Practic e 9

7

of Japan , ha s a characte r i n commo n wit h th e concep t o f "th e principles o f regula r bookkeeping " a s prescribe d b y Articl e 3 8 o f the Commercia l Code , whic h wa s enacte d prio r t o 191 9 i n th e Federal Republi c o f Germany . I n 191 9 whe n Enn o Becker , wh o drafted th e Imperia l Ta x Code , mad e a statut e o f "th e 'substance ' of th e principle s o f regula r bookkeeping , o r orderly bookkeeping, " the definit e content s o f th e standar d ha d no t bee n presente d unti l that year . Th e principle s o f regula r bookkeepin g wer e establishe d for th e first tim e i n Article 16 2 of th e Imperia l Ta x Code i n 191 9 a s an itemize d substance . Th e stat e approve d comprehensivel y a n idea merchant s ha d cultivate d fo r a lon g time , a soun d an d fai r practice regardin g th e entry ; tha t is , i t wa s generall y understoo d that "th e principle s o f regula r bookkeeping " i n Articl e 3 8 o f th e German Commercia l Cod e wer e onl y article s o f la w i n whic h th e state expresse d it s approval , i n a cart e blanch e manner , o f mer chants' 'soun d an d fai r practic e i n accounting / whic h lacke d spe cific rule s o r principles an d require d documentation . As a consequence , Japanes e scholar s o f th e Commercia l Cod e actually ha d t o see k shelte r i n a n empty , hazy , an d abstrac t con ceptual regulatio n b y explainin g tha t " a fai r practic e i n account ing" mean s that , i n vie w o f th e objective s o f book s o f account , which clarif y financial statu s o r th e result s o f th e busines s opera tion o f an enterprise , i t i s th e practic e i n accounting tha t i s judge d to b e fai r an d appropriate. 10 Thi s mean s tha t i n th e heart s o f th e committee member s wh o comprise d th e Sectio n Meetin g o f th e Commercial Code , th e residu e o f Professo r Kotar o Tanaka' s "the ory of a carte blanch e regulation " was stil l i n existence . In other words, th e committeemen o f the Sectio n Meetin g o f th e Commercial Cod e did no t know that , in the ta x laws i n the Federa l Republic o f Germany , ther e existe d detaile d statutor y regulation s indicating th e substanc e o f th e principle s o f regula r bookkeeping . In 1976 , moreover , thes e statutor y regulation s wer e introduce d into Chapte r 4 , "Book s o f Account, " o f th e Germa n Commercia l Code, Paragrap h 2 of Article 4 3 o f which actuall y prescribes : "En tries i n book s an d othe r require d notation s ar e t o b e don e i n a complete, accurate , timely , an d orderl y manner. " The y di d no t know thi s fact . I f the y actuall y kne w it , the y shoul d hav e quote d it. I d o no t thin k tha t th e excellen t Japanes e scholar s o f th e Com -

98 Fai r Accountin g Practic e mercial Cod e ar e ignoran t o f thi s fact . Therefore , i n additio n t o the previousl y mentione d books , I checke d th e followin g lis t o f books: Seiji Tanak a (honorar y professor , Hitotsubash i University) , Allrevised Detailed Discussion of General Rules of the Commercial Code (1978, Keiso-Shobo ed.). Takeo Suzuk i (honorar y professor , Universit y o f Tokyo), New Edition of the Commercial Code (1978, Keiso-Shobo ed.). Yoshinori Hasui , comp. , General Rules of the Commercial Code — Commercial Transaction Law (1980, Horitsu Bunkasha ed.) . Seiji Tanaka , comp. , New Edition Commercial Code, 4th rev . ed . (1978, Chikura-Shobo ed.). Masao Takahim a (professor , Keio-Gijuk u University) , General Rules of the Commercial Code, The Commercial Transaction Law (1976 , Keio-Tsushin ed.). Seiji Tanak a an d Ryosuk e Kita , Commentary, General Rules of the Commercial Code, rev. ed. (1975, Keiso-Shobo ed.). Kenji Sanekat a an d Toshir o Shima , comps . General Rules of the Commercial Code (1980, Seirin-Shoin Shinsh a ed.). Shuzo Toda (professor, Chu o University), General Rules of the Commercial Code (1980, Bunkyu-Shorin ed.) . Teruhisa Ishii , General Rules of the Commercial Code, rev . ed. (1979, Kobundo ed.). Yoshinori Hasui, Toshio Sakamaki, and Harumi Shimura , comps. , Lecture on General Rules of the Commercial Code (1980 , Seirin Shoin Shinsh a ed.). Setsu Tatsut a (professor , Kyot o University) , comp., Summary Explanation of the Commercial Code (1980, Yuhikaku ed.). Katsuro Kamiyanagi , Masahir o Kitazawa , Tsune o Ootori , and Aki o Takeuchi, comps . General Rules of the Commercial Code, Commercial Transaction Law (1980 , Yuhikaku ed.). Tsuneo Ootori , Ichir o Kawamoto , Masahir o Kitazawa , Yo h Sato , and Shuz o Toda , Practice, the Commercial Code (General Rules,

Fair Accountin g Practic e 9 Commercial Transactions), ed.).

rev

9

. ed . (1976 , Seirin-Shoi n Shinsh a

Choshichi Hoshikawa , Kogor o Yamaguchi , Watar u Horiguchi , an d Toshio Sakamaki , comps. , General Rules of the Commercial Code, Commercial Transaction Law, rev . ed. (1979 , Hogaku-Shoin ed.) . After reviewin g al l th e abov e books , I wa s trul y disappointed . I had t o doub t m y ow n eye s man y times . It wa s shockin g t o m e tha t none o f th e scholar s liste d abov e touche d o n th e concep t o f "th e principles o f regular bookkeeping " unde r Articl e 3 8 of th e Germa n Commercial Code , whic h i s equivalen t t o th e Japanes e concep t o f a "fai r practic e i n accounting"—no t a n empty , obscure , an d ab stract concept , bu t a concep t o f statutor y law , detaile d expositio n of whic h ha s bee n i n existenc e i n Germa n taxatio n law s fo r mor e than sixt y years . Nor h a d the y mentione d th e fac t tha t th e concep t of "th e principle s o f regula r bookkeeping " h a d actuall y bee n adopted i n Articl e 4 3 of th e Germa n Commercia l Code . How d o thes e Japanes e scholar s vie w th e situatio n i n recen t years i n whic h deplorabl e incident s i n accountin g hav e happene d repeatedly? A s Japanese politician s hav e becom e tradesmen , the y may hav e los t thei r capabilit y fo r seriou s thinkin g abou t th e for mation o f th e destin y o f th e stat e an d th e people . Nay , prio r t o their appearanc e o n th e m a i n stag e o f politics , the y ma y hav e lef t behind, somewhere , thi s essentia l attribute . I hop e tha t th e reade r wil l thin k abou t thi s matter . I t i s th e managers, no t professiona l accountants , wh o firs t tak e a loo k a t the origina l record s o f transactions . Professiona l accountants , however, whethe r the y ar e ta x practitioner s o r license d ta x ac countants, ar e i n th e positio n o f receivin g accountin g material s a t a late r time . Whethe r o r no t perfec t "completeness " an d " t r u t h " of accountin g material s ca n b e secure d i s dependen t entirel y o n the inne r heart s o f th e managers . Wh y doe s th e commercia l cod e or th e taxatio n la w assum e a n attitud e o f prescribin g i n a digni fied m a n n e r th e perfec t "completeness " an d " t r u t h " o f th e entr y as th e tex t o f lega l provisions ? Wha t ar e the y afrai d of ? Wha t trouble ar e the y afrai d of ? Wha t i s standin g i n thei r way ? Thos e who liv e i n J a p a n shoul d wis h sincerel y tha t al l shoul d b e abl e t o lead a clea n an d soun d lif e wit h confidence . If th e reade r agrees , I urge h i m t o join ou r movemen t fo r estab lishing a la w unde r whic h no t onl y al l merchant s bu t al l thos e

100 Fai r Accountin g Practic e responsible fo r accountin g record s will be under th e obligation t o secure, just a s peopl e i n Europ e an d Americ a are , perfec t "com pleteness" an d "truth " i n al l records . Articl e 5 3 o f th e Enforce ment Regulation s fo r th e Corporatio n Ta x La w prescribe s "re garding al l th e transaction s whic h exer t influenc e o n property , liabilities, an d capital. " Thi s articl e i s a n afterthought , however , and i s not i n th e origina l law . Article 3 2 of the Commercia l Code , which predate d th e revisio n tha t wa s mad e i n 1974 , mentione d "all matter s tha t shoul d exercis e influenc e o n assets. " I d o no t know why , bu t th e five letter s "Its-Sai-No-Ji-Ko " ("al l matters" ) have bee n delete d fro m th e revise d Commercia l Code . Di d the y think i t unnecessary t o continue th e essential elemen t i n account ing tha t indicate s "completeness " i n record s o f transactions , be cause thi s elemen t ha d take n roo t securel y i n a "fai r practic e i n accounting"? Suc h a conclusion i s nonsensical! It i s high tim e fo r us t o cur b th e disgracefu l incident s i n accountin g tha t occu r re peatedly. Article 34 of the French Commercial Cod e prescribes: "Est pun i d'un emprisonnemen t d e un a cinq an s et d'un e amend e d e 240,000 a 4,800,00 0 francs , o u d e Tun e d e ces deux peine s seulement , tou t commissaire qui a sciemment donn e ou confirme de s information s mensongeres su r la situation d e la societe, ou qui n'a pas revele a u procureur d e l a Republiqu e le s fait s delictueu x don t i l a e u con naissance." Articl e 40 0 o f th e Stoc k Law , unde r th e headin g "In correct Representation, " proscribe s a falsehood i n financial state ments, whil e Articl e 403 , unde r th e hea d "Offenc e agains t th e Obligation o f Report, " proscribe s a falsehoo d i n a n audi t report ; these matter s warran t imprisonmen t fo r a ter m o f less than thre e years o r a fine. R . V . Jhering , th e nineteenth-centur y Germa n jurist said , "Th e goa l o f la w i s peace; th e mean s theret o i s strug gle." It is now high time to put thi s into practice. From a theoretica l viewpoint , whe n th e Calculatio n Regula tions o f our Commercia l Cod e ar e revised , I would lik e t o se e th e substantive enactmen t o f principle s makin g financial statement s conform t o the highest standard s regardin g corporat e accounting . In regard t o practical business , I would reques t th e establishmen t of penal provision s tha t ar e o n th e sam e leve l a s thos e o f Britain , America, Germany , an d France . Thes e provision s shoul d provid e

Fair Accountin g Practic e 10

1

not onl y tha t ''entrie s shoul d b e m a d e i n a n orderl y an d clea r m a n n e r / ' b u t als o tha t "i n book s o f account , i t i s necessar y t h a t matters shoul d b e entere d i n th e m a n n e r o f complet e comprehen siveness, truthfulness , timeliness , orderliness , an d clearness. " I believe tha t onl y b y doin g thi s ca n w e reduc e th e n u m b e r o f disgraceful accounting-relate d incident s tha t occu r repeatedly .

Notes 1. Tsune o Ootori, The General Rules of the Commercial Code, p. 237. 2. Eiz o Hattori, General Rules of the Commercial Code, p. 351. 3. Kenichir o Osumi, General Rules of the Commercial Code, p. 219. 4. Accounting (Dec . 1979), p. 99. 5. AICPA Professional Standards, Vol . 3, Accounting as of July 1 , 1976, p.7261. 6. Henr y Ballantine, On Corporations, p. 874. 7. App.,Vol.IV,D52 . 8. Dr . Carl S. Shoup, Report on Japanese Taxation, Vol . II, p. 224. 9. Recommendations on Accounting Principles, 18 . "Presentatio n o f Balance Shee t an d Profi t an d Los s Account," p. 49. 10. Hattori , General Rules of the Commercial Code, p. 351.

9 Calculation Regulation s i n th e Federa l Republic o f Germany : Par t I

Itemized Discussio n of th e Principle s of Regula r Accountin g As I said earlier , Dr . Kotar o Tanaka , a prominen t schola r repre senting Japanes e academi c circle s o n th e subjec t o f commercia l laws, made a fatal erro r i n grasping th e concept of the "principle s of regula r bookkeeping " prescribe d b y Articl e 3 8 o f th e Germa n Commercial Code. This ha s le d t o irrevocabl e damag e i n th e sub sequent developmen t o f accountin g theorie s an d th e accountin g system i n Japan . Th e Imperia l Ta x Cod e (RAO) was draw n u p b y Enno Becke r an d enacte d o n Decembe r 13 , 1919. With th e enact ment o f this particular law , the Federal Republi c of Germany had , for th e first time , itemize d an d detaile d regulation s a s a positiv e law regarding th e principles of regular bookkeeping . It wa s aroun d th e middl e o f November 1921 , when a n item-by item explanation o f the Imperial Ta x Code was published b y Enn o Becker. I regre t tha t I d o no t hav e a cop y o f thi s first edition . I have obtained , however , th e origina l tex t o f th e secon d editio n o f this book , whic h wa s publishe d i n Augus t 1922 . In th e Prefac e t o the second edition , Enn o Becker stated tha t "th e secon d editio n i s similar t o th e first edition , whic h quickl y sol d out. " Althoug h h e mentioned a numbe r o f dispute s tha t ha d take n plac e an d th e utilization o f judicial precedents , he did no t mentio n tha t th e la w had bee n revised . Thu s i t ma y safel y b e sai d tha t th e tex t o f th e 105

106 Calculatio n Regulations : Par t I law a s i t appear s i n thi s secon d editio n i s identica l wit h th e la w as it was first enacted . Critical Revie w o f Paragraph s 1 and 2 of Article 16 2 Article 16 2 a t th e beginnin g o f th e Imperia l Ta x Cod e ha d th e following textua l organization . Paragrap h 1 o f thi s articl e pre scribes a s follows: "Whosoeve r i s responsible fo r keepin g th e books, or making notation s accordin g t o the ta x laws, should observ e th e following regulations/ ' I n th e revisio n o f Paragrap h 1 mad e i n August 1965 , the phras e "accordin g t o th e regulation s o f 16 0 an d 161 or otherwise" was inserted afte r th e word "whosoever. " In th e current law , whic h too k effec t i n Januar y 1977 , however, th e en tire tex t o f this Paragrap h 1 has bee n deleted . This was don e onl y to avoi d duplicatio n wit h anothe r provisio n tha t prescribe s th e person responsible fo r makin g a n entry . Paragraph 2 dictate s a s follows : "Th e entrie s i n th e book s ar e supposed t o b e conducte d continuously , completely , an d accu rately. The taxpayer shoul d use a living language and th e charact ers o f same. " Thi s paragrap h ha d no t change d unti l 1977 , whe n the current la w wa s enacted . Unde r th e current law , the first par t of Paragrap h 2 wa s move d t o Paragrap h 1 and, moreover , wha t had bee n Paragrap h 7 , regardin g th e entr y o f cash , wa s move d next t o th e latte r par t o f Paragrap h 2 s o tha t i t becam e par t o f Paragraph 1 of Article 146 , which no w read s a s follows : "Postin g and othe r require d notation s ar e t o b e don e completely , accu rately, an d i n a timel y an d orderl y manner . Cas h receipt s an d disbursements shoul d b e entere d daily. " I n thi s instance , a s I touched o n i t earlier , th e first proble m i s the meanin g o f the ter m "timely." Accordin g t o th e Germa n dictionar y Duden, "zeitger echt" ("timely" ) mean s "rechtzeitig " ("o n time" ) (Vol . 10 ) an d "punktlich" ("punctually" ) (Vol . 8). That is , "timely" mean s tha t an entr y i s t o b e mad e "withi n a rightfu l time " an d "punctil iously." As it is prescribed tha t cas h should be recorded o n a dail y basis, dail y record s o f receipt s an d disbursement s an d confirma tion of balance ar e indispensable . The point a t issu e leads us only t o the "timeliness " of the entr y of "credi t transactions"—transfe r transactions , i n th e term s o f bookkeeping. I n regar d t o this , I hav e alread y state d tha t Articl e

Calculation Regulations : Par t I 10 7 29 (EStR 29 ) o f th e Enforcemen t Regulation s provide d a n expla nation o f Article 5 of the Germa n ta x la w under th e subject "Reg ular Bookkeeping. " Its Paragraph 2 begins with th e following reg ulation: "Al l business transaction s ar e t o be posted i n registers i n a timely and orderly manner. The timely posting of business trans actions—with th e exceptio n o f cas h transactions—doe s no t re quire daily posting. However there must exist a temporal relation ship between th e transactions and their posting in account books." This i s th e wordin g o f th e Enforcemen t Regulations , enacte d b y the Federa l Ministe r o f Finance , who ha d adopte d th e decisio n o f the Federal Financ e Court tha t wa s handed dow n i n 1965 . The regulation prescribe s tha t a cash transactio n b e entered o n the da y i t occur s an d tha t a transfe r transaction , wheneve r i t occurs, does not have to be entered on the same day. The principl e of "timeliness, " however , shoul d stil l appl y t o transfe r transac tions an d thei r entry . Th e tim e limi t fo r th e "timeliness " o f th e entry o f a transfe r transactio n i s define d a s th e en d o f th e mont h after th e mont h whic h include s th e da y on which th e transaction s occurred. The EStR prescribe s this particular relatio n by using th e following expressio n i n th e middl e par t o f Paragrap h 2 : "On e cannot object , a s lon g a s th e credi t transaction s o f one mont h ar e posted t o the register before th e end of the following month. " The deman d fo r "timeliness " no t onl y refer s t o th e tim e limi t for th e entr y o f transactions , i t als o clarifies th e limi t o f approva l for th e "regularity" o f books of account, t o say nothing of the tim e for presentin g financial statements . This matte r ca n b e known b y taking a loo k a t anothe r par t o f thi s cour t decision . Th e cour t decision state s a s follows : "Th e regularit y o f a commercia l ac counting assume s tha t th e balance shee t an d profi t an d los s statements ar e draw n u p withi n a reasonable tim e afte r th e en d o f th e fiscal year . Bookkeepin g whic h i s reconstructed late r i s not 'regu lar,' eve n i f i t i s technicall y correct." 1 I woul d gues s tha t th e reader ma y no w se e ho w stric t th e standar d regardin g "timeli ness" is in the calculation regulation s of German laws . The Concept o f "Timeliness " in American Accountin g The reade r shoul d pa y specia l attentio n t o thi s particula r point , because i t i s remarkably differen t i n American accounting . I n hi s

108 Calculatio n Regulations : Par t I book Detailed Explanation of the Corporate Accounting Principles, Professor Kaichir o Banb a o f Hitotsubashi Universit y ha s detaile d the concep t o f "timeliness " t o whic h h e ha s added : "pickin g up , from America n literature , th e thin g tha t i s considered a s th e con stituent elemen t o f general principl e i n thi s country' s accountin g principles/' 2 I assum e tha t th e "timeliness " t o whic h Professo r Banba refer s i n thi s instanc e i s ".2 0 0-5 . Timeliness " i n "A C Section 1024 , Objective s o f Financia l Accountin g an d Financia l Statements," whic h wa s establishe d i n Octobe r 1970 , a s "State ment o f th e Accountin g Principle s Board " b y th e AICPA. 3 I think , however, i t simpl y state s tha t i n regar d t o informatio n abou t a corporation's financial accountin g prepared fo r the respective economic judgments o f stockholders an d creditors , being informed o f such information a little earlier than usual i s one of the seven majo r quality objectives . The American principl e o f "timeliness " ha s no t bee n base d o n the conceptio n tha t a tim e limi t b e established i n regard t o entr y and s o forth. In order to establish th e sound development o f Japan's economy, whether th e German mode l of establishing "timeliness " or th e America n mode l o f "timeliness " i s mor e desirabl e ha s al ready becom e self-evident . T o su m up , i t ca n b e sai d tha t thi s matter wil l resul t i n a proble m o f insigh t an d capacit y o f th e legislators, th e person s wh o hav e t o dra w u p th e law . I hop e th e reader clearl y understand s thi s poin t i n particular . Th e reaso n distinct lega l standards exis t i n regard t o the timeliness of entrie s and s o forth i n th e Federa l Republi c o f Germany i s that ther e i s a legal relatio n i n whic h it s legislatio n constitute s th e insid e an d outside relationshi p wit h jurisprudence tha t approve s th e verifia ble bookkeepin g record s o f book s o f account . Recognitio n o f thi s point ha s bee n clearl y indicate d i n judicia l precedents . I woul d like, therefore, t o touch on it later . Critical Revie w o f the Opinions of Herber t Bronne r As stated above , Paragraph 7 of Article 16 2 of the original la w wa s moved t o th e latte r par t o f Articl e 146 . What wa s th e tex t o f th e law whe n i t wa s enacted ? Th e text , whic h follows , wa s differen t from th e existin g la w i n severa l ways : "Cas h receipt s an d dis -

Calculation Regulations : Par t I 10 9 bursements shoul d b e poste d a t leas t dail y i n commercia l trans actions/' The point I want t o make i s that a positive la w standar d to th e effec t tha t "th e entr y o f cas h transaction s shoul d b e mad e at leas t once a day" has been in existence in Germany's legislatio n since 1919 . In th e sixt y year s sinc e th e enactmen t o f thi s positiv e law standard , althoug h th e paragrap h wa s move d t o th e latte r part o f Article 14 6 of the new law , the substance o f this particula r standard ha s not changed . Mr. Herbert Bronner , a certified publi c accountant an d license d tax practitioner i n Berlin, states that i t has been a tenet of regula r bookkeeping fo r merchant s tha t th e entr y o f cas h transaction s should b e made i n a cashbook. 4 Th e authorit y fo r hi s statement, I suspect, mus t b e th e judicia l decisio n tha t wa s hande d dow n b y the Federa l Financ e Cour t o n Marc h 6 , 195 2 (th e twenty-sevent h year o f Show a i n Japan) . Accordin g t o Tax Court Decisions in Catalog Form, b y Dr . Ott o Schmid t o f Cologne, a cop y o f which I happen t o own, the essentia l poin t o f this judicial decisio n wa s a s follows: "Regula r commercial bookkeepin g requires the posting of cash transaction s i n a cas h book. " Bronne r furthe r state s a s fol lows: "The BFH-U of 1 October 196 9 (IR 73/66 BStBl 197 0 II S. 45) once more thoroughly addresse s th e regularity of cash accounting . It require s regula r cas h accounting." 5 H e state s this , but h e doe s not introduc e th e contents of the decision of this court . Mr. Bronne r quote s a s man y a s 1,54 3 cases , wit h th e date s o f the cour t decisions , th e date s o n whic h th e cour t opinion s wer e published, an d th e cas e numbers , th e judicial decision s tha t hav e been hande d dow n ove r th e pas t fifty year s fro m Januar y 192 1 t o January 1971. 6 I t i s regrettabl e tha t hi s discussio n o f th e limita tions o f cour t decision s i s inadequate . Fo r example , th e cour t decision hande d dow n o n Octobe r 1 , 1969, states a s follows: "Whe n recording eac h individua l cas h receip t an d disbursement , th e re quirements o f a businesse s cas h accoun t d o not, a s a rule , includ e the responsibility o f a runnin g recor d o f the cas h o n han d an d it s representation i n th e book s o r documents . Thi s i s different , how ever, when the daily over-the-counter receipt s are determined (whe n permissible) b y a cas h report , a treasurer' s report. " A s a resul t o f this cour t decision , i t ha s bee n clarifie d tha t th e amoun t o f cas h on hand varie s whenever payment an d receipt of money are made ;

110 Calculatio n Regulations : Par t I however, ther e i s no obligation t o make a n entr y o f the amount of cash on hand . Mr. Bronner's book , a s one migh t expect , i s the wor k o f a busi nessman, and h e devotes 8 3 pages to a discussion of Handelsbilanz and 28 1 page s t o Steuerbilanz. H e als o devote s 34 9 page s t o a n analysis of the "individual posting of the balance and of profit an d loss statements/ ' especiall y th e theor y involve d i n each , an d h e freely quote s judicia l precedents . Amon g th e book s i n thi s cate gory, his is brilliant. M y only criticism i s that h e has been inaccu rate i n his quotations fro m th e relevant judicial precedents . A book entitle d Tax Code: Tax Court Code Secondary Laws (12t h ed., 1977) , coauthore d b y Rol f Kiihn , a lawyer , certifie d publi c accountant, an d ta x practitioner , an d b y Hein z Kutte r an d Rut h Hormann—judges o f th e Financia l Affair s Court—als o suffer s fro m the incompletenes s o f its quotation s fro m th e judicial precedents . It i s superio r t o Bronner' s book , however , i n th e accurac y o f it s quotations. I n additio n t o th e limite d natur e o f th e quote s fro m the judicial precedents , clarit y i s lackin g i n thi s boo k just a s i t i s in Bronner's. If I wer e t o pic k u p th e gis t o f th e majo r cour t decision s fro m the above-mentioned Tax Court Decisions in Catalog Form, relyin g only o n th e date s an d th e number s o f th e cour t decisions , th e following summar y o f th e cour t decision s coul d b e made : "Cas h accounting in which cash receipts and disbursements are recorde d on th e nex t busines s da y i s stil l considere d proper , i f compellin g business reason s preven t th e postin g o n th e sam e day , an d whe n it can be determined wit h certainty from th e bookkeeping records , how th e cash on hand ha s developed. " In th e pursuit o f the calcu lation regulation s o f a n enterpris e an d th e lega l conditio n o f en tries i n th e Federa l Republi c o f Germany , on e ofte n encounter s situations i n whic h th e decisio n i n a tria l endeavor s t o judge an d demonstrate, elaborately , th e existenc e o r nonexistenc e o f "regu larity." German y ha s legislatio n whic h dictate s tha t whe n a cor poration's calculation s an d entries are found t o have "regularity, " the fac t itsel f ha s "probativ e force " unde r th e law . Thi s concep t must appea r a n unexpected , perhap s eve n unorthodo x metho d t o those wh o ar e primaril y familia r wit h America n accountin g an d American ta x law . Secondly, I woul d lik e t o introduc e th e essentia l point s o f th e

Calculation Regulations : Par t I 11

1

court decisio n whic h bot h Bronner' s book , Die Bilanz, an d Kuhn , Kutter, an d H o r m a n n ' s Tax Code hav e quoted . O n Ma y 12 , 1966 , the Federa l Financ e Cour t hande d dow n th e followin g decision : "The principle s o f regula r bookkeepin g d o not , a s a rule , requir e that retai l merchant s wh o generall y sel l ware s over-the-counte r t o customers wh o ar e no t personall y know n t o the m recor d th e cas h receipts individually. " A principl e governin g entrie s tha t i s con sidered nearl y th e sam e a s th e substanc e o f thi s cour t decisio n ha s also bee n m a d e statutor y i n J a p a n . I t i s th e provisor y claus e am ong item s o f sale , No . 1 1 o f th e item s mentione d i n book s o f account b y a corporat e bod y tha t i s plannin g t o obtai n approva l for filing a blu e return , Separat e Tabl e No . 2 0 o f th e Enforcemen t Regulations fo r th e Corporatio n Ta x Law . Th e provisor y claus e prescribes a s follows : In sale s i n cas h b y a corporat e bod y conductin g retai l sale s an d othe r activities simila r t o retail sales , as t o those item s tha t canno t confor m t o the tex t of this regulation, in place of it, the daily amoun t o f sales in cas h and th e person or persons to whom the sales were made [may be entered], or as to those whose customers cannot b e entered, and, among such item s as th e nam e o f a n article , th e conten t o f othe r presentation s made , th e quantity, uni t price , o r amoun t o f money , thos e item s whic h canno t b e entered ma y be omitted . In a remark s column , No . 1 in thes e Enforcemen t Regulations , i t is prescribe d tha t "i n th e sale s i n cas h b y a corporat e bod y whic h conducts retai l sale s an d act s simila r t o retai l sales , a s t o thos e which canno t b e base d o n th e regulatio n o f th e provis o show n i n the above , onl y th e tota l a m o u n t o f dail y sale s i n cas h ma y b e entered, whe n th e approva l t o d o s o wa s obtaine d fro m th e Chie f of th e Taxatio n Offic e concerned. " Thi s Japanes e regulatio n i s applicable t o th e statutor y condition s o f entrie s i n Germany . What i s importan t her e i s th e fac t tha t i t wa s i n Ma y 196 6 whe n this cour t decisio n wa s hande d dow n i n th e Federa l Republi c o f Germany. Sixtee n year s earlier , condition s governin g entries , es pecially th e poin t a t issue , were mad e statutor y i n J a p a n . Thus , i n this J a p a n wa s ahea d o f th e Federa l Republi c o f Germany . Personal View s o n th e Judicia l Precedent s Concerne d In regar d t o cashbooks , th e followin g judicia l preceden t canno t b e overlooked. I t i s th e juridica l decisio n o f th e Germa n Financ e

112 Calculatio n Regulations : Par t I Court tha t wa s hande d dow n o n Jul y 13 , 1971 . The gis t o f thi s decision i s a s follows : "I t i s no t necessar y t o sav e th e record s o f the origins of receipts, if their contents ar e recorded i n a cashboo k kept i n th e for m o f consecutivel y liste d dail y cas h report s imme diately afte r th e transfe r o f th e dail y receipts. " Th e relatio n be tween th e storag e o f record s an d th e conditio n o f a cashboo k i s restricted b y thi s judicia l decision . Th e reaso n thi s decisio n wa s handed dow n i s that , i n th e Federa l Republi c o f Germany , th e principles o f regula r bookkeepin g a s genera l categorica l proposi tions are majestically provide d for in the positive laws . In addition t o this judicial precedent, ther e is another tha t doe s not appea r i n Bronner' s boo k an d tha t i s concerne d wit h th e handling o f cash. It i s a judicial preceden t tha t wa s handed dow n by the Federa l Financ e Cour t o n October 20 , 1971 . The gist of thi s decision, whic h wa s writte n b y th e judg e wh o ha d actuall y han dled th e case , runs a s follows : "I f specia l cash(books ) ar e kep t i n addition t o th e mai n cas h register , regula r bookkeepin g require s the existenc e o f secondar y ledger s fo r individua l specia l cas h ac counts. In a specia l cas h accoun t mus t b e include d contribution s made t o the entrepreneur." 7 In cases where several safes ar e used, a "memorandum" o f cash for eac h saf e i s required . I t wil l b e necessar y t o tak e int o consid eration tha t th e memorandu m itsel f i s t o b e treate d a s a n objec t for "regularity " i n bookkeeping , togethe r wit h th e following , whic h has been prescribed b y Item 1 , Paragraph 2 of Article 29 of Income Tax Guidelines : "N o specifi c bookkeepin g syste m i s prescribed . However, th e bookkeepin g syste m chose n mus t guarante e th e re cording o f al l busines s transaction s an d assets. " I t ca n b e said , therefore, tha t wha t i s mean t b y recordin g al l transaction s an d property ha s bee n extende d eve n t o a deman d fo r "regularity " i n entries i n current cas h deposi t journals tha t shoul d correspon d t o supplementary cas h registers . Declaration o f "Conclusiveness" by a Delegated Orde r Special attentio n shoul d b e pai d t o "Einfuhrungserla/ 3 zu r AO vom Oktobe r 1976, " which i s know n a s a delegate d orde r an d i s said t o hav e th e secondar y forc e o f la w unde r Germa n ta x juris -

Calculation Regulations : Par t I 11 3 prudence. At the beginning of Paragraph 1 o f Article 14 6 under th e heading "Regularit y Requirement s fo r Bookkeepin g an d fo r Rec ords," th e followin g appears : "Onl y regula r bookkeepin g ha s pro bative force. " Tha t is , Articl e 14 6 proclaim s tha t i n th e Federa l Republic of Germany, only th e calculations, records, and book s of account tha t ar e precisely based on the principles of regular book keeping ar e "verifiabl e bookkeepin g records. " As Dr. Klau s Tipk e of Cologn e Universit y ha s said : "Th e require d testimonia l proo f must b e honored . Evaluatio n o f testimonia l proo f befor e th e pre sentation thereo f i s not permitted." 8 In regar d t o thi s poin t i n particular, fo r thos e who ar e particu larly intereste d i n thi s matter , I woul d recommen d lookin g a t a 180-page book, Proof in Tax Law, b y Wolfram Birkenfel d wh o wa s a judge of the Tax Court i n Berlin. Birkenfeld discusse s this matte r in considerabl e depth . I trust th e reade r wil l understan d tha t th e concept o f book s o f accoun t a s "verifiabl e bookkeepin g records " cannot b e conceptualized i n American an d British accounting an d under America n an d Britis h ta x jurisprudence , an d tha t provi sions tha t acknowledg e "verifiabl e bookkeepin g records " ar e cur rently i n existence i n Japan's ta x laws . Critical Revie w o f Paragraph s 3 and 4 of Article 16 2 To return t o a critical revie w o f the tex t o f Article 162 , Paragraph 3 of the article states: "Business books should contain n o account s that ar e registered under false or invented names." The text of this provision remaine d unchange d fo r fifty-eight year s afte r it s enact ment i n 191 9 until Januar y 1977 . In th e curren t AO, however, th e following provision s hav e bee n inserte d a s Paragrap h 2 of Articl e 146: Books an d th e otherwis e require d record s ar e t o be kept an d store d withi n the jurisdictio n o f thi s law . Thi s doe s no t appl y t o place s o f busines s (business establishments ) outsid e o f th e jurisdictio n o f thi s la w tha t ar e required t o kee p book s an d record s b y loca l law , a s lon g a s the y fulfil l this requirement . I n thi s cas e an d i n th e cas e o f subsidiar y companie s outside o f th e jurisdictio n o f thi s law , th e result s o f th e loca l bookkeepin g must b e take n ove r b y th e bookkeepin g o f the busines s establishmen t her e insofar a s i t i s o f importanc e fo r taxation . I n thi s cas e th e ta x la w regula -

114 Calculatio n Regulations : Par t I tions withi n th e jurisdictio n o f thi s la w ar e t o b e followe d an d t o b e marked i n the books. 9

This particular provisio n ha s n o connection a t al l with Paragrap h 3 o f Articl e 16 2 o f th e forme r AO. Furthermore , Paragrap h 4 o f Article 16 2 stated: "Insofa r a s i t i s customary i n th e business , th e books are to be bound an d given consecutive numbers on each lea f or page/ ' Thi s provisio n wa s als o unchange d unti l Januar y 1 , 1977. In th e ne w la w tha t too k effec t o n tha t date , thi s provisio n does no t appear . Articl e 1 0 of th e Frenc h Commercia l Cod e pre scribes tha t seria l number s an d initial s b e entere d i n a journa l book an d a genera l ledger , gratis , b y a judg e o f th e commercia l court, a judge of the ordinary loca l court, the mayor, or the deput y mayor. 10 Such a demand , however , ha s no t existe d i n th e Frenc h Ta x Laws. I t ma y no t b e a seriou s proble m t o mak e a n entr y o f a n essential facto r o r a condition for books of account i n the Tax Law or i n th e Commercia l Code . What i s importan t i s whethe r o r no t the essentia l facto r o r conditio n ha s bee n give n a s a positive law . What i s problemati c i s th e fac t tha t th e stat e ha s legalize d i t a s the livin g standar d o f th e people . I attac h specia l importanc e t o the fac t that , i n accor d wit h changin g times , th e stat e ha s reso lutely mad e thi s step . Thi s provisio n i n th e Frenc h Commercia l Code, however, has raised a n obstacle t o the popularization o f th e recently develope d computerize d accounting . Th e fac t that , prio r to th e us e o f book s o f account , merchant s wer e unde r th e obliga tion t o obtai n a seria l numbe r an d th e initial s o f official agencie s means tha t al l thos e book s o f accoun t tha t hav e bee n turne d ou t by computers shoul d be considered onl y as subsidiary books . As a result , a situatio n ha s bee n create d i n whic h th e actua l "livre-journal" an d "livre-d'inventaire, " bot h o f whic h ar e re quired fo r th e entry o f transactions o n a sequential basi s i n accor dance wit h Articl e 8 o f th e Frenc h Commercia l Code , shoul d b e disposed o f a s scrap , whenever thei r record s ar e complete d ever y month. Thi s include s al l th e book s mentione d abov e tha t hav e been use d u p t o th e previou s month . Otherwise , du e t o th e book s of account an d variou s table s tha t computer s hav e turne d out , o n a large scale, the storage locations for merchants' books of account will become just lik e the stacks in a library .

Calculation Regulations : Par t I 11 5 Mr. Miche l Bossard , a publi c accountan t an d residen t o f th e CCMC Data Processin g Center , th e larges t suc h cente r i n France , talked abou t thi s matte r wit h me . Mr . Bossar d visite d TK C to gether wit h Mr . Heinz Sebiger , th e presiden t o f DATEV , which i s the larges t dat a processin g cente r i n th e Federa l Republi c o f Ger many. The y visite d Japa n fo r th e purpos e o f organizin g a com bined associatio n o f larg e dat a processin g center s i n Japan , Ger many, an d France . W e spok e o n th e electri c trai n headin g fo r Kinugawa Ho t Sprin g on March 31 , 1980. France an d Ital y Unlike i n France , th e fundamenta l requirement s i n regar d t o th e preparation o f book s o f accoun t an d th e maintenanc e o f th e rec ords o f a busines s ar e dictate d b y Civi l La w i n Italy . Al l enter prises, excluding mino r merchants , shoul d provid e dail y journal s and inventor y books . And every yea r al l businesses mus t dra w u p balances an d profi t an d los s statements. 11 U p t o thi s point , noth ing seem s particularl y strange . Als o prescribed , however , i s tha t when merchants ' book s o f accoun t ar e initiated , seria l number s must b e entered o n each page, and eac h leaf should be stamped b y a registration offic e and , in cases when a special la w so prescribes, by a notar y public. 12 Finally , ever y yea r th e merchants ' book s o f account are to be inspected by the registry office o r a public notar y office.13 The fact tha t a court, a city office, a registry office , an d a publi c notary offic e ar e involve d wit h book s o f accoun t an d accountin g records convey s a particula r kin d o f conceptio n regardin g book keeping, eve n t o u s Japanese . Th e fac t tha t th e Italia n Civi l La w demands "Klarheit " an d "Correctness " in indicating th e financial situation o f a n enterpris e an d i n th e characte r o f financial state ments give s me th e impressio n tha t th e financial statement s t o be submitted, o r t o be made public b y an enterprise , must i n genera l have th e character o f substantial obscurit y o r at leas t a shade of a darker ton e i n themselves. 14 Givin g du e consideratio n t o th e fac t that book s o f accoun t hav e neve r bee n acknowledge d a s ''verifia ble bookkeepin g records " i n Italy , m y sens e abou t thi s particula r point ma y be considered reasonable. 15

116 Calculatio n Regulations : Par t I Critical Revie w o f Paragrap h 5 o f Articl e 16 2 The origina l tex t o f Paragrap h 5 of Article 16 2 says : No blank space should be left i n places that are to be described accordin g to th e rule . Th e origina l content s o f a n entr y shoul d no t b e rendere d illegible b y crossin g ou t o r i n an y othe r way ; th e entr y shoul d no t b e erased, no r shoul d an y othe r modification s b e undertake n whos e natur e would mak e i t uncertai n whethe r the y ha d bee n mad e a s th e origina l entry or not until later . At thi s poin t ther e i s a m a t t e r tha t weighs , just a bit , o n m y mind . This origina l tex t o f Paragrap h 5 of Articl e 16 2 i s th e exac t tex t o f the provisio n tha t appear s o n pag e 20 4 of th e secon d editio n o f th e book publishe d i n 192 2 b y Enn o Becker . However , i n Volum e 2 of Dr. Ott o Schmidt' s Tax Court Decisions in Catalog Form (2 4 vols. , Cologne), fro m whic h I quote d earlier , th e word s "A n Stellen , di e in de r Regel " appear . Th e wor d " i n " ha s bee n added . This finding m a d e m e suspicious . I therefore collate d Schmidt' s text wit h th e ful l tex t o f Paragrap h 5 of Articl e 16 2 o f th e AO a s i t appears i n Tax Laws: A Collection of the Texts with Notes and Index (24th ed. , 1972) . Th e latte r tex t i s identica l wit h th e provision s transcribed b y Enn o Becker . Becaus e German s ar e suppose d t o b e accurate i n thei r scholarship , I though t a n inaccurac y coul d no t be possible . Finally , I checke d th e origina l tex t o f Articl e 16 2 a s i t appears i n Wirtschaftspmfer-Handbuch, publishe d i n 197 3 b y th e Institute o f Chartere d Accountant s i n Germany , whic h shoul d b e an authorit y o n thi s matter . A s migh t b e expected , Paragrap h 5 begins wit h th e openin g passag e "A n Stellen , di e de r Rege l n a c h / ' in whic h th e wor d " i n " doe s no t appear . In conclusion , I knew tha t Germa n scholars , like thos e i n Japan , had frequentl y m a d e mistake s i n thei r theories , however, the y als o made mistake s eve n i n thei r g r a m m a r . I n thi s particula r instance , it i s a clea r erro r fro m th e poin t o f vie w o f Germa n g r a m m a r t o insert " i n " i n thi s particula r expression , becaus e doin g s o dupli cates th e sens e o f th e wor d "nach. " I n thi s connection , thi s partic ular articl e ha s bee n eliminate d i n th e ne w law . To retur n t o th e subjec t a t hand , Paragrap h 5 of Article 16 2 wa s not touche d i n th e revisio n i n 1965 . However, i t ha s bee n delete d in th e ne w law .

Calculation Regulations : Par t I 11 7 Critical Revie w o f Paragraph s 6 and 7 of Article 16 2 Paragraph 6 of th e tex t o f Article 16 2 provides: "Whereve r thi s i s customary i n business, books should be kept in ink. If the taxpaye r makes entrie s fro m temporar y records , th e latte r shoul d b e kept . Vouchers shoul d b e numbere d an d kep t a s well. " Thi s provisio n had als o no t bee n revise d sinc e it s enactmen t i n 1919 . I t wa s deleted, however, fro m th e ne w la w tha t wen t int o effect i n Janu ary 1977 . Paragraph 7 of the text of Article 16 2 was enacted in the origina l AO in 191 9 and als o appeared i n the revision mad e i n 1965 : "Cash receipts an d disbursement s shoul d b e recorde d a t leas t dail y i n the conduct o f business." In th e 197 7 law, however, thi s provisio n was transferre d t o Paragrap h 1 of Article 146 , as I state d earlier , and i t was modified slightly : "should b e written dow n daily. " Th e substance o f thi s provision , however , ha s no t change d a t all . Th e reason thi s ca n b e sai d i s tha t th e ter m "festgehalten " ca n b e interpreted a s th e mer e entr y o f receipt s an d disbursement s an d the balance, but i t also mean s collation wit h th e balance o f actua l cash i n hand . Dr. Eberhar d Littmann , wh o wa s identifie d earlie r a s th e pre siding judg e a t th e Federa l Financ e Cour t i n Munich , ha s stated , however, in his Income Tax Law: "A t any time, it must b e possibl e to compar e th e recorde d cas h o n han d wit h th e actua l amoun t based o n th e records i n th e cashboo k (se e also BFH v . 9. 10. 1952, BStBl 1954 III S. 71; 10.12. 1953, BStBl 1954 III S. 82.)" 16 Tha t is , the provision s regardin g th e "dail y entr y obligatio n o f receipt s and disbursements " o f the forme r la w wer e incorporate d int o th e standards throug h genera l interpretation , includin g eve n th e obligation o f daily collation o f the balance o f actual cas h i n hand, a s a matter o f cours e b y thi s decisio n o f th e BF H an d othe r officia l documents whil e th e origina l la w wa s i n effect . Suc h bein g th e case, it can be concluded tha t it s substance has not changed a t all . Critical Revie w o f Paragrap h 8 of Article 16 2 When i t was enacted i n 1919 , Paragraph 8 of Article 16 2 provided: "The books , records , an d busines s paper s (insofa r a s the y ar e o f

118 Calculatio

n Regulations : Par t I

importance fo r taxes ) shoul d b e kep t fo r te n years . Thi s tim e period begin s a t th e en d o f th e calenda r yea r i n whic h th e las t entry i s mad e i n th e book s o r record s o r i n whic h th e busines s papers ar e created. " Thi s provision , however , a t th e tim e o f it s revision o n Augus t 2 , 1962 , an d a t th e tim e o f it s enforcemen t o n August 8 , 1965 , was revise d a s follows : Books, inventories , balanc e sheets , record s accordin g t o Sectio n 1 , business letter s received , copie s o f busines s letter s sent , journa l vouchers , business papers tha t hav e tax significance, an d other documents are to be kept i n order. That i s 1. Books , inventories, and balance sheets for ten years, 2. Records , business letter s received , copies of business letters sent , journal vouchers, and other documents for seven years, as long as a shorter time period i s not specified i n other tax laws. The period of time begins at th e end of the calendar year in which the las t entry wa s mad e i n th e boo k i n whic h th e inventor y wa s recorded , th e balance wa s determined , th e busines s lette r wa s receive d o r sent , th e voucher cam e int o existence , o r th e record s o r othe r document s wer e created. In th e ne w la w tha t wen t int o effec t o n Januar y 1 , 1977 , thes e provisions wer e remove d fro m Articl e 146 , i n whic h entr y condi tions wer e m a d e statutory , an d wer e incorporate d int o Articl e 14 7 with th e additio n o f a ne w subject , "Regulation s fo r th e Preserva tion o f Documents. " Furthermore , th e provision s underwen t a remarkable change . I n th e first place , Paragrap h 1 of Articl e 14 7 of th e curren t la w states : The following document s are to be preserved i n order : 1. Book s and records , inventories, balance sheets , as well as the explana tions require d fo r understandin g the m an d othe r document s o f th e organization, 2. Busines s letters received , 3. Copie s of business letters sent , 4. Journa l vouchers , 5. Othe r documents of tax significance . And Paragrap h 2 of Article 14 7 runs a s follows : Except fo r th e balanc e sheet , th e document s liste d i n Sectio n 1 can als o be stored o n a computer storag e dis k or another dat a medium , when thi s is i n accordanc e wit h th e principle s o f regular bookkeepin g an d whe n i t is certain tha t th e copies or dat a

Calculation Regulations : Par t I 11

9

1. Ar e identica l i n appearanc e wit h th e receive d busines s letter s an d vouchers an d i n conten t wit h th e othe r documents , whe n the y hav e been made legible . 2. Ar e availabl e durin g th e perio d o f tim e the y ar e t o b e preserve d an d can be made legible at an y time within a reasonable time . If th e document s liste d i n 146 , Section 5 , have bee n produce d o n a dat a medium, th e dat a ca n b e store d printe d ou t instea d o f i n th e dat a me dium; th e printe d document s ca n als o b e preserve d accordin g t o Sen tence 1 . The lengt h o f tim e o f preservatio n an d th e scop e o f th e mate rials t o b e preserve d have , moreover , bee n prescribe d b y Para graph 3 o f Articl e 162 , th e origina l tex t o f whic h wil l b e referre d to later . Th e material s liste d i n No . 1 , Paragrap h 1 , of Articl e 14 7 are t o b e preserve d fo r te n years , an d th e scop e o f th e material s t o be preserve d ha s bee n enlarge d t o som e extent . A s t o thos e mate rials no t liste d i n No . 1 , they ar e t o b e preserve d fo r si x years , jus t as before . Adapting t o th e Ag e o f Computerize d Accountin g The reade r ma y b e perplexe d b y suddenl y comin g acros s a refer ence t o "Paragrap h 5 of Article 146 " at thi s stage , considering tha t I hav e no t give n th e content s o f Paragrap h 5 of Articl e 146 . This i s nothing bu t a sligh t confusio n tha t i s th e resul t o f th e rearrange ment o f th e tex t o f th e provision s o f th e forme r la w a t th e tim e when th e ne w la w wen t int o effect . I t i s undeniable tha t on e o f th e major aspect s o f th e conversio n fro m th e ol d la w t o th e ne w on e was th e coordinatio n o f a sudde n chang e i n th e economi c commu nity, especiall y du e t o computer-aide d accounting . Articl e 16 2 o f the Imperia l Ta x Cod e ende d wit h th e followin g Paragrap h 9 i n 1919: "Th e ta x offic e ca n chec k whethe r book s an d record s ar e being kep t continuously , completely , an d correctl y i n for m an d contents." A t tha t time , t o establis h suc h standard s o f orde r wa s considered sufficient . I t wa s a tim e whe n n o on e coul d eve n drea m about th e futur e overwhelmin g popularit y o f computer-aide d ac counting. Paragrap h 5 o f Articl e 14 6 o f th e ne w la w i s pu t i n th e statutory for m tha t follows : The books and other required record s can also consist of the orderly filing of th e voucher s o r ca n b e kep t o n dat a media , insofa r a s thes e form s o f

120 Calculatio n Regulations : Par t I bookkeeping, a s wel l a s th e proces s used , confor m t o th e principle s o f regular bookkeeping ; a s concerns record s tha t ar e only t o be kept fo r ta x purposes, th e reliabilit y o f th e metho d use d i s determine d accordin g t o the purpos e th e record s shoul d serv e i n taxation . I n keepin g th e book s and othe r require d record s o n dat a medi a on e must b e especially carefu l that th e dat a ar e availabl e durin g th e tim e perio d record s ar e t o be kep t and tha t the y ca n b e mad e legibl e withi n a reasonabl e perio d o f tim e (Sections 1 throug h 4 apply accordingly) . As the reade r ca n see , the tex t o f this provisio n i s a moder n revise d version o f the principle s o f regular bookkeeping , especiall y consid ering accoun t today' s economi c community , whic h center s o n computer-aided accounting . Th e principle s o f regula r bookkeep ing, as th e itemize d theor y o f a positiv e law , have graduall y change d along wit h th e changin g times . Subsequent Revisio n o f Articl e 16 2 Thus fa r I have introduce d th e ful l tex t o f Articl e 16 2 of th e Impe rial Ta x Code , whic h wa s draw n u p b y Enn o Becke r a n d enacte d in 1919 . Since the n th e Ta x Cod e ha s bee n modifie d severa l times . The mos t thoroug h revision , however , wa s th e on e mad e i n Augus t 1965. Although a transitiona l version , standin g betwee n th e earl y law an d th e curren t one , thi s la w wa s enforce d fo r twelv e year s and i s th e nucleu s o f th e curren t law . A s thi s i s s o — a n d consider ing th e ol d prover b "Carryin g knowledg e int o ne w fields"—it i s necessary t o examin e th e ful l tex t o f th e 196 5 versio n o f Articl e 162. In th e revisio n m a d e i n 1965 , th e followin g provisio n wa s in serted int o Articl e 16 2 as Paragrap h 9 : The copie s o f busines s letter s sen t (copies , carbons , o r othe r permanen t copy o f th e wordin g o n a compute r storag e disk ) mus t agre e wit h th e originals. The other paper s mentione d i n Sectio n 8 , No. 2, are t o be kep t in th e originals. They can als o be kept i n th e form o f reduced-size copie s that ar e identical with th e originals. This applies also to journal voucher s insofar a s th e filing o f these record s replace s th e keeping o f journals an d ledgers. If, becaus e o f this , documents ca n onl y b e kept i n a for m tha t i s not readable without aid, then the party must produce at his own cost th e required number of reproductions readable without aid to the tax official s or t o th e court . I n th e cas e o f investigatio n o r test s i n th e room s o f th e

Calculation Regulations : Par t I 12

1

business, the required readin g machine s fo r reduced-siz e copies are t o be provided. This provisio n show s tha t b y Augus t 196 5 th e Federa l Republi c o f Germany h a d a positiv e la w regulatio n tha t deal t wit h th e preser vation o f accountin g material s b y microfil m an d wit h computer aided accounting . Wit h mino r revision s i n it s wordin g a n d orga nization, thi s Paragrap h 9 was incorporate d int o Articl e 14 7 in th e current la w tha t ha s bee n i n effec t sinc e 1977 .

Notes 1. BHF VI154/63 U; Urt. 5. 3. 65; BStBL III 1965. 285. 2. Seep . 11. 3. AICPA Professional Standards, Vol . 3, July 1 , 1976, p. 7226. 4. DieBilanz nach Handels- und Steuerrecht, 8 Auflage, 1971 , S. 502. 5. Se e p. 502. 6. Se e pp. 754-78. 7. BFHIR 63170; Urt. v. 20.10. 71. 8. Tax Law (8th ed), p. 526. 9. Deutsche s wissenschaftliches Steuerinstitu t de r Steuerberate r un d Steuerbevollmachtigten e.V. , AO-Handbuch (1981) , p. 50. 10. Cod e de Commerce, art. 19. 11. Codic e civile, art. 2214, 2217. 12. Ibid. , art. 2215, 2421. 13. Ibid. , art. 2216, 2421. 14. Ibid. , art. 2423. 15. Test o unico, art. 117 . 118. 16. Eberhar d Littmann, Das Einkommensteuerrecht, 12 Auflage (Neuester Stand Gro/3format , 1978) , Band I, S. 321-123a .

10 Calculation Regulation s i n th e Federa l Republic o f Germany : Part I I

Critical Revie w o f Paragraph s 3 , 4, and 6 of th e Ne w Tax Code (AO) Paragraph 3 o f Articl e 14 6 o f th e curren t Ta x Cod e (AO), whic h constitutes th e nucleu s o f th e calculatio n regulation s o f th e ta x laws of the Federa l Republi c of Germany, stipulates : "Th e entrie s and othe r require d record s ar e t o be made i n a living language. If any language othe r tha n Germa n i s used, tax officials ma y requir e translations. I f abbreviations , numerals , letters , o r symbol s ar e used, the n th e meanin g mus t b e unambiguousl y indicate d fo r each." I hav e alread y touche d o n th e poin t tha t thi s ter m " a livin g language," whic h mean s "ordinar y language, " ha d alread y ap peared i n Articl e 3 2 o f th e Germa n Commercia l Cod e tha t wa s enacted i n 1961 . Computer-aided accounting , or business process ing b y a computer , utilize s symbol s an d marks . In Japan , a revi sion o f th e la w ma y encompas s thes e phenomena , however , I a m sorry tha t th e positiv e law s regardin g accountin g o r ta x law s i n my countr y hav e n o provision s tha t correspon d t o thi s particula r German provision . Paragraph 4 o f Articl e 14 6 ha s th e followin g expression : "A n entry o r recor d ma y no t b e change d i n suc h a manne r tha t th e original contents can no longer be determined. Such changes mus t not be undertaken whos e nature make s it unsure whether the y ar e 122

Calculation Regulations : Par t I I 12 3 part o f th e origina l entr y o r no t mad e unti l later/ ' Th e alteratio n of original records in accounting has frequently cause d difficultie s in ta x examinatio n i n Japan . Th e legislativ e framewor k tha t en compasses thi s problematic spher e will be instructive t o Japan . As we have already looke d at Paragraph 5 of Article 146 , we can now examine th e last paragrap h o f Article 146 . Paragraph 6 stipulates: ''Th e regulation s o f order als o appl y wheneve r th e proprie tor keeps books and record s tha t hav e taxatio n significance , with out bein g require d t o d o so." Unlike th e presen t situatio n i n Japan , the Commercia l Cod e an d th e Ta x Law s i n th e Federa l Republi c of Germany spel l out strict and realistic legal provisions regardin g the determination o f the limit s of responsible person s fo r th e stat utory obligatio n o f bookkeeping, th e detail s o f which w e will con sider later. As those enterprisers wh o are hovering abov e or belo w the lin e o f thi s limit , regardles s o f whethe r the y ar e corporation s or lega l persons , feel uneas y abou t committin g a "violatio n o f th e duty t o keep books" under th e German Pena l Code, under whic h a prison sentenc e o f les s tha n tw o year s o r a fine can b e imposed , I think these regulations are necessary. 1 Dr. Erich Samson , a professor a t Kie l University , wrot e th e section s o n th e Pena l Cod e an d the Cod e o f Crimina l Procedur e i n Steuerstrafrecht mit Steuerordnungswidrigkeiten. I wil l touc h o n th e Ta x Pena l Cod e late r i n regard t o the principles of regular bookkeeping . Critical Revie w o f Paragraph s 3 , 4, 5, etc., of th e New AO 1 stated earlier that Paragrap h 8 of Article 16 2 of the 191 9 law wa s revised and incorporate d int o Article 14 6 of the 196 5 law, and tha t it wa s agai n revise d an d incorporate d int o Article 14 7 of the 197 7 law unde r th e ne w headin g "Regulation s fo r th e Preservatio n o f Documents." I have, however , introduce d onl y Paragraph s 1 and 2 of Article 147 . Some modifications i n regard t o the period for th e preservation o f material s hav e bee n mad e i n Articl e 14 7 in orde r to cop e wit h computer-aide d accounting ; i n th e curren t law , th e sphere o f expressio n i n th e lega l provision s ha s bee n enlarge d a s far a s Paragraph 5 . Paragraph 3 prescribes: The documents listed in Section 1 , No. 1, are to be preserved for ten years, the othe r document s liste d i n Sectio n 1 are t o b e kep t fo r si x years , a s

124 Calculatio n Regulations : Par t I I long as a shorter perio d is not permitte d b y other ta x laws . The period of time t o keep records doe s not expire , however, insofa r an d a s lon g as th e documents hav e significanc e fo r taxatio n fo r whic h th e perio d o f assess ment has not expired. 16 9 Section 2, Sentence 2 is not valid . The origina l tex t o f th e secon d sentenc e o f Paragrap h 2 o f Articl e 169, which appear s a t th e en d o f Paragrap h 3 , states: "Th e statut e of limitation s i s te n years , insofa r a s a ta x ha s bee n evaded , an d five year s i f i t ha s bee n reduce d b y involuntar y negligence. " I n this instance , th e ter m "statut e o f limitations " i s a concep t tha t i s generally unfamilia r t o th e Japanese . Th e titl e tha t ha s general ized th e ne w la w fro m Articl e 16 9 t o 17 1 i s "2 d Expiratio n o f th e Statute." Th e titl e refer s t o th e tim e perio d tha t m u s t elaps e before th e credit s an d debit s t o b e considere d fo r taxatio n hav e become legall y final. Paragraph 4 o f Article 14 7 of th e ne w la w states : "Th e perio d o f time begin s a t th e en d o f th e calenda r yea r i n whic h th e las t entr y was mad e i n th e book , th e inventor y wa s taken , th e balanc e deter mined, th e busines s letter s receive d o r sent , th e vouche r cam e int o existence, o r th e record s o r othe r document s wer e created. " A calendar yea r terminate s a t exactl y twelv e midnigh t o f Decembe r 31 o f tha t year . Fro m th e viewpoin t o f Japanes e phraseology , however, w e hav e t o say , "fro m Januar y 1 , nex t year. " I fee l tha t there ca n b e a simple r for m o f expression , instea d o f makin g suc h a detaile d limitation , whic h i s to o depressin g fo r th e Japanese . I t should b e take n int o consideratio n tha t underlyin g th e phraseol ogy ther e i s a differenc e o f nationa l characte r betwee n thes e tw o nations. Finally, Paragrap h 5 dictates : Anyone who keeps document s onl y i n th e for m o f copies on microfil m o r on othe r dat a media , i s require d t o provide , a t hi s ow n expense , th e necessary apparatus an d ai d required t o render th e documents legible . At the request o f the fiscal authorities, he is to print th e documents immedi ately, i n ful l o r i n par t an d a t hi s ow n expense , o r h e i s t o provid e reproduction legibl e without aid . The "Regulation s fo r th e Preservatio n o f Documents " o f Articl e 147 of th e ne w la w come s t o a n en d wit h thi s Paragrap h 5 . I mus t remin d th e reader : "Th e proo f o f th e puddin g i s i n th e eating." I n Articl e 16 2 o f th e 191 9 AO, Paragrap h 9 complete s th e

Calculation Regulations : Par t I I 12

5

text o f th e provision s relate d t o th e authorit y o f ta x office s t o examine book s o f accoun t an d records . Th e purpos e o f th e lega l control o f thes e provision s i s differen t fro m tha t o f th e Paragrap h 9 tha t appear s i n th e revise d 196 5 version . Paragraph s 9 and 1 0 of the 191 9 AO becam e Paragraph s 1 0 an d 1 1 i n th e 196 5 revision . Paragraph 1 0 of th e newl y revise d la w i n 196 5 states : The ta x an d revenu e offic e ma y inspec t a s t o whether book s an d record s are bein g kep t continuously , completely , an d accuratel y regardin g for m and content . Thi s inspectio n i s als o permitte d t o th e exten t tha t i t doe s not concer n th e conditio n (circumstances ) o f th e person s o r businesse s whose books are audited, bu t rathe r i s concerned wit h clarification o f th e condition o f th e employee s wh o ar e o r hav e bee n i n th e emplo y o f thes e persons or businesses. Paragraph 1 1 states : In a larg e business , a regula r compan y audi t shoul d b e undertake n b y appropriately traine d official s o r expert s o f th e finance administration . The audit shoul d i n every case include th e period o f time back t o the las t audit conducted. When a business conducts an audit for the first time, the finance administratio n shal l determin e th e perio d o f tim e tha t th e audi t must include . Both Paragraph s 1 0 an d 1 1 ar e include d i n Articl e 19 3 o f th e current law , a s the y hav e bee n absorbe d i n Paragrap h 1 o f tha t Article. Under th e titl e "Admissibilit y o f a n Externa l Audit, " Articl e 19 3 pre scribes: (1) A n externa l audi t i s permitte d i n th e cas e o f taxpayer s wh o ow n a commercial, agricultural , o r forestr y busines s o r wh o ar e self-em ployed. (2) I n case s o f taxpayer s othe r tha n thos e indicate d i n Sectio n 1 , a n external audi t i s permitted a ) t o th e exten t tha t i t concern s th e obli gations o f thi s taxpaye r t o pay taxe s o n behal f o f another o r t o with hold o r pa y ou t taxes , or b) i f extrem e circumstance s requir e clarifi cation fo r ta x purpose s an d a n audi t a t th e offic e i s not practica l du e to the nature and extent of the circumstances t o be examined . I thin k tha t Paragraph s 1 0 an d 1 1 i n th e revise d la w i n 196 5 an d Article 19 3 o f th e curren t la w d o no t correspon d i n vie w o f thei r respective connotatio n an d extension ; the y simpl y hav e th e rela tionship o f probable correlation .

126 Calculatio n Regulations : Par t I I In th e AO-Handbuch (Munich : C . H. Beck, 1977; page 62) , subtitled Writings of the German Scientific Tax Institute of Tax Advisors and Tax Representatives, E.V., ther e appear s a sectio n "Imperia l Tax Cod e an d It s Secondar y Law s i n Compariso n wit h th e Ta x Code, AO 1977. " At page 66 , Paragraphs 1 0 and 1 1 of Articl e 16 2 of th e Imperia l Ta x Cod e appea r sid e b y sid e wit h Articl e 19 3 of the ne w law , a roug h arrangement . I t i s clea r tha t ther e i s n o logical correspondenc e betwee n them , an d tha t Articl e 19 3 of th e new la w has undergone suc h a transformation tha t i t ma y b e sai d to be a newly created articl e of law. Criticism o f Professo r Leonar d Pee z Professor Leonhar d Peez , th e autho r o f Principles of Regular Data Processing in Accounting (Wiesbaden : Th . Gable r Press , 1975) , writes: "We find th e clearest references t o the principles of regular bookkeeping an d a codification , incomplet e however , o f forma l principles i n th e followin g regulations. " H e the n cite s th e follow ing seven sources of law: 1. 3 8 through 47 a HGB. 2. 14 9 through 16 1 AktG. 3. 4 1 and 42 GmbHG. 4. 3 3 through 33 h GenG. 5. 5PublG. 6. 16 0 through 16 3 AO. 7. 5 EstG (wit h Abschn. 29 EStR) As thi s boo k wa s publishe d i n 1975 , the autho r naturall y quote s the provisions of the Imperial Ta x Code prior t o the revised la w of 1977. Thi s obviousl y coul d no t b e helped . However , I thin k i t regrettable tha t compare d wit h th e variou s source s o f law s tha t have bee n cite d i n th e Wirtschaftsprufer-Handbuch, whic h wa s compiled b y th e Institut e o f Chartere d Accountant s i n Germany , this book is incomplete. Furthermore, on page 58, the book quotes, as "prefunctor y principles, " article s o f th e Germa n Commercia l Code from 3 8 through 47 a HGB a s the first sourc e of law. On page 54, however, i t indicate s Article s 3 9 and 49 , from amon g th e prin ciples of regular bookkeeping tha t have been prescribed b y Article

Calculation Regulations : Par t I I 12 7 38 of the German Commercia l Code, as materielle principles, which is an error because i t contradicts itself . Professor Peez' s boo k is , nevertheless, an extremel y helpfu l ref erence book, because i t carries, as an appendix , th e full tex t o f th e material o n calculatio n regulation s i n th e Commercial Code . This "Outline o f a Revision " wa s mad e publi c a s Paper 71261 of the German Bundestag, 7th Session. Attentio n shoul d b e pai d t o th e fact, a s a conspicuou s feature , tha t th e concep t o f "th e principle s of regula r bookkeeping " i n Germa n accountin g ha s bee n consti tuted a s a versatil e concep t o f positiv e laws , no t onl y i n th e Ta x Code and th e Commercial Cod e but als o in various sources of laws. The reaso n i s tha t usin g th e concep t "th e principle s o f regula r bookkeeping" a s a singl e term , i t ha s th e characte r o f havin g appeared o n th e mai n stag e a s a positiv e la w b y carryin g th e demand fo r th e formulatio n o f specifi c socia l standard s tha t ar e peculiar t o each source of a law . The Origin of th e Statutor y Obligatio n o f Bookkeepin g At m y elbow , ther e i s a boo k tha t explain s th e Germa n Commer cial Code , a boo k whic h is , I believe , th e mos t comprehensiv e i n the Federa l Republi c o f Germany . I t i s comprise d o f si x volume s with ove r forty-fiv e hundre d page s an d wa s publishe d b y Walte r de Gruyte r & Co. i n Berlin— Commercial Code, Commentary be gun b y Herman n Staub , continue d b y member s o f th e Imperia l Courts (3 d ed. , revise d b y Superio r Cour t Judg e Diete r Brugge mann, Celle ; Presiden t o f th e Senat e o f th e Federa l Cour t o f Ap peals Rober t Fischer , Karlsruhe ; retire d Superio r Cour t Judg e Paul Ratz, Munich; Wolfgang Schilling , Esq., Mannheim; an d Professor Han s Wurdinger , Hamburg) . Pages 439 through 46 3 of Volume 1 ar e primaril y devote d t o a n explanatio n o f th e Germa n Commercial Code. At page 442, the following i s particularly noted : 33ff i s no t a remedia l statut e i n th e sens e o f 82 3 Sec . 2 BGBl. 1 Her e th e merchant's obligatio n fo r bookkeeping , unde r busines s la w o r profes sional law , come s int o possibl e conflic t wit h hi s obligatio n unde r civi l law an d certainl y wit h suc h dut y i n ta x laws . In eac h cas e th e objectiv e i s different; thi s definitel y determine s th e conten t o f th e individua l respon sibility. . . . The obligatio n t o kee p book s (accordin g t o civi l law ) i s base d

128 Calculatio n Regulations : Par t I I on contract—business contracts, agreements of profit sharing—less often on law; subsidiarily in the cases of 713.3 (716 Abs. I!), 4 740 Abs. 2, 514136 BGBl) The Civi l Code , a s a genera l la w fo r a citizen' s life , assume s th e responsibility fo r th e deman d fo r "orderl y bookkeeping, " whic h has bee n necessitate d b y individua l an d separat e livin g relation s in order t o cope with versatil e aspect s o f living. As the Civi l Cod e is th e la w amon g citizens , i t ma y hav e a characte r base d o n con tract. O n th e contrary , Ta x La w ha s t o assum e th e responsibilit y for establishing, as a standard, the existence of systematic, unified , and detaile d bookkeepin g whos e primary objec t i s adequate deci sions o n taxabl e capacit y i n th e relationshi p betwee n "th e ruler " and "th e governed. " I t seem s t o m e tha t Commercial Code, th e book mentione d above , is truly farsighte d i n it s opinion tha t Arti cle 3 8 of th e Germa n Commercia l Cod e places a merchant' s obli gation o f bookkeepin g i n a positio n o f constan t competitivenes s between both th e Civil Code and th e Tax Laws. The Statutory Obligatio n o f Bookkeepin g fo r Those Who Are Not Merchant s In regar d t o th e bil l t o amen d th e calculatio n regulation s i n th e German Commercia l Cod e tha t wa s mad e publi c b y th e Germa n National Assembly , thi s bil l di d no t affec t Paragrap h 1 of Articl e 38.1 have alread y touche d o n th e poin t tha t a s th e "obligatio n t o keep books, " whic h i s base d o n th e "principle s o f regula r book keeping" prescribe d b y Paragrap h 1 of thi s Germa n Commercia l Code, has bee n understoo d t o have th e characte r o f a publi c law , in case of any violation of it, there is a legal provision under whic h the violator wil l incu r a penalty o f imprisonment o f less than tw o years o r a fine, i n accordanc e wit h Articl e 283 b o f th e Germa n Penal Code. Due t o th e limit s o f space , I wil l no t introduc e thi s provisio n here bu t wil l postpon e i t t o som e othe r time . I a m concerned , moreover, that Paragrap h 1 o f Article 38 may be misunderstood t o the effec t tha t someon e wh o i s othe r tha n a merchant—fo r ex ample, a n agricultura l worke r o r a forester—ha s n o "obligatio n to kee p books, " because Paragrap h 1 of Article 3 8 of th e Germa n

Calculation Regulations : Par t I I 12 9 Commercial Cod e only prescribes fo r "eac h merchant. " Articl e 1 9 of th e Introductor y La w fo r th e Ta x Code , which wa s enacte d o n December 14 , 1976 , contains a provisio n i n regar d t o th e "book keeping obligatio n o f farmer s an d foresters, " accordin g t o whic h anyone wh o ha s a n annua l incom e o f mor e tha n D M 120,00 0 ha s the obligatio n o f makin g regula r entrie s an d o f makin g lawfu l "regular balanc e sheets. " Our Japanese governmen t ha s lon g held a n ambiguou s attitud e in regard t o the "obligation o f bookkeeping" and the tax payment s of farmers, foresters , an d s o forth. I t i s my opinion, however, tha t the Japanes e governmen t shoul d mak e a decisio n tha t th e de mands o f th e time s d o no t allo w thi s attitud e o n thi s particula r matter. I f th e Japanes e governmen t stil l take s th e positio n tha t there i s a socia l valu e i n thi s ambiguity , the n wha t mor e ca n b e said about thi s attitude ? Paragraph 2 o f Articl e 3 8 o f th e Germa n Commercia l Cod e i s the provisio n tha t mandate s th e orderl y preservatio n o f corre spondence regardin g transactions . I n th e draf t o f th e revision , what wa s t o be preserve d wa s clarifie d an d enlarge d throug h th e addition o f a tota l o f three phrases, for example , "Abschrift" (whic h means a "copy" ) an d "ander e Datentrager " (whic h mean s "othe r data medium") . I n Articl e 41 , the revise d draf t resulte d onl y i n the deletio n o f th e ter m "a n inventor y o f a property. " I n Articl e 42, there ar e n o conspicuous point s o f revision. What wa s revise d on a large scale were Articles 43 and 44. Paragraphs 1 and 2 of Article 43 of th e Germa n Commercial Cod e Article 4 3 is a lega l provisio n unde r th e headin g "Th e Keepin g of Business Books. " It s nucleus , i n wha t wa s hithert o Paragrap h 1 , prescribed tha t i n making an entry i n commercial books and othe r necessary records , a merchan t shoul d us e "ordinar y language, " and thi s nucleu s ha s no t changed . Onl y th e expressio n "un d de r Schriftzeichen eine r solchen " (whic h mean s "an d thes e letters" ) has bee n deleted . A second sentenc e ha s bee n newl y adde d t o thi s Paragraph 1 : "If abbreviations , numerals , letters , o r symbol s ar e used, a meaning mus t b e unambiguously determine d fo r each. " I t

130 Calculatio n Regulations : Par t I I is clear tha t thi s ne w additio n i s intended t o cope with th e ag e of electronic computers . The followin g sentence , whic h wa s revise d i n 1976 , ha s bee n inserted i n Paragrap h 2 of Article 43 : "Entries i n books an d othe r required record s mus t b e conducte d completely , accurately , an d in a timely and orderly manner." I have already touched on "timeliness" i n thi s particula r instance . If thi s provision , a s a categori cal proposition , i s not introduce d int o our Commercia l Code , thi s country's commercia l la w scholars , th e Justic e Ministr y authori ties, and th e member s o f the Die t will not, for a long time, be abl e to avoi d th e censur e tha t the y ar e incompeten t an d unfaithful . One shoul d no t flatter mas s psycholog y i n a fawnin g manne r i n establishing lega l standards , whateve r the y ma y be . Jus t lik e a doctor wh o assume s ful l responsibilit y fo r th e medica l treatmen t of a patient b y overcoming th e patient's temporar y anguish , thos e who ar e connecte d wit h legislatio n shoul d tak e ful l responsibilit y for th e formation o f the "soundness" in our society . I believ e tha t thi s attitud e ha s bee n th e principl e objec t o f th e "philosophy o f law " sinc e th e day s o f Plato . Becaus e o f limite d space, I must postpon e introducin g th e revise d bil l regardin g th e calculation regulation , Paragrap h 3 o f Articl e 4 3 o f th e Germa n Commercial Cod e below . I will , however , shar e wit h m y reader s the fatal defect s i n th e current Japanes e Commercia l Code , which I must touc h on here. What I s Meant by the Concept of th e "Small Merchant " Article 3 of the Revise d Enforcemen t La w i n Japan's Commercia l Code prescribe s th e lega l provisio n tha t define s th e smal l mer chant. The provision state s tha t th e "smal l merchant " i n Article 8 of the new la w mean s a merchant whos e capital i s less than 2,00 0 yen and whos e business i s not a company. 7 Frankl y speaking , thi s article i s a par t o f Japan's Commercia l Cod e tha t i s hidden awa y and not much spoken about. I have become intensely aware of this because I a m a busines s practitione r i n accounting . Becaus e o f this lega l provision—Article 8 of Japan's Commercia l Cod e — the concept o f a small merchan t wh o is exempted fro m th e obligatio n of regula r bookkeepin g ha s bee n substantiall y disseminated . Th e

Calculation Regulations : Par t I I 13 1 obligation t o keep books of account, which i s prescribed b y Article 32 of Japan's Commercia l Code , has become an unreasonabl e thing , simply becaus e thi s particula r articl e i s not accompanie d b y pen alty provisions , suc h a s Article s 1 2 and 1 9 of th e Britis h Compa nies Ac t o f 1976 , Articl e 2 4 o f th e U.S . Securitie s Ac t o f 1933 , Article 3 2 of the U.S . Securities an d Exchang e Ac t of 1934 , Article 379 o f th e Germa n Ta x Code , an d Articl e 283 b o f th e Germa n Penal Code. Irrespective o f levels of scale, the scop e of the accountin g prac tices of Japanese enterprise s ha s bee n weakened . Thi s mean s tha t the Civi l Cod e ha s becom e th e instrumen t tha t ha s produce d nu merous ta x evader s an d person s wh o d o no t file thei r taxes . Thi s trend ha s contribute d i n a bi g wa y t o th e collaps e o f nationa l finance. The Frequency o f th e Revision of th e Commercial Cod e and Its Specia l Characteristic s Just befor e I wrote thi s chapter , I receive d a cop y o f a boo k tha t was publishe d b y C . H. Beck i n th e Federa l Republi c o f German y on January 1 , 1980, the titl e of which wa s Beck's Text Edition (rev . ed., 1980) . Upo n openin g it , I discovere d tha t th e Business Law Book, Outline of a Revision (rev . ed.) , which wa s mad e publi c b y the Nationa l Assembl y o f th e Federa l Republi c o f German y an d had bee n quote d i n Leonhar d Peez' s Principles of Regular Data Processing in Accounting (1975 , S . 16 6 ff.) , especiall y th e portio n regarding th e calculatio n regulations , ha d alread y bee n mad e a statutory la w an d ha d bee n integrate d int o th e existin g Germa n Commercial Cod e after revision s of the provisions i n th e draft bil l were made twice . I must , therefore , mak e a correctio n her e wit h m y dee p apolo gies. Th e curren t Germa n Commercia l Code , whic h wa s enacte d on Ma y 10 , 1897 , ha s bee n revise d frequently , a s man y a s fifty times during this century. I am deepl y touched b y the courageous ness of the Germa n legislatur e tha t i s implied b y the frequenc y o f their revisions . I am uneasy , however , tha t thei r wor k o f revisio n has neve r extende d t o th e name s o f the laws . For example , i t wa s on July 29, 1976, when th e provision i n the first sentence of Article

132 Calculatio n Regulations : Par t I I 41 o f th e curren t Germa n Commercia l Cod e becam e legalized , th e original draf t o f whic h wa s m a d e publi c a n d revise d b y th e Ger m a n Nationa l Assembly . Th e n a m e o f th e revise d la w wa s Firs t Law t o Comba t Busines s Crime . Unde r thi s law , th e revision s o f the sai d provision s o f th e Commercia l Cod e wer e m a d e an d an nounced b y BGBl, I , 2034 . In th e sam e way , th e revision s o f Para graph 2 o f Articl e 38 , the revision s o f Article s 43 , 44, an d 47a , th e addition o f Paragrap h 2 a t o Paragrap h 2 o f Articl e 39 , an d th e deletion o f Articl e 44 a an d Articl e 44 b o f th e Germa n Commercia l Code—all thes e wer e m a d e i n th e revisio n o f th e Enforcemen t Law o f th e AO tha t wa s enacte d o n Decembe r 14 , 1976 , the result s of which wer e mad e publi c b y BGBl, I , 3341. 8 In m y surve y o f th e revision s o f th e Germa n Commercia l Cod e that wer e mad e o n fifty occasions , I have foun d onl y thirtee n time s when th e revisio n o f th e Commercia l Cod e wa s indicate d i n th e name o f th e law . The mos t conspicuou s exampl e i s the bi g revisio n made i n 197 3 involvin g change s i n mor e tha n a hundre d articles . This revisio n wa s implemente d b y a la w entitle d "Proclamatio n Concerning th e Implementation. " Thi s write r canno t hel p bein g astonished a t this . W e wil l hav e t o kee p ou r eye s o n BGBl a t al l times. Th e sayin g "S o man y countries , s o man y customs " i s cer tainly true .

Notes 1. Klau s Franzen , Brigitt e Gast-D e Harm , an d Eric h Samson , Steuerstrafrecht mit Steuerordnungswidrigkeiten, 2 Auflage (Munich: C. H. Beck'sche Verlagsbuchhandlung, 1978) , S. 587. 2. Thi s i s th e regulatio n concernin g damag e compensatio n t o a busi ness a s th e resul t o f an unlawfu l act , an d i t i s equivalent t o Articles 70 9 and 71 0 of the Civil Code of Japan. 3. Thi s i s th e regulatio n regardin g th e right s an d obligation s o f th e persons who are administering th e affairs o f a company . 4. Thi s i s th e regulatio n concernin g th e right s o f inquir y an d inspec tion of a syndicate member . It should b e especially noted tha t th e expression "the books of business and th e company's papers" has been include d in the text of this provision . 5. Thi s is the provision acknowledgin g a partner's participatio n i n th e result o f uncompleted busines s affairs . Thi s i s equivalent t o Paragraph 3 of Article 681 of the Civil Code of Japan.

Calculation Regulations : Par t II 13 3 6. Thi s i s the tex t o f the provision regardin g th e relationship betwee n a wife' s liabilit y an d he r bringin g propert y ("propert y brough t int o th e marriage"). Moreover, page 443 has th e following description : "Th e obligation t o kee p book s fo r taxes , a s oppose d t o tha t give n cas e b y cas e according t o civil law, is not formed independently. " 7. Th e amoun t o f mone y wa s change d t o 500,00 0 ye n b y th e revisio n in 1981. 8. Beck'sch e Textausgaben HGB , 63 neu bearbeitete Auflage , Stand : 1 . Jan.1980, S.1135 .

11 Calculation Regulation s i n th e Federa l Republic o f Germany : Par t II I

The German Commercial Cod e Revised i n 198 0 Considering th e orde r o f m y arguments , I shoul d no w introduc e the ful l tex t o f th e revisio n o f th e Germa n Commercia l Cod e tha t has bee n mad e a positive law . In th e cours e o f drafting th e provi sions o f th e revise d law , whic h appeare d i n Paper 7/261 of the German Bundestag, 7th Session an d wa s mad e publi c b y th e German Nationa l Assembly, several modifications an d additions wer e made. I wrote earlier , for example , that "i n Articl e 41, the revise d draft resulte d onl y i n th e deletio n o f th e ter m 'a n inventor y o f property/ " the reason for which was simply that th e revised draf t stated such . Whe n I checke d th e tex t o f th e provision s o f th e positive la w o f th e Commercia l Cod e a s o f January 1 , 1980 , however, I foun d tha t th e word s "unte r Angab e de s Datums " ("wit h an indicatio n o f the date ; ') ha d bee n adde d t o the first sentenc e of Article 41 , the entir e tex t o f which read : "Th e balanc e shee t i s t o be signed and date d by the merchant." Thus , with thi s addition t o the first sentence , th e obligatio n o f affixin g one' s nam e t o th e inventory wa s remove d bu t th e obligatio n o f indicatin g a day , month, and year was added . Furthermore, Paragrap h 2 a was added t o Article 39 , which wa s itself lef t untouche d i n th e revision . Paragraphs 1 and 2 of Articl e 39 wer e no t change d prio r t o Worl d Wa r I . Som e o f m y reader s may already be familiar wit h these paragraphs, but fo r the benefi t 134

Calculation Regulations : Par t II I 13

5

of th e younge r generation , I wil l introduc e the m here . Paragrap h 1 prescribes : At th e tim e o f th e openin g o f business , a merchan t ha s t o mak e a n accurate entr y o f suc h item s a s fixed property , credit s an d liabilities , amount o f cash, and othe r item s of property, and, at th e same time, put a value o n eac h ite m o f propert y an d mak e a "balanc e sheet " [thi s i s th e translation fo r "Abschlu/3, " which indicate s th e relatio n betwee n prop erty and liabilities—au.]. Paragraph 2 states : In the next place, at th e end of each business year, a list of property an d a balance shee t ar e require d t o b e draw n up . The ter m o f a busines s yea r should no t excee d twelv e months . Th e preparatio n fo r th e inventor y o f property an d a balance shee t shoul d b e conducted durin g th e period tha t corresponds t o the progress of appropriate busines s operations . The followin g Paragrap h 2 a wa s adde d t o th e text : When listin g th e inventory , th e exten t o f th e propert y accordin g t o type , amount, an d valu e ma y als o b e determine d base d o n rando m samplin g with th e ai d o f accepte d mathematica l statistica l methods . Th e proces s must follo w th e principles o f regular bookkeeping . The stated valu e of a n inventory compile d i n thi s manne r mus t equa l tha t state d valu e o f . . . a physical inventory . Reading throug h thi s adde d tex t m u s t convinc e m y reader s o f th e following. Th e Federa l Republi c o f German y ha s trie d t o mak e th e calculation regulation s a s precis e a s possible . Thi s Germa n en deavor seem s a n extensio n o f w h a t Euge n Schmalenbac h onc e said, "Tha t whic h i s professional i s a lawfu l n o r m . " l I think , however , tha t th e competen t authoritie s i n J a p a n ar e apt t o excus e thi s b y sayin g tha t thi s legislatio n i n German y i s th e inevitable resul t o f th e racia l trait s o f th e German s o r th e Ger manic race , an d tha t suc h legislatio n woul d no t necessaril y b e compatible wit h th e dispositio n o f the Japanese . It i s my wis h tha t the Japanes e authoritie s tak e charg e o f th e legislatio n an d th e revision o f law s b y concentratin g thei r thought s o n on e poin t b y which Japan' s cours e wil l b e directe d i n a trul y beneficia l w a y — beneficial no t onl y t o th e stat e bu t als o t o th e Japanes e people — that the y overcom e thei r initia l instincts , becaus e th e la w essen tially ha s th e powe r o f formin g socia l orde r i n itself . A t an y rate ,

136 Calculatio n Regulations : Par t II I my reader s shoul d realiz e tha t i n th e Federa l Republi c o f Ger many, th e German s hav e bee n attemptin g t o graduall y mak e th e calculation regulation s a s precis e a s possibl e b y adaptin g thes e regulations t o th e phenomena l chang e o f th e times . In th e secon d place , i n th e provision s o f Paragrap h 2a , i t ha s been prescribe d tha t "th e proces s mus t follo w th e principle s o f regular bookkeeping/ ' I n regar d t o th e definit e content s o f th e methods o f dispositio n o r "th e wa y i t shoul d b e , " however , thi s provision doe s no t indicat e an y specifi c provision s o f an y positiv e law. That is , the concep t o f the "principle s o f regular bookkeeping " has no t bee n m a d e a positiv e la w i n al l it s "connotations " an d "extensions" i n regar d t o thi s particula r theory . Thu s th e theor y of th e "threefol d structure " o f thi s concept , whic h I hav e main tained fro m th e beginning , ha s objectiv e appropriatenes s i n itself . According t o a boo k o f researc h o n th e Germa n Commercia l Code, whic h wa s publishe d o n Februar y 20 , 1956 , b y th e Foreig n Laws Researc h Associatio n o f Kob e Universit y (publishe d b y Yohi Kaku, Vol . 1 o f a reprinte d ed . [1s t ed.] , p . 105) , Paragrap h 3 o f Article 3 9 prescribes a s follows : Due t o th e natur e o f his business , i n th e cas e wher e a merchant , i n eac h business year , has an y commercial good s in stock tha t canno t b e entere d properly i n an inventor y o f a property, he may make such a n entry i n th e course of two business years . His obligation o f preparing a balance shee t every busines s yea r shoul d no t b e disturbe d b y thi s two-yea r busines s entry. This provision , however , wa s totall y delete d b y th e revisio n m a d e on Augus t 2 , 1965 . A t thi s time , Paragraph s 3 an d 4 wer e newl y established. A s o f Januar y 1 , 1980 , th e text s o f thes e provision s have bee n lef t unrevised . Th e origina l tex t o f Paragrap h 3 states : In compiling th e inventory at the end of a fiscal year, a physical inventor y of the item s of the property i s not necessar y a t thi s point i n time , as lon g as the amount o f the items of property ca n be determined i n type, amount, and valu e b y another proces s tha t follow s th e principles o f regular book keeping eve n i f i t doe s no t includ e a physica l inventor y a t thi s poin t i n time. Finally, the original tex t of the provisions of Paragraph 4 prescribes: In th e inventor y a t th e end o f a fiscal year, item s of property d o not nee d to be recorded if :

Calculation Regulations : Par t II I 13

7

1. Th e merchan t ha s recorde d thei r possessio n b y type , amount , an d value i n a specia l inventor y base d o n physica l inventor y o r othe r process permitted b y Section 3 , and whic h has been conducted fo r on e day within th e past thre e month s before, or the first tw o months after , the end of the fiscal year, and , 2. . . . that, base d o n th e specia l inventor y b y applyin g a proces s o f ex trapolation or . . . which follow s goo d accountin g practice , i t i s certai n that th e amount o f property item s on hand a t th e end of the fiscal year at thi s point can be valued i n a regular way . I hav e bee n a bi t puzzle d b y th e fac t tha t i n th e boo k Business Law Book, Commentary (Vol . 1 , p. 46 3 [Berlin : Walte r d e Gruyte r & Co. , 1967]) , a n erro r appear s i n th e tex t o f th e provision s i n Paragraph 4 o f Articl e 39 : "Vermogensgegengegenstande " shoul d appear a s "Vermogensgegenstande. " Moreover , th e boo k als o mad e the erro r o f indicatin g Ite m No . 1 as "de r beide n erste n Monate " ("the firs t tw o months'') . Bot h expression s ma y b e o f th e sam e meaning. A s th e m a t t e r i s concerne d wit h th e expressio n o f th e text o f law , however , i t seem s undesirabl e t o notic e suc h frequen t mistakes. Such mistakes , however , ar e a triflin g matter . I prefe r t o em phasize tha t I a m deepl y impresse d tha t suc h ultramoder n tech nical method s i n present-da y accountin g a s "perpetua l inventor y method," o r "cos t reversa l method, " hav e bee n m a d e positiv e laws i n th e Germa n Commercia l Code . I s seem s t o m e tha t thos e persons wh o ar e concerne d wit h legislatio n i n th e Federa l Repub lic o f German y ar e replet e wit h th e attitud e o f Josu i Kurod a (1546 1604), a feuda l daimy o wh o becam e a Christia n i n 158 3 and wrot e the famou s boo k o f ethic s Five Principles of Water. I n thi s boo k h e wrote i n regar d t o th e propert y o f water : "Wate r seek s it s ow n future cours e a t al l times. " Paragraphs 1 throug h 3 o f Articl e 4 0 wer e unchange d befor e World Wa r I . Paragraph 1 prescribes tha t " a balanc e shee t shoul d be indicate d i n th e Germa n currency. " Paragrap h 2 states tha t "i n drawing u p a n inventor y o f property an d a balanc e sheet , al l item s of property an d liabilitie s shoul d b e adde d u p wit h th e price s t h a t are attribute d a t th e poin t o f tim e whe n th e sai d preparatio n i s t o be m a d e . " Paragrap h 3 state s tha t "uncertai n credi t shoul d b e added u p b y th e estimate d a m o u n t t o b e collected , an d irrecover able claim s shoul d b e deducted. " Th e provision s o f th e curren t

138 Calculatio

n Regulations : Par t II I

Paragraph 4 , which wa s modifie d b y th e revisio n mad e o n Augus t 2, 1965 , are a s follows : Insofar a s thi s conform s t o th e principle s o f regula r bookkeeping , on e may, in preparing th e inventory and balance sheet : 1. Collec t a s a grou p item s o f propert y o f approximatel y equa l valu e o r similar type, for which an average value (based on the type of property or other circumstances) i s known, 2. asses s items of the capital assets, as well as raw materials and supplie s of th e stock , wit h a constan t amoun t an d a constan t value , i f thei r amount i s subjec t t o onl y mino r fluctuations i n size , value, an d com position. However , ever y thre e year s a s a rul e a physica l inventor y must be conducted . Article 4 0 come s t o a n en d wit h Paragrap h 4 . I hav e alread y touche d o n th e revisio n o f Articl e 4 1 . As fa r a s Article 4 2 i s concerned , I believ e tha t a t a certai n poin t afte r World Wa r II , expression s lik e "eine s Landes " ("o f a L a n d " ) ma y have bee n change d t o "eine s Bundesstaats " ("o f a federa l state") . In regar d t o this , I thin k i t ver y strang e tha t th e "Chart s o f Modi fications o f th e Ta x La w Book " i n Beck's Text Edition (6 3 Auflage , S. 113 2 ff. ) omi t thi s an d s o doe s Business Law Book, Commentary in th e chapte r "Histor y o f Business Law. " The tex t o f thi s article , I believe , existe d befor e Worl d Wa r I and remaine d unchanged , excep t fo r th e partia l modification s o f particular expression s mentione d above . This particula r provisio n prescribes tha t "i n th e cas e o f an enterpris e belongin g t o th e state , federal states , o r a domesti c self-governin g body , th e administra tion tha t shoul d dra w u p th e final repor t o n th e financial account s by a metho d tha t i s differen t fro m th e provision s o f Article s 3 9 t o 41 shoul d no t b e restricted. " I n short , thi s articl e prescribe s tha t only th e repor t o n th e final account s shoul d no t b e restricte d b y the Germa n Commercia l Code , and , therefore , othe r article s suc h as thos e prescribin g entr y conditions , an d s o forth , ar e t o restric t these publi c busines s entities . Consequently, an d a s wil l b e explaine d i n detai l later , th e pen alty i n regar d t o a n infringemen t o f th e "entr y obligation, " whic h is prescribe d b y Articl e 283 b o f th e Pena l Cod e o f th e Federa l Republic o f Germany , shoul d naturall y b e applied . Th e Federa l Republic o f Germany, moreover , i s a stat e tha t ha s observe d strictly ,

Calculation Regulations : Par t II I 13

9

unlike Japan , th e "principl e o f th e legalit y o f a d m i n i s t r a t i o n / ' There ar e detaile d regulation s regardin g th e for m o f th e repor t o n the final settlemen t o f account s i n "Regulatio n fo r Owners/Opera tors, Novembe r 2 1 , 1938 " (Paragrap h 2 o f Articl e 1 8 o f th e Law s and Regulation s mentione d above) . As this i s not m y mai n subject , however, I will no t detai l the m here. 2 As I hav e alread y mentioned , wha t wa s chiefl y change d wer e Articles 4 3 and 44 . As to Article 43 , however, I have introduce d m y readers onl y t o Paragraph s 1 an d 2 . I wil l continu e m y revie w here. I n Paragraph s 3 an d 4 o f Articl e 43 , an d i n th e draf t o f th e revision o f thes e paragraph s tha t wa s m a d e publi c b y th e Germa n National Assembly , ther e ha s bee n n o chang e a t all . Th e tex t o f Paragraph 3 states: "Th e entrie s an d othe r require d record s ar e t o be m a d e i n a livin g language . I f an y languag e othe r t h a n Germa n is used, th e ta x official s ma y requir e translations . I f abbreviations , numerals, letters , o r symbol s ar e used , the n th e meanin g mus t b e unambiguously indicate d fo r each. " Thi s particula r provisio n h a d never existe d before . Judgin g fro m th e logica l sequenc e o f thi s provision, however , i t wil l b e clea r tha t suc h a specia l provisio n i s not necessar y i n Japan' s Commercia l Code . The followin g provisio n i n statutor y for m i s foun d i n Para graph 4 : The busines s book s an d othe r require d record s ca n als o consis t o f th e orderly filing o f voucher s o r ca n b e kep t o n othe r dat a medi a insofa r a s these form s o f bookkeeping , a s wel l a s th e proces s used , confor m t o th e principles o f regula r bookkeeping . I n keepin g th e book s an d othe r re quired records on data medi a one must be especially certain tha t th e dat a are availabl e durin g th e perio d th e record s ar e t o b e kep t an d tha t the y can b e mad e readabl e a t an y tim e withi n a reasonabl e perio d o f time . Section 1 , sentence 2, and Section s 2 and 3 apply accordingly . The necessit y fo r makin g record s o f accoun t o n dat a medi a avail able mus t b e considere d indispensabl e an d wil l soo n b e a m a t t e r of cours e fo r thos e enterprise s tha t hav e installe d excellen t smal l electronic computers . On Februar y 24 , 1964 , th e "Managemen t S t a n d a r d o f Com puter-Aided Accounting, " whic h wa s base d o n Articl e 600 1 o f th e U.S. Interna l Revenu e Code , wa s enacte d int o law—Revenu e Pro cedure—in th e Unite d States . Thos e Japanes e peopl e wh o avai l

140 Calculatio n Regulations : Par t II I themselves o f th e spiritua l structur e o f th e "affluence " ("amae" ) of thi s nation , a tren d tha t ha s bee n popularize d o r even strength ened a t present , o r thos e wh o tr y t o find th e sourc e o f th e vitalit y of ou r natio n i n th e presen t ambiguit y o f ou r lega l standards — how d o the y vie w th e deman d fo r th e "Accountin g Managemen t Standards" tha t i s commo n wit h advance d nations ? Thes e stan dards hav e bee n worke d out , on e b y one , b y th e Internationa l Accounting Standard s Committee , whic h wa s organize d b y a grou p of nin e develope d nations , o f whic h Japa n i s a member . D o th e Japanese inten d t o choos e th e wa y o f th e orpha n amon g th e ad vanced countrie s b y shuttin g eye s an d ear s t o these demands ? I t i s indeed a matter o f deep concern . Paragraph 1 o f Articl e 44 , whos e ful l tex t ha s bee n entirel y revised, follows : Each merchan t i s obligate d t o retai n th e followin g document s i n a n orderly manner. 1. Busines s books , inventories , balanc e sheets , alon g wit h th e instruc tions necessary t o understand them, and other documents of organization. 2. busines s letters received, 3. copie s of business letters sent, 4. voucher s for posting in the books to be kept according to 38 Section 1. The origina l tex t o f Paragrap h 2 state s "Busines s letter s ar e onl y pieces o f writin g whic h concer n a busines s transactions. " Para graph 3 , which i s a lon g article , prescribes : The following document s are to be preserved in order: Books and records, inventories, balanc e sheets , a s wel l a s th e require d explanation s fo r understanding them and other documents of the organization. . .. If document s base d o n 14 6 Sectio n 5 hav e bee n produce d o n dat a media, instead of the data media the data can also be stored printed out; the printed documents can also be preserved according to Sentence 1 . As state d above , th e Revenu e Procedure , whic h establishe d th e "Management Standar d o f Computer-Aide d Accounting " i n th e United States , make s i t a n obligatio n t o furnis h a n "audi t trail " (Article 2 ) and t o dra w u p "visibl e an d legibl e records " (Article 4) . There ar e n o specifi c provision s regardin g th e perio d o f preserva tion o f accountin g record s an d busines s correspondenc e i n th e United States . Th e fac t tha t specifi c provision s d o no t exis t corre -

Calculation Regulations : Par t II I 14 1 sponds t o legal provisions tha t declar e tha t ther e i s no prescribe d period concernin g "fals e declaration " o r "nondeclaration " i n th e United States. 3 Paragraph 4 of Article 4 4 prescribes: "Th e document s liste d i n Section 1 , No. 1 , are t o kep t fo r te n years. " An d Paragrap h 5 of Article 44 states: "The period of time for keeping records begins a t the en d o f the calenda r yea r i n which th e las t entr y i n th e boo k i s made, th e inventor y i s listed , th e balanc e shee t determined , th e business lette r received or sent, or the journal vouche r produced. " These paragraph s ar e th e en d o f Articl e 44 . Forme r Article s 44 a and 44b were deleted, as was made known when the revision wen t into effec t o n Decembe r 14 , 1976 . Leonhar d Peez' s Principles of Regular Data Processing in Accounting (1975 ) contain s (beginnin g on p . 166 ) th e draf t o f th e revisio n o f th e Germa n Commercia l Code that wa s announced b y the Germa n Nationa l Assembly . It i s clearly state d o n pag e 16 8 o f thi s boo k tha t i n th e draf t o f thi s revision, "Articles 44a and 44b are revoked. " The ten-volume Industrial Accounting in Programmed Form wa s published b y th e Busines s Administratio n Press , Dr . Th . Gabler , in Wiesbaden . Th e tex t o f thi s boo k wa s supervise d by , amon g other professors , K . F . Bussmann i n Munich , Jor g Bottle r i n Gie /3en, Peter Horvath i n Darmstadt, and Dr . Herbert Karg l in Mainz. Volume 9 , Trade Balance Sheet, Tax Balance, wa s publishe d th e year afte r Peez' s boo k wa s published . Despit e th e clea r statemen t in Peez' s book , Volum e 9 made th e erro r o f carryin g th e ful l tex t of Article s 44 a an d 44 b (se e p . 297) . I t seem s t o m e tha t th e tendency t o neglect clos e examination ma y no t b e limite d onl y t o university professor s i n Japan . Regarding th e Tw o Ordinance s Due t o spac e limits , I canno t includ e th e content s o f tw o ordi nances o r ministeria l notice s tha t ar e relate d t o th e mai n subjec t of this study. I have touche d o n th e point tha t a ministerial notic e ("Erlass") unde r Germa n la w i s a secondar y sourc e o f law . Th e first o f thes e i s BMWF-Erlas s o f Decembe r 21 , 1971, 4 whic h i s concerned wit h th e dispositio n o f microfilms . Th e othe r i s BM F Ordinance o f Januar y 26 , 1973 , regardin g th e concep t o f dat a

142 Calculatio n Regulations : Par t II I storage, whic h i s prescribe d unde r th e headin g "Regula r Book keeping/' i n Paragrap h 6 o f Articl e 2 9 o f th e EStR tha t wa s en acted i n 1969 . The full text s of these tw o ordinances ca n b e foun d on pages 16 3 and 16 6 of Professor Peez' s Principles of Regular Data Processing in Accounting.

Books of Account an d Their Probative Powe r I have s o far hardl y touche d o n La w No . 32 of March 27 , 1890 , in which ther e wa s alread y a n obligator y provisio n i n regar d t o th e preparation o f books o f account. Thi s Commercia l Cod e was the n revised b y La w No . 9 o n Marc h 4 , 1893 , i n whic h Chapte r 4 , "Books o f Account," had provision s tha t wer e mor e detaile d tha n those o f th e existin g law— a tota l o f eleve n article s (fro m Articl e 31 t o Articl e 41) . On e provisio n worth y o f specia l mentio n her e appeared i n Article 3 1 and prescribed : "eac h merchan t . . . should have the responsibility for making preparations for complete books of account," thu s indicatin g tha t th e lega l provisio n requirin g th e "completeness" o f book s o f accoun t wa s alread y i n existenc e i n Japan. I assum e tha t thi s provisio n i n Articl e 3 1 ma y hav e bee n influenced b y the fact tha t Articl e 28 of the General Germa n Com mercial La w o f 186 1 impose d condition s o n book s o f accoun t under whic h Germa n merchant s wer e responsibl e fo r th e prepa ration o f them . The revise d Japanes e Commercia l Cod e o f 1893 , furthermore , prescribed i n Articl e 39 , th e "probativ e power " o f book s o f ac count. Th e concep t o f "probativ e power " a s state d earlier , wa s a legal concep t tha t ha d alread y bee n adopte d i n Articles 3 4 and 3 6 of th e above-mentione d Germa n Commercia l Code ; i t date d eve n further bac k to 1794 , namely, to the sixth year of Kansei under th e rule o f th e Empero r Kokaku , whic h happene d t o b e th e sevent h year under th e regime of Ienari Tokugawa , the eleventh Shogu n of the Tokugaw a cla n i n Japan . I t wa s i n 179 4 tha t th e Prussia n General Commo n La w (La w o f th e Land ) was enacted . The abov e legal concep t o f "probativ e power " ha d alread y bee n adopte d i n Articles 566 , 569, and 60 5 from amon g th e tex t o f provisions tha t legalized bookkeepin g regulation s fo r merchants .

Calculation Regulations : Par t II I 14 3 The Misunderstanding o f Ou r Accounting Scholar s There i s what appear s t o be a n unavoidabl e erro r i n th e theor y of a Japanes e schola r whos e articl e appeare d i n th e Jul y issu e o f Accounting (Vol . CXVIII) , th e bulleti n o f th e Japa n Societ y o f Accounting. Examinin g Paragrap h 1 of Article 14 9 of AktG, whic h prescribes tha t " a statemen t o f accounts i n a business year shoul d be in conformity with th e principle s o f regula r bookkeeping/ ' h e concluded tha t thi s particula r provisio n "looke d lik e a repetitio n of" th e principle s o f regular bookkeepin g a s prescribed b y Articl e 38 o f th e Germa n Commercia l Code , an d that , conditionally , i t was quit e a "clums y wa y o f makin g rules. " H e stated , moreover , that thi s provisio n gav e hi m "th e impressio n o f havin g bee n swayed" b y th e historica l concep t o f th e principle s o f regula r bookkeeping tha t ha d bee n th e traditio n o f the Germa n Commer cial Code since 1898 . Furthermore, he stated tha t books of account themselves wer e onl y th e interna l evidenc e o f th e statemen t o f final account s i n a fiscal year. He also wrote tha t th e principles of regular bookkeepin g ha d bee n prescribe d i n Articl e 14 7 o f th e British Companie s Ac t o f 1948 , th e regulation s o f whic h wer e inseparable fro m th e "principle of a true and fair view. " In th e first place , Articl e 14 7 o f th e Britis h Companie s Ac t o f 1948 is th e provisio n tha t wa s abolishe d b y Paragrap h 1 2 of Article 1 2 o f th e Companie s Ac t o f 197 6 an d los t it s validity. 5 Sec ondly, th e concep t o f th e principle s o f regular bookkeepin g i s no t the on e tha t originate d i n th e Germa n Commercia l Cod e of 1897 . It is , i n fact , th e concep t tha t originate d tw o year s earlie r i n Article 1 9 of th e Hessia n Genera l Incom e Ta x Law. 6 I n th e thir d place, I a m extremel y dubiou s abou t thi s scholar' s attitud e tha t this particula r provisio n "looke d lik e a repetitio n of " th e princi ples o f regula r bookkeeping . Sparin g n o effort s i n m y research , I have found tha t th e term thi s scholar mentioned, "zu entsprechen entspricht" ("t o confor m to") , appeared no t onl y i n Article 14 9 of the AktG bu t als o in Article 2 6 of the Federa l Bankin g La w an d i n Articles 141 , 146, and 14 7 of the Ta x Code of 1977 . In Article 41 of GmbHG, th e expressio n "z u sorgen " ("t o car e for" ) thes e princi ples i s used . I n Articl e 33 b o f th e Unio n La w (GenG), the expres sion "zur Anwendung" ("for application" ) i s used, while in Article

144 Calculatio n Regulations : Par t II I 5 of the "Law of Opening t o the Public/' the word used is "gelten " ("to b e valid"), and i n others there are alternative expressions . To make a long story short , I must emphasize th e legislative fact tha t the "principle s o f regula r bookkeeping/ ' a s a generi c ter m tha t has a threefol d structure , ha s functione d a s a pivota l concep t i n all sphere s o f society i n whic h ther e i s a nee d fo r entrie s i n book s of account . Finally, this scholar stated tha t th e books of account themselve s were only th e interna l evidenc e o f the statemen t o f final account s in a busines s year . I hav e alread y mentione d th e view s o f Dr . Klaus Bierle , senio r lecture r a t th e Universit y o f th e Saarland , Saarbriicken, who wrote about th e principles of regular bookkeep ing in the Dictionary of German Tax Jurisprudence, an d the opinio n of Professo r Ulric h Leffso n o f Munste r University , wh o wrot e th e section o n th e principle s o f regular bookkeepin g i n th e Dictionary of Business Economics. Thei r statement s clearl y sho w tha t th e "principle of vouchers" is included i n the concept of the principle s of regula r bookkeepin g an d tha t suc h a concep t forme d th e basi s of thei r ow n judgment s tha t n o postings b e mad e withou t vouch ers. I would als o like to state here that th e "principle of a true an d fair view " in the British Companies Act of 194 8 is a mistranslatio n and misunderstandin g o n th e par t o f several Japanes e scholars . I will discuss this point i n particular, however, later i n this study . The Concept of th e Smal l Businessman , th e Disposition b y Notification, an d the Standar d of For m I sai d earlie r tha t th e provisio n abou t th e concep t o f smal l mer chants in Article 3 of the Enforcement La w of the revised Commer cial Cod e i n Japa n i s th e "secre t part " o f this country' s Commer cial Code. The reason i s that apar t fro m i n the Meiji, or the Taish o era i n Japan , nowadays , a smal l merchan t whos e capita l i s les s than 2,00 0 ye n (i n 198 1 thi s amoun t wa s raise d t o 500,00 0 yen — au.) does not exis t a t al l i n Japan. Th e existence o f this particula r provision itself , therefore , ha s remove d th e limit s o n wh o i s re sponsible fo r makin g a n entry , an d i t ha s mad e th e entr y obliga tion under th e Commercial Cod e a mysterious thin g indeed . Article 8 o f th e revise d Commercia l Code , whic h wa s enacte d

Calculation Regulations : Par t II I 14 5 by Law No. 49 on March 7 , 1899 , described " a smal l merchant" a s follows: "Th e regulation s regardin g commercia l registration , trad e name, and 'commercia l books ' shall not be applied t o anyone wh o sells a n objec t doo r t o door , o r o n th e road , o r t o other small merchants." Regardin g th e scope of "and othe r smal l merchants, " it wa s prescribe d tha t wha t th e ter m encompasse d "shoul d b e provided fo r b y a n Imperia l ordinance, " b y Articl e 7 o f th e En forcement La w o f th e Commercia l Code , whic h becam e effectiv e on th e sam e dat e th e revise d Commercia l Cod e wa s enforced . I leave th e judgmen t o f whic h i s th e mor e logica l an d practica l o f these two laws in my reader's hands . In Germa n law , persons wh o are responsibl e fo r th e entry obli gation ar e define d b y bot h th e Commercia l Cod e an d th e AO. T o make a lon g stor y short , whe n a perso n wh o ha s bee n exempte d from th e entr y obligatio n i s reviewe d fro m th e standpoin t o f th e Commercial Code , he is "a small merchant " who has been define d by Paragrap h 1 o f Articl e 4 o f th e Germa n Commercia l Code . However, unde r th e revisio n mad e i n Marc h 1953 , this provisio n has bee n change d a s follows : "Th e regulation s concernin g firms, business books , an d proxie s d o no t appl y t o th e perso n whos e business entit y neithe r i n manne r no r exten t require s a busines s operation se t up i n a commercial (businesslike ) way. " That is , term s suc h a s "craftsmen " o r "smal l business " tha t appeared i n th e former tex t o f the la w were deleted. In Paragrap h 1 o f Articl e 141 , moreover, th e AO i n 197 7 prescribe s unde r th e heading "Bookkeepin g Obligatio n o f Certain Taxpayers" : "Entre preneurs a s well a s farmers an d forester s . . . are als o obligated t o keep books for thes e businesses an d t o make balanc e sheet s base d on annua l inventorie s eve n i f ther e i s n o bookkeepin g obligatio n under 140. " What i s important her e i s that th e existenc e o r nonexistenc e o f the entr y obligatio n make s a divergin g poin t fo r confirmation b y government taxatio n offices , tha t is , th e divergin g poin t fo r th e existence of the administrative actio n called "notification, " whic h was prescribe d b y Paragrap h 2 of Articl e 141 . The standar d wa s as follows : (1 ) Excluding nontaxabl e sale s an d sale s tha t ar e cov ered b y th e provision s o f Nos . 8 and 9 of Article 4 of th e Amoun t Sold Taxatio n La w (Articl e 4 prescribes provision s o f ta x exemp -

146 Calculatio n Regulations : Par t II I tion regardin g procurement , deliver y o f money an d property , an d specified consumption , an d thes e provision s ar e extende d t o No . 27—au.)—the entr y obligatio n come s into existence i n a busines s year whe n othe r sale s excee d D M 360,000 . When othe r sale s ar e less tha n D M 360,000 , ther e i s n o entr y obligatio n a t all . Or , (2 ) when busines s asset s exceed D M 100,000, there i s an entry obliga tion, whil e ther e i s n o obligatio n whe n busines s asset s ar e belo w DM 100,000 . Or, (3 ) when th e valu e o f propert y use d fo r agricul tural o r forestr y purpose s exceed s D M 100,000 , ther e i s a n entr y obligation, while there is no obligation when property i s valued a t less tha n D M 100,000 . Or , (4 ) whe n a profi t fro m busines s (no t "net profit"—au. ) exceed s D M 24,000 i n a busines s year , ther e i s an entry obligation , while ther e is no obligation fo r a profit o f less than D M 24,000. Or, (5 ) when th e profi t gaine d fro m agricultura l and forestr y industrie s i n a busines s yea r exceed s D M 15,000 , there i s an entry obligation , while ther e i s no obligation fo r one of less tha n D M 15,000 . I t wa s prescribed , therefore , tha t whethe r the entr y obligatio n exist s shoul d b e decide d b y whethe r o r no t each circumstanc e fall s unde r on e of the abov e five different stan dards. This "standard o f form" wa s revised late r on, the detail s of which follow : Items 1 and 2 : Remain unchanged . Item 3 : The economic valu e of the flat lan d t o be used fo r agricul tural an d forestr y purpose s (t o b e decide d i n accordanc e wit h Article 4 6 o f th e Evaluatio n Law ) whic h exceed s D M 40,000 i n a business year . Item 4 : The profit gaine d fro m busines s ("ordinar y expenditure, " as i t i s calle d i n Japan ) whic h exceed s D M 36,00 0 i n a busines s year. Item 5 : The profi t gaine d fro m agricultura l an d forestr y busines s operation whic h exceed s DM 36,000 in a calendar year. 7 An important poin t her e i s that th e standard amoun t o f the recur ring profi t fo r Item s 4 and 5 cannot b e graspe d afte r th e en d o f a fiscal yea r o r a calenda r year . This i s because th e existenc e o f th e above-mentioned administrativ e action—th e "notification"—t o

Calculation Regulations : Par t II I 14 7 be take n b y th e Governmen t Taxatio n Office s constitute s a deci sive factor i n this particular matter . At this point i n time, "admin istrative actio n b y notification " doe s no t exis t i n th e ta x law s concerning incom e in Japan . In th e cas e o f Japan , i t ma y safel y b e sai d tha t th e stat e itsel f has produce d "no-retur n applicant s o n income " o n a larg e scale . Through th e recognitio n o f th e abov e five standard s fo r entr y obligation, th e reade r shoul d b e abl e t o understan d th e stron g intention of the state to impose the principle of fairness o f taxation on the people i n the Federal Republi c of Germany. In this connec tion, I woul d hop e tha t m y reade r understand s tha t thos e wh o have trie d t o obstruc t th e principl e o f justic e i n taxatio n o n th e strength o f a mysteriou s theor y o f th e nationa l characte r tha t implies that , irrespectiv e o f ou r hig h educationa l standards , w e are a nation tha t has been maintained b y the principle of "coaxin g in complyin g wit h a request, " ar e onl y thos e wh o hop e fo r th e preservation o f a n unfai r ta x syste m tha t i s valuabl e fo r them selves.

Tax Evasio n As to the guarantee s o f the calculatio n regulation s tha t hav e bee n outlined s o far , I mus t first touc h o n act s punishabl e unde r ta x law. I n thi s connection , th e AO i n 197 7 prepared a tota l o f forty four provisions , rangin g fro m Articl e 36 9 t o Articl e 412 . Articl e 369 is primarily concerne d wit h th e definition o f "acts punishabl e under tax law." It is a conspicuous point, however, that Paragrap h 2 o f Articl e 36 9 prescribe s tha t "fo r punishabl e act s concernin g taxes the general crimina l law s apply," thus linking together clearl y "felonies concernin g taxes " an d th e Germa n Pena l Code . And Article 37 0 defines "ta x evasion. " Paragraph 1 o f this article list s th e following thre e points , t o b e punishe d b y imprisonmen t o f u p t o five years or by a fine: 1. Unlawfu l o r incomplete declaration . 2. Concealmen t o f an importan t fact . 3. Non-us e of a taxable certified stamp , or a revenue stamp .

148 Calculatio n Regulations : Par t II I Paragraph 2 prescribe s tha t a n attemp t t o d o an y o f thes e i s punishable. Paragraph 3 states tha t i n especially seriou s cases, the offende r will fac e imprisonmen t o f from si x months u p t o ten years , and i t lists the following fou r examples : 1. Ta x evasion tha t originate s from "gros s self-interest. " 2. Ta x evasio n accomplishe d throug h th e abus e o f a publi c offi cial's legal authority . 3. Ta x evasio n accomplishe d b y takin g advantag e o f th e assis tance originatin g fro m th e abus e o f a publi c official' s lega l authority. 4. Continuou s tax evasion by counterfeiting o r forging of a voucher. It i s further prescribe d i n Paragrap h 2 of Article 37 8 that a fine of no t mor e tha n D M 100,00 0 ca n b e impose d when , "actin g i n violation of the order," a person evades taxes as defined b y Article 370 by negligence ("commits th e acts out of negligence"). Furthermore, Articl e 37 9 establishe s th e provision s o f "ta x risk " (unde r which Paragrap h 1 prescribe s a fine o f les s tha n D M 100,000 ) whereby on e "commit s a misdemeanor. " Thi s occurs whe n a per son: 1 ) draws up a n illega l voucher, or 2) fails t o make a n entr y of transactions, o r make s a n illega l entry , o r give s instruction s t o make an illegal entry . Paragraph 2 and th e rest ar e provisions regarding negligenc e i n submitted variou s kind s o f reports, an d s o forth. A s they hav e n o relation wit h th e main subjec t o f this article, however, I will omi t them here . Wha t i s importan t her e i s tha t th e concep t o f "ta x endangerment" i s no t onl y base d o n a fac t tha t occurre d i n th e past—such a s havin g alread y evade d a tax , o r havin g alread y received an unlawful ta x reduction o r tax exemption—but also , at the stag e a t whic h i t make s i t possibl e t o evad e taxes , i t i s a concept tha t acknowledge s th e valu e o f adde d penalty . I t follow s that, i n thi s way , th e wil l o f th e stat e t o enforc e th e principl e o f fairness o f taxation wil l be realized i n the form o f giving credenc e to the power of forming socia l order .

Calculation Regulations : Par t II I 14

9

Violation o f th e Obligatio n o f Bookkeepin g an d th e Tax Pena l Cod e As I touche d o n earlier , Articl e 283 b o f th e Federa l Republi c o f Germany's Pena l Cod e contains provision s fo r th e "violatio n o f th e obligation o f bookkeeping." Paragrap h 1 states a s follows : A person wil l b e punished b y fine or by imprisonmen t o f up t o two year s if he 1 ) does no t kee p books tha t h e i s obligated t o keep by law , or keep s or alter s the m i n suc h a manne r tha t make s th e revie w o f his asset s an d liabilities mor e difficult ; 2 ) dispose s of , conceals , destroys , o r damage s business book s o r othe r document s tha t h e i s obligate d b y commercia l law t o keep, before th e en d o f the legall y prescribe d period , and thereby , makes th e revie w o f hi s asset s an d liabilitie s mor e difficult ; o r 3 ) i n violation o f commercial law , produces balanc e sheet s i n suc h a way tha t the revie w o f his asset s an d liabilitie s i s made mor e difficul t o r doe s no t produce a balanc e shee t o f asset s an d liabilitie s o r a n inventor y a t th e prescribed time . This i s th e ful l tex t o f Paragrap h 1 of Articl e 283 b o f th e Germa n Penal Code . I n thi s instance , th e proble m i s th e essentia l facto r o f "the prescribe d t i m e / ' Articl e 14 8 o f th e AktG, however , specifie s the tim e a s "i n th e first thre e month s o f th e busines s year. " Para graph 2 o f Articl e 4 1 o f th e GenG ha s a simila r time-limi t regula tion. No . 4 , Paragrap h 1 of Articl e 24 0 o f "Konkursordnung " als o indicates a tim e limit . Th e reade r ma y have , therefore , a doub t about whethe r o r no t th e "prescribe d tim e limit " ha s bee n deter mined fo r al l merchant s i n German y an d whethe r o r no t ther e i s a time limi t fo r th e preparatio n o f a balanc e sheet . It shoul d b e noted , however , tha t Paragrap h 2 o f Articl e 3 9 o f the Germa n Commercia l Cod e stipulate s only : "t o b e applie d withi n the appropriat e tim e o f a regula r conduc t o f business. " Thu s th e Commercial Cod e maintain s th e basi c attitud e o f entrustin g th e time limi t t o common sense , without specifyin g th e perio d o f time . At th e sam e time , i t shoul d als o b e note d tha t ther e i s a judicia l precedent tha t "afte r a laps e o f seve n months , i t doe s no t fal l under a n appropriat e perio d o f t i m e . " 8 Th e ful l tex t o f Paragrap h 2 i s a s follows : "Anyon e wh o act s wit h negligenc e i n th e case s o f Section 1 , Nos. 1 or 3 , is punishable b y fine o r imprisonmen t o f u p to on e year. "

150 Calculatio n Regulations : Par t II I Paragraph 3 is a shor t sentence : "283, Abs 6 is correspondingl y valid/' Articl e 28 3 i s th e pena l provisio n regardin g bankruptcy . Paragraph 6 is the provisio n tha t stipulate s whe n th e action s o f a bankrupt perso n hav e criminalit y i n them , fo r example , th e con cealment o f funds payabl e an d other actions . Article 283 b o f th e Germa n Pena l Cod e comes t o an en d a t thi s point. Thes e provision s wer e inserte d int o i t whe n th e Germa n Penal Cod e wa s partiall y revise d o n Januar y 2 , 1975. 9 I suppos e that thi s ma y hav e resulte d fro m th e fact tha t th e Federal Repub lic o f German y ha d com e t o fee l ver y keenl y th e necessit y fo r guaranteeing b y pena l provision s th e "objectiv e exactness " an d "truth" o f th e entr y an d o f financial document s du e t o th e swif t and diversifie d advance s o f internationa l trad e an d commercia l relations, and als o in an effor t t o maintain th e internationa l repu tation o f it s enterprises . Thi s revisio n i n th e Federa l Republi c o f Germany, however , wa s mad e i n th e sam e yea r Grea t Britai n revised it s laws and followed th e United States' s revision by forty two years . A t an y rate , I hav e grea t admiratio n fo r th e Unite d States, Grea t Britain , an d th e Federa l Republi c o f Germany . Al l have establishe d lega l standard s tha t shoul d b e followe d b y al l merchants wit h n o relation a t al l t o the scope of the dimensions of the enterprises in each country . Japan's legislativ e authoritie s hav e bee n tacitl y presse d fo r a revision o f its current law s and regulation s b y the advanced coun tries i n th e world . I fear tha t the y wis h t o flee this responsibilit y due t o a lac k o f insight , confidence , an d courage , an d tha t the y will continu e t o limi t th e applicabilit y o f th e calculatio n regula tions only t o large-scale enterprise s i n Japan. I believe tha t Japa n may entertain th e possibility o f maintaining th e present syste m of laws unde r whic h n o on e assume s th e responsibilit y fo r th e exis tence o f falsehood , mistake , an d omissio n i n th e accountin g an d taxation affair s i n Japan . Now an d the n I cannot hel p bu t wonde r wh o amon g th e Japa nese will take th e responsibility fo r th e formation o f the destiny of our stat e an d nation . Thi s i s m y own , persona l feeling , however , and I woul d no w lik e t o chang e th e topi c an d closel y revie w th e calculation regulation s tha t ar e curren t i n th e Unite d State s an d England. Before m y critical review , ther e i s a problem o n which I

Calculation Regulations : Par t II I 15

1

should touch . I t i s th e existenc e o f th e Ta x Pena l Cod e i n th e Federal Republi c o f Germany . Accordin g t o th e Germa n Dictionary of Tax Law and Tax Studies, thi s Pena l Cod e was enacte d earl y in th e nineteent h century . I t i s a specia l sectio n o f th e genera l Penal Code. 10 Th e literatur e relativ e t o th e Ta x Pena l Cod e tha t I use ever y da y i s as follows : 1. Undersecretar y Romer , Imperial Tax Penal Code and Imperial Tax Judgments, 1927 . 2. Distric t Cour t Judg e Han s Cattien , Imperial Tax Penal Code and Imperial Tax Judgments, 2 d ed. , 1929 . 3. Klau s Kottke , Tax Saving, Tax Avoidance, Tax Evasion, 2 d ed. , 1962. 4. Gerhar d Suh r an d Axe l N a u m a n n , Tax Penal Code Commentary, 3 d ed. , 1977 . 5. Carol a Seckel , Tax Evasion, 2 d ed. , 1979 . 6. Pete r Sporlein , The Taxpayer and the Tax Penal Code, 1979 . 7. Jiirgen Danzer, Tax Avoidance, 1981 . 8. Glinte r Kohlmann , Tax Penal Code, 3 d ed. , 1982 . 9. Fran z Konz , Handbook of Tax Evasion, Vols . 1 and 2 , 1982 . 10. Klau s Franzen , Brigitt e Gast-D e Hann , a n d Eric h Samson , Tax Penal Code, 2 d ed. , 1978 .

Notes 1. Euge n Schmalenbach , Dynamic Balance Sheet, 5t h ed., p. 362. 2. Business Law Book, Commentary, Vol . 1, p. 484 ff . 3. IRC-Reg . 301 , 650 1 (c)-l . 198 0 Standard Federal Tax Reports, 5446 A. 4. A t tha t tim e i n Germany , th e Economi c an d Financ e Ministrie s had no t been separated . 5. Companie s Act of 1976 , Sec. 12 (12). 6. Kun o Barth, The Development of German Audit Law, Vol. 2, App., p. 102. 7. Ta x Code, 9th ed., 1 5 Feb. 1982, dtv S . 64. 8. BGHSt, BetrBer, 1955,109. 9. Klau s Franzen , Brigitt e Gast-D e Hann , an d Eric h Samson , Tax Penal Code, 2d ed. (Verlag C. H. Beck, 1978) , p. 584 ff . 10. Th e Tax Penal Code is a special section of the general Pena l Code.

12 The Formatio n o f a n Especially Clos e Connection betwee n Civi l La w and th e Ta x Law s

What Shoul d B e Learne d from Articl e 14 0 of th e New Ta x Code (AO) of th e Federal Republi c o f Germany ? The reade r ma y remembe r m y earlie r remark s abou t Ger d Span gemacher. I pointe d ou t tha t Mr . Spangemacher , th e presidin g judge o f th e Federa l Financ e Cour t i n th e Federa l Republi c o f Germany, wrot e i n General Theory of Law (5t h ed. , 1978 ) tha t h e had high praise for Enn o Becker for his historical achievement s i n drafting an d completin g th e Imperial Ta x Code (RAO), and tha t i t was Enn o Becke r i n 1918 l wh o ha d create d a n especiall y clos e connection betwee n Civi l La w (Citizens ' Law ) an d Ta x La w i n Germany. I stated tha t th e pivotal provision s o f this close connection were Paragraph 1 o f Article 16 0 of the former RAO and Articl e 140 o f th e ne w AO, an d tha t a s thi s articl e containe d s o muc h related material , I wanted t o postpone discussin g i t at tha t time . The origina l tex t o f Article 14 0 of th e revised , ne w AO o f 197 7 runs a s follows : "Anyon e wh o i s require d b y law s othe r tha n ta x laws t o kee p book s an d record s tha t ar e importan t fo r ta x pur poses mus t fulfil l th e obligation s incumben t upo n hi m b y th e other laws, also for tax purposes." I have stated tha t thi s provisio n was formerly Paragrap h 1 of Article 16 0 of the old RAO. There ar e some differences , however , i n th e text s o f Paragrap h 1 of Articl e 152

The Formatio n o f a n Especiall y Clos e Connectio n 15

3

160 an d thi s ne w Articl e 140 . Furthermore , ther e ar e als o som e differences i n th e text s o f Paragrap h 1 o f Articl e 16 0 an d th e original tex t o f thi s law , tha t is , the tex t o f 1919 . Although thi s i s a trivial matter , I would lik e t o poin t ou t th e difference s here . At th e en d o f Articl e 14 0 of th e presen t la w th e phras e "als o fo r tax purposes " appears . I n th e forme r Articl e 160 , th e phras e ap peared a t th e en d o f Paragrap h 1 as "als o i n th e interes t o f taxa t i o n / ' An d i n th e 191 9 text , thi s particula r provisio n wa s Articl e 163. Furthermore , Articl e 16 3 no t onl y h a d thi s phras e bu t i t wa s followed b y a n independen t shor t sentence : "16 2 i s correspond ingly valid.' ' Articl e 16 2 wa s relate d t o th e genera l regulation s o f books o f account, Paragraph s 1 through 9 , on whic h I have alread y touched an d whic h I will, therefore , omi t here . In regar d t o Article 14 0 (or Paragrap h 1 of Article 160 ) in partic ular, i t i s interestin g t o tak e a loo k a t Imperial Tax Code: Pocket Commentary (Cologne : Verla g Dr . Ott o Schmid t KG , 1961) , whic h was writte n b y Heinric h Wilhel m Krus e o f Cologne Universit y an d Klaus Tipk e o f Wiirzbur g University. 2 Krus e an d Tipk e writ e a s follows: 160 1 makes thos e obligation s o f bookkeeping an d recor d keeping , whic h exist becaus e o f law s othe r tha n ta x laws , ta x obligation s (derive d fro m bookkeeping obligation ) a t th e sam e time . Thi s mean s tha t pertinen t nontax regulation s ar e being applied t o tax law and tha t violation s of th e nontax regulation s hav e th e sam e consequence s a s violation s o f suc h regulations contained withi n th e tax laws. 3 My reader s ma y no w understan d tha t th e reaso n Ger d Spange macher conclude d tha t thi s provisio n forme d a n especiall y clos e connection betwee n Civi l La w an d Ta x La w wa s becaus e h e ac cepted th e explanatio n o f Drs . Tipke an d Kruse . In thi s connection , a documen t date d Octobe r 1 , 1976 , "Writin g Concerning Introductor y Regulation s Concernin g th e Ta x Code, " is attache d t o Articl e 140 . Th e substanc e o f thi s particula r provi sion canno t b e completel y clarifie d unti l thi s documen t ha s bee n examined i n detail . A s luc k woul d hav e it , I hav e a cop y o f Compendium of the Tax Code (40t h ed. , Munich: C . H. Beck Press , 1980) , which wa s issue d o n Januar y 1 , 1980 . I t wa s writte n an d sen t t o me b y a frien d wh o reside s i n Heidelberg , Germany , Mr . Walte r Ludwig Eckert , th e presiden t o f th e Ta x Advisor s Associatio n o f

154 Th e Formatio n o f a n Especiall y Clos e Connectio n North Baden . Thi s i s a hug e referenc e book , containin g 106 3 pages . At page 232 , "Book an d Recor d Keepin g Obligation s Du e t o Othe r Laws'' appears , th e enactmen t o f th e Enforcemen t Regulation . I n regard t o Articl e 140 : By thi s regulatio n th e so-calle d nonta x bookkeepin g an d recor d keepin g regulations, which ar e als o importan t t o taxation, ar e mad e useabl e als o for ta x laws . Thos e tha t com e unde r consideratio n includ e th e genera l book and recor d keepin g regulations of commercial, corporate, and cooperative law. Also included ar e the book and record keeping obligations fo r certain businesse s an d professor s tha t resul t fro m myria d law s and ordi nances (for example, the following book s are to be kept and/or records ar e to be made). At thi s particula r point , althoug h i t i s a repetition , I woul d lik e to agai n cal l you r attentio n t o th e fac t tha t th e conceptio n a t th e heart o f thi s articl e i s no t i n existenc e i n th e sphere s o f practica l business o r academi a i n Japan . I t seem s t o m e tha t mor e tha n sixty year s ag o Enn o Becke r mus t hav e ha d th e "insight " tha t unless h e prepare d suc h lega l provision s an d complete d th e ver satile formatio n o f a n especiall y clos e connectio n betwee n Civi l Law an d Ta x Law , ther e woul d b e n o roo m fo r conception s suc h as th e principl e o f justice i n taxatio n an d th e ideolog y o f justice i n taxation. Earlier I mentione d tha t Articl e 14 0 containe d a grea t dea l o f material. Th e reaso n i s that , unde r th e curren t law , th e book s tha t are liste d a s "th e followin g books " i n th e Enforcemen t Regulatio n of Articl e 14 0 appl y t o sevent y differen t sphere s o f jurisprudence , resulting i n a trul y spectacula r sight . A t present , a s I writ e thi s chapter, th e governmen t o f J a p a n ha s bee n cite d b y th e Organiza tion fo r Economi c Cooperatio n an d Developmen t (OECD ) fo r th e omission o f law s an d ordinance s regardin g th e protectio n o f pri vacy, an d s o forth. I n respons e t o this , th e governmen t ha s hastil y m a d e preparation s t o draf t th e indicate d law s b y settin g u p a research committe e t o b e chaire d b y Professo r Ichir o Kato , th e former presiden t o f th e Universit y o f Tokyo . I hav e als o bee n invited t o serv e a s a m e m b e r o f thi s specia l committee . It seem s t o m e tha t th e reaso n J a p a n ha s bee n viewe d a s a n "honor student " i n it s economi c activitie s i s mainl y relate d t o it s preeminence i n th e spher e o f producin g merchandise . O n th e othe r

The Formatio n o f an Especiall y Clos e Connectio n 15

5

hand, Japan' s performanc e i n the spher e of social science , regard ing th e consolidatio n o f legislation , i s utterl y different . I t wil l b e necessary fo r thos e i n hig h authority , therefore , t o kee p a clos e watch o n thes e matters . It i s an amazin g fac t indee d tha t throug h the mediu m o f Articl e 140 , the principle s o f regula r bookkeepin g in th e Federa l Republi c o f Germany hav e a profound effec t o n al l legislation i n the Federal Republi c of Germany . In regar d t o th e firs t spher e o f jurisprudence liste d b y th e En forcement Regulatio n o f Article 140 , the text reads as follows : 1. Supportin g book s b y collector s an d transporter s o f trash , a s well as refuse disposers , according t o 2, Sees. 2 and 3 of refus e proof regulatio n (o f July 29, 1974, BGBl, I , 1574); The Enforcemen t Regulatio n concernin g th e secon d spher e o f ju risprudence states : 2. Fro m enterprise s i n whic h use d oi l i s guilde d i n a certai n amount o r th e use d oil s accordin g t o 6 , Sec . 1 of th e use d oi l law (o f Dec . 23, 1968 , BGBl I , 1419 ) with 2 , Sees . 1- 3 o f th e regulation fo r th e implementatio n o f the use d oi l la w (o f Dec . 2, 1971 , £GB/1, 1939) ; The third spher e of jurisprudence i s shown as : 3. Fro m pharmacies , preparatio n book s an d examinatio n book s according t o 6 , Sec. 4, and 7 , Sec. 6 of the pharmacy busines s regulations (o f Aug. 7, 1968 , BGBl, I , 939); The fourth spher e of jurisprudence i s stated as : 4. Fro m informatio n bureau s an d privat e investigators , record s concerning th e assignment s give n out , accordin g t o th e stat e regulations give n b y individua l states , as , fo r example , ac cording t o 1 , Sec. 1 of th e Bavaria n informatio n an d privat e investigators regulation (o f Oct. 19 , 1964, GVBl, Bavaria, 188) ; The Enforcemen t Regulatio n define s th e fifth spher e o f jurispru dence as: 5. Fro m thos e i n construction industrie s an d recipient s o f build ing capital, who undertake a new construction, building book s

156 Th e Formatio n o f an Especiall y Clos e Connectio n according t o 2 of th e la w concernin g th e securit y [collateral ] of building debt s (of June 1 , 1909, BGBl, 449); About te n year s befor e th e enactment o f the Imperial Ta x Code in Germany, th e la w concernin g th e securit y o f buildin g debt s wa s enacted. Thi s wa s durin g th e perio d German y wa s a n empire . At this particula r stage , I hope th e reade r understand s an d admire s the fac t tha t unde r Articl e 140 , when Enn o Becke r undertoo k t o create a clos e connectio n betwee n Civi l La w an d Ta x Law , h e infiltrated th e syste m o f entry obligatio n deepl y int o th e nationa l economy. To continue, the original tex t o f the Enforcemen t Regulatio n i n regard t o the sixth sphere of jurisprudence run s as follows : 6. I n th e cas e o f publi c contract s fo r building , a separat e con struction accoun t fo r eac h buildin g contrac t b y th e contrac t taker, accordin g t o 16 , Sec. 1 of building pric e regulatio n (V O PR No. 1/70 concernin g price s in public contracts fo r buildin g BGBl, 1972,1,293) ; The seventh spher e of jurisprudence i s indicated a s follows : 7. Fro m proprietor s o f lodgings , a n inde x o f tourist s (guests ) according t o th e stat e law , for example , accordin g t o 18 , Sec. 1 o f th e registratio n la w o f th e stat e o f Nort h Rhine-West phalia (o f Apr. 28, 1950, GVBl, NW, 117); In th e Federa l Republi c o f Germany, th e government o f a state , which i s referre d t o a s a "Land, " ha s th e powe r t o legislat e law s that appl y onl y t o th e stat e concerned . Th e "Land " als o ha s a notification law , unde r whic h resident s ar e obligate d t o submi t various kinds of reports. The legislative power of a "Land " ca n b e confirmed b y th e followin g provisio n foun d i n Paragrap h 1 o f Article 7 0 o f th e curren t Constitution : "Th e state s shal l hav e th e right t o legislat e insofa r a s th e Constitutio n doe s no t confe r thi s legislative powe r o n the federation" (trans . Guido Goldman, "Th e German Politica l System") . The Enforcemen t Regulatio n define s th e eight h spher e o f jurisprudence thus :

The Formatio n o f an Especiall y Clos e Connection 15

7

8. Fro m businesses that have insemination stations , records concerning th e collection, release, and use of the sperm accordin g to 18 , Sec. 3 of th e anima l husbandr y law s (o f Apr . 20 , 1976 , BGBl, I , 1045); The ninth spher e of jurisprudence ha s been prescribed a s follows : 9. Fro m enterprises tha t import , export, grow, harvest, manufac ture and process, trade in, purchase, distribute, and dispose of substances tha t com e unde r th e narcotic s law s an d inventor y books concerning th e entr y an d exit , a s well a s processing, of the narcotic s accordin g t o 5 , Sec . 1 of th e narcotic s la w (i n this case of Jan. 10 , 1972, BGBl, I , 1); The tent h spher e o f jurisprudence, accordin g t o th e Enforcemen t Regulation, provides: 10. Fro m pharmacies , doctors , an d veterinarians , dispensaries , practices, an d clinics , book s o r fil e card s concernin g th e whereabouts o f narcotic s (narcotic s books ) accordin g t o th e narcotics prescriptio n regulation , no . 1 5 (o f Jan . 24 , 1974 , BGBl, I , 110); The origina l tex t o f th e Enforcemen t Regulatio n prescribe s i n regard t o the eleventh spher e of jurisprudence: 11. Fro m securit y industr y businesse s (watchmen) , record s con cerning th e securit y contract s accordin g t o 11 , Sec. 1 of th e regulation concernin g th e securit y industr y (o f Jun e 1 , 1976 , BGBl, I , 1341); The Enforcemen t Regulatio n i n regar d t o th e twelft h spher e pro vides as follows : 12. Fro m regiona l maste r chimne y sweeps , "sweeping books " according t o 14 , sec . 1 o f th e regulatio n concernin g chimne y sweeping (of Dec. 19, 1969, BGBl, I , 2363); Having rea d thu s far , th e reade r ma y b e beginnin g t o appreci ate th e breadt h o f th e concep t tha t Ger d Spangemache r calle d "Civil Law/ ' Spangemache r onc e sai d tha t Enn o Becke r formu lated th e lega l relationshi p betwee n th e stat e a s ta x credito r an d

158 Th e Formatio n o f an Especiall y Clos e Connectio n the citize n a s taxpayer , whos e lega l relationshi p mean t suc h a connection. Japan's business , academic, and political circle s see m to have n o conception o f such legislation . I believe, however, tha t if w e wan t th e realizatio n o f "justic e i n taxation " i n Japa n i n a true sense , w e shoul d lear n thi s particula r conceptio n tha t Enn o Becker created mor e than sixt y years ago. At an y rate , th e Enforcemen t Regulatio n o f Articl e 14 0 o f th e AO, unde r whic h th e obligatio n o f recordin g i n Civi l La w shoul d be regarde d a t th e sam e tim e a s a n entr y obligatio n i n Ta x Law , exercises it s effectivenes s i n sevent y differen t sphere s o f jurispru dence. As it contains so much material , I have been hesitant abou t introducing al l o f thi s Enforcemen t Regulatio n t o you . A s th e subject o f my argument , th e probative powe r o f commercial books , is coming next, I will continue m y discussion here . The origina l tex t o f th e Enforcemen t Regulatio n provide s a s follows concernin g th e thirteenth spher e of jurisprudence: 13. Fro m proprietor s an d leader s o f workshops fo r th e blind , records concernin g th e amoun t an d earning s o f th e ware s o f th e blind an d supplementar y ware s accordin g t o 3 , Sec. 1 of th e regulation concernin g th e implementation o f the law for busi nesses fo r ware s o f th e blin d (i n thi s case , th e regulatio n o f March 25 , 1969, BGBl, I , 283); Furthermore, th e Enforcemen t Regulatio n prescribe s a s follow s regarding th e fourteenth spher e of jurisprudence: 14. Fro m th e bookmaker , carbo n copie s o f th e bettin g ticket s o r betting books , statement s o f accoun t an d contract s wit h th e bookmaker's assistants and business books according to 4, sec. 1 RennwLott G (o f Apr . 8 , 1922 , RGBl, I , 335 , 393), 1 0 bis 1 3 ABRennw-LottG (Implementa l Provision s fo r th e Racin g an d Lottery La w o f Jun e 16 , 1922 , Centra l Pape r o f th e Germa n Empire); In th e Federa l Republi c o f Germany , suc h kind s o f record s ar e given a lega l characte r a s record s fo r taxatio n an d are , therefore , records o f transaction s i n whic h "completeness " an d "truth " ar e demanded. Any violator i s treated a s a tax offender (Articl e 369 of AO), an d

The Formatio n o f an Especiall y Clos e Connection 15

9

he is subject t o penal regulation s (Articl e 283b of the Pena l Code). As th e clea r wil l o f th e state , "equa l sacrifice " a s a principl e o f taxation i n th e scienc e o f finance an d th e principl e o f fairnes s o f taxation, viewe d fro m ta x jurisprudence , hav e lai d dow n ne w roots i n instance s suc h a s thos e state d above . W e ca n tak e not e here o f th e hig h qualit y o f Germa n governmen t official s and , a t the same time, of the superior qualit y o f German statesmen . To return t o our mai n subject , th e origina l tex t o f th e Enforce ment Regulatio n regardin g th e fifteenth spher e o f jurisprudenc e states as follows : 15. Fro m firms tha t proces s butter, specia l record s as per No. 7 of the regulatio n concernin g milk-fat-reductio n an d productio n and expor t (o f Mar. 26, 1974, BGBl, I , 785); The Enforcemen t Regulatio n regardin g th e sixteent h spher e o f jurisprudence indicates : 16. Fro m denaturin g enterprise s (denaturin g o f sof t wheat) , rec ords concernin g th e origi n an d storag e o f th e sof t wheat , a s well a s th e amoun t o f sof t whea t denature d daily , accordin g to 12 , Sec. 1 , No. 1 , and 12 , Sec. 2, No. 1 of th e ordinanc e o f the denaturing . . . of grain (o f Nov. 19 , 1971, BGBl I , 1831); The Enforcemen t Regulatio n regardin g th e seventeent h spher e o f jurisprudence is : 17. Fro m guardians , custodia l book s fo r th e securitie s i n deposi t according t o 14 , Sec . 1 of th e la w concernin g th e deposi t o f securities (of Feb. 4, 1937, RGBl, I , 171); The Enforcemen t Regulatio n regardin g th e eighteent h spher e o f jurisprudence is : 18. Fro m plants tha t preproces s eg g products, records concernin g the egg products going in and coming out, according t o 5, Sec. 2, No . 2 o f th e eg g productio n ordinanc e (o f Feb . 19 , 1975 , BGBl, I , 537); The nineteenth spher e o f jurisprudence i s defined b y th e Enforce ment Regulatio n a s follows :

160 Th e Formatio n o f an Especiall y Clos e Connectio n 19. Fro m proprietor s o f drivin g schools , record s concernin g th e training o f eac h pupi l a s wel l a s concernin g th e fe e charge d according t o 18 , Sees. 1 and 2 of th e drivin g teache r la w (o f Aug. 25, 1969 , BGBl, I , 1336 , amended b y Art . 1 , No. 9 of th e law of Feb. 3, 1976, BGBl I , 257); The Enforcemen t Regulatio n regardin g th e twentiet h spher e o f jurisprudence i s as follows : 20. Fro m th e responsibl e head s o f th e officiall y recognize d train ing institute s fo r drivin g instructors , record s concernin g th e training o f eac h drivin g teache r candidat e accordin g t o 28 , Sec. 1 o f the driving teache r law . The Enforcemen t Regulatio n regardin g th e twenty-firs t spher e of jurisprudence prescribes : 21. Fro m owners of motor vehicle s who are required t o keep trav eling record s o r monitorin g devices , lo g entrie s accordin g t o 57a of street traffi c regulation s (Nov . 15, 1974, BGBl I , 3193); The twenty-secon d spher e o f jurisprudenc e i s prescribe d a s fol lows: 22. Fro m forestr y seedin g an d plantin g businesses , register s con cerning al l stocks , receipts , chang e i n stock , an d issuanc e o f seed and plant materia l a s per 12 , Sec. 1 o f the law concernin g forestry see d and plant materia l (i n this case, of Oct. 29, 1969, BGBl I , 2057); The Enforcement Regulatio n regardin g th e twenty-third spher e of jurisprudence states : 23. Fro m thos e entitle d t o gas/oi l subsidies , usag e book s fo r gas / oil according t o 9, Sec. 1 o f gas/oil subsidy regulation o f transport (o f Mar . 20 , 1961 , BGBl I , 260); 8, Sec. 1 gas/oil subsid y regulation fo r rai l traffi c (o f Dec. 11, 1973, BGBl I , 1900) ; and 8 o f gas/oi l subsid y regulatio n fo r stree t traffi c (o f Dec . 21, 1973, BGBl, I, 1962); Having rea d thi s far , th e reade r mus t b e impresse d b y how th e Federal Republi c of Germany ha s attempted t o infiltrate th e prin -

The Formatio n o f an Especiall y Clos e Connectio n 16

1

ciples o f regula r bookkeepin g int o ever y clas s o f th e nation , an d how faithfull y th e natio n ha s attempte d t o understan d full y tha t "equal sacrifice " i s the taxatio n principl e i n the scienc e of finance and tha t th e principle o f justice o f taxation i s the taxatio n princi ple i n ta x jurisprudence . Althoug h w e Japanes e hav e gaine d worldwide preeminenc e i n th e spher e o f th e productio n o f com modities, w e shoul d no t b e s o frivolou s a s t o behav e arrogantly . What we have covered thu s far comprises only about a third of the total sphere s over which th e Enforcement Regulatio n exercise s it s legal control . To return t o the Enforcemen t Regulation , concerning th e twenty fourth spher e of jurisprudence, th e following i s prescribed : 24. Fro m businesse s tha t dea l i n poultry, registers concerning th e amount o f poultr y receive d an d sold , accordin g t o 2 o f th e poultry diseas e ordinance (o f Dec. 19, 1972, BGBl, I , 2509); The Enforcement Regulatio n concernin g th e twenty-fifth spher e of jurisprudence i s as follows : 25. Fro m farmers, which sell or deliver fresh poultr y meat , specia l records concernin g th e sal e o r delivery , accordin g t o 3 , Sec. 2 of th e poultry-mea t exceptio n ordinanc e (o f Jul y 19 , 1976 , BGBl, I , 1857); The Enforcemen t Regulatio n concernin g th e twenty-sixt h spher e of jurisprudence states : 26. Fro m processin g plant s o f th e grai n an d fee d industr y unde r certain conditions , book s concernin g al l busines s transac tions, especially concernin g th e detail s of purchase, of storag e of th e processing , an d o f th e sal e a s wel l a s th e brokerag e o f the product , accordin g t o 16 , Sec. 1 of th e grai n la w (o f Nov . 24, 1951 , BGBl,l, 901) ; The twenty-sevent h spher e o f jurisprudenc e i s prescribe d b y th e Enforcement Regulatio n as : 27. Fro m dealer s o f use d good s an d preciou s metals , use d good s books concernin g thei r busines s accordin g t o la w o f th e fed eral state , for example , according t o 1 , Sec. 1 , and 2 , Sec. 1 o f

162 Th e Formatio n o f an Especiall y Clos e Connectio n the use d good s regulation s o f th e Stat e o f Nort h Rhine-West phalia (o f Mar. 19 , 1958, GVBl, NRW 79) ; In Japa n ther e ar e man y instance s o f entry obligatio n i n book s of accoun t an d th e obligatio n o f record s bein g mad e statutor y i n regard t o special professions , fo r example , Article 1 4 of the Pawn shop Business Law , Article 34- 2 of the Quarrying Law , and Articl e 24 of the Medical Practitioner s Law . Unlike in the Federal Repub lic o f Germany , however , ther e ar e n o lega l provision s i n Japa n under whic h entr y obligatio n an d th e obligatio n o f record s hav e been positione d unde r Civi l La w a t th e sam e tim e a s unde r Ta x Law for th e purpose o f establishing a n especially clos e connectio n between Civi l La w an d Ta x Law . Establishmen t o f suc h law s i n the Federa l Republi c o f Germany , a s state d above , belong s t o matters tha t g o back more than sixt y years. Whether o r no t suc h a conceptio n shoul d b e adopte d i s no w considered provisionall y a s a separat e problem , bu t wh y ha s i t happened tha t literatur e touchin g o n suc h a conceptio n an d th e real existenc e o f legislation ha s neve r been foun d i n thi s country ? In thi s connection , I feel keenl y th e inconsistenc y wit h ou r stud y of comparative jurisprudence . The realization o f the ''principl e of justice i n taxation " i s indee d a seriou s proble m i n Japan . Th e reason fo r thi s i s tha t i t i s a social phenomenon tha t i s in propor tion t o the patriotism, th e discernment, an d th e courage t o pursu e what a state should be of those who are concerned with legislatio n in this country . The Enforcement Regulatio n concerning the twenty-eighth spher e of jurisprudence prescribe s as follows : 28. Fro m operator s o f good s transporters , trave l logs , books con cerning th e lon g distanc e transpor t o f goods, dispatching an d accompanying documents , an d book s concernin g th e broker age of cargo or cargo space, according t o 28, Sees. 1 and 2 ; 29, Sentence 1 ; and 32 , Sec. 1 of the carg o transpor t la w (o f Aug. 6, 1975 , BGBl, I , 2132) in conjunction wit h l-3 a o f the regula tion concerning monitoring of tariffs i n long distance shippin g and shipping across borders (of Sept. 30, 1974, BGBl I , 2428); The twenty-nint h spher e o f jurisprudenc e i s prescribe d b y th e Enforcement Regulatio n a s follows :

The Formatio n o f an Especiall y Clos e Connectio n 16

3

29. Fro m midwives , billin g book s concernin g professiona l busi ness, as per 1 0 of the second ordinance for the implementatio n of midwifery la w (of Sept. 13 , 1939, BGBl, I , 1764 ) The Enforcemen t Regulatio n concernin g th e thirtiet h spher e o f jurisprudence state s as follows : 30. Fro m entrepreneur s wh o giv e out , transmit , o r receiv e hom e piecework, list s of this work, payment registers , and paymen t books, accordin g t o 6 , Sentenc e 1 , and 8 , Sec . 1 of th e hom e work la w (o f Mar. 14 , 1951, BGBl, I , 191) , in conjunction wit h 9 ff. o f the first ordinanc e fo r th e implementatio n o f the hom e workers law (of Jan. 27, 1976, BGBl, I , 222); This regulation position s even the details of records of work in th e home a s record s i n ta x laws . I t shoul d b e understoo d tha t th e above entry obligation i s subjected a t th e same time to the restrictions o f th e Exemptio n Regulatio n i n regar d t o smal l businesse s as prescribed b y Paragraph 1 of Article 4 of the Germa n Commer cial Code . Otherwise , i t constitute s a violatio n o f Paragrap h 3 of Article 2 0 of the statut e tha t prescribe s tha t unles s executiv e powe r and judgmen t ar e boun d b y la w an d justice , suc h act s wil l mea n the destruction o f the so-called principle o f lawfulness o f administration. The Enforcemen t Regulatio n concernin g th e thirty-firs t spher e of jurisprudence states : 31. Fro m producers , mixers , importers, o r wholesal e distributor s of light, heating, or diese l fuel , book s concerning th e content s of tanks, out o f which th e supplier s ca n b e determined, a s pe r 5, Sec. 1-3 BlmSchV (o f Jan. 15 , 1975, BGBl, I , 264); The Enforcemen t Regulatio n concernin g th e thirty-secon d spher e of jurisprudence prescribe s as follows : 32. Fro m producers o f hops, records concerning th e hops sold an d delivered, accordin g t o 6 o f th e ordinanc e fo r subsidie s fo r hops growers (of Dec. 18, 1975, BGBl, I , 3135); The thirty-third spher e of jurisprudence i s prescribed as :

164 Th e Formatio n o f a n Especiall y Clos e Connectio n 33. Fro m entrepreneur s wh o produc e weapon s t o b e shippe d o r ship th e weapon s themselves , o r wh o obtai n actua l contro l over weapon s o f wa r fro m anothe r o r transmi t sam e t o an other, weapons books as proof of the whereabouts of the weapons, as per 12 , Sec. 2 of the la w concernin g th e monitorin g o f weapons of war (of Apr. 20, 1961, BGBl, I, 444); Next i s th e Enforcemen t Regulatio n concernin g th e thirty-fourt h sphere of jurisprudence: 34. Fro m stockbrokers , dail y journals , a s pe r 33 , Sec . 1 o f th e stock exchange la w (of May 27, 1908, RGBl, 215) ; The Enforcemen t Regulatio n concernin g th e thirty-fift h spher e of jurisprudence state s as follows : 35. Fro m warehousemen , warehous e receip t register s an d stoc k ledgers, accordin g t o 37 , Sec . 1 , an d 38 , Sec . 3 , No. 1 of th e regulation concernin g negotiabl e warehous e receipt s (o f Dec . 16, 1931 , RGBlf 1,763) ; At this stage , my descriptio n o f th e relate d sphere s o f jurispru dence ha s covere d barel y hal f o f th e tota l regulations . The reade r may breath e a sig h o f relie f a t thi s point . I hop e tha t m y reade r will b e patien t an d continu e t o wor k throug h thi s chapter . Thi s particular matte r canno t b e foun d i n accountin g literatur e i n Ja pan, no r i n tha t o f ta x jurisprudence , muc h les s i n th e scienc e o f the Commercia l Code , o r i n busines s economics , an d s o forth . From th e standpoint o f securing a sound nationa l economy , this is a problem tha t ha s considerable importance . The Enforcemen t Regulatio n provide s concernin g th e thirty sixth sphere of jurisprudence: 36. Fro m incom e ta x advisors , specia l record s concernin g re ceipts, disbursements , an d assets , a s pe r 2 1 o f ta x advisor s law (of Nov. 4, 1975, BGBl, I , 2735); Article 2 1 o f th e Ta x Advisor s La w i n th e Federa l Republi c o f Germany state s th e following : "Th e Incom e Ta x Adviso r mus t record al l receipt s an d disbursement s consecutivel y an d com pletely. Th e record s ar e t o b e kep t withou t dela y an d i n th e Ger-

The Formatio n o f an Especiall y Clos e Connectio n 16

5

man language. " Karl-Hein z Mittelsteiner , th e president o f the Association o f License d Ta x Practitioner s i n Hamburg , coauthore d Steuerberatungsgesetz Handkommentar wit h Hors t Gehre . I n thi s work, Mittelsteine r states : "I n general , th e Incom e Ta x Adviso r [Associations] d o no t fal l unde r th e bookkeepin g regulation s a s per 16 1 f f o f th e ta x code/' 4 Suc h bein g th e case , th e recordin g obligation, which does not fall generall y under th e entry conditio n of AO, has agai n bee n positioned a s the entry obligation unde r th e tax law s vi a Articl e 14 0 of AO. In th e concep t o f civil law , whic h Gerd Spangemache r discusse s i n hi s boo k General Theory of Law, the professiona l law , know n a s th e License d Ta x Practitioner' s Law, has naturally bee n included . To continu e wit h ou r examinatio n o f th e regulations , th e En forcement Regulatio n concernin g th e thirty-sevent h spher e o f ju risprudence state s as follows : 37. Fro m manufacturer s o f aircraft, record s concernin g th e regu lar implementatio n o f sample tests , according t o 23 of testin g regulations fo r aircraft (o f May 16 , 1968, BGBl, I , 416); The Enforcement Regulatio n regardin g th e thirty-eighth spher e of jurisprudence prescribes : 38. Fro m aeronautica l technica l firms , record s concernin g th e conducting o f inspections o f aircraft, a s per 3 8 of testing regu lations for aircraft ; The Enforcemen t Regulatio n concernin g th e thirty-nint h spher e of jurisprudence follows : 39. Fro m owner s o f aircraft, record s concerning th e at cos t flight s subject t o authorization , route s flow n b y airplanes , an d cos t per fligh t hour , accordin g t o 7 2 of th e ai r traffi c permi t ordi nance (of Nov. 28, 1968, BGBl, I , 12630) ; The fortieth spher e of jurisprudence i s prescribed a s follows : 40. Fro m firms tha t proces s ski m mil k powder , specia l record s concerning th e quantity o f skim milk powder received , issued , and o n han d accordin g t o 7 of th e ski m mil k pric e reductio n regulation (o f Feb. 19, 1976, BGBl I , 346);

166 Th e Formation o f an Especiall y Clos e Connectio n The Enforcemen t Regulatio n concernin g th e forty-firs t spher e o f jurisprudence indicates : 41. Fro m brokers , loa n an d investmen t agents , builder s an d building consultants , informatio n concernin g th e contract s and/or buildin g project s accordin g t o 1 0 o f th e agen t an d builders ordinance (o f June 11 , 1975, BGBl, I , 1351); Having rea d throug h th e abov e regulations , m y reade r mus t rec ognize th e Germa n attitud e tha t eve n i n th e professiona l occupa tions fraudulen t act s ar e possible . Th e Federa l Republi c o f Ger many, however , demand s righteousnes s i n it s legislation . I t i s highly desirabl e tha t th e power of the la w applies t o all economi c fields, withou t exception , becaus e a huma n bein g i s neithe r Go d nor a devil. The Enforcement Regulatio n regardin g th e forty-secon d spher e of jurisprudence prescribes : 42. Fro m meta l dealers , business book s (metal books ) concernin g their purchase s a s per 6 , Sec. 1 of the law concerning trad e i n base metal s (o f July 23 , 1926, BGBl I 415) and th e applicabl e state ordinances, for example, according t o 4 of the regulatio n of th e stat e o f Nort h Rhine-Westphali a concernin g trad e i n base metal an d retail trad e i n scrap (of Mar. 19 , 1958); The Enforcemen t Regulatio n governin g th e forty-thir d spher e o f jurisprudence i s as follows : 43. Fro m firms o f the mil k an d fa t industry , book s concerning al l business transactions , especiall y concernin g detail s o f pur chase, storage , processing , an d distributio n a s wel l a s th e brokerage o f certai n products , accordin g t o 23 , Sec. 1 of th e milk and fat la w (of Feb. 28, 1951, BGBl I , 135); The forty-fourth spher e of jurisprudence i s as follows : 44. Fro m firms tha t produc e o r trad e i n mixe d feed , additiv e (thereto), or prepared mixtures , books concerning th e produc tion, amount s received , issued , an d o n han d accordin g t o 17 , Sec. 3 of the feed la w (of July 2, 1975, BGBl I , 1745 , compared to31 o f the feed regulation of June 16 , 1976,BGBl,I, 1497) ;

The Formatio n o f an Especiall y Clos e Connection 16

7

The Enforcemen t Regulatio n concernin g th e forty-fift h spher e o f jurisprudence states : 45. Fro m breeder s an d dealer s o f parrot s an d parakeets , book s concerning th e typ e an d numbe r o f th e animal s accordin g t o the parro t importatio n regulatio n (o f Mar . 3 , 1975, BGBl, I , 653); according t o 4 of the Psi Hakosis 5 regulation (o f July 18 , 1915, BGBl I , 1429); The Enforcemen t Regulatio n define s th e forty-sixt h spher e o f ju risprudence as : 46. Fro m pawnbrokers , record s o f eac h paw n transactio n an d it s settlement, accordin g t o 3, Sec. 1 of the regulation concernin g the conduc t o f busines s o f th e pawnbroker s (o f Jun e 1 , 1976 , BGBl 1 , 1334); The book s o f accoun t tha t ar e prescribe d b y Articl e 1 4 o f th e Pawnshop Busines s La w i n Japa n hav e onl y a relatio n t o th e Police Statio n concerne d (Articl e 15) , an d thes e book s hav e n o legal relation wit h th e tax laws . The Enforcemen t Regulatio n concernin g th e forty-seventh spher e of jurisprudence states : 47. Tes t center s fo r th e verificatio n o f measurin g instrument s fo r electricity, gas , water, o r heatin g ar e t o kee p verifiabl e docu ments concernin g th e verifications , tes t results , an d specia l tests accordin g t o 1 7 of th e tes t cente r regulatio n (o f June 18 , 1970, BGBl, I , 795); The forty-eighth spher e of jurisprudence i s prescribed as : 48. Fro m trave l agencie s an d hote l brokers , specia l records , ac cording t o state' s la w (GVBl Rhineland-Palatinat e 1958 , 173; GVBl Hess e 1958 ; GVBl Bavari a 1959 , 53; GVBl Lowe r Sax ony 1959 , 1; GVBl Hamburg , 1964 , 99); The Enforcemen t Regulatio n governin g th e forty-nint h spher e o f jurisprudence states : 49. Fro m businesse s tha t produc e o r distribut e certai n seeds , records concerning th e weight o r the number o f the seeds issued ,

168 Th

e Formatio n o f a n Especiall y Clos e Connectio n

distributed, o r use d i n thei r ow n business , accordin g t o 13 , 19, Sec. 2, and 21 , Sec. 2 of seed trad e la w (o f June 23 , 1975, BGBl, I, 1453) ; The Enforcemen t Regulatio n concernin g th e fiftieth spher e o f ju risprudence prescribe s a s follows : 50. Fro m businesse s tha t distribut e seeds , o r packag e o r proces s seeds fo r other s fo r profit , inspectio n book s concernin g th e receiving an d distributin g o f seed , accordin g t o 35 , Sec . 2 o f the see d trad e la w (o f June 23 , 1975 , BGBl, I , 1453) ; At thi s point , I a m reminde d o f a boo k publishe d throug h th e Harvard La w Schoo l an d entitle d Taxation in the Federal Republic of Germany, th e centra l figures o f whic h ar e Henr y J . Gumpe l an d Carl Boettcher . Unde r th e headin g "Th e Presen t Lega l S y s t e m / ' the boo k states : The present Germa n approach i s characterized by a striking legalism tha t permeates al l fields of substantive an d procedura l law . There is a distinc t tendency t o hav e th e greates t possibl e variet y o f situation s covere d b y express statutor y regulations . There als o i s an obviou s desir e t o create a practically complete system of judicial review for every conceivable clai m or wrong . I n obviou s reactio n t o th e utte r lawlessnes s o f th e Hitle r er a and a n understandabl e skepticis m towar d th e legislativ e assemblie s an d their work , th e populatio n turne d t o the neutra l court s o f law a s th e on e agency of the state from whic h dispassionate decision s and fair treatmen t could be expected. 6 It ma y b e understandabl e tha t present-da y legislativ e activitie s i n the Federa l Republi c o f German y ar e intende d primaril y t o re move th e wea k point s tha t wer e inheren t i n th e Weima r Constitu tion unde r Hitler . Although I a m awar e o f th e courag e o f th e Nationa l Assembl y of th e Federa l Republi c o f Germany , thei r activitie s no w see m extraordinary. Althoug h bot h th e Weima r Constitutio n an d th e Imperial Ta x Cod e wen t int o effec t i n 1919 , th e latte r ha s bee n handed dow n almos t intact , whil e o f th e former , onl y five Article s are included , jus t a s the y are , i n th e curren t Constitutio n o f th e Federal Republi c o f Germany. 7 To return t o our mai n subject , th e Enforcemen t Regulatio n tha t defines th e fifty-first spher e o f jurisprudence says :

The Formatio n o f a n Especiall y Clos e Connectio n 16

9

51. Fro m person s wh o responsibl y conduc t pes t contro l wit h highl y poisonous substances , record s concernin g fumigation s con ducted, a s pe r 1 2 o f th e regulatio n o n th e implementatio n o f the regulatio n concernin g pes t contro l wit h highe r poisonou s substances (o f Mar . 25 , 1931 , RGBl, I , 83) ; The fifty-second spher e o f jurisprudence i s a s follows : 52. Fro m producer s o f bee f cattle , a s wel l a s slaughterhouses , slaughter chart s a s pe r 6 a n d 1 1 o f th e regulatio n concernin g producers o f beef cattl e (o f Apr . 28 , 1975 , BGBl, I , 999) ; The Enforcemen t Regulatio n prescribe s th e fifty-third spher e o f jurisprudence as : 53. Fro m seller s o f slaughter livestoc k an d agent s a t th e wholesal e cattle markets , marke t clos e certificate s t o b e issue d fo r eac h sale, accordin g t o 10 , Sec . 1 of th e livestoc k an d mea t la w (o f Apr. 25 , 1951 , BGBl, 1,272) ; The Enforcemen t Regulatio n belongin g t o th e fifty-fourth spher e of jurisprudence ha s bee n expresse d a s follows : 54. Fro m manufacturer s o f firearms, weapon s productio n book s by firms tha t bu y an d distribute , o r weapon s trad e book s b y firms tha t sel l weapon s fo r profi t The Enforcemen t Regulatio n concernin g th e fifty-fifth spher e o f jurisprudence states : 55. Fro m an y business , whic h produce s a m m u n i t i o n fo r profit , buys, sells , o r distribute s a m m u n i t i o n t o others , a m m u n i t i o n trade book s accordin g t o 12 , Sec . 1- 3 o f th e weapon s la w (o f Mar. 8 , 1976 , BGBl I , 432 ) i n connectio n wit h 14-1 8 o f th e first regulatio n t o enforc e th e weapon s la w (o f Ma y 24 , 1976 , BGBl, I , 1285) ; The Federa l Republi c o f German y i s quite differen t fro m J a p a n . In Articl e 2 6 o f it s Constitution , ther e ar e provision s i n regar d t o a w a r o f aggression . Paragrap h 1 of Articl e 2 6 prescribe s th e uncon stitutionality an d punishabilit y o f th e ac t o f preparin g fo r a w a r of aggression . Paragrap h 2 prescribe s a s follows : ''Weapon s de -

170 Th e Formatio n o f an Especiall y Clos e Connectio n signed fo r warfar e ma y no t b e manufactured , transported , o r marketed excep t wit h th e permissio n o f th e federa l government . Details shal l b e regulate d b y federa l law. " Henc e w e hav e th e above-mentioned weapon s law . According t o the Brockhaus Encyclopedia: "Detail s ar e regulate d b y a la w o f Apri l 20 , 1961 , concerning th e contro l o f weapons o f war." 8 Sinc e then , several revi sions have bee n made . As these revision s ar e no t par t o f the mai n subject o f this study , however , I will no t describ e progres s i n thi s particular matter . The Enforcemen t Regulatio n concernin g th e fifty-sixth spher e of jurisprudence provides : 56. Fro m businesse s i n whic h a t leas t 1,25 0 swin e ca n b e held , inspection book s concernin g exi t an d entr y o f th e swine , ac cording t o 13 , Sec. 1 of th e regulatio n concernin g wholesal e keeping of animals—swine (o f Apr. 9, 1975, BGBl, I , 885); The Enforcement Regulatio n regardin g th e fifty-seventh spher e of jurisprudence states : 57. Fro m producer s o f a seru m o r vaccin e (17 c o f th e Livestoc k Plague Law , i n thi s cas e o f Dec . 19 , 1973 , BGBl 1974 , I , 1) , books concerning—among othe r things—date s o f production, the numbers an d amount s of each individual batch, accordin g to 1 5 of the regulation concernin g seru m an d vaccines (of Feb. 27, 1973 , BGBlf I , 134); The Enforcemen t Regulatio n regardin g th e fifty-eighth spher e o f jurisprudence prescribes : 58. Fro m businesses tha t have permits for the use and handling of explosives, listing s concernin g th e amoun t o f th e explosive s produced, reclaimed , purchased , imported , o r otherwis e brought int o th e are a o f jurisdiction o f thi s law , transferred , used, o r destroye d accordin g t o 15 , Sec . 1 of th e explosive s law (of Aug. 25, 1969, BGBl I , 1938 ) in connection with 5 2 and 53 of th e secon d D V explosive la w (o f Apr . 24, 1972 , BGBl I , 633, amende d b y th e regulatio n o f Jun e 28 , 1976 , BGBl I , 1713);

The Formatio n o f an Especiall y Clos e Connectio n 17

1

The Enforcemen t Regulatio n prescribin g th e fifty-ninth spher e o f jurisprudence states : 59. Fro m veterinarians, who have their own in-house pharmacies , records (proof ) concernin g th e purchase , production, storage , and distributio n o f medicine accordin g t o 5 , Sees. 2-4 an d 1 3 of th e regulatio n concernin g in-hous e veterinar y pharmacie s (of July 31 , 1975, BGBl, I , 2115); The sixtieth spher e of jurisprudence i s prescribed a s follows : 60. Fro m owner s o f establishment s fo r th e disposa l o f anima l remains, records . . . concerning th e amount o f material deliv ered, accordin g t o 1 2 of the regulatio n o f Sept . 1 , 1976, BGBl, I, 2587; The Enforcemen t Regulatio n prescribin g th e sixty-firs t spher e states: 61. Fro m insuranc e companies , a special presentation o f account s according t o the external "RechVUVO " (of July 11 , 1973, BGBl, I, 1209 , amended b y th e regulatio n o f Aug. 16 , 1976 , BGBl, I , 2388) and accordin g t o interna l "RechVUVO " (of Oct. 17 , 1974, BGBlt I , 2453 , modifie d b y th e regulatio n o f Ma y 11 , 1976 , BGBl, I , 1252); According t o th e 198 0 editio n o f Beck's Concise Commentary: Insurance Policy Law (Munich : C . H . Beck' s Press) , althoug h ther e are onl y 19 3 article s i n th e tex t o f th e Insuranc e Polic y Law , i n addition t o 1 6 article s i n th e Introductio n t o it , ther e wer e 3 6 kinds of laws that should be called additional article s that brough t together th e provision s o f eac h par t o f thi s particula r law . In m y opinion, this is substantial evidenc e of how faithfully th e Nationa l Assembly o f th e Federa l Republi c o f German y ha s though t o f th e principle o f lawfu l (regular ) administration , whic h ha s bee n pro vided fo r b y Paragrap h 3 of Articl e 2 0 of th e Federa l Republi c o f Germany's Constitution . Thi s particula r poin t ma y b e entirel y different i n Japan . The Enforcemen t Regulatio n fo r th e sixty-secon d spher e o f ju risprudence i s as follows :

172 Th e Formatio n o f an Especiall y Clos e Connectio n 62. Fro m smalle r mutua l insuranc e companies , a specia l presen tation o f accounts accordin g t o the "RechbkVVO " (of Oct. 18, 1974, BGBl, I , 2909 , amende d b y th e regulatio n o f Mar . 24 , 1975, BGBl, 1,847) ; The concept o f the reciprocal characte r o f a small-scale insuranc e group i s no t compatibl e wit h th e insuranc e syste m i n Japan . Fo r example, i n th e Federa l Republi c o f Germany , ther e i s a syste m "Small . . . People's Insurance/ ' whic h i s similar t o Article 18 9 of the Insurance Polic y La w mentione d above . Once again, however , as thi s ha s nothin g t o do with m y mai n subject , I will no t g o int o details here . The Enforcemen t Regulatio n definin g th e sixty-thir d spher e o f jurisprudence is : 63. Fro m Auctioneers , record s concernin g th e auctio n contracts , according t o 21 , Sec. 1 of th e regulatio n concernin g auction s for profit (o f June 1 , 1976, BGBl, I , 1345); Under th e Auctio n La w i n Japan , i t ha s bee n prescribe d tha t i n the cas e o f a propert y auction , th e executio n organizatio n shoul d be "the executio n office r o f the District Cour t controllin g th e loca tion wher e th e auctio n i s t o b e held " (Articl e 3 o f th e Auctio n Law). I t als o state s tha t i n th e cas e o f a rea l estat e auction , th e execution organizatio n shoul d b e "th e Distric t Cour t controllin g the place wher e th e real estate t o be auctioned i s located" (Articl e 22 o f th e Auctio n Law) . There i s n o roo m fo r intervention , there fore, b y th e so-calle d trader s concerned . However , th e ac t o f a n auction sal e b y auctioneerin g trader s i s beyon d th e scop e o f th e Auction La w i n Japan . I n m y opinion , i t i s absolutel y necessar y for u s t o learn th e point a t whic h th e record s o f these auctioneer ing trader s shoul d b e looke d upo n a s thos e unde r th e ta x laws . In addition, thei r completeness , truth , timeliness , clarity , an d th e completeness wit h whic h the y satisf y othe r require d condition s should als o b e demande d a s th e la w i n conjunctio n wit h penalt y laws and regulations . The Enforcemen t Regulatio n regardin g th e sixty-fourt h spher e of jurisprudence state s as follows :

The Formatio n o f an Especiall y Clos e Connection 17

3

64. Fro m administrator s o f commo n propert y o f condominiu m owners, busines s plans , accounts , an d presentation s o f ac counts, according t o 28, Sees. 1 , 3, and 4 of the condominiu m law (of Mar. 15 , 1951, BGBl, I , 175); The Enforcemen t Regulatio n concernin g th e sixty-fift h spher e o f jurisprudence indicates : 65. Fro m anima l traders , inspection book s concerning th e horses , cattle, an d swin e i n thei r possession , accordin g t o 2 0 o f th e Bundesrat's implementatio n instruction s t o th e livestoc k epi demic law (of Dec. 7, 1911 , RGBl, 1912,3) ; The year 191 1 obviously precede d Worl d War I . The enactmen t of the Imperial Tax Code occurred afte r th e Weimar constitutiona l system wa s establishe d i n 1919 . Althoug h i t i s understandabl e that th e Imperia l Ta x Cod e adopte d law s an d regulation s tha t were drafte d i n 1911 , the curren t Constitutio n doe s no t includ e these law s an d regulations , except fo r five articles (Article s 13 6 to 141) of the Weimar Constitution . Moreover, thes e articles ar e con cerned onl y wit h religiou s problems . I mus t wonde r whethe r a n enforcement regulatio n o f the Bundesrat fro m 191 1 still has valid ity. However, th e Constitutio n o f the Federal Republi c of Germany , drafted i n 1949 , ha s "transitiona l stipulations/ ' Paragrap h 1 of Article 12 3 of which prescribe s tha t " a la w i n force befor e th e first meeting o f th e Bundesta g shal l remai n i n forc e insofa r a s i t doe s not conflic t wit h th e Constitution. " Suc h "transitiona l stipula tions" canno t b e foun d i n th e Constitutio n o f Japan. Thi s ma y b e due t o th e fac t tha t th e curren t Constitutio n o f Japa n i s th e out come o f th e revolutionar y creatio n an d enactmen t o f th e whol e text of the Constitution o f the Empire of Japan. The new Constitu tion was put i n place with th e obstinate insistenc e by Article 73 of the Imperia l Constitutio n o f Japa n tha t i t wa s a revisio n o f th e Imperial Constitution . Doe s the reade r acknowledg e tha t th e Jap anese ar e a peopl e wh o accept , calml y an d constitutionally , a made-up stor y regarding eve n the public affairs o f the state ? The Enforcement Regulatio n regardin g th e sixty-sixth sphere of jurisprudence prescribes :

174 Th e Formatio n o f an Especiall y Clos e Connectio n 66. Fro m owner s o f public scales , documents concernin g th e cer tified publi c weighings, according t o 8, Sec. 8 of the weighin g ordinance (of June 18 , 1970, BGBl, I , 799); The sixty-seventh spher e of jurisprudence i s defined a s follows : 67. Fro m a business , whic h withi n th e meanin g o f th e win e la w (of Jul y 14 , 1971 , BGBl, I , 893 ) produces , markets , exports , and import s product s . . ., winebooks i n accordanc e wit h 57 , Sec. 1 , No. 1 of the wine law in conjunction wit h 1 of the win e supervision regulatio n (o f Mar . 30 , 1973 , BGBl, I , 245) ; con cerning analytica l examination s o f th e product s withi n th e meaning of the wine law for other firms, analysis books, as per 57, Sec . 1 , No. 3 of th e win e la w i n connectio n wit h 2 of th e wine supervision regulation ; The Enforcemen t Regulatio n concernin g th e sixty-eight h spher e of jurisprudence dictates : 68. Fro m proprietor s o f businesses tha t sell , purchase, exchange , process, or use wild game for profit, gam e trad e books accord ing t o 3 6 o f th e federa l la w (i n thi s case , o f Mar . 30 , 1961 , BGBl, I , 304); The Enforcement Regulatio n governing the sixty-ninth sphere prescribes as follows : 69. Fro m housin g entrepreneurs , book s (busines s reports ) i n ac cordance wit h th e guideline s o f th e umbrell a organization , according t o 23 , Sees. 1 and 2 of th e regulatio n o f th e execu tion of the equal opportunity housing law (in this case, of Nov. 24, 1969 , BGBl, 1,2141) ; Finally, th e Enforcemen t Regulatio n definin g th e seventiet h spher e of jurisprudence states : 70. Fro m processin g plant s an d commercia l enterprise s o f suga r production an d th e storag e an d transpor t businesse s tha t stor e or distribut e sugar , book s coverin g al l busines s transaction s (especially thos e concernin g purchase , storage, processing, sale, and brokerage), according t o 12 , Sees. 1 an d 3 of the sugar la w (of Jan. 1,1951, BGBl, I, 47).

The Formatio n o f an Especiall y Clos e Connection 17

5

The Enforcemen t Regulation , whic h i s an administrativ e orde r to Article 14 0 of th e AO, come s t o a n en d here . It conclude s wit h the followin g sentence : "Infringement s o f thes e obligation s o f keeping non-tax-relate d book s an d records , ar e tantamoun t t o in fringements agains t th e regulation s concernin g keepin g tax-re lated books and records . Refer t o 162 , Sec. 2 (Estimates), 379, Sec. 1 (Tax Risk)." In thi s way , th e obligation s o f entry an d record s unde r th e ta x laws in the Federal Republi c of Germany have formed, i n as man y as seventy spheres of jurisprudence, an especially close connectio n between Civi l La w an d Ta x La w an d hav e take n roo t i n a broa d and diversifie d wa y i n th e citizen' s life . Th e reade r ma y no w understand ho w wid e th e influenc e o f th e principle s o f regula r bookkeeping is . I would hop e tha t thos e wh o ar e concerne d wit h law makin g i n Japa n wil l follo w th e exampl e o f th e Federa l Re public o f German y an d wor k t o brea k dow n Japan' s unfai r ta x system. The Difference betwee n Ordinance s an d Guidelines an d the Legal Injunctio n I must no w touc h o n severa l problems . The first i s the dissimilar ity between the words "Erlasse" (''ordinances") an d "Richtlinien " ("guidelines"). Th e Enforcemen t Regulation , th e objec t o f whic h is to create a n administrativ e orde r o f an especiall y clos e connec tion betwee n Civi l La w an d Ta x Law , ha s bee n calle d "Einfuhr ungserla/3 zu r AO. " Th e wor d "Erlasse " ("ordinances" ) i s use d only i n thi s wa y i n th e Enforcemen t Regulation , an d thi s ter m i s different fro m "Richtlinien " ("guidelines") , whic h i s a simila r administrative order . These two terms diffe r i n that "Richtlinien " ("guidelines") cover s al l th e text s of the tax laws , while "Erlasse " ("ordinances") ar e t o be announce d officiall y onl y i n conjunctio n with th e provisio n tha t i s particularly recognize d a s importan t i n each part o f the ta x law . They are identical , however, i n that bot h only hav e th e characte r o f a "secondar y source " o f law . Tha t is , they d o no t restric t a cour t o f justice . Althoug h bot h ar e an nounced officiall y b y th e ministe r o f finance, th e characte r o f th e "primary source " of law is still lacking in both of them .

176 Th

e Formatio n o f a n Especiall y Clos e Connectio n

In thi s particula r respect , th e sam e i s als o tru e o f "Bundverfii gungen" ("circula r notices") - Consequently , thes e thre e action s are t o b e pronounce d invali d b y th e Cour t o f Finances , whe n the y are foun d t o deviat e fro m th e interpretatio n o f th e law . O n th e other hand , "Durchfuhnmgsverordnungen " ("implemen t order s [regulations concernin g executio n o f a law]") , abbreviated "DVO " or "DV, " whic h hav e th e sourc e o f law , ar e calle d "Rechtsverord nungen" ("decre e laws") . Paragrap h 1 of Articl e 8 0 o f th e Consti tution o f th e Federa l Republi c o f German y ha s prescribe d thi s particular point , unde r whic h th e governmen t o r th e ministe r ha s been accorde d b y la w th e authorit y t o issu e decre e laws . Wha t must b e attende d to , however , i s tha t th e content , purpose , an d scope o f th e authorizatio n s o conferre d mus t b e se t fort h i n suc h law, an d a deviatio n fro m thi s limitatio n i s t o b e judge d invali d by virtu e o f being a n infringemen t upo n th e Constitution . In th e ligh t o f th e philosoph y o f law , thi s point , i n particular , stands t o reason . I n m y opinion , ther e i s n o nee d fo r furthe r state ment o f thi s particula r point . Articl e 4 1 o f th e Constitutio n o f J a p a n prescribe s tha t "th e Die t shal l b e th e highes t orga n o f stat e power." Therefore , fo r example , i n a cas e whe n th e authorit y fo r enacting th e entruste d orde r i s conferre d upo n outsid e organ s b y the Diet , i t i s logica l tha t th e contents , purpose , an d exten t o f thi s authority shoul d b e provide d fo r i n th e la w concerned . Whe n w e openly bas e ou r action s o n thi s philosoph y o f law , i t ma y safel y b e said tha t bot h Articl e 6 8 o f th e Incom e Ta x La w an d Articl e 6 5 o f the Corporatio n Ta x La w i n J a p a n ar e law s tha t hav e a n unconsti tutional character . Article 6 8 o f th e Incom e Ta x La w o f J a p a n prescribe s tha t "outside o f thos e tha t ar e specificall y prescribe d i n thi s clause , necessary matter s regardin g th e scop e o f variou s kind s o f incom e and th e calculatio n o f th e a m o u n t o f mone y gaine d fro m variou s kinds o f income shoul d b e provided fo r b y governmen t ordinance. " Article 6 5 o f th e Corporatio n Ta x Law , moreover , prescribe s tha t "excepting thos e item s whic h ar e specificall y provide d fo r i n thi s Section 2 an d th e prio r sectio n [calculatio n o f th e a m o u n t o f money gaine d fro m income] , necessar y matter s concernin g th e calculation o f th e amoun t o f mone y gaine d fro m incom e i n eac h business yea r shoul d b e provide d fo r b y governmen t ordinance. "

The Formatio n o f an Especiall y Clos e Connectio n 17

7

It i s difficult t o sa y tha t thes e tw o particular provision s prescrib e in th e law , th e contents , purpose, and exten t o f the authorit y tha t was transferred t o the government ordinance . It i s recognize d tha t th e "ambiguity " o f thes e provision s ha s brought fort h th e circula r notice s i n regar d t o th e Incom e Ta x Law an d th e Corporatio n Ta x Law , bot h o f which hav e included , in larg e quantities , "th e necessar y matter s regardin g th e calcula tion of the amount o f money gained from income/ ' It appears tha t the Die t i n Japa n ha s transferred , withou t ou r knowledge , th e comprehensive enactmen t authorit y o f the tax laws to the directo r general o f th e Nationa l Ta x Administratio n Agency . Fo r th e sak e of th e prestig e o f Japan' s legislation , thi s shoul d b e reforme d b y mustering th e all-out courag e of our nation . Authority fo r Rectifying th e Law s The next matte r t o be considered i s whether or not th e minister of finance o r the director genera l of the National Ta x Administratio n Agency, through thei r respectiv e administrativ e orders , can mak e up fo r a portio n o f th e ta x la w tha t i s lacking , o r ca n rectif y th e defects o f th e ta x law . I n regar d t o this , ther e onc e existed , an d may currentl y exist , a n opinio n tha t i n additio n t o it s functio n o f explaining th e tex t o f th e ta x law , th e Nationa l Ta x Administra tion Agenc y i n Japan , throug h a circula r notice , ca n suppl y a deficient portio n i n the tax law or rectify a defective portio n o f th e tax law . I suspec t tha t thi s particula r opinio n ma y b e nearl y identical wit h tha t i n ta x jurisprudence i n Germany befor e Worl d War II. When th e Imperia l Ta x Cod e wa s enacte d i n 1919 , Articl e 6 prescribed: "When , in the meaning o f the law, the officials hav e t o make a decision on their own judgment, i t is to be made in consid eration o f justice an d equity." 9 Ther e i s n o doub t a t al l tha t thi s provision wa s late r replace d b y Article 1 2 of the AO, under whic h the federal ministe r o f finance, throug h hi s administrative orders , had th e authority t o prescribe federal ta x law and t o rectify it. 10 It is necessary fo r us to bear i n mind, however, tha t thi s responsibil ity wa s definitel y eliminate d i n th e Federa l Republi c o f German y after Worl d War II.

178 Th

e Formatio n o f a n Especiall y Clos e Connectio n

The first pavin g ston e i s se t dow n i n Articl e 12 9 of th e Constitu tion o f th e Federa l Republi c o f Germany. Unde r th e headin g ''Con tinued Validit y o f Authorizations/ ' Paragrap h 3 o f Articl e 12 9 prescribes a s follows : "Insofa r a s lega l provision s withi n th e meaning o f paragraph s (1 ) an d (2 ) o f thi s articl e authoriz e thei r a m e n d m e n t o r supplementatio n o r th e issu e o f lega l provision s instead o f laws , suc h authorizatio n ha s expired. " Wha t i s referre d to b y "lega l provision s withi n th e meanin g o f paragraph s (1 ) an d (2)" i s tha t Paragrap h 1 indicates law s an d regulation s unde r th e federal law s an d Paragrap h 2 indicate s thos e i n th e law s o f th e individual states . I n eithe r case , Article 12 9 stipulate s tha t hence forth n o suc h action s shal l b e acknowledge d (fo r example , th e law s and regulation s tha t hav e th e characte r o f administrativ e orders ) as takin g th e plac e o f th e la w o r a s changing , rectifying , o r newl y issuing law s an d regulations . This wa s furthe r confirme d b y a decisio n o f th e Federa l Financ e Court, o n Novembe r 22 , 1951 , two year s afte r th e enactmen t o f th e Constitution o f th e Federa l Republi c o f Germany. 1 1 Furthermore , the revise d AO, whic h wa s enacte d tw o year s late r o n Jul y 11 , 1953, officiall y proclaime d th e abolitio n o f suc h authorization s through a n expres s provisio n unde r th e ta x law. 12 W e Japanes e should reflec t o n th e fac t tha t th e authoritie s o f th e Nationa l Ta x Administration Agenc y i n Japan , throug h th e circula r notice s tha t are issue d b y th e directo r general , ca n no t onl y proclai m custom ary standard s i n th e interpretatio n o f th e law , bu t ca n als o suppl y a deficienc y i n th e ta x law s an d rectif y a defect . Thi s practic e ha s been completel y wipe d ou t unde r present-da y Germa n ta x juris prudence. I n thi s regar d i t ma y safel y b e sai d that , whe n com pared wit h th e ta x law s o f th e Federa l Republi c o f Germany , Japan's ta x law s an d th e administratio n o f taxatio n busines s la g by mor e tha n te n years . Notes 1. I t should be 1919 , not 1918—au . 2. Althoug h thi s boo k is called a "pocket commentary/ ' i t i s a majo r work comprised o f two volumes with a total of over 1,60 0 pages . 3. Se e Vol. l,p.465 .

The Formatio n o f a n Especiall y Clos e Connectio n 17

9

4. Seep . 37. 5. Thi s is a contagious disease in birds that also infects human beings. 6. Se e pp. 74-75. 7. Articl e 14 0 of the Constitution . 8. Brockhaus Enzyklopddie, Neunzehnte r Band , 1974 , S. 771. 9. Die Reichsabgabeordnung vom 13 Dezember 1919 von Enno Becker, Zweite Auflage, 1922 , S. 27. 10. Taxation in the Federal Republic of Germany (Harvard La w School , 1963), p . 88 ; Tipk e an d Kruse , Imperial Tax Code: Pocket Commentary (Cologne: Verlag Dr. Otto Schmidt KG , 1961), S. 58. 11. BStBl, 1952,111 , S. 6. 12. BGBl, 1953,1. , S. 511.

13 The Calculatio n Regulation s i n th e United State s an d Englan d

The General Situatio n The Companies Ac t of 194 8 in Englan d ha d a total o f 462 articles , along wit h 8 tables. Sinc e th e enactmen t o f the Companies Ac t of 1862, amon g man y companie s act s tha t becam e indicativ e o f a n entire era , th e Companie s Ac t o f 194 8 ha d th e mos t numerou s provisions. As a resul t o f the Companie s Ac t of 1976 , Articles 127 , 147, 148 , 331, and s o forth—the provision s regardin g calculatio n —were all abolished an d los t thei r validity . There ar e onl y forty-fiv e article s i n th e Companie s Ac t of 1976 , in additio n t o "Schedules " 1 through 3 . The ful l tex t i s divide d into two parts, as follows: 1 ) accountants, accounting records, an d auditors, an d 2 ) miscellaneou s an d supplementary . I n Sectio n 1 , Article 12 , "Accountin g Records, " an d th e provision s relate d t o auditors i n Articles 1 3 through 2 0 are considered th e mos t impor tant. As with earlier companies acts, the penalties for not adherin g to these articles i s imprisonment fo r les s than tw o years, or a fine, or both . It i s m y opinio n tha t thi s i s a splendi d piec e o f legislation . I t seems particularly admirabl e tha t th e ter m "ever y company " ha s been used throughout an d tha t n o distinctions between companie s —such as the amount o f capital, or whether a company i s "listed, " or "unlisted"—ar e made . Th e mos t importan t poin t i n Sectio n 2 180

The Calculatio n Regulation s 18

1

may b e "disclosur e o f interest s i n s h a r e s / ' whic h ha s bee n pro vided fo r i n Article s 2 4 throug h 27 . The calculatio n regulation s i n th e Unite d State s ar e base d o n the Securitie s Ac t o f 1933, l th e Securitie s an d Exchang e Ac t (1934) , and th e Smal l Busines s Ac t o f 1958 . Eac h o f th e firs t tw o law s created a commission , an d bot h commission s hav e th e righ t t o establish regulations . Th e rule s an d regulation s promulgate d b y these commission s hav e becom e colossal . It i s a bi g job , therefore , to becom e totall y familia r wit h thes e rule s an d regulations , i n detail an d accurately . As these America n rule s an d regulation s ar e no t necessaril y p a r t of m y m a i n subject , I wil l touc h o n the m onl y peripherally . Thes e laws an d regulation s ar e fa r mor e thoroug h i n term s o f socia l justice, o r i n justic e i n taxation , tha n thos e i n Japan , especiall y insofar a s thes e law s mak e n o distinctio n i n calculatio n regula tions i n regar d t o th e scal e o f a n enterprise . Specia l not e shoul d also be take n o f the fac t tha t a s a n executiv e ca n obtai n an d revie w records o f transactions , t o insur e th e completenes s an d trut h o f accounting records , thes e law s m a n d a t e a priso n sentenc e o r a fine to be impose d o n thos e executive s wh o counterfei t o r alte r records , or mak e fals e entrie s i n book s o f accoun t o r o n financial state ments, an d s o forth . I t i s highl y admirabl e tha t th e Securitie s Ac t of 193 3 h ad a regulatio n i n regar d t o a priso n sentenc e o f les s tha n five years , o r a fine o f no t mor e tha n five thousan d dollars , o r th e imposition o f bot h penaltie s i n th e even t o f unfair accounting. 2 Article 1 2 of th e Britis h Companie s Ac t o f 197 6 We mus t first revie w Articl e 1 2 o f th e Britis h Companie s Ac t o f 1976, whic h ha s twelv e paragraphs . A s a singl e provision , i t i s a fairly lon g article . Paragrap h 1 states: (1) Ever y compan y shal l kee p accountin g record s i n accordanc e with th e provision s o f thi s section . Paragraph 2 is a s follows : (2) Th e accountin g record s shal l b e sufficien t t o sho w an d ex plain th e company' s transactions . Paragraph 3 stipulates :

182 Th e Calculation Regulation s (3) Th e accounting record s shall be such as t o (a) disclos e with reasonable accuracy, at an y time, the financial position o f the company a t tha t time ; an d (b) enabl e th e director s t o insur e tha t an y balanc e shee t o r profit an d los s accoun t prepare d b y the m unde r Sectio n (1) above complie s wit h th e requirement s o f Sectio n 14 9 of th e Ac t o f 194 8 (th e balanc e shee t t o giv e a tru e an d fair vie w o f th e company' s stat e o f affairs, an d th e profi t and los s accoun t t o giv e a tru e an d fai r vie w o f the com pany's profit o r loss, etc.) And Paragraph 4 prescribes as follows : (4) Th e accounting records shall in particular contai n (a) entrie s o n a day-to-da y basi s o f al l sum s o f mone y re ceived an d expende d b y th e company an d th e matter s i n respect t o which th e receipt an d expenditur e too k place; (b) M a recor d o f th e asset s an d liabilitie s o f th e company ; and (c) whe n th e company' s busines s involve s dealin g i n goods , the statements mentione d i n Section (5 ) below. Paragraph 5 states: (5) Th e statements referre d t o in Section (4) (c) above ar e (a) statement s o f stoc k hel d b y th e compan y a t th e en d o f each financial yea r of the company ; (b) al l statement s o f stoc k taking s fro m whic h an y suc h statement a s i s mentione d i n paragrap h (a ) abov e ha s been or is to be prepared; an d (c) excep t i n th e case of goods sold by way of ordinary retai l trade, statement s o f al l good s sol d an d purchase d show ing th e good s an d th e buyer s an d seller s i n sufficien t detail t o enabl e th e good s an d th e buyer s an d seller s t o be identified . In this way, the concept o f statements i s presented, t o say noth ing of the statements of inventories at the end of a term, all the statements o f th e origina l record s tha t constitut e th e basi s fo r th e statements o f th e inventorie s a t th e en d o f a term , an d eve n th e

The Calculation Regulation s 18

3

statements o f th e identificatio n o f th e partie s concerne d wit h the selling and purchasin g o f goods—all o f which ar e include d i n the concep t o f statements . Th e abov e specifie d statement s ar e presented befor e th e positiv e law s an d regulation s o f th e compa nies act. This legislation is , in my opinion, admirable indeed . To continue, Paragraph 6 is written i n this way : (6) Subjec t t o Sectio n (7 ) below, th e accountin g record s shal l b e kept a t th e registere d offic e o f th e compan y o r a t suc h othe r place a s th e director s o f th e compan y thin k fit an d shal l a t all times be open to inspection by the officers o f the company . In comparison wit h Japan's curren t Commercia l Code , which pre scribes tha t th e locatio n fo r preservin g a company' s book s o f ac count ca n b e onl y a t th e sit e o f th e hea d offic e (Article s 14 3 an d 429), the British regulation s o n thi s matte r ar e mor e realistic an d practical. Paragraph 7 prescribes: (7) I f accountin g record s ar e kep t a t a plac e outsid e Grea t Brit ain, account s an d return s wit h respec t t o th e busines s deal t with i n th e accountin g record s s o kept shal l b e sen t to , an d kept a t a plac e in , Grea t Britai n an d shal l a t al l time s b e open t o inspection b y the officers o f the company . If suc h a provisio n existe d i n Japan , case s suc h a s tha t o f Ataka could be prevented i n advance . Paragraph 8 stipulates as follows : (8) Th e accounts and returns t o be sent to Great Britain i n accor dance with Sectio n (7) above shall be such as t o (a) disclos e wit h reasonabl e accurac y th e financial positio n of the busines s i n questio n a t interval s no t exceedin g si x months; an d (b) enabl e th e director s t o insur e tha t an y balanc e shee t o r profit an d los s accoun t prepare d b y the m unde r Sectio n (1) abov e complie s wit h th e requirement s o f th e sai d Section 14 9 of the Act of 1948. Paragraph 9 states:

184 Th

e Calculatio n Regulation s

(9) Subjec t t o an y directio n wit h respec t t o th e disposa l o f an y records kep t b y a compan y give n unde r an y rule s mad e unde r Section 36 5 (1 ) of th e Companie s Ac t o f 1948 , any accountin g records tha t a compan y i s require d b y thi s sectio n t o kee p shall b e preserve d b y it : (a) i n th e cas e o f a privat e company , fo r thre e year s fro m th e date o n whic h the y ar e made ; an d (b) i n an y othe r cas e fo r si x year s fro m th e dat e o n whic h they ar e made . Section 36 5 (1 ) o f th e Ac t o f 1948 , mentione d above , indicate s clearly that , i n England , wit h th e agreemen t o f th e presiden t o f the Boar d o f Trade , th e lor d chancello r ha s bee n grante d th e authority t o establis h genera l rule s tha t ar e necessar y t o accom plish th e objective s o f th e Companie s Ac t a s fa r a s "winding-u p rules" ar e concerned. 3 Th e sam e i s tru e i n Scotlan d unde r th e Ac t of Sederunt . Paragraph 1 0 o f Articl e 1 2 o f th e Companie s Ac t o f 197 6 indi cates a s follows : (10) I f a compan y fail s t o compl y wit h an y provisio n o f subsec tions (1 ) t o (7 ) above , ever y office r o f th e compan y tha t i s i n default shal l b e guilt y o f a n offens e unles s h e show s tha t h e acted honestl y an d tha t i n th e circumstance s i n whic h th e business o f th e compan y wa s carrie d o n th e defaul t wa s ex cusable; an d i f an y office r o f th e compan y fail s t o tak e al l reasonable step s fo r securin g complianc e b y th e compan y with subsectio n (9 ) abov e o r ha s intentionall y cause d an y default b y th e compan y thereunder , h e shal l b e guilt y o f a n offense. Since th e U.S . Securitie s Ac t o f 193 3 wa s enacted , unlawfu l accountings mad e b y responsibl e person s hav e bee n deal t wit h b y criminal penalties , a tendenc y tha t ha s take n roo t amon g th e advanced civilize d countrie s o f th e world . Th e reade r ma y recal l the fac t that , i n th e past , th e Expor t Committe e o f th e Organiza tion fo r Economi c Cooperatio n an d Developmen t (OECD ) ha s pointed ou t th e lac k o f originalit y amon g th e Japanes e i n th e sphere o f cultura l sciences . I mus t conclud e tha t thos e i n J a p a n

The Calculatio n Regulation s 18

5

who obstinatel y tr y t o restrict thei r field o f vision onl y t o domesti c affairs an d d o no t envisio n J a p a n ' s plac e i n th e world , wil l cheris h the dange r tha t wil l mak e Japan' s destin y tak e a wron g course . Paragraph 1 1 follows : (11) An y perso n guilt y o f a n offens e unde r thi s sectio n shal l b e liable (a) o n convictio n o n indictmen t t o imprisonmen t fo r a t e r m not exceedin g tw o years , or t o a fine, o r t o both ; o r (b) o n s u m m a r y conviction , t o imprisonmen t fo r a ter m no t exceeding si x months , o r t o a fine no t exceedin g 40 0 pounds, o r t o both . Paragraph 1 2 stipulates : (12) Sectio n 14 7 o f th e Ac t o f 194 8 (whic h i s supersede d b y thi s section) an d Sectio n 33 1 o f tha t ac t (regardin g th e liabilit y provision concernin g th e responsibilit y fo r wher e prope r book s of accoun t ar e t o b e kep t durin g th e perio d befor e th e "wind ing-up rules" ) shal l ceas e t o hav e validity . Under thi s provision , Sectio n 14 7 o f th e Ac t o f 1948 , whic h h a d hitherto bee n considere d th e provisio n o f th e principl e o f regula r bookkeeping unde r th e Britis h Companie s Ac t b y som e accountin g scholars i n Japan , wa s abolished , an d supersede d b y thi s Sec tion 12 . Section 1 9 o f th e Britis h Companie s Ac t o f 197 6 Sections 1 3 throug h 2 0 contai n th e rule s i n regar d t o auditors . Among thes e rules , Sectio n 1 9 i s unique , i n tha t ther e ar e n o similar calculatio n provision s i n th e Unite d State s o r th e Federa l Republic o f Germany . Du e t o th e limit s o f space , I wil l touc h o n only Sectio n 1 9 and en d m y examinatio n o f th e Britis h Companie s Act 1976 . Th e titl e o f Sectio n 1 9 i s "Fals e statements , etc. , t o Auditors/' an d i t i s divide d int o thre e parts . Par t On e prescribe s as follows : (1) A n office r o f a compan y wh o knowingl y o r recklessl y make s a statement that :

186 Th e Calculation Regulation s (a) i s misleading , false , o r deceptiv e i n a materia l particu lar, an d (b) i s a statement t o which thi s section applies , shall be guilt y of an offense . Part Tw o states: (2) Thi s sectio n applie s t o an y statemen t mad e t o th e auditor s o f the compan y (whethe r orall y o r i n writing ) tha t conveys , o r purports t o convey , an y informatio n o r explanatio n tha t the y require, or are entitled t o require, as auditors of the company . Judicial preceden t an d doctrin e i n thi s countr y acknowledg e the concep t o f dolus eventualis. I t shoul d b e noted , however , tha t this provisio n indicate s tha t no t onl y th e wil l bu t als o th e inten tion o f th e perso n makin g th e statemen t i s subjec t t o th e imposi tion o f penalties, an d tha t thi s i s closely aki n t o th e theor y o f th e Penal Cod e tha t maintain s tha t th e dolus eventualis i s the respon sible condition fo r intentiona l offens e a s a kind of intention . Part Thre e stipulates : (3) An y perso n guilt y o f a n offens e unde r thi s sectio n shal l b e liable: (a) o n convictio n o n indictmen t t o imprisonmen t fo r a ter m not exceeding two years, or to a fine, or to both; o r (b) o n summar y convictio n t o imprisonmen t fo r a ter m no t exceeding six months, or to a fine not exceeding 400 pounds, or to both. I d o no t kno w o f an y othe r countr y tha t ha s thi s typ e o f lega l provision prescribin g tha t an y administrato r o f a compan y wh o makes a fals e statemen t t o auditor s i n accountin g o r i n taxatio n affairs, orall y o r i n writing, wil l b e subject t o imprisonment, o r a fine, or both. In regard t o this, I must expres s my deep admiratio n of th e trul y commendabl e justic e an d courag e o f th e member s o f the Britis h Nationa l Assembl y an d thos e authoritie s wh o ar e re sponsible for drafting Britis h law s and regulations . It seem s t o m e tha t th e electe d member s o f th e Japanes e Diet , who take an oath to do all they can in the interests of the state an d the people, should take a lesson from th e British. Our bureaucrati c

The Calculatio n Regulation s 18

7

officials, wh o hav e a hig h opinio n o f themselve s shoulderin g th e formation o f th e destin y o f Japa n an d th e people , shoul d mak e every possibl e effor t t o lear n a grea t dea l fro m th e drawin g u p of such a bill and t o persuade th e Diet . The Calculation Syste m i n th e Unite d State s We will no w tur n t o th e calculatio n syste m i n th e Unite d States . In America , ther e i s n o la w simila r t o th e "La g o m bokforing " i n Sweden. Th e U.S . Interna l Revenu e Cod e (IRC) , Sec . 6001 , prescribes tha t individual s "shal l kee p suc h records, " an d s o forth . The nature of the contents and condition of such records, however, and eve n th e perio d o f preservation, hav e bee n mandate d b y reg ulations. One of the IRC's distinctive features i s that the obligatio n to preserv e "permanen t book s o f accoun t o r records " ha s bee n imposed o n al l taxpayer s (excludin g person s engage d i n agricul ture) an d o n earner s o f employmen t income. 4 Thi s measur e i s considered t o correspond t o the point tha t ther e is no prescriptio n system i n regard t o "tax dodging " and "non-filing." 5 Moreover , i n regard t o th e for m o f accountin g records , ther e i s n o specifie d statutory form. 6 A s to the method o f accounting, as a general rule , any method , suc h a s "cas h basis, " "incurre d basis, " "service out put method, " o r th e mixe d metho d (th e joint us e o f "cas h basis " and "incurre d basis" ) ca n b e freel y selected. 7 Unde r thi s U.S . legislation, however , onc e a metho d o f accountin g ha s bee n se lected, a n optiona l chang e i n th e metho d o f accountin g i s no t permitted. A change mus t b e approve d b y th e directo r genera l o f the Tax Administration Burea u o r his deputy. 8 As to this U.S. method o f accounting, in Japan som e scholars i n accounting an d th e ta x law s may hav e notice d tha t "th e standar d of corporate accountin g tha t i s recognized a s fair an d reasonable " (Ministerial Ordinanc e Regardin g Audi t Certificates , Paragrap h 3 of Article 4) and "th e standar d o f disposition o f accounting tha t i s generally considere d fai r an d reasonable " (Paragrap h 4 of Articl e 22 of th e Corporatio n Ta x Law ) see m t o b e a Japanes e versio n o f the ter m "generall y accepte d principle s o f accounting, " whic h i s used i n America n accounting . The y ma y no t realiz e tha t n o au thoritative explanator y rule s regardin g thes e concept s hav e eve r

188 Th e Calculation Regulation s been give n b y law s an d ordinances . Th e concep t o f th e principl e of regula r bookkeepin g (Paragrap h 1 of Article 5 7 of th e Enforce ment Regulation s fo r th e Incom e Ta x Law) , namely , th e metho d of accounting i n the Unite d States , is in every sense different fro m the principle o f regular bookkeeping , especially i n the adoption of the mixed metho d tha t i s acknowledged i n the United States . In an y case , however , i n th e Unite d State s whe n a taxpayer' s method of accounting is considered "not to clearly reflect income/ ' the directo r genera l o f th e Ta x Administratio n o r hi s deput y ca n order a change i n the method o f accounting i n question. 9 In American ta x laws , ther e ar e penalt y provision s regardin g unlawfu l activities o n th e par t o f taxpayer s i n a s man y a s twelv e articles , which follow below . In th e cas e o f a n attemp t t o dodg e taxes , ther e i s a provisio n under whic h a fine of not mor e tha n $10,000 , or a prison sentenc e of les s tha n five years , o r both , i s t o b e give n (Articl e 7201) . I n regard t o discontinuing us e of books of account, thei r destruction , damage t o them, or counterfeiting o r making false entries in them , there i s a provisio n (Articl e 7206) , under whic h a fine of less tha n $5,000, or a prison sentenc e o f less than thre e years , or both, i s t o be given . Moreover , i n th e cas e o f nonappearanc e i n a publi c government offic e an d nonpresentatio n o f books of account, a fine of less than $1,000 , or a prison sentenc e o f a ter m o f less than on e year is to be given (Article 7210). This i s splendid legislation , however, penalty provision s d o no t end here . Ther e ar e als o lega l provision s tha t ar e intende d t o protect taxpayers . Unde r th e headin g "offense s b y officer s an d employees o f th e Unite d States, " Article 721 4 of the U.S . Internal Revenue Code lists the offenses i n nine items and prescribes a fine of less than $10,000 , or a prison sentenc e of less than five years, or both, in addition t o disciplinary dismissal . Due t o spac e limitations , I canno t introduc e th e ful l tex t o f Article 721 4 here . Afte r th e introductor y phrase , "i n connectio n with an y revenu e la w o f th e Unite d States, " th e first provisio n o f Article 7214 states "who is guilty of any extortion or willful oppression under cover of law." Such acts have frequently bee n observe d within th e jurisdiction s o f ou r loca l Ta x Administratio n Bureau s in Japan . I regre t t o sa y tha t i n Japan , a s bill s ar e draw n u p b y

The Calculatio n Regulation s 18

9

government official s an d a statesman ca n sponge on these officials , there is no possibility tha t suc h provisions exist . The second provisio n continues : "wh o knowingly demand s othe r or greate r sum s tha n ar e authorize d b y law , o r receive s an y fee , compensation, o r reward , excep t a s prescribe d b y law , fo r th e performance o f an y duty. " I n Japan , suc h conduc t ha s absolutel y not been seen among thos e persons who are in the so-called caree r class, however, i t has occasionally bee n see n among thos e person s who have a sens e o f thei r respectiv e defea t i n th e competitio n fo r advancement i n life . In addition , ther e ar e variou s provision s concernin g suc h mat ters a s offerin g convenienc e t o ta x dodgers , o r th e receip t o r pre sentation o f mone y an d articles , however, I cannot describ e the m all here . Wha t i s clea r i s tha t i n Japan' s law s an d regulations , including it s ta x laws , rule s fo r protectin g taxpayer s hav e bee n lacking. For instance , Articl e 8 8 of th e AO enacte d i n 197 7 in th e Federal Republi c o f German y prescribe s th e principl e o f investi gation, Paragrap h 2 of which states : "The finance offic e mus t als o take circumstance s favorabl e t o th e partie s int o account." 10 I n regard t o this , Fran k Klei n an d Ger n Orlop p hav e commented : "Der Abs. 2 sagt a n sich etwas Selbstverstandliches." 11 In Japa n w e coul d no t sa y suc h a thin g eve n jus t fo r fun ! I n Japan's taxatio n law s there is not even a trace of such a provision . It shoul d b e know n tha t Fran k Klei n an d Ger n Orlopp , th e coau thors o f thi s book , ar e hig h official s i n th e finance ministr y i n th e Federal Republi c of Germany. I feel strongl y tha t a legal provisio n under whic h th e interest s o f taxpayer s ar e take n int o considera tion alon g wit h th e interes t o f th e nationa l treasur y shoul d b e introduced t o Japan a s soon as possible. Criticism o f Professo r Ear l A. Spiller, Jr. The reader will, I hope, forgive a digression from m y main subject . Professor Ear l A . Spiller, Jr. , o f Indiana Universit y seem s t o hav e been i n erro r whe n h e mad e th e followin g statemen t i n regar d t o the Securitie s an d Exchang e Commission : "Unde r th e securitie s laws o f 193 3 an d 1934 , Congres s establishe d thi s agenc y i n a n attempt t o regulat e th e nation' s securitie s market s an d t o assur e

190 Th e Calculation Regulation s that investor s ha d adequat e informatio n o n whic h t o bas e thei r decisions." 12 Th e trut h o f thi s matter , however , i s somewha t dif ferent. Th e commissio n mentione d i n Paragrap h 5 of Articl e 2 of the Securitie s Ac t of 1933 , which wa s enacted o n May 26, 1933 , is known a s th e Federa l Trad e Commission . Thi s commissio n wa s created b y the Federal Trad e Commission Act , which wa s enacte d by Congress in 1914 . According to Article 2 of the Securities Act of 1933, this commission ha s a n enormousl y wid e spher e o f jurisdiction unde r whic h its influenc e i s to be exercised no t simpl y ove r th e securitie s mar ket bu t als o over political partie s an d th e administrative machin ery o f a state . I t i s not , therefore , th e Securitie s an d Exchang e Commission. Thi s commissio n wa s create d b y Articl e 4(a ) o f th e Securities and Exchang e Act of 1934 , enacted on June 6, 1934. One law i s calle d th e Securitie s Act , whil e th e othe r i s th e Securitie s Exchange Act; they are completely differen t laws . The content s o f bot h law s ar e quit e similar . Wha t eac h regu lates, however , i s quit e different . Articl e 4 o f th e Securitie s an d Exchange Ac t ha s variou s an d detaile d regulations . Fo r example , Article 4 provides tha t th e fixed number o f commissioners servin g on th e Securitie s an d Exchang e Commissio n i s five and tha t the y are t o be appointe d b y th e presiden t wit h th e advic e an d consen t of th e Senate ; n o mor e tha n thre e commissioner s ar e t o b e se lected from th e same political party ; commissioner s ma y no t hol d other position s simultaneously ; th e annua l salar y fo r a commis sioner shal l b e prescribed ; a commissioner' s ter m o f office , a s a principle, shall be five years, and so forth . On th e othe r hand , i n th e Securitie s Ac t tha t wa s enacte d th e year before, there are no legal articles that correspond to the item s provided fo r b y Article 4 of th e Securitie s an d Exchang e Act . The reason i s that thos e wh o drafte d i t simpl y trie d t o make practica l use of the commission tha t ha d bee n created b y the Federal Trad e Commission Act in 1914 . Although th e Securities Act of 193 3 named the Federa l Trad e Commission , w e are ap t t o think tha t thi s com mission doe s no t actuall y functio n a s such . Accordin g t o Joh n L . Carey, wh o retire d fro m activ e servic e afte r assumin g th e pos t o f vice-president o f the AICPA, the Securities and Exchange Commission was created t o carry out the administration an d operations of the Securities Act of 1933. 13

The Calculatio n Regulation s 19

1

As both commission s wer e create d b y laws , i f th e administra tion an d operation s ha d bee n commissioned, w e should b e able t o look u p suc h a n articl e i n th e law . However , nothin g ha s bee n actually writte n regardin g thi s i n Spiller' s book . I sometimes thin k that book s writte n b y th e Britis h o r b y Americans , unlik e thos e written b y Germans, ten d t o lack th e basic bibliographical sourc e material o n whic h fact s ar e based an d opinion s formed , resultin g in a great dea l of inconvenience t o the unsophisticated . This is not an unusual example . I was forced t o review carefull y a 446-pag e compilation , Laws Relating to Securities Commission Exchanges and Holding Companies, whic h wa s publishe d i n 197 6 by the U.S . Government Printin g Offic e i n Washington, D.C . I was relieved t o find th e substantiv e enactmen t o f Articl e 21 0 o f th e Securities an d Exchang e Act , whic h state s tha t "al l powers , du ties, an d function s o f th e Federa l Trad e Commissio n unde r th e Securities Act of 193 3 shall be transferred t o this Commission. " I am embarrasse d b y my inattentiveness t o my studies thu s fa r and woul d lik e t o apologiz e t o m y readers . Th e ful l powe r fo r enforcing bot h th e Securitie s Ac t o f 193 3 and th e Securitie s an d Exchange Ac t of 193 4 lies with th e Securitie s an d Exchang e Com mission. Fro m th e viewpoin t o f legislation , th e scop e o f th e au thority o f the Securitie s an d Exchang e Commission i s astounding . In fact , th e commission' s authorit y i s not restricte d t o th e above mentioned tw o laws. The commission , fo r example , als o ha s authorit y unde r th e Public Utilit y Ac t o f 1935 , th e Investmen t Compan y an d Invest ment Adviser s Ac t o f 1940 , an d th e Federa l Wate r Powe r Act . Furthermore, th e scop e o f th e authorit y o f thes e law s i s trul y immense an d versatile . In thi s connection , ho w abou t th e cas e of Japan's Securitie s Exchang e Council ? Article 16 5 of Japan's Secu rities an d Exchang e Ac t prescribes , a s it s mission , tha t "i n orde r to investigat e an d deliberat e o n importan t matter s regardin g th e flotation, sale , an d purchas e o f negotiabl e securitie s an d othe r transactions, a s a n attache d orga n t o th e Financ e Ministry , th e Securities Exchang e Counci l (hereinafte r referre d t o as the 'Coun cil') is hereby established. " Does a seriou s defec t i n th e governmenta l structur e o f Japa n exist herein ? Japan' s Securitie s Ac t state s tha t th e counci l onl y has th e authorit y t o investigat e an d deliberat e specifie d matters .

192 Th e Calculatio n Regulation s Whether o r no t th e council' s recommendation s ar e adopte d is , i n reality, entirel y a t th e discretio n o f th e bureaucrats . A s th e entir e national administratio n i s thu s i n th e hand s o f a grou p o f bureau crats, I presum e t h a t th e basi s fo r th e suprem e well-bein g o f th e state an d th e natio n fo r th e comin g thousan d year s ma y b e tha t groups o f bureaucrat s wil l b e collectiv e bodie s tha t ar e jus t an d fair, an d tha t the y wil l posses s th e "pur e insight " tha t wa s advo cated b y Hegel. 14 Hege l define d pur e insigh t a s tru e knowledge . How man y person s ar e ther e i n th e worl d o f Japanese bureaucrats , however, wh o ar e actuall y i n possessio n o f suc h "fundamenta l experience"? At an y rate , i t ca n reasonabl y b e considere d tha t th e authorit y of th e U.S . Securitie s an d Exchang e Commissio n ha s bee n ex tended t o th e administratio n o f al l securities . I canno t undertak e here t o enumerat e al l o f thi s commission' s area s o f authority , bu t a fe w o f it s responsibilitie s are : th e authorit y t o establis h rules ; the authorit y t o giv e orders ; th e authorit y t o orde r book s o f ac count an d othe r book s t o b e submitted ; th e authorit y t o carr y ou t an "on-the-spo t inspection" ; th e authorit y t o mak e a decisio n re garding th e for m o f financial statements , th e exten t t o which infor mation mus t b e ope n t o th e public , th e metho d o f dispositio n o f business matter s i n accounting ; an d s o forth . At present , I hav e a t m y elbo w a boo k o f abou t a thousan d pages entitle d Securities and Exchange Commission Decisions and Reports, b y th e U.S . Government Printin g Office . Whe n thi s specia l commission—whose request s fo r cooperatio n an d whos e initia tives i n proposin g th e principle s o f accounting , etc. , wer e ap proved b y th e AICPA—wa s created , i t wa s give n th e opportunit y of drawing u p an d completin g th e present-da y voluminou s cod e o f conduct.

Notes 1. Considerin g th e provisio n o f definitio n i n Articl e 2 , the Securitie s Act of 193 3 should be called th e "Voucher Law. " 2. Laws Relating to Securities Commission Exchanges and Holding Companies, comp . Gilma n G . Udell , Superintenden t o f th e Documen t

The Calculatio n Regulation s 19

3

Room o f th e Hous e o f Representative s (Washington , D.C. : U.S . Govern ment Printin g Office , 1976) , p. 16, Sec. 24. 3. Generally , i t mean s th e la w tha t control s th e for m o f procedure i n the Court o f Session. The Court o f Session ha s been granted th e authorit y to establish genera l rule s tha t ar e necessar y t o accomplish th e objective s of th e Companie s Ac t a s fa r a s "winding-u p rules " ar e concerned . Lik e other laws , th e Britis h Companie s Ac t als o ha s variou s regulation s an d rules. 4. Regs . 1.6000-1 . 5. Regs . 301. 650l(c)-l. 6. Regs . 31. 6001-1 . 7. IRC , Sec. 446(c). 8. Regs . 1.446-1(e) . 9. IRC , Sec. 446(b). 10. I t means "taxpayers. " 11. Fran k Klei n an d Ger n Orlopp , Abgabenordnung Kommentar, 2 d ed . (Munich: Verlag C. H. Beck, 1979) , S. 191. 12. Ear l A . Spiller , Jr. , Financial Accounting: Basic Concepts, 3 d ed . (Richard D . Irwin, Inc., 1977), p. 11. 13. Refe r t o John L . Carey, The Rise of the Accounting Profession, Vol. 1(1969), p. 193. 14. G . W . F . Hegel , Phanomenologie des Geistes, 6t h ed . (Hamburg : Verlag von Felix Meiner, 1952) , S. 412 ff .

14 The Problem s o f th e Fourt h E C Guidelin e and th e Sevent h E C Guidelin e

Several Problem s i n Relatio n t o th e Principle s o f Regular Bookkeepin g I have repeatedl y referre d t o th e threefol d structur e o f th e concep t of th e principle s o f regula r bookkeeping , bu t I hav e no t ye t touche d on severa l problem s wit h th e principle s o f regula r bookkeepin g that ar e th e resul t o f changin g times . Th e firs t o f thes e i s a prob lem i n regar d t o th e Fourt h E C Guidelin e an d th e Sevent h E C Guideline. A second on e relate s t o th e Unio n Europeenn e de s Ex perts Comptables , Economique s e t Financier s (U.E.C.) . Th e thir d is th e proble m o f th e "declaratio n o f completeness " i n auditing . The fourt h relate s t o th e principle s o f regula r bookkeepin g whe n using electroni c d a t a processing . A s I a m no t a schola r residin g i n an ivor y towe r bu t a businessma n whos e dail y lif e i s ru n o n a tight, minute-by-minut e schedule , pleas e allo w m e t o touc h o n these problem s i n th e remainin g fou r chapter s o f thi s study . The Lega l Sourc e o f th e Fourt h E C Guidelin e an d th e Mai n Constituent o f th e Enterpris e t o Whic h I t Applie s What i s mean t b y th e E C (Europea n Communities) ? Thi s i s th e general n a m e fo r th e EC M (Europea n Commo n Market) , EEC , EGKS (Europea n Communit y fo r Coa l an d Steel , Minin g Union) , ECSC, a nd EURATO M (Europea n Atomi c Community) . Accordin g 197

198 Th e Problem s o f the Fourt h E C Guidelin e to Gablers Business Dictionary (10t h ed. , 1979 ; Vol . 1 , p . 1116) , "The E C (European Communities ) wer e create d durin g th e fifties primarily fo r politica l reason s (Minin g Union , 1952 ; EC M an d EURATOM, 1958 ) an d t o creat e a unite d Europ e b y bringin g th e European state s together i n commercial an d technological areas. " It i s onl y partiall y accurat e t o sa y tha t thi s happene d i n th e 1950s, however. Accordin g t o th e 196 5 edition o f th e Encyclopaedia Britannica, th e origina l for m o f a cooperativ e organizatio n i n Europe wa s th e ide a o f a custom s union , whic h aros e afte r th e Napoleonic War s (1792-1815) , an d a custom s associatio n i n Ger many, whic h wa s create d i n 1834 . This wa s th e mos t importan t customs unio n prio r t o Worl d Wa r II , an d i t wa s generall y con sidered a model . The groupin g fo r th e formatio n o f a cooperativ e organizatio n had begu n i n Europ e i n th e early perio d o f the twentiet h century . Between Worl d Wa r I an d Worl d Wa r I I variou s kind s o f geo graphically base d customs unions were attempted. All such effort s resulted i n failure , however , excep t one . Th e Benelu x Economi c Union, organize d i n Londo n i n 194 4 b y th e government s o f Bel gium, Netherlands , an d Luxembourg , wa s a successfu l custom s union. The y ha d t o wai t t o begi n thei r activitie s unti l Januar y 1948, however. Then , negotiation s regardin g th e formatio n o f a n alliance betwee n Franc e an d Ital y resulte d i n failure . France , It aly, Belgium, th e Netherlands , Luxembourg , an d th e Federa l Re public o f Germany—thes e si x countries—bega n t o wor k a s th e EC (European Communities) . After January 1 , 1973, Great Britain , Denmark, an d Irelan d joined . Othe r member s includ e Portuga l and Spain . It ca n safel y b e sai d tha t th e numbe r o f membe r nation s i s gradually increasing . Th e proces s o f establishin g th e Europea n Communities wa s initiate d i n 195 0 whe n Rober t Schuman , th e then Frenc h foreig n minister , propose d th e creation o f this entity . The proposition wa s further discusse d by the so-called Conferenc e of Messina , whic h me t a t th e ol d capita l cit y o f Messin a o n th e island of Sicily in Italy. On March 25, 1957, the Treaty Concernin g EWG an d EURATO M wa s officiall y signe d i n Rome ; i t becam e effective o n Januar y 1 , 1958 . The treat y i s known a s th e Treat y of Rome. The Europea n Communitie s an d th e Europea n Economi c Mar -

The Problem s o f th e Fourt h E C Guideline 19

9

ket hav e a numbe r o f governin g bodie s i n common , namely : th e Parliament o f th e Union , th e Council , th e Committee , an d th e Court o f Justice. The first tw o are th e mai n decision-makin g orga nizations. Gabler's Business Dictionary list s onl y thes e four. 1 Th e 1965 editio n o f th e Encyclopaedia Britannica, however , als o list s the Economi c an d Socia l Committe e a s a fifth governin g body . According to the Brockhaus Encyclopedia (1968 ; Vol. 5, p. 786), the treaty o f th e Europea n Communitie s wa s amende d afte r th e E C was officiall y organized . Whe n I reviewe d th e preambl e t o th e Fourth E C Guideline, however , I found th e following : "accordin g to th e opinio n o f th e Economi c an d Socia l Committee. " Thus , i n regard t o thi s matter , th e Encyclopaedia Britannica appear s t o b e more accurate tha n Gabler's Business Dictionary. The Fourt h E C Guideline ha s a lon g preamble, an d it s ful l tex t contains sixty-tw o articles . In it s large-siz e tex t edition , i t run s a total o f twent y pages , th e content s o f whic h ar e quit e consider able. Th e officia l titl e o f th e Fourt h E C Guideline, th e origina l o f which i s i n German , is : "Fourt h Guidelin e o f th e Counci l o f Jul y 25, 1978 , base d o n Articl e 54 , Sectio n 3 , Lette r g o f th e treat y concerning th e annual financial statemen t o f companies of certai n legal form (78/660/EWG). " The Fourth E C Guideline went throug h several drafts , an d th e first wa s mad e publi c o n Novembe r 10 , 1971. The second draft wa s completed i n February 1974 . The report o f the Inflatio n Accountin g Committee , Inflation Accounting, wa s presente d t o th e Parliamen t i n Septembe r 197 5 b y the Chancello r o f th e Excheque r an d th e Secretar y o f Stat e fo r Trade by command o f Her Majesty. The report contains an explan atory not e t o th e effec t tha t "thi s secon d draf t ha s bee n th e basi s of ou r consideration/' 2 Thi s repor t wa s presente d t o th e Parlia ment b y th e Chancello r o f th e Excheque r an d th e Secretar y o f State fo r Trad e fo r th e purpos e o f requestin g fro m Parliamen t legislation adoptin g Inflation Accounting. The object o f presenting thi s report and its limits may be under stood b y takin g a loo k at th e following sentence s containe d i n th e "conclusion an d a warning/ ' locate d a t th e en d o f th e first chap ter: We believe tha t curren t cos t accountin g wil l indicat e mor e clearl y tha n existing accountin g convention s th e effec t o f inflatio n o n a company' s affairs an d tha t i t i s urgen t tha t i t shoul d b e introduced 3 a s soo n a s

200 Th

e Problem s o f th e Fourt h E C Guidelin e

possible. However, i t should no t be assumed tha t accountin g fo r inflatio n is i n itsel f a panace a fo r th e difficultie s o f companie s durin g a tim e o f inflation.4 By readin g th e Britis h government' s conclusiv e assertio n i n Inflation Accounting, whic h wa s base d o n th e mode l o f th e secon d draft, th e reade r ma y com e t o understand th e angl e o f the "critica l m i n d / ' throug h whic h th e Fourt h E C Guideline, an d especiall y th e Council, whic h i s on e o f th e EC' s organizations , intende d t o brin g about regularit y i n compan y accountin g amon g th e E C m e m b e r nations. Th e Fourt h E C Guidelin e h a d t o decide , firs t o f all , ho w to defin e whic h companie s cam e unde r th e rubri c i n eac h m e m b e r nation, becaus e th e legislatio n i n regar d t o companie s i n eac h nation h a d bee n drafte d i n differen t historica l contexts . In thi s connection , Paragrap h 1 o f Articl e 1 o f th e Fourt h E C Guideline set s th e limit s o f th e mai n constituent s o f th e enter prises t o whic h thi s guidelin e ca n b e applied . Becaus e o f th e legis lative difference s i n th e respectiv e countries , th e name s o f the nin e countries tha t wer e currentl y member s an d th e kind s o f targete d enterprises i n eac h o f thos e countrie s wer e liste d nex t t o th e tex t of Paragrap h 1 . Fo r instance , i n th e cas e o f th e Federa l Republi c of Germany , onl y thre e kind s o f companie s wer e listed : "di e Ak tiengesellschaft, di e Kommanditgesellschaf t au f Aktien , an d di e Gesellschaft mi t beschrankte r Haftung. " I n th e cas e o f "i m Verei nigten Konigreich, " th e limitatio n wa s se t a t tw o kind s o f compa nies: "publi c companie s limite d b y share s o r b y guarantee " an d "private companie s limite d b y share s o r b y guarantee. " I d o no t plan t o introduc e an d describ e her e othe r countries ' form s o f com pany laws . The Problem s o f th e Lowes t Capita l an d th e Audi t Certificat e The nex t proble m i s th e Fourt h E C Guideline's substantia l conten t and it s relatio n t o th e principle s o f regula r bookkeeping . Befor e taking thi s up , I woul d lik e t o discus s thoroughl y som e legislativ e problems m y reade r shoul d understand . Thes e problem s hav e n o obvious relatio n t o th e principle s o f regula r bookkeeping . The y should not , however , b e overlooke d b y us , becaus e the y hav e be come th e essentia l elemen t tha t evolve s fro m th e revers e sid e o f

The Problem s o f th e Fourt h E C Guideline 20 1 the actua l circumstance s o f compan y accountin g i n connectio n with th e principle s o f regular bookkeeping . They ar e th e proble m of "lowest capital " an d tha t o f the "audi t certificate " b y a profes sional specialist . The Companies Ac t of 198 0 in Great Britai n i s a largely revise d law. I t contain s ninet y article s alon g wit h fou r "Schedules, " an d its ful l tex t run s 15 1 pages. Article 2 o f thi s ac t changed , fo r th e first tim e i n th e legislativ e histor y o f England, th e minimu m con stituent o f public companie s fro m seve n persons, as prescribed b y Article 1 of the Companies Act of 1948 , to two persons. 5 According to th e Stoc k La w (AktG) of Septembe r 6 , 1965, Article 2 of whic h prescribes th e numbe r o f founders , a t leas t five person s mus t b e involved. Articl e 16 5 of Japan's Commercia l Code , however, stip ulates tha t "i n orde r t o establish a joint-stock company , . . . there must b e mor e tha n seve n initiators. " Fro m th e viewpoin t o f th e increasing socia l necessit y fo r makin g informatio n availabl e t o the public i n general, it seems t o me that th e fewer th e number of initiators, the more splendid th e outcome. I believe, however, tha t society i s no t necessaril y harme d n o matte r wha t th e numbe r o f initiators is—two , five, o r seve n persons—an d tha t th e poin t a t issue is the amount o f capital rather tha n th e number of initiators. As a resul t o f th e revisio n tha t wa s mad e i n 1950 , Japan' s Commercial Cod e prescribed th e minimu m pric e of a stock as 50 0 yen. Paragraph 2 of Article 20 2 of th e Japanes e Commercia l Cod e and Articl e 17 4 o f th e sam e cod e prescrib e tha t "a t th e tim e a company i s established, i f the initiato r canno t subscrib e th e tota l number o f stocks that ar e to be issued, it is required tha t h e invit e stockholders." A s th e Japanes e Commercia l Cod e doe s no t pre scribe a statutor y numbe r o f stockholders , i t turn s ou t tha t eve n the invitatio n o f onl y on e stockholde r i s al l right . A s a result , a joint-stock compan y wit h capita l o f 4,00 0 ye n ca n b e establishe d by eight stockholders , each o f whom ha s t o contribute 50 0 yen. As the registratio n an d licens e ta x tha t i s presentl y require d fo r th e establishment o f a joint-stoc k compan y i s a t th e lowes t 150,00 0 yen, i t turn s ou t tha t a joint-stoc k compan y havin g capita l amounting t o approximatel y one-fortiet h o f thi s registratio n an d license tax can be established . As a resul t o f th e revisio n o f th e Limite d Responsibilit y Com -

202 Th

e Problem s o f th e Fourt h E C Guidelin e

pany La w i n J a p a n i n 1951 , the lowes t amoun t o f capital o f 10,00 0 yen, whic h h a d bee n prescribe d b y Articl e 9 o f th e Limite d Re sponsibility Compan y La w (establishe d a s La w No . 7 4 i n 1938) , was raise d t o 100,00 0 yen . Consequently , a t present , a joint-stoc k company havin g a s capita l 1/2 5 o f th e lowes t a m o u n t o f capita l o f the limite d responsibilit y compan y ca n b e established . Eve n i f th e bill entitle d " a draf t o f la w concernin g partia l revisio n o f th e Commercial Cod e an d o t h e r s / ' whic h wa s introduce d t o th e Na tional Die t i n Ma y 1981 , were passed , a joint-stoc k compan y hav ing capita l o f 400,00 0 ye n coul d b e established , becaus e th e bil l o f revision i n th e Die t i n Paragrap h 2 o f Articl e 16 6 o f Japan' s Com mercial Cod e prescribe s onl y th e lowes t a m o u n t o f stoc k a s 50,00 0 yen, an d thi s propose d bil l doe s no t fix th e limi t o f th e lowes t a m o u n t o f capital . Therefore, thi s su m o f 400,000 ye n barel y amount s t o four time s as muc h a s th e lowes t limi t o f th e a m o u n t o f capita l o f a limite d responsibility compan y now . Articl e 8 5 o f th e Britis h Companie s Act o f 198 0 prescribe s a n "authorize d m i n i m u m " o f capita l o f "public companie s limite d b y share s o r by g u a r a n t e e " t o be 50,00 0 pounds. 6 Article 2 o f th e Implementatio n La w fo r th e Ta x Law , whic h i s the existin g la w i n th e Federa l Republi c o f Germany , ha s a regu lation regardin g th e m i n i m u m fac e a m o u n t o f basic capital , unde r which th e a m o u n t i s prescribe d t o b e a t leas t D M 100,00 0 a t th e end o f 1981 . If on e deutsch e mar k i s equa l t o a hundre d yen , D M 100,000 ca n b e converte d t o 10,000,00 0 ye n i n Japanes e currency . This Article 2 , it seem s t o me , is full o f discernmen t an d courag e fo r th e purpose o f insuring , essentially , ho w a joint-stock compan y shoul d func tion. I wil l therefor e reproduc e i t her e i n full : Stoc k companie s whos e capital stock y as a resul t o f th e revaluatio n accordin g t o th e D M balanc e law ["D-Markbilianzgesetz"] 7 applicabl e t o them , amount s t o les s tha n DM 100,000 are dissolved after Decembe r 16 , 1981, unless by this date th e board o f manager s ha s registere d a resolutio n concernin g raisin g th e capital stoc k t o at leas t D M 100,00 0 or an order concerning th e organiza tion of the company accordin g t o the regulations of the stock company o r of th e reorganizatio n la w fo r entr y i n registe r o f companies. If th e resul t concerning th e raisin g o f th e capita l stoc k o r th e reorganizatio n i s dis puted, the n th e abov e specifie d da y i s replaced b y th e da y thre e month s after th e day the decision becomes legally valid .

The Problem s o f th e Fourt h E C Guidelin e 20

3

This articl e clearl y show s bot h th e discernmen t tha t wha t i s know n as th e effectivenes s o f a joint-stoc k compan y organizatio n shoul d be followe d b y al l mean s an d th e decisiv e wil l o f th e state , whic h demands tha t thos e companie s tha t d o no t obe y specifie d reason able criteri a a t al l shoul d b e legall y dissolved . Th e greate r p a r t o f the joint-stoc k companie s i n J a p a n fac e circumstance s i n whic h the law s an d regulation s concernin g stock s hav e rarel y bee n ob served, a resul t o f th e lac k o f such discernmen t an d courag e o n th e p a r t o f thos e wh o ar e responsibl e fo r legislatio n i n J a p a n . At thi s point , I woul d lik e t o revie w closel y th e opinion s o f several o f thi s country' s scholar s o f commercia l jurisprudence . Takeo Suzuk i i s th e chairma n o f th e Commercia l La w Sectio n Meeting, on e o f th e branc h section s o f th e Legislatio n Counci l o f the Ministr y o f Justice , an d i s als o a n honorar y professo r a t th e University o f Tokyo . He ha s m a d e th e followin g statement : Furthermore, a s t o th e above-state d amoun t o f capital , ther e hav e bee n no specifie d restriction s o n th e maximu m amoun t o r o n th e minimu m amount o f capital. In vie w of the present circumstance s a s a result o f th e above action , to o many joint-stock companie s havin g a n extremel y smal l amount o f capita l hav e bee n establishe d s o far , an d man y o f the m hav e not followe d faithfull y th e Joint-Stoc k Compan y La w i n Japan . A s a n ideal, it i s desirable tha t a joint-stock compan y b e limited onl y to a larg e enterprise, whil e a mino r enterpris e i s a limite d liabilit y company . T o achieve th e above purpose, however, i s actually s o difficult tha t I think i t will b e necessar y fo r u s t o thin k ou t adequat e legislatio n unde r whic h joint-stock companie s ca n b e divide d a t leas t int o tw o kinds : larg e an d small, i n accordanc e wit h th e scop e o f th e busines s operatio n o f th e enterprise. 8 I mus t poin t ou t tha t i n thi s statemen t ther e ha s bee n n o trac e of a n explanatio n o f wh y i t ha s bee n difficul t t o limi t joint-stoc k companies t o larg e enterprise s an d limite d liabilit y companie s t o minor ones . Moreover, anothe r schola r ha s state d a s follows : There ar e man y instance s i n whic h companies , th e substantia l form s o f which ar e simpl y privat e enterprises , hav e take n th e for m o f joint-stoc k companies. No small number, moreover, has not followed th e law and th e regulations regardin g joint-stoc k companies . In vie w of this presen t situ ation, nowaday s legislativ e theorie s hav e bee n extensivel y advocate d b y which th e minimu m amoun t o f capital fo r a joint-stock compan y shoul d be statutory, so that a joint-stock compan y shoul d be limited t o a form of

204 Th

e Problem s o f th e Fourt h E C Guidelin e

a larg e typ e o f enterprise , o r limite d companie s shoul d b e divide d int o two kinds—large an d small—and th e legal control that conform s t o each kind o f a limite d compan y shoul d b e pu t int o actua l practice . O n th e subject o f what appropriat e standar d shoul d be used t o divide companie s into tw o kind s (larg e an d small) , i t i s reall y ver y difficul t t o reac h a n agreement o f opinio n o n thi s matter . Moreover , becaus e ther e stil l re mains a problem o f how t o prescribe th e minimum amoun t o f capital fo r a joint-stoc k company , i t ha s s o fa r bee n onl y i n th e circumstance s i n which partia l revisio n ha s bee n promote d i n th e directio n o f dividin g a company int o large and small ones. 9 This argumen t indicate s ho w poo r th e philosoph y o f la w i s i n Japan. Han s Kelse n advocate d th e establishmen t o f a pur e theor y of la w b y differentiatin g clearl y betwee n "positiv e laws " an d "jus tice," s o a s t o gras p jurisprudenc e a s a pur e science . H e state d that " w h a t i s t o b e 'jus t an d proper ' i s th e ver y thin g tha t canno t be foun d b y reasonabl e recognition, " th e solutio n o f whic h ca n only b e accomplishe d b y th e regulatio n o f interests. 1 0 Tha t is , what standar d i s appropriat e i n decidin g whethe r a compan y i s large o r small , namely , wha t i s "rightful, " canno t b e base d o n reasonable recognition—thi s i s a thin g tha t i s a m a t t e r o f course . Although i t ha s bee n sai d tha t ther e stil l exist s a proble m i n regard t o how t o prescribe th e lowes t a m o u n t o f capital fo r a joint stock company , I mus t poin t ou t tha t ther e ar e definit e legislativ e examples i n th e Federa l Republi c o f Germany , Britain , a n d Swit zerland. I t ma y safel y b e said , therefore , tha t th e rea l proble m i n this particula r m a t t e r lie s i n whethe r i t i s goo d fo r u s t o leav e untouched th e actua l fac t tha t th e greate r p a r t o f ou r joint-stoc k companies i n J a p a n d o no t follow , i n an y way , th e Joint-Stoc k Company Law , or , paradoxicall y speaking , tha t th e Commercia l Code, which shoul d b e th e fundamenta l la w fo r a citizen' s life , ha s brought about , i n a sense , th e injuriou s resul t o f publicl y encour aging th e peopl e i n genera l i n disobedienc e t o th e la w i n J a p a n . The nex t proble m w e mus t dea l wit h i s tha t o f th e audi t certifi cation t o b e m a d e b y professiona l experts . Paragrap h I o f Articl e 162 f AktG o f th e Federa l Republi c o f German y ha s th e followin g provision, whic h ha s bee n stipulate d i n th e law : "Conten t an d scope o f th e audit : 1 ) Th e annua l financial statement , includin g the bookkeepin g an d busines s operatin g report , i s to be audite d b y one o r mor e exper t auditors . I f a n audi t ha s no t take n place , th e

The Problem s o f th e Fourt h E C Guideline 20 5 annual financial statemen t canno t b e determined. " Furthermore , Paragraph I o f Article 16 4 prescribes th e following : "Selectio n o f the examiners : 1 ) Only (certified ) publi c accountant s an d publi c accounting firms ca n b e examiner s o f th e annua l financial state ment." The Joint-Stoc k Compan y La w i s ful l o f provision s regardin g full disclosur e t o th e public . From a legislativ e viewpoint , i t shoul d be sai d tha t th e AktG i n th e Federa l Republi c o f Germany ha s se t forth a clear-cu t mandat e tha t put s al l joint-stock companie s an d limited partnership s unde r th e sam e obligatio n o f goin g throug h an audi t t o b e mad e b y certifie d publi c accountants , o r certifie d public accountants ' companies , an d tha t i n a cas e whe n suc h a n audit fails t o take place, the annual financial statemen t i n a particular business year should no t be judged a s settled . Paragraph 1 (a) o f Articl e 5 1 o f th e Fourt h E C Guidelin e pre scribes as follows: "Die Gesellschaften sin d verpflichtet, ihre n Jah resabschlu/3 durc h ein e ode r mehrer e Persone n Priife n z u lassen , die nac h einzelstattliche n Rech t zu r Priifun g de s Jahresabsch lusses zugelasse n sind. " Concernin g thi s poin t i n particular , Dr . Heinrich H . Jonas writes : " A company whos e siz e fall s unde r th e provisions o f thi s la w i s obligate d t o b e audited . I n th e prelimi nary draf t n o us e wa s mad e o f th e possibilit y o f grantin g a fiveyear extensio n t o thos e GmbH s tha t hav e regulation s whic h hav e heretofore bee n exempte d fro m these . Hence , th e questio n o f th e applicability o f this regulation." n I regre t t o sa y tha t a s I hav e no t bee n abl e t o obtai n al l th e drafts o f thi s text , I canno t commen t o n th e explanatio n I hav e just quoted . I d o think , however , tha t m y Japanes e reader s nee d only imagine th e foundations o f such a structure of law. The quot e above implies the existence of the two kinds of limited companies , one o f whic h i s unde r th e obligatio n o f bein g audited , th e othe r being a limite d compan y tha t ha s n o such obligatio n a t al l unde r the legislative system of the Federal Republi c of Germany . A heavily revise d versio n o f the Federa l Republi c o f Germany' s Limited Compan y La w was enacted o n July 4, 1980 . Article 42a of this law , whic h wa s lef t unrevise d a t tha t time , has th e followin g provision: "Annua l audit : Th e Imperia l Ministe r o f Justice , wit h the agreement o f the Imperial Ministe r of Commerce, may specif y

206 Th e Problem s o f th e Fourt h E C Guidelin e (require) tha t th e annua l financial statemen t (th e annua l balanc e sheet an d profi t an d los s statement ) mus t b e audited . H e ma y issue regulation s necessar y fo r th e executio n of , an d i n conjunc tion with , th e audit. " Thus , i n th e Federa l Republi c o f Germany , with th e necessary conditio n o f a consultation betwee n th e Minister o f Justic e an d th e Ministe r o f Commerce , th e Ministe r o f Jus tice has been granted th e authority t o the determine which limite d companies requir e auditin g an d which do not. Here i n Japa n " a joint-stoc k limite d partnership"—fro m th e system o f suc h a compan y itself—wa s abolishe d unde r La w 16 7 in 1950 . In th e Federa l Republi c o f Germany , however , th e law s and regulation s regardin g " a joint-stoc k limite d company " wer e retained i n it s secon d Stoc k La w (AktG). Paragrap h 3 o f Articl e 278 o f thi s Stoc k La w dictate s tha t th e regulation s governin g a joint-stock limite d compan y ar e ''analogou s t o th e regulation s o f the first la w concernin g stoc k companies. " It i s considered a mat ter o f cours e tha t a n audi t b e carrie d ou t b y a certifie d publi c accountant o r a company o f certified accountants . I firmly believ e that th e fact tha t al l joint-stock companie s an d joint-stock limite d partnerships, a s well a s a considerable portio n o f limited liabilit y companies, ar e subjecte d t o a compulsor y audi t b y a thir d party , such a s a certifie d publi c accountan t o r a compan y o f certifie d accountants, shoul d b e studie d b y Japa n wher e th e refor m o f a n unfair taxatio n syste m has been advocated an d th e reconstructio n of our financial syste m i s currently considere d a n urgen t nationa l problem. As a businessma n wh o i s no t i n publi c office , I kno w tha t i t i s considered a mer e a dro p i n th e ocea n t o not e th e amoun t o f ta x evasion and th e number of tax dodgers who are made public every year b y th e Nationa l Ta x Administratio n Agenc y i n Japan . Ther e are several statesme n wh o are foolish enoug h t o maintain, even i n the slightes t degree , tha t strivin g fo r th e realizatio n o f justice i n taxation lead s u s t o decrease th e vigo r of our nationa l economy . I believe tha t suc h person s shoul d no t b e electe d an d sen t t o th e National Die t b y th e nation , becaus e the y d o no t hav e th e righ t qualifications fo r the office. Electing these people is like stranglin g the neck of our natio n wit h our own hands. At the same time , thi s particular matte r hinge s on whether o r not thos e who are respon -

The Problem s o f th e Fourt h E C Guidelin e 20

7

sible fo r draftin g ou r law s posses s bot h farsightednes s i n term s o f our nation' s futur e a n d indomitabl e courage . I n J a p a n almos t al l the key s fo r introducin g bill s int o th e Nationa l Die t ar e i n th e hands o f bureaucrats . Thu s I ardentl y woul d lik e t o believ e tha t Japanese bureaucrat s ar e a s excellen t a s thos e i n th e Federa l Re public o f Germany . When J a p a n ' s Commercia l Cod e wa s revise d i n 1981 , the provi sion tha t a n audito r i s nominate d "b y a resolutio n m a d e b y th e board o f directors " wa s change d s o tha t a n audito r i s nominate d "by a genera l meetin g o f stockholders." 1 2 Paragrap h 1 of Articl e 163 o f th e 196 5 Stoc k La w i n th e Federa l Republi c o f German y already prescribed , unde r th e headin g "Appointmen t o f Auditors/ ' that "th e annua l auditor s ar e t o b e chose n b y th e genera l stock holders meeting. " I n England , Articl e 15 9 of th e Companie s Ac t o f 1948 m a d e i t "th e genera l r u l e " t o nominat e auditor s a t th e gen eral meetin g o f stockholder s tha t wa s t o b e hel d i n eac h busines s year. 1 3 Thi s article , however , wa s replace d b y Articl e 1 4 o f th e Companies Ac t o f 197 6 with severa l modifications . In America , th e Securitie s an d Exchang e Commission , whic h was create d b y Articl e 4 of the Securitie s an d Exchang e Ac t (1934) , has th e authorit y t o establis h regulation s (Articl e 11) . I n accor dance wit h Articl e 6 , th e "change s i n registrant' s independen t accountant" i s provide d fo r i n No . 4 o f "For m 8-K, " an d th e commission i s unde r th e obligatio n tha t "th e dat e o f th e resigna tion o r dismissal , o r engagemen t o f th e ne w accountant " an d th e following matter s i n five item s b e give n a s "periodi c r e p o r t s " tha t are addresse d t o thi s commission. 1 4 I n orde r t o retur n t o ou r m a i n subject, I will omi t additiona l details . The Content s o f th e Fourt h E C Guidelin e Let u s no w conside r th e content s o f th e Fourt h E C Guideline . Th e previously mentione d Gablers Business Dictionary ma y dea l wit h this subjec t mos t tactfully . Unde r th e headin g "Concep t o f th e Fourth E C Guideline, " i t state s a s follows : The fourt h guidelin e (passe d o n Jul y 25 , 1978 ) i s intende d t o harmoniz e the regulation s concernin g annua l financial statements , includin g th e regulations concernin g th e valuatio n o f th e asset s an d th e backgroun d

208 Th

e Problem s o f th e Fourt h E C Guidelin e

report, as well as the audit and disclosure for AG, KGaA, and GmbH (wit h the exception o f insurance companie s and credi t institution s i n the mem ber nations of the community). In addition t o the continued developmen t of regulation s concernin g th e presentatio n o f accounts , it s significanc e lies primaril y i n th e inclusio n o f Gmb H i n th e condition s applicabl e t o stock la w (thoug h ther e i s a limite d disclosur e obligatio n fo r smalle r companies). The companies must apply the amended national regulation s by Februar y 1 , 1982 , at th e latest . Th e obligator y audi t fo r Gmb H mus t be introduced b y August 1 , 1985.15 The explanatio n abov e i s brie f a n d t o th e point . Moreover , a s I have alread y mentioned , a s a resul t o f th e revisio n m a d e i n Jul y 1980, th e m i n i m u m a m o u n t o f capita l fo r limite d companie s i n the Federa l Republi c o f German y wa s raise d t o D M 50,000 . Articl e 12 o f th e La w Amendin g th e La w Concernin g G m b H (Limite d Companies) als o establishe s " a perio d o f delay " a s a transitiona l condition. Thi s la w establishe d a provisio n unde r whic h thos e limited responsibilit y companie s wh o fai l t o mak e thei r lowes t amount o f capita l u p t o D M 50,00 0 no t late r tha n Decembe r 31 , 1985, or thos e limite d responsibilit y companie s wh o d o no t decid e on th e chang e o f thei r respectiv e organization s b y Decembe r 31 , 1985—these companie s wil l b e forcibl y disorganized . Thi s i s th e same a s i n th e cas e o f th e Stoc k Law , an d bot h o f thes e laws , i t seems t o me , ar e revision s tha t displa y a n enormou s amoun t o f farsightedness an d courage . In regar d t o th e n u m b e r o f employee s a limite d responsibilit y company ca n hav e a t th e tim e i t i s established, Articl e 8 of Japan' s Limited Responsibilit y Compan y La w ha s provide d onl y th e up per limi t o f the n u m b e r o f company employee s b y prescribin g tha t "the tota l n u m b e r o f compan y employee s shoul d no t b e i n exces s of fift y persons'' ; th e lowes t number , however , ha s no t bee n pro vided for . I n th e Federa l Republi c o f Germany , however , Articl e 1 of th e La w Regardin g Gmb H Exemp t Limite d Companies , whic h was revise d i n Jul y 1980 , prescribes tha t a compan y ca n b e estab lished b y on e o r mor e persons . Thus , th e lowe r limi t fo r th e num ber o f compan y employee s ca n b e on e perso n an d th e greates t n u m b e r o f compan y employee s i s no t provide d for . Thi s i s indee d a noteworth y revision . On th e subjec t o f th e content s o f th e Fourt h E C Guideline , Gablers Business Dictionary state s a s follows :

The Problem s o f th e Fourt h E C Guidelin e 20

9

While basicall y strongl y oriente d towar d Germa n Stoc k Law , i t has , however, significan t innovations , a ) Nationa l lega l options : Th e fourt h guideline contain s numerou s lega l option s ( a tota l o f forty-one ) fo r member states , som e o f whic h wil l b e include d i n th e legislatio n o f th e Federal Republic . Th e mos t importan t options : (1 ) organization (group ing) fo r th e balanc e shee t accoun t for m and/o r repor t for m permitte d similarly fo r profi t an d los s statemen t i n whic h cas e eac h for m ma y b e kept o n th e basi s o f a n overal l cos t method s and/o r a turnove r cos t method (fou r variations) ; (2 ) valuation lega l options above all concernin g valuations o f intangible assets . Activation o f "expenditures fo r th e estab lishment an d expansio n o f th e company " an d o f "researc h an d develop ment expenses, " which are to be depreciated withi n five years and durin g this tim e ar e subjec t t o a distribution ban , unless th e reserve availabl e i s at leas t a s high a s the portion o f these expenditures tha t ha s not ye t bee n written off . Activatio n o f suc h intangibl e asset s tha t hav e bee n buil t b y the compan y itself . O n th e passiv e side , permissibilit y o f expenditur e dedications; (3) assessment: member nations many permit deviatio n fro m the principl e o f acquisitio n valu e unti l a late r coordination . Tha t is , certain position s (e.g. , thos e o n th e basi s o f replacemen t value ) ma y b e balanced. The difference betwee n purchase and replacement cos t must b e allocated t o a specia l revaluatio n reserve , whos e us e i s carefull y regu lated. Article 15 7 o f th e Stoc k La w i n th e Federa l Republi c o f German y is differen t fro m th e Fourt h E C Guidelin e i n tha t th e forme r ha s specified th e for m o f a statemen t o f profi t an d los s a s a report . Paragraph 4 o f Articl e 15 3 o f th e Stoc k La w als o prescribe s tha t "the expenditur e fo r th e establishmen t an d raisin g o f capita l ma y not b e use d a s a s s e t s / ' whic h i s clearl y oppose d t o th e Fourt h E C Guideline provisions . On th e subjec t o f th e obligator y regulation s o f th e Fourt h E C Guideline, Gablers Business Dictionary state s tha t " a m o n g th e most importan t innovation s whic h mus t b e take n int o accoun t i n application o f Germa n la w on e note s especiall y th e following/ ' and, a s th e first item , i t states : (1) In additio n t o the balance shee t an d th e profit an d los s statement, th e annual financial repor t consist s o f an appendix , which i s of equal impor tance t o th e othe r component s an d whic h ca n includ e dat a concernin g the balanc e shee t an d th e profi t an d los s statement . I n addition , i t con tains supplementary information , fo r example , the total amoun t o f financial obligations , o r th e groupin g o f th e sale s b y spher e o f activit y an d geographically determine d markets .

210 Th

e Problem s o f th e Fourt h E C Guidelin e

On th e subjec t o f th e content s o f th e compan y report , Articl e 16 0 of th e Stoc k La w ha s detaile d provisions , whic h hav e bee n classi fied int o five items . Item 4 prescribes i n it s first sentenc e tha t "th e report mus t confor m t o th e principle s o f a conscientiou s an d ac curate account. " Ite m 4 doe s no t demand , however , th e annexin g of a supplementar y statement , includin g th e groupin g o f th e sale s by spher e o f activit y an d geographicall y determine d markets , a s the Fourt h E C Guidelin e does . In m y opinion , th e curren t progres s in regar d t o demandin g th e openin g o f accountin g informatio n t o the publi c shoul d b e take n int o consideration . The secon d o f th e Fourt h E C Guideline' s obligator y regulation s states: "Th e annua l financial statemen t i s supplemente d b y th e situation (background ) report , abov e all , concernin g th e futur e foreseeable developmen t o f th e compan y an d th e are a o f researc h and development. " Paragrap h 2 o f Articl e 16 0 o f th e Stoc k La w uses th e expressio n "a s certai n a vie w a s possible, " however , thi s expression remain s a "modifier " t o th e essentia l facto r tha t "th e valuation an d write-of f method s ar e t o b e specifie d a s completel y as. . . ." A t thi s point , I becam e awar e tha t a s a m e d i u m fo r th e formation o f th e Fourt h E C Guideline , th e philosoph y o f th e Ger m a n Stoc k La w an d tha t o f th e "tru e an d fai r view"—whic h seems t o constitut e th e ver y nucleu s o f Anglo-Saxo n accountin g thought—have collide d wit h eac h other , hav e bee n compounded , and, finally, hav e reache d a compromise . The thir d obligator y regulatio n provides : The Fourth Guideline refers a s well to the principles of regular balancing , but i t moreover also requires the annual financial repor t t o give a pictur e of th e stat e o f th e property , finances, an d profit s o f th e compan y tha t matches th e actual circumstance s [oriente d towar d th e Anglo-Saxon con cept o f . . .] . I n additio n t o observin g th e principl e o f continuit y an d indicating figures fro m th e previou s year , th e balanc e shee t require s a stronger groupin g o f obligation s an d account s receivabl e accordin g t o their deadlines ; th e profi t an d los s statement require s th e specia l identi fication o f unusual experience s an d unusual profits ; taxe s on the yields of the norma l conduc t o f business ar e t o be reporte d separatel y fro m taxe s on unusual yields . Concerning " a liabilit y tha t i s not eviden t fro m th e annua l balanc e statement, includin g th e registratio n o f securitie s fo r thei r ow n

The Problem s o f th e Fourt h E C Guidelin e 21

1

obligations/' whic h ha s bee n provide d fo r i n No . 7 of Paragrap h 3 of Articl e 16 0 o f th e Stoc k Law , th e protectiv e claus e ha s bee n established b y Paragrap h 4 o f Articl e 16 0 of th e Stoc k Law , whic h provides tha t "accordin g t o reasonabl e busines s j u d g m e n t / ' fail ure i n statin g it s detail s wil l b e allowed . Suc h article s ma y b e philosophically contradictor y t o th e Fourt h E C Guideline . Lastly, th e fourt h obligator y regulation , th e origina l tex t o f which appear s i n Gabler's Business Dictionary, i s as follows : The Fourt h Guidelin e place s th e mos t importan t principle s o f regula r balancing o f account s before th e valuatio n regulations . I n particular , a s regards th e corporatio n la w especially , th e followin g modification : th e lower include d valu e o n th e deliver y dat e ma y no w onl y b e applie d fo r investments an d shares . I n th e cas e o f capita l (fixed ) asset s an d liqui d assets, a lowe r appraisa l ma y n o longe r b e retaine d afte r th e reason s n o longer exis t (offe r o f restitutio n o f value , compulsor y valu e adjustment , elimination o f the option of retention). Gabler's Business Dictionary's summarize d introductio n o f th e Fourth Guidelin e o f th e Europea n Communitie s end s here . I n re gard t o perusin g th e ful l tex t (sixty-tw o articles ) o f thi s Fourt h E C Guideline, i t seem s t o m e tha t thi s summarize d introductio n i s correct, brief , an d t o th e point . Althoug h Gabler's Business Dictionary doe s no t touc h o n th e followin g points , I thin k furthe r atten tion shoul d b e pai d to : Paragraph 5 o f Articl e 3 3 o f th e Fourt h E C Guidelin e ha s give n a righ t o f proposa l fo r th e revisio n o f th e directe d provision s o f this guideline , whic h shoul d b e mad e withi n seve n year s afte r th e notice o f th e Fourt h E C Guidelin e t o th e committee . Paragraphs 1 an d 2 o f Articl e 5 5 hav e established , fo r eac h o f the m e m b e r nations , variou s tim e limit s fo r th e legalizatio n o f th e directive. Paragrap h 3 o f Articl e 55 , especially , ha s impose d o n each m e m b e r natio n a n obligatio n t o infor m th e draf t a t th e tim e when thi s directiv e i s t o b e legalized . Furthermore , Paragrap h 1 (b) o f Articl e 5 1 ha s impose d a n obligatio n o n a n auditor , regard ing " a u d i t , " t o confir m th e consistenc y betwee n a n annua l state ment o f accounts an d th e accountin g m a d e withi n a busines s year , and s o forth . According t o th e Augus t 14 , 1978 , issue o f th e Official Journal of the European Communities, th e Englis h versio n o f Paragrap h 1 (b)

212 Th e Problem s o f the Fourt h E C Guidelin e of Article 5 1 is a s follows : "Th e perso n o r person s responsibl e fo r auditing th e account s mus t als o verif y tha t th e annua l repor t i s consistent wit h th e annua l account s fo r th e sam e financial year. " The Germa n versio n o f thi s is : "Di e mi t de r Absehlu/Sprufun g beauftragte Perso n ha t auc h z u priifen , o b de r Lageberich t mi t dem Jahresabschlu/3 des betreffenden Geschaftsjahre s i n Einklan g steht." I mus t admi t a t thi s poin t tha t I fee l ther e i s a delicat e difference betwee n th e tw o versions . I tak e responsibilit y fo r translating throughou t thi s work , bu t I mus t confes s t o a feelin g of uneasiness elsewhere as well. "A True and Fair View" Is a Mistranslatio n At an y rate , th e expressio n " a tru e an d fai r view " i s foun d si x times in this Fourth E C Guideline. The term " a true and fair view " was originally an d widel y known a s the one that originate d i n th e British Companie s Ac t o f 1948 . Paragraph 1 of Articl e 14 9 of th e Companies Ac t o f 194 8 prescribe s tha t al l balanc e sheet s shal l provide "a tru e and fair view" regarding "the state of affairs o f the company" a s o f th e en d o f th e fiscal year . I t als o prescribe s tha t all th e "statement s o f profi t an d loss " provid e " a tru e an d fai r view" concerning th e profit an d los s of the compan y i n tha t fiscal year. Thus , th e sam e expressio n i s use d twic e i n on e article . I n regard t o th e essentia l element s fo r providin g " a tru e an d fai r view," i n Paragrap h 2 of th e Companie s Ac t o f 194 8 th e detaile d regulations were transferred t o the "Eighth Schedule. " This "Eight h Schedule" becam e th e "Secon d Schedule " i n th e Companie s Ac t of 1967 , and thi s stat e ha s bee n extende d u p t o th e present . Th e "Second Schedule " extend s fro m Par t I t o Par t III , and ther e ar e thirty-one article s i n all. The content s o f th e "Secon d Schedule " ar e s o extremel y de tailed tha t ther e i s al l th e differenc e i n th e worl d betwee n th e "Second Schedule " an d th e Calculatio n Regulation s o f Japan' s Commercial Code . For example , under th e headin g "Genera l Pro visions a s t o th e Balanc e Shee t an d Profi t an d Los s Accounting, " Part I of the "Secon d Schedule " prescribes i n detail regardin g th e indication o f eac h item , th e conditio n o f it s application , an d s o forth. Th e content s o f Par t I ar e s o ful l tha t the y surpas s th e

The Problem s o f th e Fourt h E C Guideline 21 3 articles of the German Commercia l Cod e and th e Stoc k Law in th e Federal Republi c o f Germany . Hithert o i n Japan , th e expressio n "a tru e an d fair view " has been translated int o Japanese a s "Shin jutsu kats u kosein a gaikan. " A s a matte r o f convenience , I hav e sometimes succumbe d t o followin g th e Japanes e custo m o f "equivalent words " in translation. In order t o translate th e abovementioned Englis h phras e mor e correctly int o Japanese, however , it shoul d b e translate d a s "Shinjitsu-katsu-koseina-byosha " ("th e field o f vision " o r "visibility") , o r "Shinjitsu-katsu-koseina-ken shiki" ("insight, " "farsightedness") . O n pag e 73 7 o f Volum e I of Palmer's Company Law, th e followin g appears : "Thu s ' a tru e an d fair view ' i s a criterio n o f a highe r orde r tha n bot h th e require ments o f standar d accountin g practic e an d th e specifi c require ments o f th e Companie s Act. " ("Shikarugayueni-shinjitsu-katsu koseina - byosha - [kenshiki] narumon o - wa - hyojuntekina - kaikei jitsusen - no - shoyoken - ya - shokaishahojyo - no - tokuteiyoken - no rosha-yorimo-kojigen-no-handankijun-nanode-aru.") Since 1971 , this particular propositio n ha s been handled b y th e Accounting Standard s Steerin g Committee , which wa s forme d b y five groups relate d t o accountin g i n England . This committee ha s taken charg e o f developin g som e practica l standard s o f account ing. The members of this committee once admitted tha t deviation s from averag e accountin g practic e standard s may , i n som e cases , be consistent wit h " a tru e and fair field of vision (farsightedness), " and adherin g t o averag e accountin g practic e standard s ma y ac tually b e injuriou s t o " a tru e an d fai r field o f visio n (farsighted ness)." A look at th e 197 5 edition of Recommendations on Accounting Principles, issue d b y th e Institut e o f Chartered Accountant s i n England an d Wales , ma y hel p u s understan d thi s paradox . Th e Recommendations on Accounting Principles ha s touche d o n th e concept o f " a tru e an d fai r view " i n five passages , fro m page s 7 7 to 86 , an d a t th e en d o f th e first paragrap h o n pag e 77 , it state s that "th e need to give a true and fair view is the overriding consid eration applicabl e i n all circumstances." I feel tha t a n oversight of the high dimensio n o f this statement ma y have produced th e ter m "Shinjitsu-katsu-koseina-gaikan" ("th e externa l outline") , whic h has bee n th e practica l "translate d term " i n thi s country . I have a proper understandin g o f th e Japanes e wor d "gaikan " a s havin g

214 Th e Problem s o f the Fourt h E C Guidelin e the meanin g "general " an d "th e outlin e o f a wa y o f lookin g a t things."

The Special Characte r of th e Fourth EC Guideline Because accounting though t o n the European Continen t coul d no t but acknowledg e thi s characte r o f a hig h dimension , Heinric h H . Jonas, i n hi s boo k The EC Balance Sheet Guidelines (1980) , migh t have had t o make a statement, especiall y i n his Introduction, tha t the Fourth E C Guideline is a compromise. 16 Above all , wha t i s particularl y importan t i n Chapte r 8 o f th e Fourth E C Guideline , "Content s o f th e Note s o n th e Accounts — Contents o f the Appendix," ma y b e the provisions whic h stipulat e that particula r consideratio n shoul d b e pai d t o th e protectio n o f an obligee , callin g fo r th e indicatio n o f "th e tota l amoun t o f an y financial commitment s tha t are not included in the balance sheet, " which i s provided fo r by Paragraph 7 of Article 43. Another impor tant provisio n i s tha t o f Articl e 46 , Chapte r 9 o f th e Fourt h E C Guideline i n regar d t o futur e estimates , "Content s o f th e Annua l Report—Contents o f the Situation Report. " Paragraph 1 o f Article 46 prescribes a s follows: "Th e annual repor t mus t includ e a t leas t a fai r revie w of the development o f the company's busines s and of its position. " An d Paragrap h 2 states: "Th e repor t shal l als o giv e an indication of : a ) any important event s that have occurred sinc e the en d o f th e fiscal year ; b ) th e company' s likel y futur e develop ment; c ) it s activitie s i n th e field o f researc h an d development ; and d ) information concernin g acquisition s o f its own share s pre scribed b y Articl e 2 2 (2 ) of Directiv e 77/9 1 /EEC." I t seem s t o m e that requirement s (a ) (b) and (c ) in Paragraph 2 are th e provision s that introduce , straightforwardly , th e though t o f " a tru e an d fai r field of vision (farsightedness). " In hi s EC Balance Sheet Guidelines (page s 30 0 throug h 306) , Heinrich H . Jona s ha s include d a detaile d lis t o f comparison s under th e headin g " A Compariso n o f th e Principle s o f Valuatio n According t o the Fourt h E C Guideline an d Corporat e Commercia l Law." Especiall y i n connectio n wit h "th e principle s o f regula r bookkeeping," h e list s twenty-on e item s an d discusse s th e pres -

The Problem s o f th e Fourt h E C Guideline 21 5 ence of a relationship o f adaptation t o the provisions of the Fourt h EC Guideline. He states, for example, that th e provision tha t fixed assets shoul d be appraise d eithe r b y purchas e pric e o r b y cos t o f production , " which i s prescribed i n Paragraph 1 of Article 35 of the Fourth E C Guideline, has been adapted t o the principles of regular bookkeeping/' an d th e adoptio n o f th e "Equity-Method, " whic h i s pre scribed b y Articl e 5 9 of th e Fourt h E C Guideline, is not approve d by th e "principle s o f regular bookkeeping, " an d s o forth. Ther e i s no poin t a t presen t (Jul y 1981 ) i n translatin g th e entir e lis t o f comparisons, introduc e i t here, and discus s i t i n detail. On Febru ary 5 , 1980 , a draf t o f revision s o f man y article s o f RefEHGB, RefEAktG, an d RefEGmbHG wa s complete d an d i t ma y alread y have bee n mad e publi c b y th e Federa l Ministr y o f Justic e i n th e Federal Republi c of Germany . The Drafts o f th e Various Law s to Be Revise d An articl e entitle d " A Statemen t o n th e Preliminar y Draf t o f th e Balance Shee t Guidelin e La w of February 5 , 1980," written b y th e Commission o n Accountin g o f th e Associatio n o f Universit y In structors o f Busines s Administration , appeare d o n page s 58 9 through 59 7 of the Decembe r 4 , 1980 , issue of the magazin e Business Administration. Thi s magazin e i s published b y C. E. Poesche l Verlag i n Stuttgar t an d it s editor s ar e si x renowne d universit y professors, heade d b y Dr . Klau s Chmielewicz , Ruhr-Universita t Bochum; it s editoria l committe e i s compose d o f twelv e scholars . In tha t articl e i t i s reporte d tha t a n authoritativ e "principle s o f regular bookkeeping " commissio n ha s alread y bee n establishe d and has already presented variou s recommendations. The point a t issue ha s bee n narrowe d dow n t o abou t sevent y items . Th e bill s that hav e been mad e publi c b y the Federal Ministr y o f Justice ar e extremely diversifie d an d lengthy , contrar y t o previou s expecta tions; th e bil l t o revis e th e Commercia l Cod e (RefEHGB), fo r ex ample, i s comprised o f a hundred articles . I must, therefore , omi t entirely a discussion o f this statement itself . Hans Haverman n o f Diisseldorf , forme r presiden t o f th e Insti tute o f Certifie d Publi c Accountant s i n Germany , contribute d a n

216 Th e Problem s o f the Fourt h E C Guidelin e article, "Th e Preliminar y Draf t o f th e Transformatio n La w t o th e EC Guideline s I s Ready/ ' t o th e Apri l 1 , 1980 , issu e o f Business Auditing, whic h i s publishe d b y th e Institute . I n thi s article , h e provides a n outlin e o f th e bill s an d hi s opinio n o n severa l funda mental problem s an d point s out tha t th e scope of the revised bill s is s o massiv e tha t the y excee d ou r previou s expectations . Fo r example, what Articl e 1 of the Fourt h E C Guideline formerl y reg ulated i n the Federal Republi c of Germany was limited to a "joint stock company, " a "joint-stoc k limite d partnership/ ' an d a "lim ited company. " Th e revise d bills , mad e publi c b y th e Federa l Ministry o f Justice , includ e i n additio n t o thes e thre e kind s o f "business entity " commercia l corporation s an d companies, 17 th e enterprises o f publi c bodies , registere d cooperatives , enterprise s that ar e obligate d t o present account s unde r th e disclosur e law, 18 banks and insuranc e companies, and other companies . The Federal Ministr y o f Justice i n th e Federa l Republi c o f Germany, unde r instructio n o f th e Fourt h E C Guideline, actuall y an nounced th e draf t o f th e revisio n o f th e law s unde r whic h al l enterprises i n th e Federa l Republi c o f German y shoul d b e sub jected to restriction by law. The magazine Business Administration published a specia l issu e o n th e Fourt h E C Guideline s i n Marc h 1979, in which recommendations fo r reform o f the presentation of accounts unde r commercia l la w were mad e publi c i n th e name of the Commissio n o n Accountin g o f th e Associatio n o f Universit y Instructors o f Busines s Administration . A t th e beginnin g o f thi s special issue , the commission stated : "Th e reform o f the presenta tion o f accounts unde r commercia l la w represents a central prob lem of the study of business administration. " It i s reasonabl e fo r professor s i n busines s economic s t o mak e such a statement, which i s full o f fighting spiri t an d excitement . If it wer e th e objectiv e truth , however , ho w woul d thes e professor s explain th e fac t tha t i n non e of the thre e volumes—157 0 page s i n all—of th e importan t wor k Basics of the Study of Business Administration, b y Eric h Gutenberg , professo r o f busines s administra tion a t th e Universit y o f Cologne , i s ther e a discussio n o f th e presentation o f accounts. Would thes e professors tacitl y maintai n that Dr . Gutenbur g i s no t a schola r i n busines s economic s i n th e true sense of the word. At the beginning (page 2) of this recommen dation fo r refor m mad e b y th e Associatio n o f Universit y Instruc -

The Problem s o f th e Fourt h E C Guideline 21 7 tors of Business Administration, i t i s stated tha t "th e mos t impor tant recommendation s fo r refor m ma y b e summarize d i n th e following theses/ ' In th e first hal f o f th e first proposal , i t i s state d tha t "today' s presentation o f accounts , diversifie d b y typ e o f law , shoul d b e replaced b y a unifor m la w fo r th e renderin g o f account s unde r commercial law , a t leas t fo r larg e companies . Thi s la w woul d supersede th e relevant regulation s fro m th e HGB, GmbHG, GenG, PublG, an d AktG." A s stated earlier , th e first ite m tha t ha d bee n designated a s the most important proposal for revision was denie d by th e Federa l Ministr y o f Justice. I t wa s divide d int o RefEHGB, RefEAktG, RefEGmbHG, an d s o forth , an d i t wa s finally mad e public a s law s wit h a n enormou s numbe r o f provisions. Concern ing th e recommendatio n o f revisio n mad e b y th e Associatio n o f University Instructor s o f Busines s Administration , mos t o f thi s proposal has been translated an d introduced t o Japan by Professo r Yasuo Morikawa o f Meiji University . I will therefor e refrai n fro m further unnecessar y discussio n o f this matter . The above-mentione d "unifor m la w fo r th e presentatio n o f ac counts unde r commercia l law " ha d bee n demande d no t onl y b y the Commissio n o n Accountin g o f th e Associatio n o f Universit y Instructors o f Business Administration, bu t i t was also mentione d as "th e formulatio n o f th e amendmen t law, " o n pag e 2 o f th e Introduction o f a boo k entitle d Presentation of Accounts under the New Law (1980) , a wor k o f mor e tha n 40 0 pages . Thi s boo k wa s compiled fro m th e Symposion an d th e Referate und Diskussionen of the Fourth and Sevent h Guidelines that even the Schmalenbac h Association participate d in , and th e work wa s compiled b y Dr . H. C. Marcu s Bierich , Dr . Walthe r Buss e vo n Colbe , Dr . Ger t La/3 mann, an d Dr . Marcu s Lutter . Althoug h th e ter m i s different , scholars o n th e fron t lin e i n busines s economics , i t woul d seen , were also thinking of how to cope with th e Fourth E C Guideline. The Fourth EC Guideline an d the Principles o f Regular Bookkeepin g As stated i n th e preambl e o f th e Fourt h E C Guideline, almos t al l of thi s directiv e i s relate d t o "th e coordinatio n o f nationa l provi sions concerning th e presentatio n an d conten t o f annual account s

218 Th e Problem s o f the Fourt h E C Guidelin e and annua l reports. " As a consequence, i t ma y safel y b e assume d that almos t al l of the directive will be related t o the "principles of regular bookkeeping. " It seem s necessary a t thi s point t o touch briefl y o n th e fact tha t the recommendation s fo r revisio n regardin g th e la w fo r th e pre sentation o f account s unde r commercia l law , whic h wa s mad e public i n Marc h 197 9 b y th e Commissio n o n Accountin g o f th e Association o f Universit y Instructor s o f Busines s Administration , especially Sectio n 4 o f th e recommendation s fo r th e formulatio n of th e content s o f th e annua l financial statement , hav e take n u p Paragraph 2 of Article 2, Article 3, and Paragraph 1 o f Article 31 of the Fourt h E C Guideline a s of particular concer n i n regard t o th e "principles o f regula r bookkeeping. " Firs t o f all , Dr . Ulric h Leff son, i n The Principles of Regular Accounting (5t h ed. , 1980 ; page s 143-444), explains eac h principle i n turn, and the y are numerous . In Regularity of Bookkeeping Standards on Bookkeeping and Records (7th ed. , 1978) , coauthored b y Kar l Peter , Kur t Joachi m vo n Bon rhaupt, and Werner Korner, each principle is listed with its source in the law and the n each is explained . For example , th e first t o b e discusse d ar e th e "principle s o f regular bookkeepin g accordin g t o th e bookkeepin g guideline s o f November 11 , 1937," followed b y th e "genera l principle s o f regu lar bookkeepin g accordin g t o th e decision s o f the ta x courts, " th e "principles o f regular bookkeepin g accordin g t o HGB," th e "prin ciples o f regular bookkeepin g accordin g t o AktG," th e "principle s of regular bookkeeping accordin g t o Tax Code 77," the "principle s of regula r single-entr y bookkeeping, " th e "principle s o f regula r inventory," th e principle s o f "regula r cas h bookkeepin g i n AB C form," th e principle s o f "regular cas h bookkeepin g i n curren t ac count bookkeepin g i n AB C form," an d th e principle s o f "regula r bookkeeping for individua l branche s of professions an d business. " The principles of regular bookkeeping are thus far mor e numerou s than th e te n principles enumerate d i n Paragraph 4 of the "recom mendations fo r reform " o f th e Commissio n o n Accountin g o f th e Association of University Instructors o f Business Administration . The primary objectiv e o f this commissio n wa s no t a n all-inclu sive enumeratio n o f th e principle s o f regula r bookkeeping . Afte r its enumeratio n o f th e nucleu s o f th e principle s o f regula r book -

The Problem s o f th e Fourt h E C Guideline 21 9 keeping i n th e Federa l Republi c o f Germany , i t state d tha t a bal ance mus t b e struc k betwee n conformit y t o thes e principle s an d the on e principl e o f " a tru e an d fai r view " prescribe d b y Articl e 149 o f th e Companie s Ac t o f 194 8 i n England . A s a result , th e commission declare d tha t th e article s o f the Fourt h E C Guidelin e should b e followed . I t ma y safel y b e sai d tha t thi s wa s a n ex tremely importan t inciden t i n conventional Germa n accountancy . Paragraph 1 of Article 2 of th e Fourt h E C Guideline prescribe s that i n annua l reports , th e balanc e sheet , th e statemen t o f profi t and loss , and th e "schedules," "shall constitut e a composite whole. " Paragraph 2 of this article prescribes tha t "the y shall be drawn u p clearly an d i n accordanc e wit h th e provision s o f thi s directive. " Paragraph 3 states tha t "annua l report s shal l giv e a tru e an d fai r view (fiel d o f visio n o r farsightedness ) o f th e company' s assets , liabilities, financial position , and profit an d loss. " The professor s wh o serve d o n thi s committe e mus t hav e bee n impressed b y th e fac t tha t part s o f Articl e 14 9 of th e Companie s Act of 194 8 in England were substantially an d completely adopte d just a s the y stood . Suc h bein g th e case , i n Sectio n 2 o f thes e "recommendations fo r reform, " the y stat e tha t "th e annua l state ment o f accounts should giv e "a picture consistent wit h th e actua l circumstances o f th e company' s assets , financial affairs , an d cir cumstances o f profi t an d loss. " The y the n mad e a proposa l tha t was in accord with th e main object of the above-mentioned Articl e 149. The mai n objec t o f Article 14 9 is no t necessaril y understoo d by accountin g scholar s i n Japan. 19 Th e "recommendation s fo r re form" mad e b y th e Commissio n o n Accountin g o f th e Associatio n of University Instructors of Business Administration, "Twenty-fiv e Justifications fo r th e Conten t o f Annua l Financia l Statements " states: "I n cas e o f a conflic t betwee n th e balancin g regulation s and a vie w o f th e actua l circumstance s regardin g th e property , finances, an d profit s o f th e company , th e balancin g tha t i s mor e expressive of that specifi c firm take s precedence." 20 This is not an original proposal by this committee of professors ; it ca n b e foun d o n pag e 73 7 o f Palmer' s Company Law, whic h I quoted earlier . Th e centra l meanin g o f th e expressio n " a tru e and fai r view " i s th e followin g principle . I n eac h individua l cir cumstance, accountant s ar e allowe d t o ignor e law s an d regula -

220 Th

e Problem s o f th e Fourt h E C Guidelin e

tions, when , i n accor d wit h thei r ow n insight , field o f vision , and discernment , i t i s necessar y t o d o s o i n orde r t o adop t a method o f preparin g a statemen t o f account s tha t i s a superio r presentation. The Sevent h E C Guidelin e Finally, Gablers Business Dictionary tion o f th e Sevent h E C Guideline :

give s th e followin g descrip -

The outline (published i n 1976 ) regulates th e establishment o f statement s of accoun t o f conglomerate s an d supplement s th e Fourt h E C Guideline , which applie s exclusivel y t o th e individua l balanc e sheet . Th e Sevent h EC Guideline requires tha t multinationa l group s establish a consolidate d statement o f account s tha t include s al l participant s locate d i n th e terri tory of the community, even if they have their headquarters outside of the community. The Sevent h E C Guidelin e i s comprise d o f twenty-si x articles . Gablers Dictionary's descriptio n i s brief an d t o th e point . I woul d lik e t o cal l th e reader' s attentio n t o th e following : "GoB," th e abbreviatio n o f th e Germa n term , i s usually translate d into Japanes e a s "Sekino-bokino-gensoku " ("th e principle s o f reg ular bookkeeping") . Articl e 3 8 o f th e existin g (a s o f Februar y 1 , 1981) Commercial Cod e o f th e Federa l Republi c o f German y ha s a provision unde r th e headin g "Bookkeepin g Obligations " fo r mer chants tha t prescribe s "Buche r z u fuhre n . . . nac h de n Grund satzen ordnungsmassige r Buchfuhrung " ("book s ar e t o be k e p t . . . according t o regula r bookkeepin g principles") , fro m whic h th e custom o f translatin g thi s particula r Germa n ter m " G o B " int o Japanese a s "Sekino-bokino-gensoku " ma y hav e originated . Paragraph 2 a o f Articl e 3 9 o f th e Germa n Commercia l Code , however, ha s a provisio n i n regar d t o " A Statemen t o f th e Fina l Accounts," whic h prescribe s "Da s Verfahre n mu/ 3 de n Grund satzen ordnungsma/3ige r Buchfuhrun g entsprechen " ("th e proce dure mus t confor m t o th e principle s o f regula r bookkeeping") . I t seems obvious , therefore , tha t " G o B " should no t b e understoo d a s simply "makin g entrie s i n a n accoun t book. " Instead , thi s ter m also encompasse s "th e wa y t o mak e a statemen t o f final account. " As Ulric h Leffso n ha s stated : "Unde r Germa n law , th e rule s fo r

The Problem s o f th e Fourt h E C Guideline 22 1 bookkeeping an d balanc e sheet s ar e designate d th e 'Principle s o f Regular Bookkeepin g (GoB). ' " 2 1 A s th e Sevent h E C Guidelin e i s comprised o f regulation s regardin g th e makin g o f a statemen t o f final accoun t b y a conglomerate , th e ful l tex t o f th e twenty-si x articles of the Sevent h E C Guideline should b e viewed as concern ing the principles o f regular bookkeeping . Thus, the principle s o f regular bookkeepin g a s a lega l standar d continue t o g o throug h a proces s o f expansion an d progress . Ear lier I wrote " a pictur e consisten t wit h actua l circumstances, " bu t I no w wis h t o rectif y m y us e o f th e Japanes e ter m "eizo " ("a n image"), becaus e "byosha " ("depiction" ) i s a muc h bette r Japa nese translatio n o f th e Germa n ter m "Bild " ("picture") . I mus t add here , moreover , tha t i t i s a matte r o f commo n knowledg e among internationa l scholar s o f accountin g tha t th e authenti c German versio n o f th e Englis h ter m "tru e an d fai r view " shoul d be equivalent t o the German expressio n " a picture consistent wit h actual circumstances." 22 I am familia r wit h the following article s in regard t o the Fourt h and th e Sevent h E C Guidelines , al l o f whic h wer e publishe d i n Business Auditing, th e bulleti n o f th e Institut e o f Chartere d Ac countants i n Germany . Describin g thes e article s an d criticizin g them here , however , wil l unnecessaril y prolon g thi s discussion . Thus I will onl y indicat e th e locatio n o f thes e referenc e material s for your information : (1) Ulric h Leffso n (Munster) , "O n th e Genera l Nor m an d Certifi cation of the Preliminary Draf t o f a Balance Guideline Law, As Well A s Note s Concernin g Othe r Regulations, " Jun e 1 , 1980 , S.289ff. (2) Wol f Miille r (Frankfurt),"Amendmen t o f th e Gmb H La w an d Other Regulation s o f Commercia l La w o f Januar y 1 , 1981, " Aug. 1,1980, S. 369 ff . (3) "Join t Statemen t o f th e Chambe r o f Certifie d Publi c Accoun tants an d th e Institut e o f Publi c Accountant s Concernin g th e Preliminary Draf t o f a Balance Guideline Law," Sept. 15 , 1980, S. 501 ff . (4) Ulric h Leffson (Munster) , "Business Audits and th e University : A Symposium i n Munste r (Report s an d Summar y o f th e Dis -

222 Th

e Problem s o f th e Fourt h E C Guidelin e

cussion: Th e Influenc e o f a Recognizabl e Ris k o f th e Compan y on th e Statement s i n th e Auditor' s Repor t an d Certification/ ' Dec. 1,1980 , S . 63 7 ff . (5) Herber t Biene r (Bonn) , "Concerning th e Transformatio n o f th e Fourth E C Guideline, " Dec . 15 , 1980, S. 689 ff . (6) R . J . Niehu s (Diisseldorf) , " 'Materiality'—Th e Principl e o f Presentation o f Account s Als o i n Germa n Commercia l L a w ? " Jan. 1,1981 , S . Iff . (7) Edgar d Casta n (Hamburg) , "Th e Practic e o f Annua l Financia l Statement Disclosures, " June 15 , 1981 , S. 33 7 ff . Concerning Marlen e Brown' s Vie w As thi s chapte r draw s t o a close , w e mus t no t overloo k a n articl e written b y Marlen e Brow n tha t appeare d o n Februar y 5 , 1981 , in issue no . 552 8 o f The Accountant, th e journa l o f th e Institut e o f Chartered Accountant s i n Englan d an d Wales . I n "Dramati c Changes, Th e E C Fourt h Guideline, " Ms . Brow n introduce s th e Fourth an d Sevent h E C Guideline s throug h a n examinatio n o f th e opinions o f th e director s o f th e nin e bi g office s o f accountant s wh o represent th e world . Sh e conclude s tha t thes e tw o E C guideline s have a potentia l impac t throug h whic h dramati c change s ma y b e brought abou t throughou t th e Europea n Continent . Due t o spac e limitations , i t woul d b e difficul t t o introduc e th e full tex t o f Ms . Brown' s articl e here . Thu s I wil l quot e onl y w h a t seems essentia l t o he r poin t o f view . Abov e al l else , she maintain s that Europ e i s a t presen t makin g rapi d change s i n a variet y o f directions. Th e Toky o Residen t Offic e o f th e E C provide d m e wit h the informatio n tha t th e n u m b e r o f E C directive s (guidelines ) issued eac h yea r total s abou t thre e thousand . Fro m thi s n u m b e r the scal e an d rapidit y o f th e change s i n Europ e shoul d b e clear . Changes i n th e spher e o f accountin g ar e include d i n thi s number . Ms. Brown states : The Fourt h Guidelin e wil l directl y affec t th e ove r on e and a hal f millio n companies tha t ar e locate d withi n th e Europea n Economi c Community . The Fourt h Guidelin e doe s no t accor d wit h Unite d Kingdo m practic e in al l respects . It wa s perhap s unrealisti c t o expect membe r state s t o b e able t o brin g int o la w th e significan t change s require d b y th e Fourt h

The Problem s o f th e Fourt h E C Guidelin e 22

3

Guideline within two years of its adoption. Germany has issued a preliminary draf t fo r comment , bu t reaction s hav e bee n largel y advers e an d certain delay s ar e likely. Suc h being th e reason, one of the biggest problems o f th e Fourt h Guidelin e i s tha t ther e ar e a number o f options and , if th e differen t countrie s legislat e fo r som e o f th e option s i n differen t ways, th e resul t wil l b e disharmony . Suc h a rigid framework woul d no t have bee n acceptabl e a t thi s stag e whe n ther e ar e s o man y difference s in the lega l an d accounting requirement s o f member states . Harmoniza tion i s no t a n instan t process ; i t require s a gradual , step-by-ste p ap proach. She add s tha t "th e Fourt h Guidelin e too k te n years fro m it s incep tion t o it s adoption/ ' bu t "t o sugges t amendment s i s a goo d prac tice." Ms. Brow n furthe r state s a s follows : "I n tryin g t o legislat e fo r countries tha t ar e a s fa r apar t a s th e Unite d Kingdo m an d Ger many—witness th e pragmati c lega l syste m o f th e Britis h a s op posed t o Germany' s prescriptiv e lega l syste m (th e Britis h syste m being flexibl e la w backe d u p wit h privat e secto r regulations , lik e accounting standards)—i t i s very difficul t t o bring al l thes e int o a cohesive document. " I n regard t o th e Sevent h Guideline , sh e quote s Mr. Marti n Clayto n o f Pric e Waterhous e tha t "i t i s tru e tha t th e Seventh Guidelin e i s muc h mor e politicall y sensitiv e tha n th e Fourth." Whe n Mr . Clayto n say s "muc h mor e politicall y sensi tive," I wonde r whethe r h e actuall y mean s t o impl y a stron g instability. Marlene Brow n goe s o n t o sa y tha t "th e Fourt h Guidelin e wil l undoubtedly ge t throug h th e Unite d Kingdom' s Parliament. " I n quoting th e comment s o f Georg e Eccle s o f Deloitte , Haskins , an d Sells, Marlen e Brow n offer s th e criticis m tha t "on e of th e deficien cies o f th e Fourt h Guidelin e i s tha t peopl e ar e pu t unde r tremen dous pressur e an d ar e dragge d on e wa y i n tryin g t o compl y an d another i n tryin g t o agre e wit h th e fiscal authorities. " Ms . Brow n deplores tha t "a s an actua l problem, " most Continenta l countries , unfortunately, prepar e account s fo r the taxman . It seem s t o me , however , tha t thi s lamentatio n i s als o Japan' s at present . I hope tha t w e Japanes e se e clearl y tha t th e member s of th e Nationa l Die t i n Japa n ar e th e person s wh o ar e responsibl e for th e formatio n o f societ y throug h legislativ e actio n i n Japan . I feel keenl y tha t ther e ar e extremel y fe w Nationa l Die t member s

224 Th

e Problem s o f th e Fourt h E C Guidelin e

who ar e awar e o f thi s particula r proble m an d tha t thi s i s Japan' s misfortune. To retur n t o ou r mai n subject , Ms . Brown argue s b y borrowin g the opinion s o f Mr . Andre w Brow n o f th e Erns t an d Whinn y Ac counting Firm : One of the major problem s i s how membe r state s wil l defin e " a tru e an d fair view. " Touchin g o n th e cor e o f th e concep t o f accountin g i n th e Fourth Guideline , h e [Andre w Brown ] state s wit h a worrie d ai r tha t "i f the tru e an d fai r vie w i s goin g t o com e ou t i n countrie s suc h a s Franc e and German y a s meanin g 'complianc e wit h law ' an d th e countrie s con cerned tak e up differen t opinion s in different ways , the law will be differ ent from on e country t o another." Thi s is indeed a pity, because th e basi c philosophy o f " a tru e an d fai r view " i s muc h wide r tha n "complianc e with law. " It i s m y opinion , however , tha t thi s statemen t i s i n erro r an d i s due t o Ms . Brown' s overanxiousnes s abou t thi s particula r prob lem. Th e propositio n wa s mad e publi c earlie r b y th e Commissio n on Accountin g o f th e Associatio n o f Universit y Instructor s o f Busi ness Administratio n i n th e Federa l Republi c o f Germany , an d i n regard t o th e principl e o f " a tru e an d fai r view, " thei r statemen t was identica l wit h w h a t appeare d i n Volum e I o f Palmer' s Company Law i n England , a s i f the commissio n h a d copie d th e origina l text o f thi s particula r debate . A t presen t (Augus t 1981) , th e legis lative bil l ha s no t bee n approve d ye t i n th e Federa l Republi c o f Germany, s o tha t i t i s stil l unknow n ho w thi s propositio n wil l b e specified i n th e law . I feel , however , tha t a t leas t th e constitutent s of thi s Germa n Associatio n o f Universit y Instructor s o f Busines s Administration, wh o hav e socia l influenc e i n on e wa y o r another , are no t unenlightened . At th e en d o f her article , i n quotin g th e statemen t o f Mr . Marce l Asselberghs o f th e Arthu r Anderse n Office , Marlen e Brow n state s that "i n certai n countrie s lik e Italy , Belgium , an d Luxembourg , we ar e comin g ou t o f th e Middl e Ages! " It i s not clea r whethe r sh e is referrin g t o backwardnes s i n th e spher e o f accountin g o r t o th e tendency t o dogmatis m i n th e Middl e Ages . Much shoul d b e m a d e of th e fac t tha t Belgiu m wa s th e first stat e amon g th e m e m b e r states o f th e E C that enforce d th e legalizatio n o f the Fourt h Guide line.

The Problem s o f th e Fourt h E C Guideline 22 5 Despite Articl e 3 2 of th e Fourt h Guideline , whic h clarifie s a s a valuation principl e "acquisitio n cos t theory " o r "cos t o f produc tion theory/ ' Articl e 3 3 of th e sam e guidelin e approve s th e selec tion b y membe r state s o f "valuatio n b y th e replacemen t valu e method" o r anothe r valuatio n metho d rathe r tha n a valuatio n method tha t approve s inflationary accountin g an d th e revaluatio n of "tangibl e fixed assets " or "financia l tangibl e property/ ' o n th e condition tha t th e membe r state s concerne d prescrib e it s con tents, limit , an d applicabl e regulatio n b y law . Marlen e Brow n discloses th e interna l affair s o f th e progres s o f establishin g th e guideline wit h he r statement : "German y refuse d absolutel y an d fought agains t Articl e 33 , which permitte d membe r state s t o leg islate for inflation-adjusted informatio n t o be presented." Sh e concludes her articl e wit h th e following words : "The battle t o permi t member state s to present curren t cos t information i s in effect onl y an addendum. " The Fourth an d Sevent h Guidelines , which originate d fro m th e Treaty fo r th e Establishmen t o f th e Europea n Communit y an d have numerous provision s totalin g 24 8 articles, are based o n Article 54 , Paragrap h 3 (g ) o f thi s treaty . A s Titl e 3 , Chapte r 2 ex presses clearly, these two guidelines belong to the category of "th e right of establishment," and , I feel, these two guidelines are aime d at settling , throug h legislatio n an d o n a consolidate d basis , th e conduct i n regar d t o compan y accountin g o f each o f th e membe r states, which objective wil l be attended b y hardship . Notes 1. Gablers Business Dictionary (10t h ed. , 1979) , Vol. 1 , p. 1118 . 2. Inflation Accounting, Repor t o f th e Inflatio n Accountin g Commit tee, Chairma n F . E. P . Sandilands, Esq. , CBE , presente d t o Parliamen t b y the Chancello r o f th e Excheque r an d th e Secretar y o f Stat e fo r Trad e b y Command o f Her Majesty , Septembe r 1975 , p. 230 . 3. Thi s mean s "legislativ e action. " 4. Ibid. , p . 7 . 5. Companie s Ac t o f 198 0 (London : He r Majesty' s Stationar y Office) , p. 10 . 6. Wit h a n exchang e rat e o f 50 0 ye n t o a pound , thi s 50,00 0 pound s becomes 25,000,00 0 yen . Refe r t o th e Companie s Ac t o f 1980 , Sec. 85.

226 Th e Problems of the Fourth EC Guideline 7. Thi s i s th e abbreviatio n o f "th e la w enacte d o n Augus t 21 , 1948, concerning a balanc e shee t o f startin g a busines s indicate d b y Germa n marks, and th e law regarding th e determination o f new capital. " 8. New Edition of the Company Law, published o n February 10 , 1981, 1st ed., p. 25. 9. Th e first editio n wa s publishe d o n Apri l 20 , 1981 , compiled b y Masao Takashima, Basic Lecture on Jurisprudence, the Commercial Code II (The Company Law) (Hogakushoin ed.) , p. 44. 10. Han s Kelsen , Reine Rechtslehre, trans . Kisaburo Yokot a (Iwanam i Shotened., 1973) , p. 32. 11. Heinric h H . Jonas, Die EG-Bilanzrichtlinie Grundlagen und Anwendung in der Praxis (Rudolf Hauf e Verlag, 1980) , S. 275. 12. Articl e 3 o f th e La w Regardin g a n Exceptio n o f th e Commercia l Code Regarding Auditing of Joint-Stock Companies, etc. 13. Si r Francis Palmer, Company Law, 22d ed., England, Vol. 1, p. 762. 14. Le e J . Seidle r an d D . R. Carmichael , Accountants' Handbook, 6t h ed., 1981 , Vol. 1, pp. 5-13. 15. Gablers Business Dictionary, Vol. II, p. 1987. 16. Seep . 3. 17. I n accordance wit h Paragrap h 1 (1) of the Corporation Ta x Law of 1980 in the Federal Republi c of Germany, in addition t o these three kind s of busines s entities—" a joint-stoc k company, " " a joint-stoc k limite d partnership," and " a limite d company"—thi s ma y indicat e suc h compa nies as colonial companies and unions under mining law . 18. "Publizitatsgesetz " (Disclosur e Law ) i s a n abbreviation ; th e offi cial nam e o f thi s la w i s "Geset z ube r di e Rechnungslegun g vo n besti mmten Unternehme n un d Konzernen " (La w Concerning th e Representa tion of Accounts by Certain Companies and Conglomerates). It is comprised of onl y twenty-fiv e articles , Articl e 1 of which , a s o f Februar y 1 , 1981 , under th e heading "Enterprise s Obligate d t o Present Accounts," states i n Paragraph 1 : "Accordin g t o thi s paragraph , a n enterpris e mus t presen t (render) accounts , i f a t leas t tw o o f th e thre e followin g characteristic s apply fo r th e las t da y of the fiscal year (closing/deliver y date ) an d fo r th e two followin g closin g dates. " Howeve r eage r th e peopl e o f th e Federa l Republic o f German y ma y hav e bee n fo r legislatio n afte r Worl d Wa r II , from th e standpoin t o f th e Japanese , ther e i s n o escapin g ou r feelin g o f some complicatedness i n this matter, even if we understand th e followin g prescriptions o f th e Germa n law s a s th e differenc e o f a principl e o n th e limitation o f th e scop e o f "bookkeepin g obligation, " suc h a s i s show n below. Article 14 1 of the Tax Code has fixed by law the scope of taxpayers wh o have th e obligatio n t o kee p books . Article 4 4 of HGB ha s prescribe d th e bookkeeping obligatio n o f a merchan t i n conjunctio n wit h it s Article 38. Article 5 of the Income Tax Law has equally fixed by law the bookkeepin g obligation.

The Problem s o f th e Fourt h E C Guidelin e 22

7

Furthermore, Articl e 1 of th e Disclosur e La w ha s prescribe d th e obli gation t o keep books i n thi s way . The firs t o f th e thre e characteristic s is : The balanc e shee t tota l o f th e annua l balanc e shee t produce d o n th e delivery/closing dat e exceed s D M 125,000,000 . The secon d characteristi c is a s follows : Th e gros s profi t o n sale s o f th e compan y i n th e twelv e months prio r t o th e closin g dat e exceed s D M 250,000,000 . Th e thir d characteristic is : The compan y ha s employe d o n th e averag e mor e tha n five thousand employee s i n the twelve months prior t o the closing date . It follows, therefore, tha t a n enterprise t o which tw o of the above thre e characteristics appl y i s a n undertakin g tha t i s unde r th e obligatio n t o have it s accountin g record s prepared , accordin g t o th e La w Concernin g the Presentatio n o f Account s b y Certai n Companie s an d Conglomerates . These enterprises includ e even banks and insuranc e companie s an d othe r companies. 19. Accountin g Researc h Section , Kob e University , Accountancy Dictionary, 3 d ed., p. 677; Chuo-Keizaisha, Accounting Handbooks, lates t ed. , Dec. 1976, p. 829. 20. Se e Paragraph 3 (Paragraph 3 in this instance indicate s Paragrap h 3 of Article 2 of the Fourth E C Guideline). 21. Handworterbuch der Betriebswirtschaft, Viert e Auflage, p. 1011. 22. Unio n Europeenn e de s Expert s Comptables , Economique s e t Fi nanciers (U.E.C.) , International Accounting Lexicon, Specia l ed. , 1980 , p.111.

15 Problems Relatin g t o Unio n Europeen e des Expert s Comptables , Economique s et Financier s (U.E.C. )

Derrick Owles' s Vie w an d Criticis m A special issue , dated Apri l 3, 1980, of The Accountant, th e journa l for professiona l accountant s i n th e Unite d Kingdom , i s entitle d "Annual Revie w 1979-80. " Th e issu e carrie s a n articl e entitle d "Foreign Affairs—Internationa l Harmonization " b y Derric k Owles , a visiting fellow a t the City University Business School. He writes: "The developmen t o f standards , nationa l an d international , i s a comparatively recen t activit y i n th e accountin g world . Before th e 1939-45 war , ther e wa s nothin g don e eve n o n a nationa l scale , and i t wa s onl y i n th e aftermat h o f th e wa r tha t nationa l stan dards were developed, but wit h n o idea of any internationa l coop eration." It i s m y contention , however , tha t thi s conclusio n i s incorrect . As I indicate d earlier , befor e Worl d Wa r I I th e Unite d Kingdo m and man y othe r countrie s ha d n o prescribe d nationwid e stan dards o f their ow n i n regard t o accounting. In th e Federal Repub lic o f Germany , however , Articl e 16 2 o f th e Imperia l Ta x Code , which wa s enacted i n 1919 , had create d detaile d accountin g stan dards unde r th e headin g "Obligation s o f Taxpayer s an d Othe r Persons." Moreover , whe n Articl e 2 9 (EStR 29) wa s enacte d i n 1937, a mor e detaile d nationwid e standar d o f accountin g wen t into effect . 228

Problems Relatin g t o Unio n 22 9 In th e Unite d States , moreover, before th e end of World War II, there wer e alread y i n effec t a numbe r o f detailed , nationwid e standards i n regard t o title of account, book s of account, account ing, vouchers, an d th e for m an d content s o f financial statements . The Securitie s Ac t (1933), the Securitie s an d Exchang e Act (1934), the Holdin g Compan y Ac t (1935) , and—base d o n thes e acts — Rules 250.2 7 an d 250.2 8 ha d bee n formulate d b y th e Securitie s and Exchang e Commissio n (SEC) . Moreover , Regulatio n S- X o f the Investmen t Compan y Ac t (1940) , Accountin g Serie s Releas e No. 4 (1938) , and other s wer e establishe d b y th e SEC . Thus i t i s clear tha t Owles' s statemen t tha t " there wa s nothin g don e eve n on a national scale " contradicts th e facts . Owles furthe r state s tha t "i t wa s no t unti l 196 6 tha t an y step s were take n towar d internationa l uniformity. " Thi s statemen t i s also in error. Four years prior t o 1966 , that is , in September 1962 , the Eighth Internationa l Congres s of Public Accountants wa s hel d in New York City. Its general assembl y too k place at th e Waldorf Astoria Hotel , an d i t wa s attende d b y nearl y fou r thousan d per sons. A t thi s genera l meeting , t o th e bes t m y memory , th e chie f delegate fro m Holland , speakin g fro m th e centra l rostrum , sug gested t o al l th e delegate s tha t ther e wa s a pressin g nee d fo r mapping out internationally unifie d accountin g and auditing stan dards. I heard thi s timel y propositio n fro m on e o f th e fron t seat s on the second floor of the assembly hall . Subsequently, i n 1966 , a conference wa s held b y the thre e dele gations from th e United Kingdom , the United States , and Canada , and th e Accountant s Internationa l Stud y Grou p wa s created . I n 1972, when th e Tent h Internationa l Congres s o f Accountants wa s held i n Sydney , Australia , th e representative s o f th e Accountant s International Stud y Grou p sen t a request fo r official participatio n in thi s meetin g t o Australia , France , Germany , Japan , Holland , Mexico, an d severa l others . Thu s i t wa s tha t th e Internationa l Accounting Standard s Committe e wa s organized. The first partic ipating group s represente d a tota l o f sixtee n countries , an d it s inaugural meetin g was held i n June 1973 . This newl y create d Internationa l Accountin g Standard s Com mittee (IASC ) unfortunately ha d n o authorit y t o sanctio n it s con stituents, an d i t als o faile d t o obtai n th e officia l participatio n o f

230 Problem s Relatin g t o Unio n the Financia l Accountin g Standard s Boar d (FASB ) o f th e Ameri can Institut e o f Certifie d Publi c Accountant s (AICPA) . It s prob lems, however , di d no t sto p there . The IASC' s independenc e wa s also threatene d b y th e creatio n o f the Internationa l Federatio n o f Accountants (IFAC), which was organized in October 197 7 in Munich. Sixty-three nation s joined thi s federation . The IFAC was organized a t the Eleventh International Congres s of Accountants . I t wa s formed , no t a s a "standard-settin g body/ ' but a s " a forum/ ' throug h whic h thos e accountant s wh o hav e assembled fro m th e fou r corner s o f th e worl d ca n mee t an d tak e action. On e o f th e function s o f th e IFA C is , i n fact , t o organiz e various kind s o f meetings , an d i t immediatel y planne d th e pro grams i t wante d t o hol d durin g th e nex t five years . According t o Dr. Owles , th e IFA C "i s t o issu e guideline s an d a cod e o f ethics , develop program s fo r trainin g accountants , an d repor t o n man agement accountin g techniques. " Owles furthe r point s ou t tha t a t th e tim e o f th e Sydne y Inter national Congres s i n 1972 , th e Internationa l Coordinatin g Com mittee fo r th e Accountin g Professio n wa s organized , an d tha t i t was through thi s group tha t th e IFAC came int o being in 1977 . He also indicate s tha t th e IAS C was a forerunne r o f th e IFAC , a ste p in th e righ t direction . H e shows tha t th e IAS C and th e IFA C have mutually independen t bu t closely related spheres of influence, an d that whe n a membe r o f th e IAS C i s als o a membe r o f th e IFAC , there i s a questio n o f whethe r o r no t ther e i s an y roo m fo r th e coexistence o f thes e tw o internationa l organization s whos e mis sions cover the same sphere of influence . Dr. Owle s als o assert s tha t car e shoul d b e take n tha t al l th e members o f th e internationa l organization s ar e merel y bodie s o f accountants, an d no t th e government s o f th e countries , an d h e points ou t tha t i n man y instances , governments hav e th e righ t t o speak i n regard t o accounting standards . In the case of the Unite d Kingdom, for instance , he maintain s i t i s the Departmen t o f Trade. In France, the Plan Comptable Genera l i s under th e direct contro l of the Conseil Nationa l d e la Comptabilite, and only 1 5 percent of this Conseil is the responsibility o f the Ordre National de s Expert s Comptable et des Comptables Agrees. In Sweden, the United King dom, an d Belgium , accountin g i s subjec t t o thos e countries ' re -

Problems Relatin g t o Unio n 23 1 spective legislativ e organs . H e state s tha t "thes e example s sho w the difficulties i n the way of effective internationa l coordination/ ' When Owle s mention s tha t th e FAS B in th e Unite d State s doe s not participat e i n an y wa y i n th e IASC , he write s tha t th e "FAS B is suppose d t o b e th e standard-settin g authorit y fo r th e Unite d States." Suc h a n understandin g ha s generall y bee n entertaine d and man y Japanes e accountin g scholar s hol d th e sam e opinion . We should b e aware , however, o f th e schola r Home r Kripke , wh o is currently a professor o n th e faculty o f law a t Ne w York Univer sity an d ha s bee n concerne d fo r mor e tha n forty-fiv e year s wit h the securit y administratio n o f th e Unite d State s government . In dicating tha t variou s decision s mad e b y th e SE C hav e bee n "su percomplicated an d overregulation " t o those who are not experts , he has publicly questione d th e SEC' s actions: "By what authorit y did the SEC franchise it s own statutory responsibilit y t o the FASB to mak e thes e decisions? " W e shoul d remembe r thi s scholar' s work.1 Dr. Owle s als o state s tha t th e Unite d Nation s i s concerne d about accountin g an d tha t i n May 1978 , it organized th e Commis sion o f Transnationa l Corporations , t o b e headquartere d i n Ne w York Cit y an d operat e unde r th e mandat e o f preparin g financial report an d accountin g standard s fo r multinationa l corporations . He state s tha t i t ha s bee n agree d tha t thi s commissio n i s t o b e composed o f thirty-fou r member s unde r th e direc t contro l o f th e United Nation s Economi c an d Socia l Council . No definit e under standing o n thi s matter , however , has been reache d s o far, partic ularly i n regard t o the number o f committeemen fro m eac h of th e constituent states . Recognizin g th e presen t stat e o f affairs , Owle s clarifies hi s positio n saying : "Thus , ther e ar e sign s tha t th e gul f between develope d an d developin g countrie s wil l hinde r eve n th e preparation o f accountin g standards . An y standard s tha t ar e es tablished will , moreover , b e voluntar y sinc e th e Unite d Nation s has no power to order compliance. " Owles refer s nex t t o th e Fourt h E C Guideline an d th e Sevent h EC Guideline. As I have alread y discusse d thes e guidelines , I wil l not repor t Owles' s comments . Writing abou t th e Organizatio n fo r Economic Cooperatio n an d Developmen t (OECD) , h e state s tha t in 196 3 th e OEC D announce d th e OEC D Draf t Doubl e Taxatio n

232 Problem s Relatin g t o Unio n Convention an d that , i n 1976 , it publishe d Guidelines for Multinational Enterprises. H e goe s o n t o sa y that , i n 1978 , th e OEC D established a workin g committe e whos e missio n i t i s t o stud y accounting standard s an d tha t i t circulate d a questionnair e re garding accounting practices i n the member states . After touchin g on trend s i n accountin g office s throughou t th e world , h e state s that "i n th e Unite d Kingdo m an d th e Unite d States , th e nee d fo r continuing professiona l educatio n afte r qualificatio n i s seen t o b e part o f th e pric e tha t mus t b e pai d fo r publi c recognitio n o f th e accountant." He writes that "i n the future, emphasis will be transferred t o professiona l educatio n afte r qualificatio n ha s bee n ob tained." H e conclude s wit h a n optimisti c vie w tha t i n th e 1980s , in th e spher e o f accountin g i n particular , man y activities , espe cially internationa l collaboration , wil l b e advanced , an d tha t i n twenty year s o r so , there wil l b e a n increas e o f nationa l pressur e directed a t accountants . Just befor e touchin g o n th e subjec t o f th e Fourt h an d th e Sev enth E C Guidelines, Owles argues th e very essence of this chapter . Concerning th e Organization an d Achievements o f th e U.E.C. Derrick Owles , however, doe s not touc h o n when th e Unio n Euro peene de s Expert s Comptables , Economique s e t Financier s (U.E.C. ) was organized . I t i s sai d tha t th e U.E.C . wa s organize d a t th e insistence o f Pau l Caujoll e i n Franc e i n 1951. 2 A s a consequence , its headquarter s ar e locate d i n Paris . Th e U.E.C . wa s organize d when group s o f free professiona l expert s an d qualifie d specialists , representing eleve n nations , too k par t i n a meeting . B y 1973 , the U.E.C. had increase d to fifteen member nations. When the Sevent h Conference o f th e U.E.C . met i n Octobe r 1973 , in additio n t o th e affiliated organization s representin g fifteen nations , tw o group s from tw o additiona l nation s participate d a s correspondin g mem bers. I must dra w th e reader's attentio n t o two references. On e is th e minutes o f the proceeding s o f the Sixt h Congress , which wa s hel d in Copenhagen , th e capita l o f Denmark , i n Octobe r 1969 . It wa s published i n Diisseldor f i n 197 0 by th e Institut e o f Chartere d Ac countants i n Germany . The other reference , als o published b y th e

Problems Relatin g t o Unio n 23 3 Institute of Chartered Accountant s i n Germany, is the proceeding s of th e Sevent h Congress , whic h wa s hel d i n Madrid , Spain , i n 1973. The proceedings were published i n 1978 . In accordance wit h the proceedings o f the Sevent h Congress , the names o f the partici pating groups, classified b y country, are as follows : Belgium: Colleg e Nationa l de s Expert s Comptable s de s Belgique , Institut de s Reviseurs d'Enterprises . Denmark: Foreninge n o f Statsautoriserede Revisor , F.S.R . England and Wales: Th e Institut e o f Chartere d Accountant s i n England an d Wales ; The Association o f Certified Accountants . Finland: K.H.T . Yhdistys Foreningen C.G.R . Germany: Institut e o f Chartere d Accountant s i n Germany , e.V. ; Institute of Auditors i n Berlin . Iceland: Felag Loggiltra Endurskodenda . Ireland: The Institute o f Chartered Accountant s i n Ireland . Italy: Consiglio Nationale dei Dottori Commercialisti, Federazion e Nationale de l Collegi dei Ragionieri . Luxembourg: Ordr e des Experts Comptables Luxembourgeois. 3 The proceeding s o f eac h congres s carrie s o n it s titl e pag e " A contribution o f Expert s Comptable s t o th e developmen t o f th e European economy. " Thus , i t i s clea r tha t i t i s professiona l ac countants fro m eac h countr y represente d wh o ar e makin g ever y effort t o help th e development o f the Europea n econom y b y work ing towar d "regularity " throug h thei r deliberation s o n divers e accounting theorie s an d practices . A s the numbe r o f expert s wh o attended th e tw o congresse s wa s abou t fifteen hundre d fo r th e Sixth Congres s and abou t tw o thousand fo r th e Sevent h Congress , it can be said tha t thes e conferences wer e quite large . The officia l language s t o b e use d i n meeting s o f th e U.E.C . ar e limited t o four : French , German , English , an d Spanish . I n th e conference hall , simultaneou s translation s int o thes e fou r lan guages ar e t o b e availabl e t o al l th e participants . A s is ofte n th e case, th e languag e proble m seem s a majo r obstacle . Th e U.E.C ,

234 Problem

s Relatin g t o Unio n

therefore, ha s publishe d a lexico n o f accountin g term s fo r th e express purpos e o f facilitatin g th e knowledg e o f ho w t o expres s specific technica l accountin g term s i n eac h languag e o f th e mem ber states . The book s tha t ar e readil y availabl e t o m e ar e Lexique U.E.C. (1974) an d th e International Accounting Lexicon (1980) . I am inter ested i n th e latte r Lexicon fo r th e followin g reason . Thi s lexico n reports tha t base d o n Articl e 5 4 o f th e so-calle d Roma n Treaty , which establishe d th e Europea n Communit y an d became effectiv e in January 1958 , the Fourt h E C Guideline wa s issue d i n July 1978 , in whic h th e expressio n " a tru e an d fai r view/ ' whic h constitute s an importan t accountin g concep t unde r Britis h law , ha s bee n frequently referre d to . No t onl y doe s th e International Accounting Lexicon contai n thi s phrase , i t als o indicate s th e officia l versio n o f this phras e i n th e languag e o f eac h membe r state , alon g wit h a n explanation o f it . I t i s indicate d clearl y i n thi s Lexicon tha t th e French versio n fo r thi s specifi c phras e i s "imag e fidele," an d th e Danish versio n i s "palidelig t billede. " The Italian versio n i s "quadr o fedele," whil e th e Germa n versio n i s "ei n de n tatsachliche n Ver haltnissen entsprechende s Bild " (" a pictur e consisten t wit h th e actual circumstances") . Earlier I touched o n th e Germa n versio n o f thi s Britis h phrase . It i s explained i n Englis h as : a concept signifyin g tha t th e presentation o f financial information i n the accounts i s fre e fro m an y bia s tha t coul d b e detrimenta l t o th e reader' s understanding, tha t i t conveys with acceptable accurac y what happene d during the period concerned an d how matter s stood a t the end of it, and that such presentation i s appropriate t o the business transaction s i t embraces. The concept of a true and fair view, which was introduced i n the Fourth E C directive, ha s bee n translate d i n th e othe r language s o f th e Community (Danish , French , German , Italian ) a s show n i n th e table below. It seem s noteworth y tha t mor e tha n te n year s elapse d b y th e time th e International Accounting Lexicon (Institut e o f Chartere d Accountants i n Germany , Diisseldorf , 1980) , which wa s publishe d by th e U.E.C , coul d adop t th e Britis h accountin g concep t "tru e and fair view" and apply th e German expression " a picture consis tent wit h th e actua l circumstances " a s th e Germa n translatio n t o the abov e Unite d Kingdo m expression . Detail s o f thi s matte r i n

Problems Relatin g t o Unio n 23 5 particular ar e sketche d ou t i n Dr . Lother Schruf f 's book Presentation of Accounts and Audits of AG and GmbH under the New Law (Fourth EC Guideline), whic h wa s publishe d i n 197 8 by th e Insti tute o f Chartere d Accountant s i n Germany . I n accordanc e wit h this book , i t wa s o n Marc h 9 , 1968 , that th e preliminar y draf t o f the Fourt h E C Guidelin e wa s firs t mad e public . Articl e 2 o f thi s preliminary draf t stated : "I t (tha t is , the annua l financial report ) must confor m t o the principles o f regular an d dependabl e presen tation o f accounts. " Articl e 2 was revised , however , accordin g t o the Recommendation s fo r th e Fourt h E C Guideline , whic h wer e made publi c o n Novembe r 16 , 1971: "The annua l financial repor t must confor m t o the principles of regular bookkeeping." And since then, i n accordanc e wit h th e Revise d Recommendation s fo r th e Fourth E C Guidelin e o f Februar y 26 , 1973 , Article 2 wa s furthe r modified to : "Th e annua l financial repor t mus t giv e a n accurat e insight int o th e stat e o f th e company' s property , finances, an d profits." Sinc e then , however , base d o n th e Fourt h E C Guideline , which wa s mad e publi c Jul y 25 , 1978 , the expressio n i n questio n was further modifie d t o its present form . In th e first preliminar y draft , thi s sentenc e wa s th e secon d i n the first paragrap h o f Articl e 2 . I n th e secon d draft , however , i t was moved t o the second paragraph o f Article 2. In the third draft , no change was made i n regard t o the location of the sentence, and, finally, i n th e fourt h an d las t stag e o f confirmin g th e ful l tex t o f the Fourt h Guideline , thi s sentenc e wa s transferre d t o th e thir d paragraph o f Article 2. It seems t o me tha t changin g th e arrangement o f the provision s does no t i n itsel f hav e an y significance . Th e essential poin t lie s i n whether th e intrinsi c natur e o f th e financial repor t i n a specifie d fiscal yea r i s reviewed fro m th e standpoin t o f securin g stric t "re levancy" t o th e give n lega l standard s o r fro m th e stanc e tha t i t can exceed the given legal standards unde r certain circumstances . For th e pas t te n year s Germa n an d Britis h accountin g though t have been in severe and continuous conflict. Anglo-Saxon account ing thought ha s no w mad e a conquest o f the Europea n Continent , at leas t o f thos e membe r state s tha t ar e affiliate d wit h th e Euro pean Community (EC) . This is a revolutionary change in Europea n accounting a t th e end of the twentieth century . Taking a look at pag e 187 1 and beyon d o f the Pocket Dictionary

236 Problem s Relatin g t o Unio n of Accounting (2 d ed. ; Stuttgart : C . E . Poesche l Verlag , 1981) , edited b y H . C. Mult, Eric h Kosiol , Klau s Chmielewicz , an d Mar cell Schweitzer , w e ca n find thos e revise d bill s mentione d abov e and other s tha t wer e mad e public o n May 18 , 1981, by the Justic e Ministry o f th e Federa l Republi c o f German y i n complianc e wit h the Fourth E C Guideline i n 1978 , for example, the revised bills fo r the Commercia l Code , Stoc k Law , Limite d Responsibilit y Com pany Law , PublG, and s o forth. Based on the bills for revision, it is clear tha t th e expressio n " a pictur e consisten t wit h th e actua l circumstances," th e Germa n versio n o f th e Britis h accountin g concept " a tru e an d fai r view " i n th e International Accounting Lexicon, publishe d b y th e U.E.C. , i s adopte d correctl y an d wit h changes o f no t eve n on e wor d i n th e above-mentione d revise d bills. As far a s th e for m i s concerned, thi s expressio n i s used, jus t as i t is , twic e i n Paragrap h 2 o f Articl e 238 , onc e i n No . 2 o f Paragraph 2 of Article 239, and onc e in Paragraph 1 of Article 277 in the German Commercia l Code . In th e revise d Stoc k Law , moreover , al l o f Articl e 14 9 wa s rewritten an d th e followin g expressio n appears : "I n drawin g u p the annua l financial statemen t an d th e situatio n repor t . . . th e regulations o f th e Commercia l La w Cod e . . . i n th e first an d sec ond section s o f th e thir d boo k concernin g th e annua l repor t an d situation repor t . . . are applicable. " I t i s prescribe d tha t al l th e articles o f th e Commercia l Cod e show n abov e shoul d b e applied . This expressio n als o appear s i n revise d Articl e 42 . B y usin g th e same phrasing a s that use d i n the revised Stoc k Law, Paragraph 1 of the revised Articl e 42 prescribes tha t th e above-mentioned arti cles of the Commercial Cod e should also be applied . In th e cas e o f th e PublG, mor e correctl y speaking , th e La w Concerning th e Presentatio n o f Account s b y Certai n Companie s and Conglomerates , Articl e 5 of thi s revise d la w i s a full y revise d version. Paragraph 5 of the proposed Articl e 5 , by using th e sam e phrasing a s tha t i n th e revise d Stoc k La w an d th e Limite d Com pany Law , prescribe s tha t th e above-specifie d variou s provision s of article s o f th e Commercia l Cod e shoul d als o b e applied . Suc h being th e case , the above-state d indicatio n tell s us tha t th e stipu lations fo r th e preparatio n o f a financial statemen t tha t too k roo t before 193 7 i n th e Germa n Commercia l Cod e hav e thu s bee n changed on a large scale.

Problems Relatin g t o Unio n 23 7 As lon g a s th e U.E.C. intend s t o promot e "regularity " amon g the respectiv e theorie s an d practice s o f eac h membe r stat e affili ated with th e U.E.C, and t o promote i t through th e proceedings of congresses an d othe r variou s publications , thereb y makin g a con tribution t o th e progres s o f th e Europea n economy , th e U.E.C.' s problems, i t i s m y belief , wil l b e diverse . Auditing the Annual Financial Report (4t h ed. ) wa s produce d b y th e Commissio n fo r Auditing Book s o f th e U.E.C , heade d b y W . Dober . It s Appendi x gives model sentences for standard auditin g reports for each mem ber state . Du e t o spac e limitations , I canno t enumerat e her e al l the auditin g reports . I wil l cite , therefore , onl y th e fou r sample s for th e United Kingdom , Germany, France, and Switzerland . I will begi n wit h th e Unite d Kingdom . I n regar d t o th e "audit ing report/ ' ther e i s a provisio n tha t states : " A standard auditin g report fo r a limited compan y withou t subsidiarie s i s as follows: I n our opinio n th e account s se t ou t o n page s x t o y giv e a tru e an d fair vie w o f th e stat e o f th e company' s affair s o n 3 1 December 1 9 —and o f it s profi t (loss ) (results ) fo r th e yea r ende d o n tha t dat e and compl y wit h th e Companie s Act s o f 194 8 an d 1967. " Pleas e note that th e exact ter m " a tru e an d fai r view " is used. Auditing the Annual Financial Report, whic h wa s publishe d b y the Institute o f Chartered Accountant s i n Germany an d containe d this standar d auditin g report , wa s publishe d i n Januar y 1977 . Thus i t i s impossibl e tha t th e Compan y Ac t o f 1977 , which wen t into effec t graduall y durin g th e perio d Januar y 24 , 1977 , throug h October 1 , 1977, and th e Company Ac t of 1980 , enacted o n Ma y 1 , 1980, were given consideration. It seems to me that thi s particula r auditing repor t shoul d hav e bee n amende d late r t o a certai n ex tent. A book entitle d Guide to the Accounting Requirements of the Companies Acts (Publishe d fo r th e Institut e o f Chartere d Accoun tants i n Englan d an d Wale s by Ge e & Co., Ltd, 1980 ) is an impor tant reference . Next i s th e exampl e fo r th e Federa l Republi c o f Germany . Th e standard "auditin g report " i s a s follows : "Bookkeeping , th e an nual financial report , an d th e compan y repor t confor m t o law s and statute s accordin g t o my (our ) conscientious audit. " Th e reade r should remembe r tha t auditin g report s mad e i n th e Federa l Re public o f German y previousl y admitte d th e valu e i n "securin g strict conformit y t o th e give n lega l standards. " I suspec t tha t h e

238 Problem

s Relatin g t o Unio n

will als o admi t tha t a s a resul t o f th e expecte d ne w revision s o f laws lik e th e Stoc k Law , th e Limite d Responsibilit y Compan y Law, an d th e PublG, t o sa y nothin g o f th e Commercia l Cod e o f th e Federal Republi c o f Germany , an d th e fac t tha t thes e revise d law s introduce, i n accordanc e wit h th e Fourt h E C Guideline , th e con cept o f " a tru e an d fai r view " fro m th e Companie s Act s o f th e United Kingdom , th e content s o f th e expression s t o b e use d i n th e Federal Republi c o f Germany' s "auditin g report " mus t b e changed , especially i n fundamenta l points . Next i s France' s auditin g report . Th e followin g i s th e standar d form t o be submitte d t o stockholders : En execution d e la mission qu e nous a confiee votr e assemblee general d u . . . , nou s avons examine le bilan et les comptes de l'exercice clos l e . . . . Notre examen, effectue conformemen t au x mornes de revision comptable , a comporte les controles consideres par nous comme necessaires, eu egard aux regies de diligence normale . Le compt e d'exploitatio n generale , l e compt e d e perte s e t profit s e t l e bilan qu i vou s son t presente s on t et e etabli r selon . Les memes forme s e t les memes methodes d'evaluation qu e l'annee precedente . Nous certifion s qu' a notr e avi s l'inventair e e t ce s document s son t regu liers et sinceres. Nous avons egalment verifie l a sincerite des information s donnes dans le rapport d u conseil d'administration e t dans les document s adresses au x actionnaire s su r l a situation financiere e t le s comptes d e l a societe. This Frenc h auditin g repor t seem s t o fal l betwee n th e Unite d Kingdom for m an d th e Germa n for m i n tha t i t regard s no t onl y "regularity" bu t als o "justice " a s a final concep t o f value . The las t exampl e i s Switzerland's . I t i s prescribe d tha t th e following shoul d b e th e standar d styl e o f auditin g report : As the auditin g agenc y o f your company , I (we) have audite d th e annua l accounts ending on , 19—according t o lawful regulations . I (we) have determined, that : —the balanc e an d th e profi t an d los s statemen t agre e wit h th e book keeping, —the bookkeeping has been kept in a regular manner , —in th e representation o f the financial situatio n and of the results, the statutes have been observed . Based on the results of my (our) audit; I (we) submit the present annua l accounts fo r approval . Furthermore, I (we) certify tha t th e recommenda tion o f th e managin g boar d concernin g th e appropriatio n o f profits con forms t o the law and statutes .

Problems Relatin g t o Unio n 23 9 The Swis s auditin g certificat e lay s specia l emphasi s o n th e con formity betwee n variou s table s o f closin g account s an d th e ac count book , togethe r wit h th e fai r an d prope r custod y o f th e ac count book . Some o f th e othe r state s tha t requir e conformit y betwee n th e financial statemen t an d th e account boo k as an ite m tha t mus t b e mentioned i n an auditin g certificat e ar e Spain , Portugal, and Austria. Othe r state s wher e th e righ t an d prope r custod y o f a n ac count boo k itsel f ha s bee n designate d a n ite m tha t mus t b e men tioned ar e Finland, Norway , and s o on. What i t is necessary for u s to remembe r i s tha t No . (b ) o f Paragrap h 1 of Articl e 5 1 o f th e Fourth E C Guideline prescribes tha t auditor s ar e held responsibl e for th e confirmatio n o f conformit y betwee n financial statement s and books of accounts. I would gues s that thi s will be provided fo r in th e la w b y eac h membe r stat e i n th e cours e o f time . I doub t there is any thought abou t thi s particular issu e here in Japan . At an y rate , a s T . C . Hartley , a senio r lecture r i n la w a t th e London Schoo l o f Economic s an d Politica l Science , has state d i n Foundations of European Community Law (Clarendo n Press , Ox ford, 1981) , this i s really th e first ste p towar d a Europea n Federa tion, a Unite d State s o f Europe. 4 A delicate influenc e mus t surel y be exerte d b y th e futur e cours e o f th e U.E.C. , whic h ha s alread y lasted mor e tha n thirt y years . The EC and th e U.E.C . are differen t from eac h othe r i n th e scop e of their constitutin g states , however , the ide a tha t th e EC' s "Roma n Treaty " i s th e Constitutio n o f th e Community ha s already emerged . Notes 1. Home r Kripke, The SEC and Corporate Disclosure (Law & Business, Inc., Harcourt Brace Jovanovich, 1979), p. 152. 2. Die Prufung des Jahresabschlusses (Auditing the Annual Financial Report), 4 Auflage (Diisseldorf: Institut e of Chartered Accountants in Germany, 1977), S. 7. 3. The Constitutions of the Communist World, ed . William B . Simons (The Netherlands: Sijthoff & Noordhoff, 1980) , pp. 473-74. 4. Se e p. 6.

16 The Proble m o f th e " Declaration of Completeness "

Why the Proble m I s Taken Up It ma y b e du e t o poo r scholarshi p o n m y part , bu t I hav e bee n unable t o locat e an y Japanes e accountin g dictionar y o r boo k tha t scientifically treat s th e proble m o f th e "declaratio n o f complete ness," whic h i s deepl y roote d i n th e auditin g practice s o f th e Federal Republi c of Germany. Even before Kotar o Tanaka's Logic of the Laws Concerning Balance Sheet, th e field o f accountin g i n Japan shoul d hav e bee n absorbin g th e outstandin g accountin g practices of the Federal Republi c of Germany . I d o no t understan d wh y th e proble m o f th e "declaratio n o f completeness" ha s bee n overlooked , o r se t a t naught , s o fa r i n Japan. A s a ma n o f practical busines s i n accountin g an d taxatio n affairs, I ca n stat e wit h convictio n tha t mor e tha n 9 0 percen t o f Japanese corporation s an d 9 9 percen t o f Japanes e privat e enter prises d o no t pursu e "completenes s i n accountin g records. " Th e great majorit y o f th e member s o f th e Nationa l Diet , wh o tak e a n oath t o make strenuous effort s an d sacrific e eve n their own bodie s and souls for the formation o f the destiny of the nation and people , are merchants i n one way or another a t present i n Japan . I hav e no t bee n abl e t o detec t tha t th e man y bureaucrat s i n Japan—who ar e considere d t o belon g t o th e mos t excellen t cate gory of professions an d lea d their lives thinking only of the protection o f thei r professio n an d thei r promotion , an d fo r who m keep 240

The Proble m o f th e "Declaratio n o f Completeness " 24

1

ing thes e matter s t o themselve s i s o f th e highes t value—ar e no w frantically tacklin g th e formatio n o f th e destin y o f th e natio n an d the people . Wel l then , wh o wil l b e responsibl e fo r makin g suc h efforts i n th e reestablishmen t o f th e nationa l econom y o f Japan ? I really d o worr y abou t thi s matter . The referenc e material s I hav e o n h a n d i n regar d t o th e subjec t of th e "declaratio n o f completeness" ar e a s follows : 1. Auditors Handbook (1973 ) 2. Auditors Handbook (1977 ) 3. Dictionary of Accounting (1970 ) 4. Dictionary of Accounting (2 d ed. , 1981 ) 5. Ulric h Leffson , Auditing (1977 ) 6. K . v . Wysocki, Foundations of Business Auditing (2 d ed. , 1977 ) 7. Wysock i an d Hagest , The Practice of Auditing (1976 ) 8. Wolfgan g Luck , Encyclopedia of Auditing, Rendering of Accounts and Examination (1980 ) 9. Frit z Erhard , Taxation Auditing (4t h ed. , 1980 ) 10. Friedric h W . Selchert , The Annual Financial Statement under Corporation Law (1979 ) The Evolutio n o f th e Basi s o f th e "Declaratio n o f Completeness " What i s m e a n t b y th e "declaratio n o f completeness " i s tha t whic h is containe d i n 44 , Sec . 1 , No. 1 , KWG o f Jul y 10 , 196 1 (BGBl I , S . 881), accordin g t o th e Auditors Handbook (1977) , whic h wa s pub lished b y th e Institut e o f Chartere d Accountant s i n Germany. 1 Th e m e d i u m o f tha t orde r i s Declaratio n 3/6 8 o f th e Federa l Contro l Board fo r Credit , Berlin , Decembe r 20 , 196 8 (no. 3/1969) . No. 1 o f Paragraph 1 o f Article 44 of this Financial Syste m La w states: The Federa l Contro l Boar d i s empowered: 1. ) t o require th e informatio n concerning al l busines s transaction s an d th e presentatio n o f book s an d papers fro m credi t institution s an d thei r agencie s an d t o undertak e thi s even withou t specia l cause . The employee s o f th e Federa l Contro l Boar d may ente r th e plac e of business o f the credi t institutio n fo r thi s purpose . The basic right o f Article 1 3 of the Constitution i s limited t o this extent . Article 1 3 o f th e Constitutio n o f th e Federa l Republi c o f Ger many i s th e provisio n regardin g inviolabilit y o f residence . Articl e

242 Th e Proble m o f th e "Declaratio n o f Completeness " 13 is limited, however , b y Paragrap h 1 of Article 44 and i s appar ently contradictory t o Paragraph 3 of Article 1 o f the Constitution , which prescribes : "The followin g basi c rights shal l bind th e legislature, th e executive , an d th e judiciar y a s directl y enforceabl e law." Paragraph 3 of Article 13 , however, admits the infringement , or restriction , o n th e inviolabilit y o f th e hom e i n a cas e base d o n the law , s o tha t i t shoul d b e understoo d tha t i t i s i n n o wa y contradictory. The above provision o f No. 1 of Paragraph 1 of Article 44 of th e Financial Syste m La w provide s fo r th e authorit y o f th e federa l government ove r bankin g facilities . I a m no t satisfied , however , with th e reaso n thi s provisio n ha s bee n connecte d t o th e "decla ration o f completeness." My inquiries int o the expert opinion tha t was issue d i n 193 3 b y th e Institut e o f Chartere d Accountant s i n Germany, ha s le d m e t o th e fac t tha t i n 1935, twenty-si x year s before th e enactmen t o f this Financial Syste m Law , the followin g expert opinio n ha d alread y bee n mad e public : "Filin g o f a Decla ration o f Completenes s b y th e Executiv e Boar d o f th e Audite d Firm." Furthermore , a n opinio n wit h th e sam e titl e a s th e abov e was als o publishe d i n 1942 . In 1958 , the experts ' opinion , "Ne w Model fo r th e Declaratio n o f Completeness, " wa s mad e public . That is , the custo m o f makin g a deman d fo r th e proclamatio n o f completeness has been ripening over a period of twenty-odd years . Consequently, it can be said that th e enactment o f the Financia l System La w i n 196 1 wa s merel y a n incentiv e t o mak e thi s la w part o f th e lega l system . I n Januar y 1958 , th e subjec t o f "th e declaration o f completeness" had alread y bee n deal t wit h i n "Th e Decrees o f th e Ban k Supervisor y Authoritie s o f th e Federa l Terri tory," and thi s notificatio n becam e nul l an d voi d s o that th e above indicated regulation s wer e determine d t o b e applicabl e onl y t o the annua l statemen t o f accounts fo r th e business yea r t o star t i n and afte r Decembe r 31 , 1967. 2 The Necessity fo r the Declaration of Completenes s What i s the substantive reaso n for th e necessity of the declaratio n of completeness? According to Professor Ulric h Leffson o f Miinster University: "Th e audito r ca n onl y audi t tha t whic h i s included i n

The Proble m o f th e "Declaratio n o f Completeness" 24 3 the books. Conversely he cannot or can only more or less randoml y check tha t whic h the y d o no t include . Thu s a ga p exist s i n th e possibility o f th e audit . Thi s ga p shoul d b e close d insofa r a s pos sible by a so-called declaratio n o f completeness." 3 It seem s t o m e tha t Leffson' s opinio n include s a formulation o f an important proble m i n regard t o the performance o f auditing. Is there an y standar d amon g Japanes e accountin g regulations , th e focus o f which i s on " a ga p i n th e possibility o f the audit/ ' a s wa s pointed ou t b y Professor Leffson ? Du e to my lack of knowledge o n this subject, I regret tha t I have no answer t o this question . Japan's "Workin g Rule s o f On-Sigh t Audits " ha s adopte d th e official attitud e o f "settin g a limi t t o th e scop e o f duty " o f a n auditor b y usin g th e expressio n "th e auditin g o f th e record s o f transaction." Thi s means tha t i t is all right fo r a n audito r t o audi t only the records of transactions. On the other hand, Japan's Finan cial Accountin g Principle s proclaim , a s th e first o f it s "Genera l Principles," th e principl e o f accuracy . Th e audi t t o b e mad e b y Japan's professiona l accountants—bot h certifie d publi c accoun tants an d license d ta x practitioners—i s regulate d b y Japan's sta tutory laws , under whic h th e pursuit o f the "principl e o f truthful ness" shal l b e conducted . Th e sourc e o f thes e law s i s Articl e 4 of the Ministeria l Ordinanc e Regardin g Audi t Certificates , specifi cally fo r a Certifie d Publi c Accountant , an d Articl e 4 5 o f th e Ta x Agent Law, which i s specifically fo r a Licensed Ta x Practitioner . That bein g th e case , a t leas t tw o problem s ca n b e identified . One i s whether th e authoritie s judg e tha t th e pursui t o f th e prin ciple o f truthfulnes s ca n b e conducte d onl y b y th e auditin g o f recorded transactions . I n othe r words , d o th e authoritie s believ e that th e principl e o f truthfulnes s ca n b e accomplishe d wit h n o regard a t al l t o th e "ga p i n th e possibilit y o f th e audit " tha t wa s pointed ou t by Professor Leffson ? The secon d proble m stem s fro m th e stat e o f th e statutor y law s that exis t i n Japan . Th e Unite d State s ha s take n th e followin g statutory action . Unde r Articl e 2 4 o f th e Securitie s Ac t (1933) , anyone who violates the law is subject t o imprisonment fo r a ter m of les s tha n five years , or a fine o f no t mor e tha n $5,000 , or both . Under Articl e 3 2 o f th e Securitie s an d Exchang e Ac t (1934) , any one who violates th e la w i s subject t o imprisonment fo r a ter m o f

244 Th e Proble m o f the "Declaratio n o f Completeness " less tha n tw o years , o r a fine o f $10,000 , o r both ; i n th e cas e o f specialized trader s i n securitie s exchange , a fine is not mor e tha n $500,000. Article 1 9 of Britain's Companie s Ac t of 197 6 has statu tory provisions under which imprisonment fo r less than tw o years, or a fine of less than 400 pounds, or both, are imposed o n a perso n who actually submits fraudulent accountin g records to an auditor . In th e Federa l Republi c o f Germany , Articl e 28 3 (b) of th e Crimi nal La w ha s a statutor y provisio n unde r whic h th e perso n wh o orders th e preparatio n o f fraudulen t accountin g records , o r th e person wh o prepares them , shal l b e punished wit h imprisonmen t of less than tw o years or a fine. In Japan, however, th e problem i s that whethe r o r no t i t i s judged tha t th e principl e o f truthfulnes s in accountin g ca n b e accomplished , ther e ar e n o penalt y provi sions to induce compliance . The solution t o these tw o problems i s next t o impossible, give n Japan's curren t accountin g regulations . I firmly believ e tha t herei n lies the defec t o f the current accountin g syste m i n Japan an d tha t the Federal Republi c o f Germany's "declaratio n o f completeness " is a good model for what Japan' s accountin g syste m shoul d be. The Essential Qualitie s of th e Declaration of Completenes s In 196 7 th e Institut e o f Chartere d Accountant s i n German y an nounced officiall y "Principle s o f Regular Conduc t fo r Genera l Au dits" a s "Exper t Opinion , No . 1/1967. " I t i s comprise d o f thre e sections: A , B, and C . A is "Introductor y Remarks, " B is "Assign ments of the Final Exam, " and C is "Principles for Conductin g th e Examination." Th e nint h principl e o f C is "Obtainin g th e Decla ration o f Completeness. " I n regar d t o this , th e followin g exper t opinion i s attached : "Th e genera l audito r i s t o obtai n a declara tion o f completenes s fro m th e audite d firm; thi s i s no t i n lie u o f auditing procedures but rather a proper supplement t o the genera l audit." An d tw o note s ar e attache d t o this . Th e first not e states : "The declaratio n o f completenes s i s a comprehensiv e statemen t by the executive (board) concerning th e completeness o f the infor mation an d record s rendered . Thereb y i t als o serve s t o delineat e responsibility (reference s t o expert opinion 1/42). " I hav e alread y pointe d ou t tha t Germa n law s clearl y deman d

The Proble m o f th e "Declaratio n o f Completeness" 24 5 the completeness o f accounting record s and tha t bot h HGB 43 and AO 146 require it . What I want t o emphasize i s that thi s "declara tion o f completeness " ha s mad e a decisiv e contributio n t o th e determination o f a n auditor' s limi t o f responsibility . I t seem s t o me that Japan' s accountant s shoul d immediatel y dra w a lesson of this particular poin t fro m th e Federal Republi c of Germany . The second not e states: "The Institute of Chartered Accountant s has designe d model s o f declaration s o f completeness . Thes e ar e based o n procedure s whic h occu r ofte n i n practice s an d ma y b e modified o r supplemente d a s necessar y i n individua l cases. " As I have already mentioned , nearl y thirt y year s have passed sinc e th e "declaration o f completeness " wa s mad e publi c officiall y t o Ger man societ y a s th e exper t opinio n o f th e Institut e o f Chartere d Accountants i n Germany . I t i s therefor e quit e natura l tha t thi s declaration ha s bee n refine d b y th e passag e o f tim e an d tha t it s expression i s more elastic than eve r before . The ful l tex t o f th e exper t opinio n know n a s th e "Principle s o f Regular Conduc t fo r Genera l Audits " appear s i n Appendi x 1 (pp. 248-56) o f a boo k entitle d Foundations of Business Auditing (1911), written b y Klau s v . Wysocki, a professo r o f busines s administra tion a t th e Universit y o f Munich. In this connection, Appendix 2 is the ful l tex t o f "Auditin g Electroni c Dat a Processin g Bookkeep ing," which wa s made public as Opinion 1/197 4 by the Institute of Chartered Accountant s i n Germany . Thi s i s an exceptionall y lon g opinion, extending ove r twenty-two pages . In regar d t o th e "declaratio n o f completeness, " Frit z Erhard , who wa s formerl y a C.E.O . i n th e Federa l Republi c o f Germany , also discusse s i t i n hi s book , Taxation Auditing (4t h ed. , 1980). 4 Quoting from th e "contents of activities" prescribed by 33 StBerG, and i n accordanc e wit h th e fac t tha t Articl e 3 3 actually contain s the expressio n "th e preparatio n o f tax statements, " he state s tha t a ta x practitione r ha s t o clarif y th e limit s o f hi s sincerit y and , simultaneously, hi s responsibilit y fo r "tru e accuracy, " an d tha t "as a rule , th e ta x adviso r ma y rel y o n th e statement s mad e t o him, especially when a declaration of completeness has been mad e by th e client. " H e continues , however , b y sayin g tha t th e ta x practitioner "doe s no t ow e an y specia l obligatio n t o th e FA , so he does no t hav e t o verif y whethe r hi s clien t ha s als o observe d th e

246 Th e Proble m o f th e "Declaratio n o f Completeness " instructions give n t o him. " I hav e som e differen t opinion s abou t this matter . The nonexistence o f a "specia l obligation, " a s a ter m o f profes sional registration , a t governmen t taxatio n affair s offices , i s a s equally applicabl e t o a ta x practitione r a s t o a certifie d publi c accountant. I n 5 7 StBerG, however , ther e i s a statemen t t o th e effect tha t on e shoul d b e unde r th e obligatio n o f "conscientious ness." The sam e expressio n ha s als o been use d i n 43 WPO. I hav e already touche d o n the point tha t "conscientiousness, " as an obli gation specifically define d by these two German laws, is more tha n the "cautiou s obligation " o f a n hones t administrato r unde r th e German Civi l Code. Concerning th e obligation t o ascertain whethe r o r not th e "declaration o f completeness " wa s mad e cautiously , I a m afrai d tha t there ar e n o lega l provision s anywher e tha t defin e thi s particula r obligation. I mus t state , however , tha t simpl y becaus e a specifi c provision i s not t o be found, concludin g tha t ther e is "no necessit y for confirmation" i s not compatible with the concept of "conscien tiousness." In Japan ther e are no penalties for "unfaithfu l entries, " and th e Japanese peopl e hav e learne d t o b e o n th e lookou t fo r th e oppor tunity t o evad e taxes . I t seem s clea r t o m e tha t w e Japanes e cannot hel p bu t recogniz e th e stron g possibilit y tha t thi s "decla ration o f completeness " ma y b e utilize d i n a n easygoin g way . I n regard t o how th e "declaration o f completeness," as a supplemen t to th e substantia l truthfulnes s o f accountin g an d financial state ments, should b e draw n up , the concep t o f "appropriate cautiou s obligation," whic h i s provided fo r b y Japan's professiona l regula tions, should perform it s expected function . The Format of th e Declaration of Completenes s The model i n the Auditors Handbook (1977 ) is an example i n thre e comparatively shor t sentences . Th e mode l printe d i n Professo r Wysocki's book , however , i s comparatively lon g an d detaile d bu t simple. A sketch y outlin e o f Professo r Wysocki' s mode l follow s below. At the to p of this document, th e title "Declaratio n o f Complete-

The Proble m o f th e "Declaratio n o f Completeness" 24 7 ness" i s printe d i n Gothi c type , unde r whic h appea r th e addres s and dat e and , belo w them , th e nam e o f th e auditor , followe d b y the nam e o f th e enterpris e t o b e audited . Belo w tha t appear s "Business Yea r of 19—Financia l Statement/ ' "Re : Annual Finan cial Statemen t an d Busines s Repor t fo r th e Busines s Yea r 19—, " and th e following statement : " I (we) as member(s) of the executiv e board/director o f the compan y (i n our ow n nam e a s well a s in th e name of and b y order of all other member s o f the executive board / director of the company) hereby declar e to you as general auditor s the following. " Wha t follow s i s divided int o four categories : A, B, C, an d D . "A " comprise s "explanatio n an d proof " an d " B " i s "bookkeeping an d records, " which i s further broke n dow n into six items. "C " i s th e "annua l financial statemen t an d operatin g re port," th e content s o f whic h ar e classifie d a s fourtee n items . "D " is a vacant entr y colum n fo r "addition s an d remarks. " The lowes t portion i s reserved fo r th e signature . In "A, " "explanation an d proof, " th e following appears : " I (we ) have give n yo u th e explanation s an d proof , which yo u have aske d me (us ) fo r i n accordanc e wit h 16 5 AktG, t o th e bes t o f m y (our ) knowledge and belief. I (we) have named fo r you the persons liste d as follow s a s informants. " Followin g thi s ar e fou r line s o f empt y columns an d the n thi s concludin g sentence : " I (we ) have directe d these individual s t o giv e yo u al l requeste d informatio n an d rec ords completely an d accurately. " My reade r ma y hav e alread y perceive d th e car e wit h whic h these mode l sentence s tr y t o avoid a "ga p i n th e possibility o f th e audit," a s pointe d ou t b y Professo r Leffson . I hav e alread y ex plained tha t th e bookkeepin g an d record s i n " B " are divide d int o six items , however, ther e i s no point i n quotin g al l o f these. I will quote onl y th e first: " I (we ) hav e give n instruction s t o plac e th e business book s and othe r compan y document s completel y a t you r disposal." This sentence attempt s t o discourage an y intention s b y company official s regardin g "windo w dressing " or the omission of their respectiv e earnings . I n th e Federa l Republi c o f Germany , "thick an d threefold " measure s hav e bee n take n i n order t o avoi d or to prevent "window-dressin g accounting " and ta x dodging . I have mentioned tha t th e annual financial statemen t an d oper ating repor t i n "C " i s divide d int o fourtee n items , however , I

248 Th e Proble m o f the "Declaratio n o f Completeness " would lik e t o introduc e her e jus t a samplin g o f thos e items . Th e first state s as follows: "I n m y (our) opinion, in the annual balanc e sheet audite d b y you, all assets , obligations, and risk s (e.g., losses from pendin g transactions ) require d fo r th e balanc e shee t hav e been take n int o account. " Th e secon d states : "Ther e ar e n o ac counts receivable fro m loan s tha t ar e subject t o 89 or 11 5 AktG o n the delivery date . Only in th e amount i n which the y ar e identifie d or note d a s suc h i n th e annua l balanc e sheet. " I n thi s case , ther e is a squar e bo x i n whic h a n "X " i s t o b e entere d i f th e situatio n applies. Among thes e fourtee n items , there ar e thirty-si x column s demanding suc h selective indication . I a m sur e m y reade r ha s caugh t th e ide a o f thes e items ; thu s I will omi t a discussio n o f th e res t o f them . Th e colum n fo r "addi tions an d remarks " i n "D " is , needles s t o say , blank . A s state d above, at th e lowes t portio n o f this paper , ther e i s a spac e fo r th e signature(s) of the person(s) responsible for submitting this special report. It is my hope that a requirement fo r a "declaration o f completeness," like that i n Germany, is adopted i n the accounting practic e of Japa n an d tha t i t i s eve n mor e comprehensive , encompassin g more tha n "th e auditin g o f records of transaction." 5 I woul d lik e to se e a syste m i n Japa n i n whic h th e limi t o f responsibilit y o f both th e audito r an d th e busines s i s muc h cleare r an d throug h which th e incentive s o f "windo w dressing " an d ta x evasio n ca n thus b e intercepted . Th e syste m i n th e Federa l Republi c o f Ger many, eve n thoug h i t i s nonexisten t i n th e accountin g practic e o f the United States , should b e introduced t o Japan . It i s interestin g t o not e tha t th e Britis h ta x retur n i s base d o n the same idea as this "declaration o f completeness." In the Unite d Kingdom's 198 1 ta x return , a t th e uppe r par t o f th e firs t page , there i s a spac e fo r th e signatur e o f th e individua l taxpayer . Jus t above this space, there is a "declaration" i n which i t is stated tha t all the items entered on this "return" are, to the best of the prepar er's knowledg e an d belief , "correc t an d complete. " A s this state ment i s printe d i n larg e type , just abov e th e spac e fo r th e signa ture, no one can clai m no t t o have read i t or t o have misse d it . To the lef t o f this "declaration" i s a statement, i n parentheses, that a false entry ma y lead t o an "indictment. "

The Proble m o f th e "Declaratio n o f Completeness" 24 9 As Alexis Carrel, a Nobel-prize winner i n medicine, once said i n his boo k Reflection on Life, a huma n bein g "i s fre e an d abl e t o d o wrong." The "declaration o f completeness" can be said, therefore , to be a necessary too l for auditing s o that huma n being s do not d o wrong. The thought o f giving a n accoun t o f this British ta x retur n has bee n adopte d an d indicate d a s a matte r o f course bot h i n th e United State s an d th e Republi c o f Singapore . Suc h though t i s nonexistent her e i n Japan . Notes 1. Auditors Handbook, 1977 , S. 407. 2. Ibid. , S. 409. 3. Ulric h Leffson, Auditing, 1977 , S. 251. 4. Se e p. 70. 5. Japan' s "Working Rules of Field Audits," No. 2 (2), "General Audit Procedure."

17 Principles o f Regula r Bookkeepin g an d Electronic Dat a Processin g

Regarding Referenc e Material s I do not kno w whethe r ther e ar e som e lega l accountin g standard s in Japan i n regard t o this subject . I am awar e o f the statemen t b y the directo r o f th e Civi l Affair s Burea u o f th e Ministr y o f Justice , dated Novembe r 18 , 1974, regarding "th e preservation o f books of account an d othe r importan t busines s document s vi a microfilm " and o f a referential opinio n regardin g "th e microcopyin g o f books of accoun t an d others, " whic h wa s mad e publi c o n Augus t 20 , 1974, b y th e Electroni c Compute r Accountin g Committe e o f Ja pan's Association of Certified Publi c Accountants. Both document s are concerned wit h th e preservation, an d s o forth, b y microphoto graph o f books of account an d others . They have n o relation a t al l to th e lega l standard s o r theoretica l standard s tha t ar e directl y related t o electronic computer accounting . In the Federal Republic of Germany, where legislative activitie s have bee n undertake n t o a heroic degree , the literatur e regardin g the subject i s amazingly abundant . Just a few examples follow . The three-volum e Electronic Data Processing Law wa s writte n by Wolfgang E . Burhenne an d Klau s Perband. This book's subtitl e is Systematic Collection of Legal Regulators, Organizational Fundamentals, and Decisions for Electronic Data Processing. Th e first volume contain s th e followin g lega l standards : forty-nin e federa l laws (for example, the Federal Dat a Protection Law ) and sixty-on e 250

Principles o f Regula r Bookkeepin g 25 1 provincial laws . I n additio n t o these , ther e ar e als o th e Unite d States's Dat a Protectio n Law , th e Europea n Conference' s Resolu tion Concernin g Dat a Protection , th e Europea n Community' s (EC's ) Four-Year Progra m fo r th e Promotio n o f Dat a Processin g an d th e EC's Decisio n o f th e Europea n Parliamen t Concernin g Dat a Pro tection, the Austria's Government Bil l for Dat a Protection , the ful l text o f th e Federa l Republi c o f Germany' s notificatio n regardin g Principles fo r th e Acquisition o f Electronic Dat a Processin g Docu ments, an d th e ful l tex t o f forty-on e administrativ e orders . Th e second volum e contain s th e ful l tex t o f ninety-si x administrativ e orders regardin g eac h provinc e o f th e Federa l Republi c o f Ger many an d detail s o f federa l an d provincia l electroni c compute r systems. The third volum e i s chiefly comprise d o f commentary o n the lega l regulations . Viewe d fro m th e Japanes e perspective , th e huge amount o f material thes e volumes contain i s overwhelming . Next is Volume 2 of the Dictionary of Business (1980) . This book gives a versatil e explanatio n (page s 85-133 ) i n regar d t o dat a processing. O n page s 1088-113 8 o f Volume 1 of th e Dictionary of Business Administration (1974) , there ar e explanation s o f data base s and dat a bas e systems , dat a collection , dat a protectio n an d secu rity, dat a processing , an d dat a processin g facilities . Nex t i s th e Dictionary of Accounting (1981) , in whic h ther e i s a n explanatio n of dat a base s an d accountin g o n page s 374-8 3 o f Volum e III . Volume 1 of th e Dictionary of Tax Law and Tax Studies (2 d ed. , 1981) lists the following referenc e material s i n regard t o electroni c computer-aided accounting : • Japanese Data Processing Organizations, writte n b y the author . • Data Base Retrieval an d Data Base, Taxation, writte n b y Dr . Joachim Conradi , wh o complete d th e dat a bas e syste m i n Ger many. This is listed with a book entitled DATEV (in eight pages), which wa s writte n b y Hein z Sebiger , th e presiden t o f th e Nu remberg Chambe r o f Tax Advisor s an d th e chairma n o f the DATEV Dat a Processin g Organizatio n o f th e Ta x Advisor s Profes sion i n th e Federa l Republi c o f Germany , e.G . (M.S . rer. Oec) . Also include d i s a boo k entitle d Automation in Tax Administration, writte n b y Dr . Kar l Koch , wh o i s Ministeria l Directo r i n the Federal Ministry of Finance, Bonn.

252 Principle s o f Regula r Bookkeepin g Furthermore, the literature tha t directly deals with the proble m of electronic computer-aided accountin g is as follows : Werner Kresse , The New School of the Bookkeeper (4th ed. , 1979) , Vol. II. Siegbert Rudolph , The DATEV Bookkeeping System (2 d ed., 1978) . Rolf Vieweg , Bookkeeping with Mechanized and Automatic Data Processing (5th ed., 1972). Erhard Reblin , Electronic Data Processing in Financial Accounting (2d ed., 1971) . Richard Mtiller , Accounting and Electronic Data Processing, Computers, and the Law, Vol. 5 (1977). Dieter Gernert, Introduction to Data Processing for Lawyers (1974). Rolf Vieweg , Comprehensive Applications of Electronic Data Processing for Optimal Direction of a Business (1980) . Kurt Nagel , Current Data-Processing Trends: Tables and Help in Decision Making for Data Processing and Computing with Emphasis on Control and Monitoring of Computer Centers (1979). Ingo Hafne r an d Hors t Junker , Electronic Data Processing in Medium-Sized Companies (1978) . Detler Muller-Bdling , Work Satisfaction with Automatic Data Processing (1978). K. F . Peter , Modern Legal and Tax Advising with Electronic Data Processing. In additio n t o these , I kno w o f te n othe r books . Thi s lis t shoul d suffice, however . The Electronic Computer-Aide d Accountin g Regulation s in the Tax Code in the Federa l Republi c of German y In th e Federa l Republi c o f Germany , fou r lega l provision s hav e been provide d fo r i n th e Ta x Cod e i n regar d t o th e principle s o f regular bookkeeping and the use of electronic data processing. The

Principles o f Regula r Bookkeepin g 25

3

first i s in Paragrap h 5 of Article 146 , "Regulations fo r Bookkeepin g and fo r Records. " Th e secon d i s i n Paragraph s 2 an d 5 o f Articl e 147, "Regulations fo r th e Keepin g o f D o c u m e n t s / ' An d th e thir d i s in Paragrap h 6 o f Articl e 150 , "For m an d Conten t o f th e Ta x Declarations." Paragrap h 5 of Article 14 6 prescribes a s follows : The books and other required record s can also consist of the orderly filin g of the voucher s o r kep t insofa r a s thes e form s o f bookkeeping, a s wel l a s the proces s used , confor m t o th e principle s o f regula r bookkeeping ; a s concerns record s tha t ar e onl y t o be kept fo r ta x purposes , the reliabilit y of th e metho d use d i s determine d accordin g t o th e purpos e tha t th e records should serv e in taxation. In keeping the books and other require d records i n dat a mediu m on e mus t b e especially carefu l tha t th e dat a ar e available durin g th e tim e period record s are t o be kept an d tha t the y ca n be mad e legibl e withi n a reasonabl e period . Section s 1 through 4 appl y accordingly. What i s referre d t o a s " d a t a m e d i u m " is , undoubtedly, electroni c data processin g a t th e presen t stage . In short , th e followin g i n thi s particular provisio n deserve s ou r specia l attention : (1) Thi s provisio n acknowledges , righ t u p front , tha t makin g a n entry i n book s o f accoun t o r othe r necessar y record s b y elec tronic dat a processin g i s foun d suitabl e t o th e principle s o f regular bookkeeping . (2) Thi s provisio n als o indicate s a standar d o f judgmen t regard ing th e approva l o f suc h a processin g procedure . (3) Thi s provisio n als o demand s a guarante e o f th e fre e us e o f th e data, especiall y th e possibilit y tha t thes e document s wil l b e easily "visibl e an d legible " on computers . This particula r poin t remind s m e tha t o n Februar y 24 , 1964 , th e United State s enacte d a legislativ e orde r i n th e for m o f Revenu e Procedure 6 4 - 1 2 . Articl e 4 o f thi s legislatio n prescribe s "AD P Re cord Guidelines, " Paragrap h 1 of which contain s th e ter m "visibl e and legibl e records. " To proceed, Paragrap h 2 of Article 14 7 prescribes: Except fo r th e balanc e sheet, th e evidentia l document s liste d i n Paragrap h 1 can als o b e store d on a dat a medium , whe n thi s i s i n accordanc e wit h th e principle s o f regular bookkeeping and when it is certain tha t th e copies or data : 1. ar e identica l i n appearanc e wit h th e receive d busines s letter s an d

254 Principle

s o f Regula r Bookkeepin g

vouchers an d i n conten t wit h th e othe r documents , whe n the y hav e been made legible . 2. ar e availabl e durin g th e perio d o f tim e the y ar e t o b e preserve d an d can be made legible at any time within a reasonable time . If document s base d o n 14 6 Sectio n 5 hav e bee n produce d o n dat a me dium, instea d o f th e dat a medium , th e dat a ca n als o b e store d printe d out an d th e printe d document s ca n als o b e preserve d accordin g t o Sen tence 1 . In th e abov e specia l expression , wha t i s referred t o a s "th e eviden tial document s liste d i n Paragrap h 1 " indicate s th e followin g item s shown belo w i n accordanc e wit h Paragrap h 1 : 1. Book s o f accoun t an d records , a n inventory , th e balanc e shee t and jo b orde r tha t i s necessar y fo r th e understandin g o f thes e data, an d othe r material s regardin g organization . 2. Variou s commercia l correspondenc e receive d an d th e corre spondence o n transactions . 3. Commercia l correspondenc e issue d an d copie s o f th e corre spondence o n transactions . 4. Writte n evidenc e o n entries . 5. Othe r material s tha t ar e necessar y fo r taxation . Such inclusiv e provision s i n regar d t o th e fiscal statemen t d o not exis t i n J a p a n . I t seem s t o m e tha t i n orde r fo r taxatio n t o become jus t i n Japan , i t i s absolutel y necessar y tha t som e suc h definite regulatio n i n regar d t o th e preservatio n o f informatio n should exist . T o return t o ou r mai n subject , Paragrap h 5 of Articl e 147 prescribes : Anyone who keeps documents only in the form of copies on visual or other data medium , i s require d t o provide , a t hi s ow n expense , th e necessar y apparatus an d ai d require d t o rende r th e document s legible . A t th e re quest o f th e fiscal authoritie s h e i s t o prin t th e document s immediately , in ful l o r i n par t an d a t hi s ow n expense , o r t o provid e reproduction s legible without aid . I firmly believ e tha t thi s provision , i n particular , shoul d b e intro duced int o th e taxatio n law s o f J a p a n . Lastly , Paragrap h 6 o f Article 15 0 prescribes a s follows : In orde r t o facilitat e an d simplif y th e automate d taxatio n process , th e Federal Ministe r of Finance may specify b y decree, with the agreement of the Bundesrat , tha t ta x declaration s returns , i n th e sens e o f th e moto r

Principles o f Regula r Bookkeepin g 25

5

vehicle ta x la w o r othe r dat a require d fo r th e taxatio n process , ca n b e transmitted totall y o r i n par t b y mechanicall y usabl e dat a mediu m o r teleprocessing. In particular, th e following ca n be regulated : 1. th e prerequisites fo r the use of the process, 2. particular s concernin g form , contents , processing , an d securit y o f th e data t o be transmitted , 3. th e method by which th e data i s transmitted , 4. th e responsibility fo r th e reception of the transmitted data , 5. th e liabilit y o f thir d partie s fo r taxe s o r ta x advantage s tha t ma y b e diminished o r obtained du e t o incorrect processin g o r transmissio n o f data, 6. th e extent and form o f the special filing responsibilities of the taxpaye r that ar e received for this process. Special attentio n shoul d b e pai d t o th e differenc e betwee n th e terms " l a w " (o r "decree" ) an d "genera l administrativ e regula tion." Th e former , i n thi s particula r instance , i s base d o n Para graph 1 o f Articl e 8 0 o f GG, whil e th e latte r i s prescribe d b y Paragraph 2 of Article 8 4 o r b y Paragrap h 2 of Articl e 8 5 of GG. I n the Federa l Republi c o f Germany , th e "guidelines " tha t ar e pro mulgated fo r th e administratio n o f ta x affair s belon g t o th e "reg ulation" categor y an d are , consequently , onl y a secondar y sourc e of law . A seriou s vie w mus t b e take n o f th e fac t tha t Paragrap h 6 o f Article 15 0 of th e Ta x Cod e entrust s th e federa l ministe r o f financ e with th e authorit y o f enactin g legislatio n tha t ha s a wid e scope . This legislatio n ca n restric t eve n th e Cour t o f Justic e i n accor dance wit h Paragrap h 3 of Article 2 0 o f GG, whic h prescribe s tha t the administratio n o f justice i s subject t o la w an d justice . This la w was enacte d o n Augus t 21 , 1980 , and , sinc e then , i t ha s bee n inserted i n BGBl, I , 1617 , the titl e o f whic h i s La w Concernin g th e Filing o f Ta x Declaration s o n Machin e Usabl e Dat a Medium . Th e preamble states : "Base d o n 150 , Sectio n 6 o f th e Ta x Cod e o f March 16 , 197 6 (BGBl, I , 613) , i t i s enacte d wit h th e agreemen t o f the Bundesrat. " Th e orde r i s comprise d o f fiv e item s (eleve n arti cles) i n al l an d i s thu s quit e short . Ite m 1 of thi s la w ha s onl y on e principle: "Par t 1 . General." Ite m 2 ha s thre e article s a n d it s titl e is "Par t 2 . Participatio n i n Dat a Transmission. " Articl e 3 i s "Ap proval o f th e Dat a Processin g Company. " Articl e 4 i s "Revocatio n of th e Permit. " Th e titl e o f Ite m 3 i s "Par t 3 . Approval o f th e Dat a Processing Company, " an d comprise s Article s 5 through 8 . Articl e

256 Principle

s o f Regula r Bookkeepin g

5 i s "Type , Content , an d Set-u p o f th e Dat a Medium. " Article 6 i s "Shipping Dat a Medium. " Article 7 is "Dat a Protection. " Article 8 is "Acceptanc e an d Rejectio n o f Dat a Medium. " Th e titl e o f Ite m 4 i s "Par t 4 . Liabilit y o f th e Dat a Processin g Company. " I t ha s only on e article , Articl e 9 , th e titl e o f whic h i s "Liability. " Ite m 5 is "Par t 5 . Final Regulations. " I t contain s tw o articles : Articl e 10 , "Berlin Clause, " an d Articl e 11 , "Effectiv e Date, " b y whic h thi s law i s declare d t o be effective o n and afte r Januar y 1 , 1981. Due t o space limitations , I cannot reproduc e th e ful l tex t o f thi s law. I n order tha t i t ma y serv e a s a reference fo r future legislatio n in Japan , however , I wil l introduc e th e tex t o f Articl e 9 , whic h prescribes Ite m 4 , "Par t 4 . Liabilit y o f th e Dat a Processin g Com pany." Articl e 9 i s compose d o f thre e paragraphs , th e firs t o f which follows : The dat a processin g firm i s liable , du e t o incorrec t processin g o r transmission, insofa r a s dat a mediu m contai n inaccurat e o r incomplet e dat a concerning fact s fo r paying taxe s and thereby taxe s are decreased or tax advantages ar e illegally obtained . The liability doe s not appl y insofar a s the data processing firm can show tha t the incorrect processing or transmission of the data is not due to gross negligence or the intent of the data processing firm or its vicarious agents. In examinin g Articl e 9 w e becom e awar e tha t th e Federa l Repub lic o f German y ha s legislate d tha t dat a processin g trader s coop erate wit h th e rightfu l paymen t o f taxes . Suc h a nationa l attitud e cannot b e established , a s Heinric h Henkel , a professo r a t th e Uni versity o f Hamburg , ha s said , "unles s w e ca n fix ou r eye s o n th e law a s a facto r i n th e formatio n o f th e socia l orde r an d strongl y support i t a s such." 1 Paragraph 2 o f Articl e 9 states : "Th e dat a processin g fir m ma y only b e hel d liabl e fo r payment , insofa r a s th e foreclosur e o f th e movable good s o f th e taxpaye r i s unsuccessful , o r if i t ma y b e assumed tha t enforcemen t wil l b e unsuccessful . Articl e 219 , Sen tence 2 of th e Ta x Cod e i s t o remain unaffected. " Thi s provision i s rather har d fo r u s t o understand , becaus e ther e i s n o concep t similar t o th e "responsibl e obligator " i n Japan' s ta x laws . Th e only clu e t o ou r understandin g o f thi s particula r provisio n i s foun d in th e first sentenc e o f Article 21 9 of the Tax Code: "If nothing els e is specified , a person liabl e fo r payment ma y onl y b e lai d clai m t o

Principles o f Regula r Bookkeepin g 25 7 insofar a s th e foreclosur e o f th e movabl e good s o f th e on e wh o owes taxe s remain s unsuccessful , o r i t i s assume d tha t enforce ment i s hopeless. " Tha t is , th e concep t o f a "secondar y debtor, " which originate s fro m th e ta x law s o f th e Federa l Republi c o f Germany, i s simila r t o th e concep t o f "th e secondar y taxpayer " for th e substantial amoun t o f taxes prescribed b y Article 3 6 of th e National Ta x Collection Act in Japan . Paragraph 3 prescribes a s follows: "Th e notificatio n o f liabilit y is t o b e issue d b y th e ta x offic e responsibl e fo r th e taxpayer. " A t present i n Japan, th e concep t o f "notificatio n o f liability" has no t yet becom e popular . Paragrap h 1 o f Articl e 19 1 o f th e Federa l Republic o f Germany' s Ta x Cod e ha s th e followin g provision : "Anyone wh o i s liable fo r a ta x (th e responsibl e obligator ) b y la w can b e hel d responsibl e . . . b y notificatio n o f liability . Th e notifi cations are to be made i n writing." This helps us understand wha t the "notificatio n o f liability " is . As I have alread y mentioned , th e designation " a perso n responsibl e for entry" is made i n writing a s an administrative action . I a m unde r th e impressio n tha t ther e ar e peopl e i n Japa n wh o believe tha t th e tw o kind s o f administrativ e action s lac k legiti macy and , moreover , hav e bee n lef t unbuttresse d unde r Japanes e law. I n fact , ther e i s a growin g doub t regardin g th e ver y concep tion of the system of income tax returns (Article 1 o f the Tax Agent Law in Japan). In the Federal Republi c of Germany, where th e same tax retur n system ha s bee n adopted , th e situatio n i s entirel y differen t fro m that i n Japan . Th e sam e i s tru e i n th e cas e o f Canada. 2 O n th e subject o f th e fai r distributio n o f taxes , i t seem s unnecessar y t o discuss whic h country' s ta x retur n syste m i s th e bette r one . I would lik e t o urge th e Japanese authoritie s concerne d t o do som e soul-searching o n thi s particula r matter . Th e titl e o f th e above mentioned Articl e 15 0 o f th e Ta x Cod e i s "For m an d Conten t o f the Ta x Return. " A legal provisio n correspondin g t o th e above mentioned provisio n doe s no t exis t i n Japan . I n regar d t o thi s point i n particular , Japa n i s conductin g th e destructio n no t onl y of the doctrin e o f administrative law s but als o of the Constitutio n of Japan .

258 Principle s o f Regula r Bookkeepin g The Audit Trail an d Others I wil l no w brin g m y discussio n o f th e Ta x Cod e an d computer assisted accountin g t o a n end . M y reade r ma y hav e notice d th e lack o f lega l provision s regardin g a n "audi t trail/ ' a s prescribe d by Article 4 of the Unite d State s Revenu e Procedure 64-12 , in th e Tax Code of the Federal Republi c of Germany. The second ite m i n Paragraph 2 of Articl e 4 of th e Unite d State s Revenu e Procedur e 64-12 prescribes : "(2 ) Supportin g Document s an d Audi t Trail . The audi t trai l shoul d b e designe d s o tha t th e detail s underlyin g the summary accountin g data, such as invoices and vouchers, may be identifie d an d mad e availabl e t o th e Interna l Revenu e Servic e upon request. " Furthermore, th e thir d ite m o f the same Paragrap h 2 stipulate s as follows : "(3 ) Recorde d o r Reconstructibl e Data . Th e record s must provid e th e opportunity t o trace an y transactio n bac k to th e original sourc e o r forwar d t o a final total . I f printout s ar e no t made o f transaction s a t th e tim e the y ar e processed , the n th e system mus t hav e th e ability t o reconstruct thes e transactions. " These United State s legal provisions are extremely natural fro m the point o f logical sequence , however, thes e same provisions can not b e foun d anywher e i n Japan' s legislation . I woul d gues s tha t this i s the result o f the following . Legislatio n i n Japan ha s chiefl y depended o n th e preference s o f Japanese bureaucrat s an d th e vi cissitudes o f publi c opinion . Th e member s o f th e Nationa l Diet , whose mai n jo b i s legislation , hav e bee n preoccupie d wit h thei r reception b y th e electorat e an d b y th e electorate' s requests . A s a result, thes e Die t member s hav e degrade d themselve s b y becom ing mere carriers of the lumber that Japanese officialdom ha s used in constructin g Japanes e society . I t als o seem s t o m e tha t th e Japanese journalists wh o should be shouldering th e responsibilit y for publi c opinio n ma y b e lackin g i n thei r scholarshi p an d na tional consciousness . In regard t o the legislation on this subject i n the Federal Repub lic of Germany, I have repeatedly pointed out that Article 29 of the Enforcement Regulatio n relatin g t o Articl e 5 o f th e Incom e Ta x Law in the Federal Republi c of Germany stipulates "regula r book keeping." No. 2 of Paragraph 2 of Article 29 states:

Principles o f Regula r Bookkeepin g 25

9

The development o f circumstances mus t b e take n int o account . T o mak e the wor k o f bookkeepin g mor e efficien t an d fo r th e busines s us e o f dat a processing facilitie s i n th e proces s o f bookkeeping , i n practice , busines s transactions ar e no t continuall y posted , bu t rathe r onl y periodically . I n order no t t o adversel y affec t effort s towar d efficiency , i t wil l no t b e ob jected t o if the posting of the credit transaction s o f one month take s plac e before th e en d o f th e followin g month , insofa r a s organizationa l precau tions ar e take n t o insur e tha t th e bookkeepin g document s d o not ge t los t before thei r postin g i n th e register s (e.g. , b y runnin g numberin g o f th e incoming an d outgoin g bill s o r b y collectin g the m i n specia l folder s o r binders); the general requirements o f regularity of bookkeeping accordin g to No. 1 mus t als o be fulfilled i n this case. This i s th e Enforcemen t Regulation . I t seem s t o m e tha t th e lega l standard regardin g "verifiability " i s state d therein . In hi s book , Dr . Werne r Kress e discusse s th e "machin e reada bility o f voucher s an d inpu t d a t a a s a requiremen t fo r electroni c data processing " an d conclude s tha t th e relationshi p betwee n voucher an d entr y mus t b e evident . H e doe s no t quot e lega l provi sions i n hi s statement , however. 3 Moreover , I d o no t kno w o f an y documentary regulatio n regardin g program s o f computer-assiste d accounting i n th e Federa l Republi c o f Germany . I would welcom e information o n thi s matter . In ite m 5 o f Paragrap h 2 o f Articl e 4 o f th e above-mentione d United State s Revenu e Procedur e 6 4 - 1 2 , th e followin g appears : Program Documentation . A description of the ADP portion of the account ing system should be available. The statements an d illustration s a s to th e scope o f operation s shoul d b e sufficientl y detaile d t o indicat e (a ) th e application bein g performed , (b ) the procedure s employe d i n eac h appli cation (which , fo r example , migh t b e supporte d b y flow charts , bloc k diagrams, o r othe r satisfactor y description s o f inpu t o r outpu t proce dures), an d (c ) the control s use d t o insur e accurat e an d reliabl e process ing. Important changes , together with th e effective dates , should be note d in order to preserve an accurate chronological record . Careful attentio n shoul d b e pai d t o thi s particula r matter , becaus e this i s th e are a tha t ha s seriou s problem s insofa r a s computer assisted accountin g i s concerned . I t wa s abou t twent y year s ag o that thes e lega l standard s wer e enacte d i n th e Unite d States .

260 Principle

s o f Regula r Bookkeepin g

Notes 1. Heinric h Henkel, Introduction to the Philosophy of Law, 2d ed., 1977, p. 467. 2. Incom e Tax Act, Sec. 150 (2). 3. The New School of the Bookkeeper, Vol. II, 4th ed., 1979 , p. 62, 93.

References

Japanese Aida, Yoshi o (Professor , Kei o Gijuk u University ; Docto r o f Economics) . Accounting. 1976 . Akari, Chotaro (Lecturer , Chu o University) . Tax Accounting by Exemplification. Reprint , 1964 . Aoki, Shige o (Professor , Wased a University) . An Outline of Accounting. 1978. Arai, Kiyomits u (Professor , Wased a University ; Docto r o f Commercia l Science). Theory of Financial Accounting. 45t h enlarged edition, 1979 . Chu, Saich i (Professor , Niho n University ; Docto r o f Laws). Tax Laws and Accounting Principles. Reprint, 1953 . . Laws Concerning Accounting for Taxation. 2 d and 6t h editions . Emura, Minor u (Professor , Toky o University) . An Outline of Corporation Accounting. 1979 . Hasui, Yoshinori (Professor , Kitakyush u University) . General Rules of the Commercial Code—Commercial Transaction Law. 1980 . Hasui, Yoshinor i (Professor , Kitakyush u University) , Toshi o Sakamak i (Professor, Waseda University ; Docto r of Laws), Harumi Shimur a (Professor, Ritsumeika n University) . Lecture on General Rules of the Commercial Code. 1980. Hatanaka, Fukuichi . Compiled b y Kiyosh i Kurosawa . Study on Theory for the Title of Account. Hattori, Eiz o (Professor , Tohok u University ; Docto r o f Laws) . General Rules of the Commercial Code. 2d edition, 1975 . Hiraishi, Yuichir o (Professor , Kokushika n University) . Detailed Interpretation of Corporate Income Tax. Reprint, 1970 . Hoshikawa, Choshichi (Honorar y Professor , Wased a University; Docto r of Laws), Kogoro Yamaguchi (Professor, Osaka University; Doctor of Laws), 261

262 Reference

s

Wataru Horiguch i (Professor , Hitotsubash i University) , Toshi o Saka maki (Professor , Wased a University ; Docto r of Laws). General Rules of the Commercial Code, Commercial Transaction Law. Revise d edition , 1979. lino, Toshio (Professor, Chu o University; Docto r of Commercial Science) . Theory of Financial Accounting. 36t h edition, 1979 . Inoue, Kyuy a (Professor , Niho n University) . Calculation and Theory on Corporate Income Tax. Inoue, Tatsu o (Professor , Chu o University ; Docto r o f Commercia l Sci ence). New Theory of Financial Statements. 72 d edition, 1978 . Ishii, Teruhisa (Professor, Seike i University). General Rules of the Commercial Code. Revise d edition, 1979 . Ishikawa, Keiich i (C.P.A. ; Ta x Accountant) . A Textbook on Corporate Income Tax. 1978. Kawahara, Kazu o (C.P.A. ; Ta x Accountant ; Lecturer , Niho n University) . Practice on Income Tax and Accounting Principles. Revised new edition . Kimura, Shigeyosh i (Professor , Sok a University) . Commentary on Accounting Principles. 1963. Kurosawa, Kiyosh i (Honorar y Professor , Yokoham a Nationa l University ; Doctor o f Busines s Administration) . Modern Accounting. 6t h revise d edition, 1978. Matsui, Shizur o (formerl y o f th e Ministr y o f Finance) . Business Practice on Corporate Income Tax Law. 1965. Minato, Ryonosuk e (formerl y o f th e Japa n Tobacc o an d Sal t Publi c Cor poration). Newly Revised Corporate Income Tax Law. Minemura, Shinkich i (Professor , Kei o Gijuk u University ; Docto r o f Eco nomics). New Edition of Accounting. Reprint , 1976 . Mutaguchi, Minor u (Ex-Revenu e Officer ; C.P.A. ; Ta x Accountant ; Lec turer, Postgraduat e Course , Niho n University) . New Textbook on Individual Income Tax. Nakamura, Nobuichir o (Professor, Kona n University ; Docto r of Commer cial Science). Accounting. 1s t edition, 1979 . Nomizu, Isuruo (Judg e o f the Court o f Appeal for Nationa l Tax) . Foundation on Individual Income Tax. Numata, Yoshio (Professor, Komazaw a University ; Doctor of Commercial Science). A Textbook of Accounting. 8t h revised edition, 1978. Ohta, Tetsuz o (Docto r o f Commercia l Science) , and Masutar o Ara i (Pro fessor, Seike i University) . An Introduction to the New Accounting. 9t h edition, 1978. Ootori, Tsune o (Professor , Toky o University) , Ichir o Kawamot o (Profes sor, Kob e University) , Masahiro Kitazaw a (Professor , Nagoy a Univer sity; Docto r of Laws); Yoh Sato (Professor o f Seikei University), Shuz a Toda (Professor, Chu o University; Docto r of Laws), comps. Practice, the Commercial Code (General Rules, Commercial Transactions). Revise d edition, 1976 .

References 26

3

Ooyama, Taka o (Professor , Ta x University) . Calculation and Theory of Individual Income Tax. 1972 , 1978. Osumi, Kenichiro (Honorar y Professor , Kyot o University; Docto r of Laws). General Rules of the Commercial Code. Revised edition, 1978 . Sakamoto, Yasuichi (Professor , Osak a Gakui n University ; Docto r o f Economics). Basic Accounting. 20t h edition, 1979 . Sanekata, Kenj i (Professor , Hokkaid o University) , an d Toshir o Shim a (Professor o f Tsukuba University) , comps. General Rules of the Commercial Code. 1980. Sato, Koich i (Professor , Wased a University ; Docto r o f Commercia l Sci ence). New Accounting. 21s t edition, 1967 . Someya, Kyojir o (Professor , Wased a University ; Docto r o f Commercia l Science). Modern Financial Accounting. Completel y revise d 55t h edi tion, 1979 . Suzuki, Take o (Honorar y Professor , Toky o University ; Docto r o f Laws) . New Edition of the Commercial Code. 1978. Tajima, Shir o (Professor , Komazaw a University ; Docto r o f Economics) . Revised Accounting. 4t h edition, 1977 . Takamatsu, Kazu o (Presiden t an d Professor , Sok a University ; Docto r o f Economics). Theory of Bookkeeping. Ne w revise d edition , 4th printing , 1978. Takatori, Masa o (Professor , Kei o Gijuk u University ; Docto r o f Laws) . Basic Lecture on Jurisprudence, the Commercial Code II (The Company Law). 1971. . General Rules of the Commercial Code —Commercial Transaction Law. 1976 . Takeda, Masasuke (Professor, Seike i University). Detailed Interpretation of Taxation of Corporation. 1962 . Tanaka, Kotar o (Honorar y Professor , Toky o University ; Docto r o f Laws) . Logic of the Laws Concerning Balance Sheet. Reprint, 1946 . Tanaka, Seij i (Honorar y Professor , Hitotsubash i University ; Docto r o f Laws). All-revised Detailed Discussion of General Rules of the Commercial Code. 1978. . New Edition Commercial Code. 4t h completel y revise d edition , 1978. Tanaka, Seij i (Honorar y Professor , Hitotsubash i University ; Docto r o f Laws), an d Ryosuk e Kit a (Professor , Hitotsubash i University ; Docto r of Laws) . Commentary, General Rules of the Commercial Code. Revised edition, 197 5 Tatta, Misao (Professor, Kyot o University). Abbreviated Explanation of the Commercial Code. 1980. Toda, Shuz o (Professor , Chu o University ; Docto r o f Laws) . General Rules of the Commercial Code. 1980. Ueno, Michisuke (Honorar y Professor , Toky o University). New Theory of a Balance Sheet. 11t h edition, 1942 .

264 Reference s Ueyanagi, Katsur o (Professor , Kyot o University) , Masahir o Kitazaw a (Professor, Nagoy a University ; Docto r of Laws), Tsuneo Ootori (Profes sor, Toky o University ; Docto r o f Laws) , Akio Takeuchi (Professor , To kyo University; Docto r o f Laws) , comps. General Rules of the Commercial Code, Commercial Transaction Law. 1980. Yamamasu, Tadahir o (Professor , Kei o Gijuk u University ; Docto r o f Eco nomics), an d Tsuyo o Shimamur a (Professor , Meij i University ; Docto r of Economics) . Systematic Theory of Financial Statements; Theory Section. Revised edition, 1978 . Yamashita, Katsuj i (Professor , Kob e University) . Theory of Financial Accounting Principles. Reprint, 1957 . Yoshida, Fuji o (formerl y o f th e Nationa l Ta x Administratio n Agency) . Individual Income Tax Law. 1978. Yoshikuni, Jir o (forme r chie f office r o f th e Nationa l Ta x Administratio n Agency). Lecture on Corporate Income Tax Law. 1954. . Corporate Income Tax, Edition for Practice. 1973. Yoshikuni, Jir o (forme r chie f office r o f th e Nationa l Ta x Administratio n Agency), and Masasuke Takeda . Corporate Income Tax Law, Volume of Interpretation of Laws and Ordinances. 1976. Accounting (Kaikei) . Compiled by The Accounting Institution of Japan. Accounting (Kigyo-Kaikei) . Edition of Chuokeizaisha . Dictionary of Accounting. Compile d by Institution fo r Accounting of Kobe University. Dictionary of Accounting. Editio n of Dobunkan; 3 d edition. Dictionary of Accounting. Editio n of Seirinshoin-shinsha, 1965 . Handbook of Accounting. Editio n of Chuokeizaisha, 1976 .

Non-Japanese Adler, Hans , Walthe r During , an d Kur t Schmaltz . Rechnungslegung und Prufung der Aktiengesellschaft, Handkommentar . Vierte Auflage, 1971. Austin, John. Lectures on Jurisprudence or the Philosophy of Positive Law. 1972. Ballantine, Henry Winthrop. On Corporations. Revised edition, 1964 . Barth, Kuno. Die Entwicklung des deutschen Bilanzrechts. 1955. Baumann, Jiirgen. Einfuhrung in die Rechtswissenschaft. 5 Auflage, 1977 . Baumbach, A. , and K . Duden . Handelsgesetzbuch, Kurz-Kommentare . 1 9 Auflage. Becker, Enno . Die Reichsabgabenordnung vom 13. Dezember 1919. 2 Auflage, 1922. Berger, Klausjiirgen. Kritische Analyse normativer Elemente in der Betriebswirtschaftslehre. 1979. Biener, Herbert . "Zu r Transformatio n de r 4 . EG-Richtlinie. " Die Wirtschaftsprufung (1980). Birkenfeld, Wolfram. Beweis und Beweiswilrdigung in Steuerrecht. 1973 .

References 26 5 Bronner, Hebert . Die Bilanz nach Handels- und Steuerrecht. 8 Auflage , 1971. Brown, Marlene . "Dramati c Changes : Th e EE C Fourt h Directive. " The Accountant (1981). Burhenne, Wolfgang E. , and Klau s Perband. EDV-Recht. Buschgen, Hans E. Bankbetriebslehre. Wiesbaden, 1972 . Carey, John L. The Rise of the Accounting Profession. 1969. Casey, William J. , an d Loui s H. Rappaport. SEC Accounting Practice and Procedure. 3d edition . Cattien, Hans. Reichssteuerstrafrecht und Reichssteuerstrafverfahren. 2 Auflage, 1929 . Christie, George C. Jurisprudence: Text and Readings on the Philosophy of Law. St . Paul, Minn.: West Publishing Co., 1973. Conradi, Joachim . "Datenbankabfrage. " I n Handworterbuch des Steuerrechts und der Steuerwissenschaften. 2 Auflage, 1981. Danzer, Jiirgen. Die Steuerumgehung. 1981 . Dietzen, Nikolaus. Grundsatze ordnungsmafliger Bilanzierung fur stille Reserven. 1937. Dohr, Jame s L . "Materiality—What Doe s It Mea n i n Accounting? " Journal of Accountancy (1950). Eckert, Walter Ludwig. Kompendium Abgabenordnung. 1980 . Engisch, Karl. Einfuhrung in das juristische Denken. 7 Auflage, 1977 . Erhard, Fritz. Steuerliche Betriebsprufung. 4 Auflage, 1980 . Flligel. Wegweiser. 1741 . Franzen, Klaus , Brigitt e Gast-D e Hann , an d Eric h Samson . Steuerstrafrecht mit Steuerordnungswidrigkeiten. 2 Auflage, 1978 . Gastan, Edgar . "Di e Praxi s de r Jahresabschlu/3publizitat. " Die Wirtschaftsprufung (1981). Gehre, Horst. Steuerberatungsgesetz Kommentar. 1981. Gernert, Dieter. Einfuhrung in die Datenverarbeitung fur Juristen. 1974. Godin, Freiher r von , an d Han s Wilhelmi . Aktiegensetz vom 6. September 1965, Kommentar. 4 Auflage, 1971. Goessen, Passchier . Buechhalten fein Kurz zussammengefasset und begriffen nach Art und Weise der Italiener. 1594. Gomberg, Leon. Grundlegung der Verrechnungswissenschaft. 1908 . Grass, Adolf. Die Prufung der steuerberatenden Berufe. 11 Auflage, 1978 . Gumpel, Henry J., and Car l Boettcher. Taxation in The Federal Republic of Germany. Harvard La w School, 1963. Gutenberg, Erich. Grundlagen der Betriebswirtschaftslehre. Hafner, Ingo , an d Hors t Junker . Elektronische Datenverarbeitung in mittleren Unternehmen. 1978 . Hartley, T. C. Foundations of European Community Law. 1981. Hast, Karl . Grundsatze ordnungsmafiiger Bilanzierung fur Anlagegegenstande. 1934. Havermann, Hans . "Vorentwur f eine s Transformationsgesetze s zu r EG Richtlinie liegt vor." Die Wirtschaftspriifung (1980) .

266 Reference

s

Hegel, G . W . F . Rechtsphilosophie. Editio n IItin g 2 . Stuttgart-Ba d Can statt: Friedrich Fromman n Verla g Gunther Holzboo g KG, 1974. . Phdnomenologie des Geistes, 1807 . 6 Auflage . Verla g vo n Feli x Meiner in Hamburg, 1952 . . Grundlinien der Philosophie des Rechts. Berlin , 1821. Hein. Steuerrecht und Handelsrecht. 1928 . Heisenberg, Werner. Der Teil und das Game. 4 Auflage, 1972 . Henkel, Heinrich. Einfuhrung in die Rechtsphilosphie. 2 Auflage, 1977 . Hiibschmann, Hepp , an d Spitaler . Kommentar zur Abgabenordnung und Finanzgerichtsordnung. 7 Auflage, 1979 . Hiittemann, Ulrich . Grundsatze ordnungsmafiiger Bilanzierung fiXr Verbindlichkeiten. 2 Auflage. Iizuka, Takeshi . "Datenverarbeitungsorganisation , japanische. " Handworterbuch des Steuerrechts und der Steuerwissenscaften. 2 Auflage, 1981. Irwin, Richar d D . Financial Accounting; Basic Concepts. Thir d edition , 1977. Isaac, Alfred . Die Entwicklung der wissenschaftlichen Betriebswirtschaf tslehre. Jonas, Heinrich H . Die EG-Bilanzrichtlinie: Grundlagen undAnwendung in der Praxis. 1980. Kant, Immanuel. Die Metaphysik der Sitten. Kehlmann, Gunter. Steuerstrafrecht. 3 Auflage, 1982 . Kelsen, Hans. Allgemeine Staatslehre. 1925. . Reine Rechtslehre. 1934 . Klein, Frank , an d Ger n Orlopp . Abgabenordnung Kommentar. 2 Auflage , 1979. Koch, Karl . "Automation i n de r Steuerverwaltung. " Handworterbuch des Steuerrechts und der Steuerwissenschaften. 2 Auflage, 1981. Konz, Franz. Handbuch der Steuerhinterziehung. 1982 . Kosiol, Erich. Pagatorische Bilanz. 1976 . Kottke, Klaus . Steuerersparung, Steuerumgehung, Steuerhinterziehung. 2 Auflage, 1962 . Krause, Arnold . Grundsatze ordnungsmapiger Bilanierung fur Pensionsverpflichtungen. 1935 . Kresse, Werner. Die Neue Schule des Bilanzbuchhalters. Ban d II. 4 Auflage, 1979. Kripke, Homer. "Th e SE C and Corporat e Disclosure. " Law and Business. 1979. Kruse, Heinric h Wilhelm . Grundsatze ordnungsmaftiger Buchfuhrung. 3 Auflage, 1978 . Kuhn, Rolf , Heinz Kutter , an d Rut h Hormann . Abgabenordnung, Finanzgerichtsordnung, Nebengesetze. 12 Auflage, 1977 . Leffson, Ulrich . Grundsatze ordnungsmafiiger Buchfuhrung. 4 Auflage, 1976. . Wirtschaftsprufung. 1977 . . "Wirtschaftsprufun g un d Universitat , Ei n Mtinsterane r Sympo -

References 26

7

sion, Referat e un d Zusammenfassun g de r Diskussion . De r Einflu/ 3 ei ner erkennbare n Gefahrdun g de r Unternehmun g au f di e Aussage n i m Priifungsbericht un d Bestatigungsvermerk. " Die Wirschaftspriifung (1980). . "Zu r Generainor m un d zu m Bestatigungsvermer k de s Voren tworfs eines Bilanzrichtliniengesetzes sowi e Anmerkungen z u weitere n Vorschriften." Die Wirtschaftsprufung (1980) . Littmann, Eberhard . Das Einkommensteuerrecht. 1 2 Auflage, 1978 . Mautz, R . K . The Philosophy of Auditing. America n Accountin g Associa tion, 1961. Merz. Das Recht als soziale Ordnungsmacht. 1964 . Mittelsteiner, Karl-Heinz , an d Hors t Gehre . Steuerberatungsgesetz Handkommentar. 1975 . Mittelsteiner, Karl-Heinz , an d Haral d Schaumburg . Abgabenordnung 1977. 2 Auflage, 1977 . Muller, Richard . Buchfuhrung und EDV, Computer und Recht. Ban d 5 . 1977. Muller, Welf . "Anderun g de s GmbH-Gesetze s un d ander e handelsrecht licher Vorschriften zu m 1 . Januar 1981. " Die Wirtschaftsprufung (1980) . Muller-Boling, Detler . Arbeitszufriedenheit bei automatisierter Datenverarbeitung. 1978 . Nagel, Kurt . DV AKtuell 1979 Trends, Tabellen, Entscheidungshilfen fur Datenverarbeitung und Informatik. Schwerpunktthem a Steuerun g un d Uberwachung von Rechenzentren, 1979 . Nicklisch, Heinrich. Die Betriebswirtschaft. 7 Auflage. Stuttgart, 1932 . Niehus, R . J . " 'Materiality ' ('Wesentlichkeit')—Ei n Grundsat z de r Rechnungslegung auc h i m deutsche n Handelsrecht? " Die Wirtschaftsprufung (1981). Owles, Derrick. "Foreign Affairs—International Harmonization. " The Accountant (1980) . Palmer, Sir Francis. Company Law. Volume 1 . 1976. Paton, George W. A Textbook of Jurisprudence. Secon d edition, 1951. Peez, Leonhard . Grundsatze ordnungsmaftiger Datenverarbeitung im Rechnungswesen. 1975 . Penndorf, B. Geschichte der Buchhaltung in Deutschland. Peter, K. F. Moderne Rechts- und Steuerberatung mil EDV. 1973. Peter, Karl , Kur t Joachi m Vo n Bonrhaupt , an d Werne r Korner . Ordnungsmdpigkeit der Buchfuhrung-Anforderungen an Buchfuhrung und Aufzeichnungen. 7 Auflage, 1978 . Philippson. Briefe uber das kaufmannische Rechnungswesen. 1813 . Radbruch, Gustav. Rechtsphilosophie. 8 Auflage, 1973. Reblin, Erhard . Elektronische Datenverarbeitung in der Finanzbuchhaltung. 2 Auflage, 1971. Romer. Reichssteuerstrafrecht und Reichssteuerstrafverfahren von Regierungsrat. 1927'.

268 Reference

s

Rudolph, Siegbert. Das DATEV-Buchfuhrungssystem. 2 Auflage, 1978 . Schmalenbach, Eugen . Dynamische Bilanz. 5 Auflage, 1931. . Grundlagen der Selbstkostenrechnung und Preispolitik. 3 Auflage . Leipzig, 1926. Schmidt, Harald. Buchfuhrung und Steuerbilanz. Schopenhauer, Arthur . Die Welt als Wille und Vorstellung; Parega und Paralipomena. Schreiber, Heinrich. Rechenbuch. 1518 . Schruff, Lother . Rechnungslegung und Prufung der AG und GmbH nach neuem Recht (4. EG-Richtlinie). 1978. Sebiger, Heinz . "DATEV. " I n Handworterbuch des Steuerrechts und der Steuerwissenschaften. 2 Auflage, 1981. Seckel, Carola. Die Steuerhinterziehung. 2 Auflage, 1979 . Seidler, Le e J., and D . R. Carmichael. Accountants' Handbook. Volum e 1 . Sixth edition, 1931. Selchert, Friedrich W. Aktienrechtliche JahresabschlufipriXfung. 1979 . Simons, William B., ed. The Constitutions of the Communist World. 1980 . Sombart, Werner. Der modern Kapitalismus. 1921 . Spangemacher, Gerd . Allgemeines Recht. 5 Auflage, 1978 . Sporlein, Peter. Der Steuerzahler und das Steuerstrafrecht. 1979 . Stammler, Rudolf . Lehrbuch der Rechtsphilosophie. 3 Auflage, Berli n un d Leipzig. . Die Lehre von dem richtigen Rechte. 1902. Streit, Erich . Grundsatze ordnungsmafiiger Bilanzierung fur Ruckstellungen. 1936. Suhr, Gerhard , an d Axe l Naumann . Steuerstrafrecht-Kommentar. 3 Au flage, 1977 . Tipke, Klaus. Steuerrecht, Ein systematischer Grundrip. 6 Auflage, 1978 . Tipke, Klaus , an d Heinric h Wilhel m Kruse . Reichsabgabenordnung, Taschenkommentar. 1961. Udell, Gilma n G . Laws Relating to Securities Commission Exchanges and Holding Companies. 1976. Vellguth, Hans Karl. Grundsatze ordnungsmaftiger Bilanzierung fur schwebende Geschafte. 1937. Vieweg, Rolf . Buchhaltung mit mechanischen und automatischen Datenverarbeitungsverfahren. 5 Auflage, 1972 . . Samtliche Einsatzmbglichkeiten der EDV zur optimalen Unternehmensteuerung. 1980 . Vinogradoff, Pau l Gavrilovich . Common Sense in Law. Secon d edition , 1945. Welland, Kurt . Grundsatze ordnungsmafiiger Bilanzierung fur Wechsel, Schecks und Akzepte. 1936. Wilmowski. Das preussische Einkommenssteuergesetz vom 24. Juni 1891. erlautert. 3 Auflage, 1915 . Wittgenstein. Tractatus logico-philosophicus. 1922.

References 26

9

Wohe, Gunter. Betriebswirtschaftliche Steuerlehre. Band I. 5 Auflage, 1978 . Woolsey, S . M . "Objectiv e Bas e fo r Makin g Materialit y Decisions. " The Accountant (1968). Wysocki, Klaus V. Grundlagen des betriebswirtschaftlichen Prufungswesens. 2 Auflage, 1977 . Wysocki, Klaus V., and Hagest. Die Praxis des Prufungswesens. 1976 . AICPA. AC Section 1024 Objectives of Financial Accounting and Financial Statements. 1970 . . The CPA Plans for the Future. .Professional Standards. 1976 . Beck'sche Kurz-Kommentare, Versicherungsvertragsgesetz. 1980 . Conseil National d e la Comptabilite. Plan Comptable General 63. Deutsches wissenschaftliche s Steuerinstitu t de r Steuerberate r un d Steuerbevollmachtigten e . V . AO-Handbuch (AO 1977)IHandbuch der Steuerveranlagungen. 1979 . Gemeinsame Stellungnahme der Wirtschaftspruferkammer und des Instituts der Wirtschaftsprufer zum Vorentwurf eines Bilanzrichtlinie-Gesetzes. Die Wirtschaftsprufung (1980). Handelsgesetzbuch, Grofikommentar. Berlin: Walter de Gruyter & Co., 1967. Industrielles Rechnungswesen in programmierter Form. Betriebswirtschaftlicher Verlag Dr. Th. Gabler Wiesbaden . Institute o f Chartere d Accountant s i n Englan d an d Wales . Guide to the Accounting Requirements of the Companies Acts. 1980. . Recommendations on Accounting Principles. Institut de r Wirschaftsprufe r i n Deutschland . Wirtschaftspriifer-Handbuch. 1973-1977 . Kommission fu r Buchpriifun g de r U.E.C . Die Prufung des Jahresabschlusses. 4 Auflage. Kommission Rechnungswesen—Verban d de r Hochschullehre r fu r Be triebswirtschaft e.V . Stellungnahme zum Vorentwurf eines Bilanzrichtlinie-Gesetzes vom 5. 2.1980. Die Betriebs-Wirtschaft (1980). Report o f th e Inflatio n Accountin g Committee , Chairma n F . E. P. Sandi lands, Esq. , CBE , Presente d t o Parliamen t b y th e Chancello r o f th e Exchequer an d th e Secretar y o f Stat e fo r Trad e b y Comman d o f He r Majesty. Inflation Accounting. 1975. Schmalenbach-Gesellschaft. Rechnungslegung nach neuem Recht. 1980 . The Thirteen Principal Upanishads Translated from the Sanskrit. Translated by Rober t Ernes t Hume . Secon d revise d edition . Oxfor d Universit y Press, 1981. Brockhaus Enzyklopadie. 1974. Encyclopaedia Britannica. 1965 . Gablers Wirtschafts-Lexikon. 1 0 Auflage, 1979 . Handworterbuch der Betriebswirtschaft. 1974 . Handworterbuch der Finanzwirtschaft. 1976 .

270 Reference s Handworterbuch der Wirschaftswissenschaft. Ban d 2. 1980. Handworterbuch des Rechnungswesens. 1970 . 2 Auflage, 1981. Handworterbuch des Steuerrechts und der Steuerwissenschaft. 1972 . 2 Auflage, 1981 . Handworterbuch zur Deutschen Rechtsgeschichte. Eric h Schmid t Verlag , 1971. International Accounting Lexicon (U .E .C.). 1980. Lexikon der Wirtschaftsprufung, Rechnungslegung und Prufung. vo n Wolf gang Luck, 1980 . Lexique U.E.C. 1974 .

Index

Accounting phrases : " a tru e an d fai r view" (England) , 144 , 210-14 , 219 ; "fair accountin g practice " (Japan) , 8 7 - 9 1 , 96-100 ; "generall y accepte d accounting practice, " (Unite d States), 9 1 - 9 3 , 18 7 Aida, Yoshio , 7 9 American Institut e o f Certifie d Publi c Accountants (AICPA) , 92 , 108 , 192 , 230 Aoki, Shigeo , 8 5 Arai, Kiyomitsu , 7 6 Arai, Masutaro , 6 1 Association o f Certifie d Publi c Accoun tants (Japan) , 25 0 Association o f License d Ta x Practition ers (Germany) , 30 , 16 5 Association o f Universit y Instructor s o f Business Administration , 217-18 ; Commission o n Accountin g of , 218 — 20 Auction La w (Japan) , 17 2 Audit trail , 140 , 25 8 Balance sheet , 7 , 10-11 , 134-3 7 Ballantine, Henr y W. , 9 2 Banba, Kaichiro , 10 8 Barth, Kuno , 7 Becker, Enno , 10 , 16 , 42, 105 , 116 , 15 2 Berger, Klausjiirgen , 2 1 Bierle, Klaus , 5 Birkenfeld, Wolfram , 11 3

Boettcher, Carl , 16 9 Books o f account , 8 - 1 1 , 14 2 Bossard, Michel , 11 5 British Nationa l Assembly , 18 6 Bronner, Herbert , 108-1 1 Brown, Marlene , 222-2 5 Buddhism, 4 1 Burhenne, Wolfgan g E. , 25 0 Carrel, Alexis , 17 , 24 9 Cashbook, 109-1 2 CCMC Dat a Processin g Center , 11 5 Chmielewicz, Klaus , 215 , 23 6 Christe, Georg e C , 2 6 - 2 7 Chu, Saichi , 5 8 Civil Affair s Burea u o f Ministr y o f Jus tice (Japan) , 96 , 25 0 Civil La w (Germany) , 152-53 , 157-58 , 162, 17 5 Commercial Code : o f France , 100 , 114 ; of Japan , 31 , 5 1 - 5 3 , 78 , 8 7 - 9 1 ; o f 1893 (Japan) , 142 ; o f 189 7 (Ger many), 3 - 8 , 15 , 59 , 131 ; of 190 0 (Germany), 5 9 Companies Act : o f 194 8 (England) , 143_44, 180 , 212 , 219 ; o f 1967 , 95 ; o f 1976, 143 , 181-87 , 244 ; o f 1980 , 201 Computer-aided accounting , 119 , 139 — 40, 2 5 0 - 5 9 Confucius, 4 1 Conradi, Joachim , 25 1

271

272 Inde x Constitution o f Federa l Republi c o f Germany, 173 , 17 6 Constitution o f Japan , 17 3 Corporate Accountin g Council . See Ministry o f Financ e Corporate Accountin g Principles : o f Ja pan, 15 , 84 , 8 7 - 9 1 , 93-94 ; o f Unite d Kingdom, 95 ; o f Unite d States , 9 1 94; principl e o f "accuracy, " 86 ; prin ciple o f "completeness, " 5 , 9 9 - 1 0 1 , 142, 158 ; principl e o f "materiality, " 36-46; principl e o f "timeliness, " 2 9 35, 76-77 , 106-8 ; principl e o f "truthfulness," 85 , 15 8 Corporate Accountin g Syste m Counter measure Investigatio n Commissio n (Japan), 83 , 9 0 Corporation Ta x Law : Germany , 15 , 3 1 77, 111 ; Japan, 176-77 , 18 7 Court o f Cessatio n (Japan) , 3 1 DATEV, 11 5 Debit ledger , 8 "Declaration o f completeness, " 240-4 9 Degrange, Eduard , 9 De l a Porte , 9 Deliberative Counci l fo r Corporat e Ac counting. See Ministr y o f Financ e Double-entry bookkeeping , 9 , 58 , 67 , 85 Eckert, Ludwig , 15 3 Economic Stabilizatio n Board , 9 0 Eighth Internationa l Congres s o f Pub lic Accountants , 22 9 Engisch, Karl , 2 2 - 2 4 European Communitie s (EC) , 197-9 9 External audit , 125 , 205-6 , 237-39 , 242-45 Federal Financ e Cour t (Germany) , 6 , 16, 30 , 34-35 , 45 , 109 , 111-12 , 17 8 Federal Ministr y o f Justic e (Germany) , 215-17 Federal Trad e Commissio n Act , 19 0 Financial Accountin g Standard s Board. See America n Institut e o f Certified Publi c Accountant s Financial Affair s Cour t (Germany) , 11 0 Financial Syste m La w (Germany) , 24 2

Flugel, 9 Foreign Law s Researc h Associatio n o f Kobe University , 13 6 Fugger Company , 9 Fuji Sash Co., 9 4 Fujitsu, Ltd. , 4 2 Funada, Kyoji , 2 4 Fundamental Accountin g Pla n (France), 1 4 Fundamental Taxatio n La w (Ger many), 10 , 15-16 , 29 , 55-56 , 60 , 77 ; Enforcement Regulation s of , 33-3 5 General Commercia l La w o f 186 1 (Ger many), 13 . See also Commercia l Code German Nationa l Assembly , 134 , 139 , 141 Godin, Freiher r von , 3 8 Grass, Adolf , 3 2 Guidelines (differenc e fro m ordi nances), 175-7 6 Gumpel, Henry , J. , 16 8 Gutenberg, Erich , 21 6 Hattori, Eizo , 8 8 Havermann, Hans , 21 5 Hegel, G . F . W. , 4 0 - 4 2 Henkel, Heinrich , 25 6 Hessian Incom e Ta x Law , 7 , 73 , 14 3 Hessian Provincia l Government , 7 Hormann, Ruth , 11 0 lino, Toshio , 6 1 Imperial Constitutio n o f Japan , 17 3 Imperial Ta x Cod e (Germany) , 6 , 10 , 13_14, 4 2 - 4 6 , 97 , 105-21 , 168 , 17 3 Income Ta x La w o f Germany , 15 , 60 ; of Japan , 176-77 , 18 8 Inoue, Tatsuo , 7 7 Institute o f Certifie d Publi c Accoun tants (Germany) , 21 5 Institute o f Chartere d Accountant s (Germany), 116 , 221 , 244-4 5 Institute o f Chartere d Accountant s o f England an d Wales , 36 , 95 , 213 , 22 2 International Accountin g Standard s Committee, 140 , 22 9 International Federatio n o f Accoun tants, 23 0

Index 27 3 Investment Compan y an d Investmen t Advisers Ac t o f 1940 , 19 1 Japan Societ y o f Accounting , 14 3 Japanese Nationa l Diet , 186 , 202 , 206 , 223, 24 0 Jhering, R . V. , 10 0 Jonas, Heinric h H. , 21 4 Kant, Immanuel , 17 , 18-19 , 22 , 2 5 Kato, Ichiro , 15 4 Kellenbenz, H. , 8 , 1 0 Kelsen, Hans , 24-27 , 20 4 Kimura, Shigeyoshi , 8 1 Koch, Karl , 25 1 Kokusai Denshin-Denw a Co. , Ltd. , 9 4 Kosiol, Erich , 4 , 2 1 , 2 3 6 Kresse, Werner , 25 9 Kripke, Homer , 23 1 Kruse, Heinric h Wilhelm , 6 , 13 , 15 3 Kuhn, Rolf , 11 0 Kuroda, Josui , 13 7 Kurosawa, Kiyoski , 37 , 59 , 9 1 Kusunoki, Masashige , 4 2 Kutter, Heinz , 11 0 Leffson, Ulrich , 5 , 36 , 38 , 218 , 242-4 3 Leuchs, Johan n Michael , 9 Limited Compan y La w (Germany) , 1 5 Littmann, Eberhard , 6 - 7 , 30 , 69 , 11 7 Medical Practitioner s La w (Japan) , 162 Meiji era , 14 4 Mencius, 3 7 Minemura, Shinkichi , 6 4 Ministerial Ordinanc e Regardin g Audi t Certificates (Japan) , 76 , 88 , 93 , 18 7 Ministry o f Financ e (Japan) , 31-32 ; Corporate Accountin g Counci l of , 90 , 93; Deliberativ e Counci l fo r Corpo rate Accountin g of , 8 4 Ministry o f Justic e (Japan) , 8 7 Mittelsteiner, Karl-Heinz , 30 , 16 5 Nakamura, Nobuichiro , 6 6 National Ta x Administratio n Agenc y (Japan), 14 , 177-78 , 20 6 Nippon Telegrap h & Telephone Publi c Corporation, 9 4

Numata, Yoshio , 7 4 Nuremberg Associatio n o f Ta x Practi tioners (Germany) , 1 4 Ohta, Tetsuzo , 6 1 Ootori, Tsuneo , 8 8 Organization fo r Economi c Coopera tion an d Developmen t (OECD) , 23 , 154, 1 8 4 , 2 3 1 - 3 2 Osumi, Kenichiro , 8 9 Owles, Derrick , 228-3 2 Pacciolli, Luca , 8 Paton, Georg e W. , 2 1 Pawnshop Busines s La w (Japan) , 16 2 Peez, Leonhard , 126 , 14 1 Penal Cod e o f Germany , 138 , 149-51 ; of Japan,3 2 Perband, Klaus , 25 0 Plato, 17-18 , 25 , 13 0 Principles o f positiv e law , 7 , 2 2 - 2 8 , 204 Principles o f regula r accounting . See Principles o f regula r bookkeepin g Principles o f regula r bookkeeping : con cept of , 4 - 9 , 13-28 , 51-56 , 127 ; threefold structur e of , 4 , 86 , 136 , 144; view s o f Japanes e scholars , 5 7 86 Prussian Genera l Commo n La w o f 1794, 13 , 14 2 Public Utilit y Ac t o f 1935 , 19 1 Quarrying La w (Japan) , 16 2 Radbruch, Gustav , 19-20 , 26 , 38-4 1 Sakamoto, Yasuichi , 6 4 Samson, Erich , 12 3 Samurai. See Kusunoki , Masashig e Sato, Koichi , 5 8 Schmalenbach, Eugen , 11 , 4 2 - 4 6 , 135 Schmidt, Otto , 109 , 11 6 Schoapp, J . G. , 9 Schopenhauer, Arthur , 22 , 4 1 Schreiber, Heinrich , 9 Sebiger, Heinz , 115 , 25 1 Securities Ac t o f 1933 , 37 , 92 , 96 , 181 , 190-91,243

274 Inde x Securities an d Exchang e Ac t o f 1934 , 8 9 , 9 2 , 181 , 190-91,20 7 Securities an d Exchang e Commission , 92, 189-92 , 207,22 9 Shakespeare, 8 Shimamura, Tsuyoo , 6 7 Shogun. See Tokugawa , Ienar i Shoup, Carl S. , 9 3 - 9 4 . See Shou p Mis sion Shoup Mission , 9 1 - 9 4 Single-entry bookkeeping , 9 Small Busines s Ac t o f 1958 , 18 1 Sombart, Werner , 1 7 Someya, Kyojiro , 6 5 Spangemacher, Gerd , 16 , 152-53 , 157 , 165 Spiller, Ear l A. , Jr. , 189-9 1 Stammler, Rudolf , 18-1 9 Stock La w (Germany) , 15 , 37-38 , 62 , 68,71,201,209-12 Supreme Cour t o f Administrativ e Liti gation (France) , 1 4 Suzuki, Takeo , 20 3 Tajima, Shiro , 7 3 Takamatsu, Kazuo , 6 7 Tanaka, Kotaro , 37 , 46 , 51-56 , 60 , 83 , 240 Tax Advisor s Associatio n o f Nort h Baden, 153-5 4 Tax Advisor s La w (Germany) , 164-6 5

Tax evasion , 147-51 , 187 , 20 6 Tipke, Klaus , 11 , 113 , 15 3 TKC Nationa l Federatio n o f Publi c Ac countants, 11 5 Tokugawa, Ienari , 14 2

Ueno, Michisuke , 5 7 Union Europeenn e de s Expert s Compt ables, Economique s e t Financier s (U.E.C), 232-9 7 Union La w (Germany) , 1 5 United Nations , 23 1 Upanishad philosophy , 4 1 - 4 2 U.S. Interna l Revenu e Code , 70 , 80 , 139,187 Vinogradoff, Pau l G. , 20-2 1 Weimar Constitution , 16 8 Wilhelmi, Hans , 3 8 Wysocki, Klau s v. , 245-4 6 Yamamasu, Tadahiro , 6 7 Yamashita, Katsuji , 5 8 - 5 9 Yokota, Kisaburo , 2 5 Zen, 57 , 6 1 , 6 3