Financial accounting and reporting in West German government

3

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■

FACULTY WORKING
PAPER NO. 1009

THE UBRARY OF THE

.FEB2t«B4

Financial Accounting and Reporting in
West German Government

Maureen H. Berry

College of Commerce ana Business Administration
Bureau of Economic and Business Research
University of HI nois. Urbana-Cnampaign

BEBR

FACULTY WORKING PAPER NO. 1009
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign
February 1984

Financial Accounting and Reporting in
West German Government

Maureen H. Berry, Professor
Department of Accountancy

Digitized by the Internet Archive

in 2011 with funding from

University of Illinois Urbana-Champaign

http://www.archive.org/details/financialaccount1009berr

FINANCIAL ACCOUNTING AND REPORTING
IN WEST GERMAN GOVERNMENT

SUMMARY

In 1969, West Germany revised its system of public budgeting in
an attempt to deal with the steep rise in demand for public services.
These budget reforms have resulted in congruent systems of public
sector financial management throughout the country. The West German
experience could make a valuable contribution to current research
efforts in the United States, and several other countries, to develop
a conceptual framework for governmental financial accounting and
reporting.

Many industrial market economies, shaken by recession and inflation
over the past few decades, are voicing concerns about the significant
growth in government spending each is experiencing. Because of strong
competitive demands on limited resources, these concerns have focused
on accountability issues. In certain countries, such as Canada, Sweden,
the United Kingdom, and the United States, recognition of the need for
improved financial management in the public sector has stimulated
research into the conceptual foundations of financial accounting and
reporting for government, particularly at the local level.

An incongruous, but understandable, feature of some of the U.S.
research, however, is a general propensity to fall back on private sec-
tor accounting and reporting systems as reference points and models for
application in a public sector conceptual framework. 2 This situation
can be attributed not only to a traditional private sector orientation,
but also to the sparse attention give to existing alternative philo-
sophies elsewhere in the world. Consideration and appraisal of govern-
mental accounting-information systems in other countries would steer
research towards more appropriate comparative analyses, highlight areas
where accounting technology transfers might successfully be attempted,
and stimulate interest in creative innovations. The main advantage may
well be, however, the opportunity to understand problems better when
observing how they are tackled in different institutional settings.

The objective of this paper is to contribute to this effort by
describing some of the main elements of financial accounting and report-
ing in West German government. Choice of West Germany for study is
relevant for several reasons: it has a three-tier system of government,
as also exists in the United States; it is a highly industrialized
nation: its gross national product ranking fourth in the world; and it
has heavy financial commitments to social programs. A more significant
reason, however, is the fact that West Germany revised its system of
public budgeting in 1969, giving the authorities the opportunity to
clarify public policies and spell them out in related legislation.
Thus, the West German experience must surely be of value in considering
certain conceptual and implementation problems of governmental account-
ing in the United States.

Some Differences Between the Two Systems

Some of the main features of governmental financial accounting and
reporting systems in West Germany and the United States are listed in
Exhibit 1. As is true for many governmental units in the United States,

EXHIBIT 1 GOES ABOUT HERE

the annual operating budget forms the hub of the financial management
and control system in West German government, cash flow is of primary

3YS^: FSATUu'Lj

«3jT

ct

TIC UITIT JD 5TAT3'

Method of preparation

(2) ACCOUNTING
lype of bookkeeping

Transaction recording

Goaiiitnient recognition

F.evenue recognition

Expenditure recognition

ecreciation reco/mition

(3) H3?QHTIIS
Reporting entity

Primary users

financial statement

3y operating group/
department and by
line item .

3 ingle- entry,

cameral

Consonant with
budget basis

various

Maintenance of
budget control
lists

'.'•'hen legally
receivable

Liability recorded
when legally
payable

lie corded by owned
enterprises as well
as by general
government units

providing services
for a fee on a
full Cost coverage
basis

Unit of government
(legal entity)

roverning and

oversight bodies

Specially designed
to provide cash
flow and budget
performance
information

Double-entry,
fund

Feasible conflicts
between generally
accepted accounting
principles and
budget basis-

incumbrances
entered in
accounting records

'hen measurable
and available .

Liability recorded
when incurred

Recorded in

proprietary funds
but not in
governmental funds

'und

Various

'.dap ted from
traditional,
private sector
models

Exhibit 1 . i:ain Features of Governmental 7inancial
accounting and Reporting Systems in '..est
Germany and the United Itatea

-3-

importance, and the public sector uses a special system of accounting
unlike that used in business. This system of cameral accounting, or
Kameralistik, directly provides the information required for the two
main components of the annual financial report: the cash statement and
the budget report. Additional information used by creditors to assess
financial viability, such as the summary of assets and the summary
of liabilities and reserves, is included in the report as enclosures.
Thus the accounting and reporting functions are harmonized to facilitate
external control over the management of public resources. The annual
cycle ends with an audit, a review of budget performance, as well as
efficiency and effectiveness of operations, and submission of the annual
report for acceptance, or "discharge," by the appropriate legislative
body.

The Structure of Government in the Federal Republic

In order to appreciate the system of public financial management in
the Federal Republic, it is necessary to understand the fusion of state
and law, embodied in the term Rechtsstaat , underlying the structure of
government. Johnson (1973, p. 14) describes this concept as follows:

"The Rechtsstaat idea as it finally emerged is
defined in terms of the supremacy of law, the sub-
ordination of the administration of law, the
liability of the state for the illegal acts of its
agents, guarantees against unfair application of
laws through appeal to administrative courts, and
finally a continuous improvement in the system of
public law to exclude from it those elements which
reflect the capricious influence of political or
administrative convenience."

Thus the Federal Republic's emphasis on legal norms, and its use of
institutional ways to ensure that public administration be in compliance
with the law, is bound into the notion of state identity. So, although
public sector accounting and reporting principles are defined by law in
both countries, it would be ideologically impossible to assign a secon-
dary status in West Germany to legal compliance in accounting and re-
porting, as is recommended in the U.S. public sector.-^

The Federal Republic of Germany is a federation (Bund) of consti-
tuent Laender and its government is organized on a decentralized basis.
A Land is somewhat equivalent to a province or state, but because of
translation inadequacies the German term will be used throughout. Some
24,000 Gemeinden, into which the entire country is divided, constitute
the basic units of local administration. For convenience, the term
'Gemeinde" is translated as local authority or local government. It
is important, however, to distinguish between the Anglo-American con-
:ept of exercising democracy through local self-government, and the
est German philosophy of concentrating democratic governing power in

-4-

the Federation and Laender. "All subordinate authorities are 'adminis-
trators' not governments. There is no such thing as 'local government'
in Germany." (Chaput de Saintonge, 1961, p. 3).

The Gemeinden are grouped into about 400 Landkreise which exercise
general supervisory control over them. Some Laender may also have
Aemter which represent an intermediate tier of administration between a
Landkreis and a Gemeinde. The general term Gemeindeverband is applied
to those units of local administration, such as Aemter or Kreise, which
comprise a number of lower-level units. As provided for in the Consti-
tution, known as the Basic Law (Grundgesetz) , each Land enacts its own
local government laws. However, the Constitution also provides, under
Article 28, para. 2, that the Gemeinden, which are legal corporate
bodies, must be guaranteed the legal right to manage local community
affairs. (International Institute, 1973, p. 15).

The local administration consists of an elected policy-making body:
the Gemeinde- or Stadtrat (Council), and an executive body of one or
more persons which advises the Council and is accountable to it.

By law, the local authorities have the right to financial autonomy,
but this is curtailed by the fact that the main sources of revenue have
been reserved to the federal and Land governments.^ Further, federal
and Land law prescribe the code under which the local authorities levy
their taxes, although the Gemeinden can fix the local tax rates within
limits. Local decisions about fee levies, charges, and other revenues
are also regulated. The most important local taxes are the business
tax (Gewerbesteuer) and the tax on real property (Grundsteuer) . Local
authorities also receive various grants to help mitigate the inadequa-
cies of revenue from taxes and other income. These include financial
equalization grants from the Laender, and specific grants, such as
rate support grants, from the federal and Land governments. The dis-
tribution of tax revenues between the three levels of administration
is listed in Exhibit 2.

EXHIBIT 2 GOES ABOUT HERE

Local governments are involved in more than 60 percent of public
investment expenditures, although they receive only about 30 percent
of the public budget receipts. To make up for the short-fall, about
10 percent of local government receipts are derived from borrowing in
the capital market (Streit et al; 1980, p. 278). In 1979, local gov-
ernment borrowings from public banks and private mortgage banks, which
is subject to approval by the supervisory authority, totalled about
260.5 billion marks (Sandvoss and Zweig, 1981, p. 20) which exceeds
the Federal budget of 214.5 billion marks for 1980 (Streit et al;
1980, p. 277).

-5-

PEDERAL

Financial Monopolies: Monopoly on Brandy and Inflammables;
Customs duties.

Consumption taxes: On mineral oils, coffee, tobacco, etc.,

Highway freight traffic taxes, insurance taxes, exchange taxes.

One-time property rates and equalization rates levied to equalize
taxes.

Supplementary rates on income and corporate taxes.

Charges within the framework of the European Economic Community.

LAND

Property tax; estate duty; motor vehicle taxes; tax on purchases of
real estate; capital investment taxes; beer tax; gambling taxes.

LOCAL

Real property tax and local business tax on capital and profits.

Local consumption and expenditure taxes: dog licenses, hunting
licenses, retail liquor licenses, entertainment tax, etc.,

Land-shar ing participation in community taxes:
income taxes
corporate taxes
turnover taxes

SOURCE: Manfred E. Streit et al. Die Wirtschaft Heute (Mannheim
Bibliographisch.es Institut, 1980), p. 275.

EXHIBIT 1. Distribution of Tax Revenues in Accordance with Article
106 of the Basic Law.

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The Budget Reform

The reform of controls over the public finances, expressed in the
Federal Budget Law of 19 August 1969, was a comprehensive attempt to
deal with the increasing size and significance, as well as the changing
nature, of the federal budget. By the mid-sixties, "the demand for
public services was beginning to rise steeply and budgets at all levels
of government were increasing at a rate which threatened to outstrip
the rate of growth of available resources" (Johnson, 1973, p. 194).
Uncoordinated, short-run budgeting had to give way, in the face of
those expanding demans to careful analysis of redistribution policies
from a long-run perspective. On 8 June 1967, the Law for the Promotion
of Economic Stability and Growth (StWG) set out the economic policy
function of the budget. It also created a special instrument for eco-
nomic steering. Economic equalizing reserves were to be built up in
the Federal Bank (Bundesbank) from: (1) decreases in outlays, par-
ticularly for investments, and new credit formation; and (2) a portion
of the receipts which varied with the economy. The purpose of these
reserves was to provide the resources for increases in net outlays
under depressed economic conditions.

Because of the decentralized nature of government, there was an
obvious need for inter- and intra-governmental coordination of economic
expenditures. This was facilitated by the Financial Planning Council,
established in 1968, whose members include the federal ministers of
finance and economic affairs, the Laender ministers of finance, and four
representatives of the local central organizations (Spitzenverbaende) .
In particular, a comprehensive system of budget reform was needed to
(International Institute, 1978, p. 26):

(a) Provide a legal foundation for the budget's function as an
instrument of public policy, in addition to its classical
role as evidencing coverage of needs;

(b) Develop medium-term (five-year) financial planning as a
comprehensive planning instrument; and

(c) Coordinate financial and economic policies of all those
carrying out public functions.

The Law on Budget Principles (HGrG) , and the Federal Budget Law (BHO),
both dated 19 August 1969, as well as the respective budget ordinances
of the various Laender, reformed and harmonized the budget laws at all
levels of government, while still providing leeway for local differ-
ences.

The high degree of congruence between the local government ordi-
nances of the supervisory Laender is due to the provisions of the HGrG
as well as to preliminary work by special committees. * Under #1 and
#48, Section 1 of the HGrG, the Laender were, in effect, required to
apply the provisions of the HGrG to the local authorities if no legal

-7-

impediments existed. A local government affairs committee, Study Group
III, was established by the Laender Interior Ministers to work on new
statutory regulation and technical implementation matters. A Group
subcommittee on local government budget law worked out details of the
structure and grouping of local government budgets. The models devel-
oped by these working groups were submitted to the Interior Ministers'
conferences in 1971 and 1972 for approval. The approved plans were
then adopted by the respective legislatures, except for some local var-
iations in details. Thus a public sector financial management system
which is, in the main, philosophically harmonious now exists throughout
the whole country.

Budgetary Control of the Public Finances

A budgetary control system lies at the heart of financial manage-
ment in West German government. The budget cycle, illustrated in
Exhibit 3, follows a traditional sequence of budget preparation, enact-
ment of a budget law, budget performance, submission of the annual
accounts by the administration, audit of the accounts, and approval
("discharge") of the accounts by the legislative body.

EXHIBIT 3 GOES ABOUT HERE

3udget Preparation

The annual budget package contains two essential components: an
administrative, or operating, budget (Verwaltungshaushalt) and a capi-
tal, or investment, budget (Verraoegenshaushalt) . In addition, there is
a budget statement, a financing statement, and a credit financing plan,
as well as enclosures. The budget statement is a summary of the receipts,
outlays, and credit authorizations contained in the individual budgets
(§10 HGrG; §13 BHO). The financing statement computes the net balance
of the budget financing (§10 HGrG; §13 BHO). This is arrived at by com-
paring credits taken out with debts repaid, as well as corresponding
consideration of monetary proceeds and cash surpluses or deficits. A
net financing surplus occurs when the government repays more debts than
it borrows, while the reverse situation would result in a net financing
deficit.

Deficits are usually covered by short-term credits to strengthen
the cash position and the ultimate liquidation of these credits will be
shown in the financing statement. The financing plan includes a presen-
tation of the entire estimates of receipts from credits, and outlays for
epayments, contained in the individual plans (§10 HGrG; §13 BHO).

Budget
Preparation
(£11 BHO)

Revision

Revision

Revision
I

Establishing
the Budget
(Art. 10,
Para. 3, CC)

Budget
Performance
(£34 BHO)

Revision

Revision

Bookkeeping and ^ —
docurr.enta t ion
obligations of the
cash and paying
off ices
(£s 70-75 BHO)

Closing of the books

-►Applications by

Administrative

Offices

Expend i ture
Requests by
- Ministries
->( Departments)

Revenue Estimates

i

^Headquarters

the Covernment w ♦
-►(Vote on the budget draft,
Veto by the Finance Minister)

Submission to Parliament (Bundestag)

—Legislative Proceedings
-►(Enactment of the Eudget Law)

Carrying out of the budget by the
Executive:

Obligations under instructions and
hearings rights of the Federal Audit
Office (BRH)

(Deviations subject to agreement of
the Finance Minister)
Economic interventions
The Finance Minister's right to
"necessity allowances
(Supplementary budget)

Ministry of Finance

(Coordination of
Receipts and
Expenditures;

Drawing up Budget)

! I

-^ Up-to-date audit by the ERH (the
administration's information and
submission obligations)

Communication of the audit results to the
"administration (£96, Para 1 EHO)

I

Communication of the audit results to the Ministry of

Federal Minister of Finance (£96, Para 2, BHO) ►Finance

Advice and Instructions from the Pari tainent"*-
(Bundestag), the Federal Council (Bundesrat),
and the Federal Government as well as
Individual Federal Ministers (£88, Para 2,
and £99 BHO)

Submission of accounts through the Federal
Minister of France (budget account, capital
account, closing report and sunmaries) and —
request for approval

the Parliament
and the Federal
Council

Ministry of
— ► Finance

Audit of accounts and audit of the efficiency
and orderliness of the budget and economic 4—
activity by the BRH (£39 BHO)

The Federal Covcrn~enr<-

•Rcport of the ERH

The Federal Covcrn?ent4 ►Further Information, exceptions,

(disapprovals) (£114 BHO)

->>the Parliament

and the Federal
-> Council

Approval ("Discharge") by Parliament
(Art. 114, Para. 1, CC)

SOURCE: M.infrcd E. Streit. Die Wlrtschaft Hr-ute_ (Minnhc La: 3iM iographlsches Institut)
1930, ?p. 277 .ind 233 (amended).

EXHIBIT 3". Control of Tublic Finance Under the Federal Budget law (BHO) of 19 August 1969

-9-

The enclosures to the federal and Land budgets include, in particular:

(a) A presentation of the receipts, outlays, and credit authoriza-
tions: grouped according to economic type; organized according
to certain functions served; and summarized according to type
and function; and

(b) Statements of the receipts, outlays, and credit authorizations
of the state enterprises and "special assets" such as the
Federal Railways and Post Office.

Similar enclosures, including an explanatory report (Vorbericht) , are
provided for at the local level (#2, KommHV).

The Operating and Capital Budgets

The operating and capital budgets are assembled in very similar
fashion. Each type of budget is organized by chapter (Kapitel) and
within each chapter by heading (Titel) and line-item (Haushaltsstelle) .
The term chapter refers to the administrative service involved, such
as: health services, universities, etc. (§13 BHO). Gathering together
receipts and outlays by chapter provides for an overview of the scope
of activity and costs of a particular governmental unit. A heading is
a summary of like-types of receipts and outlays (§10 HGrG; §13 BHO).
Their classification and purpose-designations, according to economic
type, are set out in the groupings plan (Gruppierungsplan) . The basic
structure of the groupings plan follows, while a detailed outline is
provided in the Appendix.

RECEIPTS

Grouping

Nr.

0 Taxes, General Grants

1 Receipts from Administration and Services

2 Other Financial Receipts

3 Receipts of the Capital Budget

OUTLAYS

4 Personnel Outlays

Expenditures for Non-personnel Administration

and Service
Grants and Advances (Not for Investments)

8 Other Financial Outlays

9 Outlays of the Capital Budget

-10-

The segmentation of the budget in accordance with the classical
economic model of consumption and investment replaced the traditional
preparation of ordinary and extraordinary budgets. Under the previous
system, the ordinary budget contained all the outlays which were to be
covered by customary receipts. The latter included taxes, user fees
or charges, interest earned on invested assets, etc. Its purpose was
to demonstrate the financial management of basic operating revenues.
The extraordinary budget, on the other hand, showed how outlays were
financed by other-than-usual revenues, generally by indebtedness. Its
outlays were of a capital nature, either for debt liquidations or
making investments. Thus the ordinary receipts were used for both
capital-related outlays, while the extraordinary receipts were used
only for capital-related outlays (Goetz, 1978, p. 46).

The new approach did not bring about as clear-cut a distinction
between operating and investment activities as the titles of the two
budgets suggest. For example, construction costs are capital budget
items, whereas maintenance costs and investment-related debt service
payments are included in operating budget outlays. Furthermore, the
amount of information regarding indebtedness has been reduced. Only
summaries of liabilities are provided in the annual financial report
and there is no longer a requirement to show the relationship between
investments and the debts incurred to finance them.

Generally speaking, certain specified investment-related trans-
actions which exceed 800 DM in value (#1 KomraHV) belong to the capital
budget. Items not meeting these specifications are estimated in the
operating budget. Regardless of classification, however, the two seg-
ments constitute a total budget. Connecting links are provided by
inter-segment transfers: almost always from the operating to the capi-
tal budget. Usually, these are cash transfers of operating receipts
surpluses to the general reserves of the capital budget for eventual
investment financing. Transfers are rarely made in the opposite direc-
tion.

Not included in the budget estimates are: receipts and outlays for
certain publicly-owned enterprises and hospitals which use double-entry
bookkeeping; "in-and-out" agency-type transactions; and carry-forward
budget and cash balances: regardless of the possible budgetary impact
of prior year carry-forwards falling into abeyance.

Budgeting Principles

Budgets may cover single or multiple years and are prepared on a
cash basis: that is, they contain forecases of cash inflows and out-
flows falling due in each of the budget (calendar) years involved. The
following theoretical principles, not necessarily ordered, underlie
their construction (Wobser, 1970, pp. 71-2):

-11-

Ca) Equilibrium (Haushaltsausgleich) : total estimated receipts
must equal total estimated outlays (Art. 110, Para. 1, GG) ;

(b) Anticipation (Vorherigkeit) : the budget law which establishes
the budget must be passed before the beginning of the financial
year (Art. 100, Para. 2, GG);

(c) Unity (Einheitlichkeit) : all receipts and outlays must be
included in one budget plan with no "special" budgets (Art.
110, Para. 2, GG; §8 HGrG; §11 BHO);

(d) Completeness (Vollstaendigkeit) : the estimates are to in-
clude authorizations to incur credit (Art. 110, Para. 1, GG);
No secret funds (schwarze Fonds) may be built up (§ HGrG; §11
BHO);

(e) Openness (Oef f entlichkeit) : the budget is to be established
by law. All Parliamentary debates about budget matters are
to take place openly;

(f) Total coverage (Gesamtdeckung) : all receipts serve to cover
all outlays, as opposed to the "earmarking" of particular
receipts for particular outlays. Exceptions may only be per-
mitted by law or in the budget plan (§7 HGrG; §8 BHO);

(g) Cash-relatedness (Kassenwirksamkeit) : without exception, the
only cash receipts and outlays to be included in the budget
plan are those which will forseeably fall due within the
budget period and thereby involve cash. This presentation

of monetary movements is designed to promote economic trans-
parency (okonomische Transparenz) and to benefit financial
management by requiring that coverage will only be provided
for estimated actual needs (§8 HGrG; §11 BHO);

(h) Line-item specialization (sachliche Spezialisierung) : receipts
are to be estimated on the basis of sources, while outlays and
indebtedness assumptions are to be separated according to pur-
pose (§12, Para. 4, HGrG; §17 BHO);

(i) Budget clarity (Etatklarheit) : resources which serve one and
the same purpose are not to be scattered in different places
within the budget (§12, Para. 5, HGrG; §17 Para. 4, BHO);

(j) Use of gross amounts (Bruttoprinzip) : offsetting or netting
of receipts and outlays is not permitted. Receipts and out-
lays are to be estimated separately, using gross amounts for
each (§12 HGrG; §15 BHO);

(k) Exactness (Genauigkeit) : exact valuations are to be attempted
in estimating receipts and outlays. To the extent possible,
subsequent actual amounts should agree with estimates;

-12-

(1) Economy (Sparsamkeit) : the concepts of economy and efficiency
should underlie the preparation of the budget and its carrying
out (§6 HGrG; §7 BHO).

In summary, both West Germany and the United States give priority
to cash-flow forecasts and share the same concern for advance publicity
about budget action. The West German total coverage principle (item
(f) above) may, however, be expressly prohibited in certain U.S. govern-
ments because of the flexibility it allows administrators in the budget-
ing and management of available resources.

Both nations may experience difficulties in presenting voluminous
amounts of data as well as meeting timeliness requirements for passing
budgetary legislation. The State of Bavaria's three-volume budget for
calendar years 1981 and 1982, for example, weighs about 18 lbs. Its
budget law covering each of these years (Haushaltsgesetz 1981/1982),
which is the lead document in the first volume, was not passed until
August 6, 1981 and went into effect retroactively as of January 1, 1981,
So, the anticipation principle (item (b) above) was only complied with
for the 1982 budget.

The Accounting System

As a general rule, governmental units in the Federal Republic use
caraeral accounting (Kameralistik) . Double-entry bookkeeping is, how-
ever, required for publicly-owned hospitals and is also used by some
public enterprises engaged in commercial-type activities, such as the
Federal Railways (Bundesbahn) .

Cameral, or chamber (Kammer) , accounting has been traced back to
the Burgundy-French chamber system taken over by Emperor Maximilian I
for his Austrian inheritance about the year 1500 (Johns, 1958, p. 2937).
During a second evolutionary stage, techniques for keeping either public
or commercial cameral accounts were developed by the 18th centrury
cameralists who were both businessmen and public administrators (Walb,
1926, p. 215). After the second world war, cameral accounting was
largely replaced by double-entry systems. West Germany, however, did
not follow this trend and is streamlining the cameral system through
the use of automated data processing.

Two basic sets of records are maintained in cameral accounting: a
cash-book (Zeitbuch: literally, time book), and a ledger (Sachbuch:
literally, object-book). Essentially, each cash transaction is posted
twice: in the cash book in temporal sequence and in the ledger accord-
ing to budget line-item (Haushaltsstelle) . The following description of
the workings of the system is drawn from the provisions of the Vacarian
Local Government Budget Ordinance (KoramVH).

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Accounting Principles

The section on accounting principles (Sec. 12, Subsect. 1, §61) is
very brief. Accounting is to be orderly, reliable, and efficient; and
the accounting records must be complete, accurate, clear, distinct,
verifiable, and posted currently. Although the goals of accounting are
not spelled out, the commentary makes it clear that accounting's main
tasks are: (1) to control budget performance by providing evidence as
to whether the budget arrangements were adequate for carrying out func-
tions, as well as whether outlays were covered by estimated receipts;
(2) to control cash by disclosing whether cash transaction authoriza-
tions issued by the administration were processed by the municipal
cashier's office, as well as which amounts remain on hand; and (3) to
show whether the budget performance resulted in a budget surplus or
deficit.

Until recently, cameral accounting could only be used for ex-post
control purposes because the manual systems usually took a considerable
amount of time to supply information. Given the introduction of auto-
mated data processing, however, the authorities express the hope that
up-to-date accounting information can and will be used for current
decision-making.

Temporal and Line-Item Postings

As mentioned above, receipts and outlays are entered in chronologi-
cal sequence in the cash-book and according to budget item in the ledger
(Sec. 12, Subsect. 1, §64). The subsidiary records supporting cash
entries include: a daily balance book, a bank pass (deposit) book, a
check control book, and a bills control book. If the cashier has cus-
tody of valuables, a Receipt and Delivery of Valuables book is also
maintained. The ledger comprises the following component volumes: an
administrative budget book, a capital budget book, a book for advances,
and a book for trust funds. The latter two books may be combined and
it is also possible to have a book for the custody of valuables.

The regulations contain a number of provisions for internal control,
including the separation of posting duties so that the two sets of
records may be independently checked against each other. Where possible,
the cash-book is to be posted by the cashier and the ledger by the book-
keeper. The real element of control lies in the fact that receipts and
outlays cannot be made without prior administrative authorizations.
These authorizations are to be provided to the cashier and the bookkeeper
independently, assuming a manual system, and entered in the accounting
records. This process is provided for in the typical arrangement of a
ledger accounting page illustrated below (v. Wysocki, 1965, p. 22).

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Budget
Account

Authorized Amounts
(Anordnungssoll)

Carried Out

Pending

Balance from
Prior Periods

Current
Authorization

Actual (1st)

Balance (Rest)

To illustrate the bookkeeping procedures, assume that an authoriza-
tion is issued to make a certain payment of 400 DM. This would be
entered in the ledger in the "Current Authorization" column of the
appropriate budget account. A payment by the cashier of 100 DM against
this authorization would be recorded in the cash-book and in the "Actual"
(1st) column of the ledger account, leaving an open balance of 300 DM.
This balance represents a legally-due but unliquidated commitment. If
it is still pending at the end of the fiscal year, it is carried forward
as a "balance from prior periods" and is not included again in the next
year's budget estimates because it is covered by the prior year's budget,

The identity of the budget account determines whether the amount
entered as "Actual" is an inflow or an outflow of cash. Thus there is
no need for a cash account in the ledger as it would only duplicate the
information in the cash-book. Both the cash-book and the ledger have
posting references which give the location of the reciprocal entry in
the other set of records. Proof that the cash-book and the ledger are
in balance with respect to cash movements is provided in the format of
the annual cash statement, described later.

The main focus of ledger accounting is on the authorized (Soil)
amounts which may, or may not, be equal to the original budget estimates
(Ansaetze des Haushaltplanes) . How such differences are accounted for
will be described later in connection with the budget performance com-
parison, contained in the annual report, which is based on the ledger.
As is evident, carrying forward a commitment for either a receivable
or a payable is similar to accrual accounting. So, the Soil recording
fills a dual function of controlling for authorized cash transactions
and providing for the recording of incomplete economic events. Such
"accruals" are only recorded when particular events can be legally
recognized, a situation which is congruent with the ground rules under
which public administration operates. In the commercial world, accrual
accounting is tied to income determination. So, for example, a commit-
ment to pay interest would be recognized at the time(s) interest accrued
on the debt rather than when the debt agreement called for the interest
payment itself to fall due. As will shortly be described, the legal-
accrual feature of cameral accounting can be viewed as a disadvantage
when certain governmental operations, supported by user-fees, determine
their costs under the reformed budget law.

The flexibility of cameral accounting is, however, evident in the
technology for recording intragovernmental transactions. If, for ex-
ample, one governmental unit provides services for another unit of the

-15-

sarae government without an actual reimbursement taking place, the value
of the services is entered in the Soil receipts of the supplier and the
Soil outlays of the client, thus affecting a budget transfer between
the two. Because, however, a Soil entry must eventually be matched
with an Actual (1st) posting, a fictitious Actual posting is also made
for each unit of government to match the respective Soil postings:

Supplier: Receipts: Soil and 1st DM

Client: Outlays: Soil and 1st DM

The cash inflows and outflows will both be overstated by the amount of
the fictitious cash entry, but the cash balance itself will be unchanged.
This same approach is also used to record other types of non-cash trans-
actions, such as accounting for depreciation, particularly by commecial-
type entities using caraeral accounting. Some problems related to the
use of cameral accounting for cost accounting purposes are highlighted
in the following discussion of cost-accountable facilities.

Cost-Accountable Facilities

Traditionally, German governments have provided a wide range of
services to their constituents, or to the public at large, and with or
without user charges. The volume and diversity of publicly-owned facil-
ities now operating in the Federal Republic is evident from the listing
in Exhibit 4.

EXHIBIT 4 GOES ABOUT HERE

In the United States, some of these facilities, such as funeral
homes and pawn shops for example, would usually be privately owned and
operated. Others, notably schools and recreational facilities, would
typically be funded and operated through special taxing authorities
called school districts and park districts.

Those West German public facilities which customarily and predomi-
nantly are financed through reimbursements (Entgelte) and are designated
as cost-accountable facilities (kostenrechnende Einrichtungen) . They
are now required under the budget reforms to include in their operating
budgets two types of imputed (notional) costs: "reasonable" (angeraessene)
straight-line depreciation and "reasonable" interest on invested capital.
The interest rate used in the calculation is to be an average of the
market rate of interest for comparable financing and the rate which can
be earned on monetary investments. Any capital obtained from contribu-
tions, allocations, or grants is to be excluded from the invested capi-
tal base (//12 KomraHV). Budget estimates for these two types of imputed

harges are to be offset by including identical amounts in the estimated
receipts.

-16-

Ind iv idual
Operating
Budget
Classification

Public Fac i3 itics

Schools

Cultural activities: museums, orchestras,
theaters

All social and youth welfare facilities
and veterans' welfare; senior citizen hones;
lodgings; public canteens; infants' creches;
kindergartens; shelters; orphanages; youth
homes and hostels, etc.

Hospitals; care stations; dental clinics;
medical advisory stations; other health care
facilities; sports fields and facilities;
stadiums; baths; parks, gardens, and other
recreational facilities

Street lighting; street cleaning; parking
facilities •*

Sewers and garbage removal; markets; slaughter
and stock yards; funeral homes; pawn shops,
etc .

Public utilities and transportation; gas, water,
and electricity works; street and underground
railways; airports; harbors; freight; dairies;
salt-works; spas and baths, etc.

SOURCE: #12 KommliV, Erl. 2.1

EXHIBIT 7: Publicly-Operated Facilities and Related Individual Operating
Budget Classifications

-17-

This new requirement represents one of several budget reforms
designed to introduce ideas from the field of business economics into
public financial management. The rationale put forward for including
such charges in the operative budgets comes from private sector cost
accounting practice. It is intended to provide the local council
(Geraeinderat) with a more complete understanding of the extent to which
user fees cover the total costs of these facilities. From a systems
design perspective, however, this attempt to bring financial and manage-
ment accounting together suffers from several defects. First, the com-
bined system is not centralized and integrated as it is in the private
sector. For purposes of cost control and efficiency, the system should
be centralized to provide for examination of cost flows from the types
of costs (Kostenarten) to the cost centers (Kostenstellen) and out
through the cost carriers (Kostentraeger) .° Instead, the system con-
centrates on the cost carriers: that is, the individual budgets (Goetz,
1978, p. 221). The question just raised about the lack of integration
has to do with the way the imputed costs are neutralized through off-
setting credits to estimated receipts. This method artificially in-
flates the financial accounting figures (Goetz, 1978, p. 229). This
problem is avoided in the West German private sector through the use of
interlocking accounts which allow for costs to be externally reported
on one basis and internally calculated on another. A further problem
of integration has to do with the use of cameral accounting. Cost
determination requires full accrual, that is, recognition of costs in
the accounting periods in which they were incurred. Cameral accounting,
however, records costs in the periods in which they legally fall due.
Dates for cost incurrence and legal maturity, as illustrated above, need
not necessarily coincide.

A final problem has to do with the budget principle of full-coverage
(Goetz, 1978, p. 240). With better understanding of total economic
costs, local councils can make more informed decisions about fee-setting,
However, the decision process will be politically guided. Because there
is no earmarking of particular receipts for particular outlays, external
accountability for fee-setting decisions is virtually eliminated. This
circumstance considerably reduces incentives for efficient and effective
cost management in these cost-accountable facilities.

The Annual Report

The objective of the annual report (Jahresrechnung) , as expressed
in Art. 102 GO, is to show the results of the budget management, includ-
ing the balances and changes in the assets (Verraogen) and liabilities
(Verbindlichkeiten) . The report should make clear how the budget plan
was carried out in the fiscal year, which receipts and outlays were
authorized and achieved, whether the budget estimates were sufficient or
whether additional resources had to be found to carry out the functions,

whether the administration kept within the given outlays authoriza-
tions.

-18-

The report consists of two basic components: a cash statement and
a budget report, as well as five enclosures.

The Cash Statement

The cash statement is divided into two main parts, one detailing
transactions affecting the operating and capital budgets, the other
summarizing the changes in the trust funds and advances balances during
the period (#78 KommHV) .

The main purpose of the cash statement is to report on cash-flow
management during the year, and its format is illustrated in Exhibit 5.

EXHIBIT 5 GOES ABOUT HERE

In Part I, the first three columns detail amounts which the cash-desk
(Kasse) was authorized to receive or pay out. A comparison is then
made between total authorizations in column 4, and actual cash movements
in column 5. The differences between these two sets of figures, shown
in column 6, are the amounts of authorized but unrealized cash receipts
and cash outlays which can be carried forward to the next budget year.
In other words, they are legally matured receivables and payables.

Interpreting the cash statement could be challenging because of
possible ambiguities in its structure and terminology. First, there is
no evident identification of the cash on hand at the end of the period.
According to the regulation (#78 KommHV) , the difference between the
total actual receipts and total actual outlays, in column 5, is to be
identified as the "cash on hand (Kassenbestand) according to the books."
However, in column 5 only the net change in the cash balance is detailed,
In Exhibit 5, for example, the final amount in column 5 shows a net cash
decrease for the year of 110. To calculate the actual cash position at
the end of the year one would need to know the beginning cash balance
but there is no line-item for this information. Further, the wording
of the columnar headings could prove confusing and explanations are
warranted.

Column 1: Final Cash Balances from Prior Year

This title does not refer to a net cash balance on hand. The
receipts and outlays carried forward represent the differences between
authorized amounts which fell due in the prior year and lesser amounts
which were actually received or paid out.

-19-

CdSh Statement for the Budget Year 19

Columns

Local Govt.
Budget

Final Cash

Balances

from

Prior

Year

Authorizations
against Budget
Balances from
Prior Year

Authorizations
of Current
Budget Year

Total
(Cols. 1
+ 2 + 3)

Actual

Cash
Balances
for Folic
ing Year

Operating
budget

Receipts

Outlays

100
80

110

600
590

7 CO
780

630
750

73
30

Proof and
cash balance

Capital
Budget

Receipts

Outlays

+ 20

80

55

- 110

+ 10

- 8(

- 120

+ 40

110
120

400
375

590
550

550
540

40

10

Proof and
cash balance

Total

Receipts

Outlays

+ 25

180
135

- 10

no

230

+ 25

1000
965

+ 40

1290

1330

+ 10

1180

1290

+ 30

no

40

Proof and

cash balance + 45

- 120

+ 35

- 110

+ 70

Columns

II. Trust and
Advances
Book

Balances
Brought Forward
from Prior Year

Paid In

Paid Out

Balances Carri
Forward to Fol
lowing Year

Trust monies
Advances

+ 200
- 60

+ 300
+ 200

450
130

+ 50
- 40

Proof and
cash balance

+ 140

+ 500

+ 10

SOURCE: #78 KoramHV

Exhi bit 5

Format of the Annual Cash Statement

-20-

Column 2: Authorizations Against Budget Balances from Prior Year

Amounts in this column were provided for in prior budgets but did
not mature until the current year. Consequently, the cash-desk was not
previously authorized to accept receipts or make outlays against them.
Thus they are not duplicated in the first column.

Column 3: Estimate Authorizations of Current Budget Year

The third column lists amounts authorized for receipts and outlays
falling due in the current year and provided for in the current year's
budget.

Column 4: Total

This subtotal of the first three columns contains a mixture of
items which the cash desk was authorized to receive or pay out in the
current year: amounts unliquidated at the beginning of the year which
fell due in the prior year, and amounts falling due in the current
year which were provided for either in the current year's budget or in
budgets of prior years which could still be utilized in the current
year.

Column 5: Actual

The total cash movements, in and out, during the current year are
listed in column 5.

Column 6: Cash Balances for Following Year

Any differences between total amounts authorized to be received or
expended, in column 4, and actual cash transactions, in column 5, are
carried over to column 6. In the cash statement for the following
year, these amounts will appear in the first column as final cash
balances from the prior year.

Transactions recorded in the trust funds and advances book, or
books, fall outside of budget accounting and are therefore presented in
a separate section II of the cash statement. The terra "trust funds" is
similar to the concept of agency funds in U.S. governmental accounting,
that is, funds which are accepted on behalf of some other party and
subsequently forwarded on. Any cash coverages between actual and
theoretically correct amounts are also treated as trust funds. Any
cash shortages, on the other hand, would be treated as an "advance,"
although salary advances usually constitute the main type of transac-
tion involved. The trust funds and advances book must keep accounts
for each individual item and, because of the "in-and-out" nature of
activities, each account has both a receipt and an expenditure side:
an unusual feature in cameral accounting.

-21-

The Budget Report

The budget report (Haushaltsrechnung) , in its key role of account-
ing for the financial performance of the budget, constitutes the essen-
tial element of the annual report. It is composed of several parts:
detailed statements of receipts and outlays of the operating and capital
budgets separately, drawn from data in the ledger, and a calculation
of the results of budget financial management which is based on these
statements.

Articulation between the cash and budget statements is provided for
by the requirement that they contain the following information in
common: the authorized (Soil) receipts and outlays, the actual (1st)
receipts and outlays, and the cash receipts and outlays balances. In
the operating and capital budget statements, illustrated in Exhibits 6
and 7, these amounts are detailed for each of the individual line-items
in the budget, following the order of the budget plan. Also, cash
receipts and outlays balances are shown gross, together with amounts
which should be deducted because they are in abeyance. The cash state-
ment, on the other hand, only shows the resulting net figures. This
same treatment is also accorded the budget receipts and outlays
balances: gross in one statement and net in the other.

EXHIBITS 6 AND 7 GO ABOUT HERE

The structure of the budget report focuses on receipts and outlays
authorized by the budget managers, highlighting an essential difference
between U.S. and German concepts of budget variance accounting. In the
U.S., budget variances would be calculated as the differences between
budget estimates and actuals. The "actual" amounts would be based on
cash accounting or accrued amounts where accruals are appropriate under
generally accepted accounting principles (GAAP). This leads to prob-
lems where cash budgeting and/or accounting is required by law. Also,
amounts accruable under GAAP may be difficult to determine or not com-
parable with cash-based budgets. In West Germany, clear distinctions
are drawn between cash transactions and legal accruals by disclosing
two sets of variances: (1) cash-flow differences between authoriza-
tions and actual cash movements, detailed in both the cash statement
and the budget report; and (2) differences between amounts budgeted
(Ansaetze) and amounts authorized (Soil), detailed in the budget report
and forming the basis for calculating the budget results. To contrast
these two approaches, assume that a governmental entity is inaugurated
with a December 31 fiscal year-end. In Year 1, it makes a property tax
levy of 100 monetary units, of which 70 percent is legally due by year-
end, 10 percent by February 28 of Year 2, and 20 percent subsequent in
Year 2.

■22-

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-24-

In the U.S., estimated receipts from property taxes for Year 1
would be budgeted for as 70 on a cash basis, 80 on an "available"
accrual basis in accordance with NCGA Interpretation no. 3, or 100 if
fully accrued. As of December 31, Year 1, the following would be
recorded, in accordance with NCGA Interpretation no. 3, assuming that
65 had been collected and no bad debt problems were anticipated.

Asset: Actual cash receipts 65

Assets: Accrued property taxes receivable:

Current 15

Deferred 20

Revenue: Revenue from property taxes 80

Liability: Deferred revenue from property

taxes (greater than 60 days from

end of current period) 20

Only if the revenues were budgeted for on an "available" accrual basis
would there be no reporting problems with respect to budget variances.
However, it would not be clear, in the absence of a cash analysis, that
only 70 of the revenue had been realized in cash. Cash receipts could
be determined, however, by deducting the amount of current property
taxes receivable (15) shown on the balance sheet, from the property tax
revenue amount (80).

In West Germany, the operating budget estimate would be recorded as
70: the amount legally due, and the transactions would be reported in
the cash statement and the budget report as follows:

Actual cash receipts 65

Cash receipts balances to be carried

over to following year 5

Authorized receipts 70

The remaining 30 would be budgeted for in Year 2 because budget receipts
balances cannot be accumulated in the operating budget. This is why
there is no such line-item in the format of the operating budget receipts
shown in Exhibit 6 as well as the fact that this item was left blank
in the cash statement illustrated in Exhibit 5. The building of budget
receipts balances is only permitted in the capital budget and is further
restricted to investment activities which are to be financed, in part
at least, through allocations, grants, and similar contributions (#1,
section 1, number 4 KoramHV) , as long as receipts are assured in the
following year. However, under certain conditions, budget receipt
balances can also be accumulated for investment outlays to be financed
by credits: up to the extent of the expected credit receipts (#79, W3 ,
KoramHV ) .

-25-

Different ground rules apply to the accumulation of budget outlays
balances. To determine what amounts of unused budget estimates may be
carried forward to the next year it is necessary only to determine what
outlay amounts may still be needed and to make a factual identification
of available under-budget outlays from information in the ledger. These
favorable budget variances would appear in columns 11 of the operating
budget outlays statement and 12 of the capital budget outlays statement.
The only deductions to be made from the amounts in these columns, for
carry-forward purposes, would either adjust for over- or extra-budget
outlays already allowed, or involve the relatively rare occasions when
certain outlays are linked with, or earmarked for, certain receipts in
accordance with #17 KommHV. Such amounts would be deducted in the
penultimate columns 12 or 13 of the operating or capital budget outlays
statements respectively. The final columns of each statement disclose
what amounts, if any, are to be carried forward.

With respect to the capital budget, ability to carry forward unused
budget outlay estimates carried the force of law (#19, section 2 KommHV),
Usually, capital budget estimates remain available for their intended
purpose until the maturity date of the last payment. For building
activities and procurement, however, estimates are available for no
longer than two years after the close of the budget year in which the
essential components of the object or building have been put into ser-
vice.

The situation is much more stringent with respect to the operating
budget (#19, section 1 KommHV). A declaration that outlays will be
carried forward is assumed to occur rarely and only when a strong case
can be made for thereby promoting economical management of resources.
Further, the availability of the estimates is limited to the end of the
following year. The declaration is made by making a special notation
(Vermerk), such as: "the resources can be carried forward," in the
budget plan.

Calculation of Results

Determination of the results of budget management is made in the
summary format illustrated in Exhibit 8. Separate analyses are pro-
vided for

EXHIBIT 8 GOES ABOUT HERE

the operating and capital budgets, and the addition of a total column
raphasizes the essential unity of the budget package. The objective is
show the extent to which an equilibrium exists between authorized
receipts and authorized outlays. Any surplus of authorized receipts
iver authorized outlays must be cleared by making a cash transfer to
rieral reserves which represents an allowable closing-entry after the

-26-

Authorlzed Receipts

Add New Budget Receipts Balances

Deduct Old Budget Receipts Balances
in Abeyance

Deduct Old Cash Receipts Balances
in Abeyance

Total Adjusted Authorized Receipts

Authorized Outlays

••-- N'eu Budget Outlays Balances

Deduce Old Budget Outlays Balances
in Abeyance

Deduct Old Cash Outlays Balances

Total Adjusted Authorized Outlays

Ossicle Difference: Adjusted
Authorized Receipts less Adjusted
authorized Outlays (Deficit Amount)

Operat ing

Budget
DM

Capital

Col u:nn

Col umn

Column 10

Column M

'olumn ?, IColurrn

To be included here: Transfer to Capital Budget
-J »o be .-ncluded here: Surplus in accordance with

#79 Para. 3 CI. 2, KomnHV

SOURCE: Enclosure 17, 079 KomraHV

Co ] UW Q 1 Column

DM
DM

'--: T 2 column numbers refer to exhibits 6 wi 7

respectively

: *» '- 8 • The Sudget Report

rormat of the Calculation of Results

-27-

annual closing date (#79, W6 , KommHV). A deficit, on the other hand,
has to be covered by a future budget estimate without delay. The longest
time interval permitted (#23 KommHV) is the second following year, which
would appear to be the earliest practicable time, or the third follow-
ing year if two-year budgets are prepared. Unlike some other Laender ,
Bavaria only applies this requirement if the total budget is in a defi-
cit position, as opposed to considering the two parts of the budget
separately. There are, however, some differences in measuring perfor-
mance between the two budget components.

Determining Operating Budget Results

For the operating budget, the total of the adjusted authorized
receipts is determined by taking the final authorized receipts of the
current budget year, reduced by any interim cancellations. From this
amount are deducted any prior year cash receipts balances now in abey-
ance or prior year cash receipts deficits.

Four steps are needed to calculate the total adjusted authorized
outlays :

(a) Start with the final authorized outlays of the current budget
year;

(b) Add: new budget outlays balances, that is, original budget
estimates against which no authorizations have been made in
the current year and which can be carried forward to the next
year;

(c) Deduct: budget outlays balances carried forward from prior
years which have fallen into abeyance;

(d) Deduct: cash outlays balances carried forward from prior
years and fallen into abeyance.

Determining Capital Budget Results

To determine the total adjusted authorized receipts for the capital
budget, the same method is used as for the operating budget but two
additional steps are required. Estimated receipts which had no authori-
zations issued against them, and which are to be carried forward to
the next budget year, are added back to the amounts authorized for the
current year. Then are deducted any prior year budget receipts balances
now in abeyance. Both of these items involve budget receipts balances
which, it will be recalled, the operating budget is not permitted to
accumulate. Total adjusted authorized outlays are calculated in the
same way as for the operating budget.

-28-

The Enclosures to the Annual Report

The regulations (Sec. 12, Subsect. 1, §81) provide for the follow-
ing enclosures to the annual report:

- a summary of property;

- a summary of liabilities and reserves;

- a profile of the accounts and a summary of the groupings;

- an identification of the open advances and trust funds at

year end; and

- a report on the accounts.

Summary of Property

The summary statement of property has to show the beginning and
ending balances, plus additions and decreases during the year, of cer-
tain assets detailed in §76 KommHV. These mainly consist of invested
funds (Geldanlagen) and fixed assets (Anlagevermoegen) .

Invested funds include receivables from investments and loans, as
well as securities and shares. Investments and loans are to be valued
at current status, while historical cost is used for securities and

shares.

Land, land-equivalent interests, and movable items which serve
various cost-accounting functions must be identified for each of the
different functions, in a separate section of the statement. Similar
types of items, or those which serve the same purpose, can be grouped
together rather than identified separately. Supporting documentation
must be maintained to show the acquisition price, or production cost if
applicable, as well as depreciation. If there is no material change in
either the quantity of items or their value over a long period of time,
a fixed value can be assigned to them but this must be reviewed at
appropriate time intervals.

The same type of accounting and reporting can be applied to fixed
assets not involved in cost-determination functions but this is not
mandatory and no depreciation or amortization is calculated.

Summary of Liabilities and Reserves

The summary of reserves details the beginning and ending balances
of the general reserves and all special reserves, as well as increases
and decreases during the period. For information purposes, the average
outlays of the operating budget is calculated for the prior three years
in order to evaluate the minimum amount of operating resources needed
by the cash desk.

-29-

Th e summary statement of liabilities also shows beginning and ending
balances and intra-period transactions, the latter not being required
for cash credits, however. The credits have to be mainly identified by
functional area and, within area, by creditor. Liabilities have to be
broken down by the types of transactions similar to borrowings. Infor-
mation is also provided about internal loans, as well as the debts of
those owned enterprises and hospitals if they use double-entry account-
ing.

The enclosures are completed by a new requirement: a profile of the
accounts and a groupings summary which serve to interpret the accounting
information in the same way as the report accompanying the budget.

Financial Review and Audit

Internal and external surveillance of financial activities forms the
last stage of the financial control cycle. Some formal internal control
organs exist in West German government, particularly in such large en-
terprises as the Federal Railways and the Federal Post Office. Other-
wise, however, internal review consists mainly of localized activities,
such as those related to spending control for example, which are focused
on the information needs of the external auditor rather than on those of
management. In similar vein, another type of institutional arrangement
provides for preliminary audit offices (Vorpruefungsstellen) in the
federal government and some of the Laender. Their main function is to
prepare for the external audit in order to ease the auditor's workload,
and they are, in fact, subject to the external auditor's instructions.

External Audit

External audits fall into two main categories: annual audits at all
three levels of government, for the benefit of the immediate authorities
(oertlich), and oversight audits carried out every several years, at the
local level of government, for the benefit of the supervisory authori-
ties (ueberoertlich) . The annual audits are generally performed by the
government auditors, although some local authorities may engage certi-
fied public accountants (Wirtschaf tspruef er) . The oversight audits are
generally performed by auditors from the offices of the Land Council.
In Bavaria, the periodic audits may also be performed by the Bavarian
Local Government Audit Federation (Bayerischer Kommunaler
Pruefungsverband) .

Annual Audits

Annual audits are of three types: an audit of the accounts
chnungspruef ung) , an audit of the operations of owned enterprises
(Abschlussprefung) , and a cash audit.

-30-

The main objective of the audit of accounts is to provide the
authorities with information which will allow them to decide whether
or not to discharge the chief administrative officials from respon-
sibility. In congruent fashion, the auditors focus on the completeness
(Vollstaendigkeit) and orderliness (Ordnungsmaessigkeit) of the records
in all formal, legal, and factual respects (H2 KommPrV, WI) from the
standpoint of adherence to business management principles.

Given the purpose of the audit, there is an understandable emphasis
in the regulations on speeding the audit review. The accounts are to
be submitted for audit within three months after the close of the fiscal
year (119 section 2 GG) , and the discharge decision is to be handed down
no later than by the end of that year (119 section 3, subsection 1 GG).
This is a very restricted time frame for all concerned and leads to com-
pliance problems. For example, the State of Bavaria's 1978 audited
accounts were not discharged by the State Parliament and Senate until
March 26, 1981: almost 15 months behind schedule. Longer delay was
experienced in the next fiscal period as the audit report on the 1979
accounts, theoretically due by the end of March 1980, and was not issued
until November 1981.

At the federal level, annual audits are performed by the Federal
Audit Office (Bundesrechnungshof ) (BRH). This is a federal agency,
independent of both the legislative and executive branches, which is
empowered by the Constitution to audit not only the federal government's
financial operations but also the efficiency, economy, and orderliness
of budget performance and management. Its jurisdiction also includes
the Federal Railways and Post Office, public enterprises, and federal
entities with separate legal identity under public law. The BRH may
also audit non-federal entities if they carry out part of the planned
budget, are entitled to accept revenues or make payments on behalf of
the federal government, or administer federal resources or property.
The agency's president, and other top-level executives, enjoy judicial
independence. This precludes their removal from office and exempts
them from certain civil service regulations and disciplinary measures.
The agency also benefits from administrative independence which leaves
it free to choose its own strategies and methods for conducting audits,
within the scope of its mission (Albrand, 1977, pp. 12-13).

The Laender are served by Land Audit Offices (Landesrechnungshoefe)
(LRH) whose organization and functions are basically similar to those
of the BRH. In the event that both federal and Land authorities are
responsible for the same audit engagement, the work can be carried out
jointly in order to prevent duplication of effort.

In individual Laender, local authorities may be audited by the LRHs ,
but in some cases the local authorities have their own audit offices or
may engage certified public accountants. In the interests of having a
timely audit, the regulations (114 KommPrV, Wl) recommend that the audit
contract be awarded six months before the end of the fiscal year so that
the auditor can carry out preliminary audit work in advance of the annual

-31-

closing. For those local authorities without audit offices, the annual
audit is considered adequate if, in addition to verifying bookkeeping
entries, the compliance with the budget statute and plan; timeliness of
receipts; the orderly nature of budget-related activities which involve
delays, cancellations, or exemptions; correct carrying out of orders
from the authorities; the necessity and appropriateness of expenditures,
considering local circumstances and the physical control of all recorded
fixed assets (12 KommPr W5).

If a local authority owns enterprises (Eigenbetrieben) , such as
utilities or transportation services, without separate legal existence,
their net operating results will be included in the authority's annual
report. As a rule, the enterprise audit constitutes a separate engage-
ment, possibly carried out by a different auditing body. Once again,
speeding the overall audit is the motivating factor because determina-
tions have to be made concerning the application of any operating prof-
its, or coverage of any operating losses, before the main audit can be
completed. If unqualified opinion is used for the enterprise audit:

"The bookkeeping, the year-end closing, and the
annual report are, according to ray dutifully-
performed audit, in compliance with legal regula-
tions and operating laws."

(17 KommPrV, W4(2)). This wording is very similar to the auditor's
certificate for private enterprises.

A third type of audit engagement is a cash audit. These are con-
ducted at least annually, on an unannounced basis, at each cashier's
office (Kasse) and its paying offices, and cover both cash and the
custody of other valuables. A cash audit is also performed whenever
there is a change of chief cashier. A report on a cash audit has to
include explanations of any irregularities, offered by the personnel.
It also encloses a record of the cash balance, signed by the chief
cashier or director of the paying office.

Audit Reports

An audit report has to be issued for each type of audit and must
contain at least the following information: the auditor's name; the
length of the audit; designation of the audit areas covered; bases for
the audit; the nature and extent of audit activities; important audit
findings; disposition of the audit findings contained in earlier audit
reports; and a summary of the results of the audit (H7 KommPrV (1)).

Identification of the areas included in the audit, as well as the
type and extent of audit activities, is intended to help avoid duplica-
tion of effort: particularly with respect to later oversight audits,
or for enterprise audits whose findings are incorporated into accounts
audits. With respect to audits of accounts, the auditor is required to

•32-

corament on the financial condition, as well as the orderliness of admin-
istrative activities, in the summary of the results of the audit. No
set format, however, is provided for the auditor's opinion. In the
case of enterprise audits, on the other hand, the auditor has not only
to give a formal opinion, as mentioned earlier, but must also comment
on the economic conditions and orderliness of the business operations.

Much the same procedure is followed at the federal, Land, and local
level with respect to the audit of the annual accounts and submission
to the appropriate legislative body. Federal and Land audit reports
are submitted to the respective Parliaments, and local authority reports
to the Council (Rat). The federal Constitution also provides that the
audit reports be available publicly for a period of seven days (H5,
Section 1, subsection 1 GG) .

The federal procedures can serve to illustrate the process. The
Federal Audit Office (BRH) informs the client agency of the audit
results, as well as the federal minister of finance if audit exceptions
are financially significant. The audit results are formally submitted,
by the BRH, directly to the Lower House, the Federal Council, and the
administration in a report entitled "Commentaries by the Federal Audit
Office on the Federal Budget Report." The Lower House may then ask for
clarification, or undertake its own inquiries through investigative
committees. By the time the Lower House eventually gives its approval,
that is: it discharges the administration, some considerable time may
have elapsed. Thus the parliamentary action has neither constitutional
consequence nor much political significance, given the changes which
may have occurred in the government in the interim. The real control
aspect of the audit function lies in its ability to influence ongoing
activity through its concurrent auditing procedures and advisory ser-
vices (Streit etal, 1980, p. 282).

Oversight Audits

Periodic audits, for the benefit of the supervisory authorities,
are usually carried out every four years. This term is shortened to
three years, however, for those local authorities without audit offices
As mentioned earlier, in Bavaria these audits may be performed either
by the Bavarian Local Government Audit Federation (BKP) or by state
auditors from the Land Council offices.

The BKP was formed in 1919, as a public law corporation, under the
name: Bavarian Federation of Public Treasuries (Bayerische Verband
oef fentlicher Kassen) , and operates under the supervision of the State
Ministry of the Interior. Over the years, the corporation's name has
been amended several times, consonant with the changing nature of its
activities. Previously, its main function was to check on the manage-
ment of its constituent bodies through its annual audits of their cash,
annual accounts, and possibly owned enterprises. Now, however, the
BKP's main task has been restricted to the same type of audits but on
a periodic oversight basis.

-33-

Members of the BKP include: (1) local central organizations
(Spitzenverbaende) ; (2) municipalities (Kreisfreie Staedte) and the
large county seats (Kreisstaedte) ; (3) local authorities and community
administrations, usually those with more than 5,000 inhabitants, as deter-
mined by the State Ministry of the Interior; (4) counties (Landkreise) ;
(5) districts (Bezirke); (6) joint authorities (Zweckverbaende) and
similar local alliances with legal personality under public law, as
determined by the State Ministry of the Interior; and (7) local charit-
able institutions administered by those BKP members in categories (2)
through (5) above. (Art. 3 PrVbG) . The BKP has several sources of
financing. It receives an annual allocation from the State budget,
fees from its members, and charges for its services. Under unusual
circumstances, it can also levy allocations of certain costs. In com-
mon with their federal colleagues, the BKP's chief executive officer
and his deputy have life-time tenure.

The Land Council state audit offices also enjoy independent status.
However, their top and middle level management personnel are state
(Land) officials and the terms of their employment follow usual civil
service procedures. Apart from possessing the requisite legal and eco-
nomic training, these officials have to have a good command of cameral
accounting and be familiar with the fundamentals of double-entry book-
keeping. Consonant with the federal independency requirements, execu-
tive auditors may not serve as honorary mayors (Buergermeister) , nor as
presidents of organs representing auditable entities under their juris-
diction.

Effectiveness of the Budget Reforms

The attempt here has been to bear on meaningful inter-system com-
parisons rather than attempt an overall evaluation of the effectiveness
of the West German system vis-a-vis certain proposals which have been
put forward in the United States. This is mainly due, not only to scope
restrictions, but also to the problems associated with identifying the
important causes of cultural differences.

Clearly, the budget reforms have led to significant gains in terras
of comparability of accounting and reporting data throughout West Germany,
However, one can question whether the federal government went far enough
to achieve the controls over public financial management which it sought
to impose or strengthen. Of particular relevance here are the two con-
trol problems already discussed: the financial elbow-room permitted by
the total-coverage budgeting principle, and the inadequacies of cameral
accounting for integrated cost control. A more important control problem
relates to the difficulty of achieving timely audits: a problem which
may be mitigated as the accounting and reporting systems become more
fully automated.

-34-

West Germany's experience with retooling its accounting-information
systems for government should be helpful in stimulating ideas and set-
ting priorities for those concerned with similar problems in other
countries. With respect to research needs in the United States, there
are, of course, important differences between the political, economic,
and social structures of these two nations. However, their local gov-
ernments face the common problems of achieving operating efficiency
under adverse financial conditions, while attempting at the same time
to demonstrate sound fiscal management and retain a measure of local
financial autonomy.

-35-

ABBREVIATIONS

BHO Bundeshaushaltsordnung

GG Grundgesetz

HGrG Haushaltsgrundsatzegesetz

KommHV Kommunal Haushaltsverordnung

KommPrV Kommunalwirtschaf tliche
Pruefungsverordnung

PrVbG Gesetz ueber den Bayer.

Kommunalen Pruefungsverband

StWG Gesetz zur Forderung der

Stabilitat und des Wachstums
der Wirtschaft

Federal Budget Law

Basic Law (Constitution)

Law on Budget Principles

Local Government Budget Ordinance

Local Government Audut Ordinance

Bavarian Local Government
Audit Federation Law

Law for the Promotion of
Economic Stability and Growth

FOOTNOTES

Research assistance for this study was provided by the German Aca-
demic Research Exchange (DAAD) , for which the author expresses her
appreciation. (Debts of gratitude are owed to Professor Karl Oettle,
University of Munich, who made available the research facilities of
his institute, as well as to his staff: notably Dr. Dieter Witt.
The author is also indebted to Professor Hanns-Martin Schoenfeld,
University of Illinois, for his help and encouragement, and to
Derek Bailey, University of Birmingham, for his valuable review of
an earlier draft.

For example, the 1980 Holder study.

As, for example, contained in: National Committee on Governmental
Accounting, Governmental Accounting, Auditing, and Financial
Reporting (Chicago, Illinois: Municipal Finance Officers Associa-
tion of the United States and Canada, 1968).

This paragraph is based on: International Institute for Legal and
Administrative Terminology, European Glossary of Legal and Admin-
istrative Terminology, vol. 14, Local Government (London: Sweet
& Maxwell, 1973), p. 23.

This paragraph Is based on Goetz, 1978, pp. 39-41.

Schoenfeld 1974, p. 33 provides a concise description of the inte-
gration of management and financial accounting in West Germany.

-36-

REFERENCES

Albrand, Dieter, July, 1977. "The Federal Audit Office of the Federal
Republic of Germany," International Journal of Government Auditing,

72-14.

Chaput de Saintonge, R. A. A. 1961. Public Administration in Germany.
London: Weidenfeld and Nicolson.

Depiereux, Stefan, 1973. Grundriss des Gemeindehaushaltsrechts.
Recklinghausen: Kommunal-Verlag GmbH.

Goetz, Franz Josef, 1978. Kommunale Jahresrechnung. Munich: Verlag V.
Florentz.

Holder, William W. , 1980. A Study of Selected Concepts for Government
Financial Accounting and Reporting. Chicago, Illinois: National
Council on Governmental Accounting.

International Institute for Legal and Administrative Terminology, 1973.
European Glossary of Legal and Administrative Terminology, vol. 14
Local Government. London: Sweet & Maxwell. (Hereafter: Inter-
national Institute.)

International Institute for Legal and Administrative Terminology, 1978.
European Glossary of Legal and Administrative Terminology, vol. 28
Haushalt und Rechnungsprufung. Berlin: Langenscheidt . (Hereafter:
International Institute.)

Johns, Rudolf, 1958. "Kameralistik" in Handwoerterbuch der

Betriebswirtschaf t . Edgar Castan and Hans-Eduard Littmann, eds.
Stuttgart: C. E. Poeschel Verlag, pp. 2936-2953.

Johnson, Nevil, 1973. Government in the Federal Republic of Germany.
Oxford: Pergamon Press.

Sandvoss, Ernst-Otto and Zweig, Gerhard, 1981. Leitfaden durch das
Kommunalkreditgeschaef t . Stuttgart: Deutscher Sparkassenverlag.

Schoenfeld, Hanns-Martin W. , 1974. Cost Terminology and Cost Theory:
A Study of Its Development and Present State in Central Europe.
Urbana, Illinois: Center for International Education and Research
in Accounting, University of Illinois.

Stret, Manfred E. _et__aj^. , 1980. Die Wirtschaft Heute. Mannheim:
Bibliographisches Institut.

Vatter, William J., 1947. The Fund Theory of Accounting and Its Impli-
cations for Financial Reports. Chicago, Illinois: The University
of Chicago Press.

■37-

v. Wysocki, Klaus, 1965. Kamerallstisches Rechnungswesen. Stuttgart
C. E. Poeschel Verlag.

Walb, Ernst, 1926. Die Erfolgsrechnung Privater und Oef fentlicher
Betriebe. Berlin: Industrieverlag Spaeth & Linde.

Wobser, Erhard, 1969. Das Haushaltsrecht in Frage und Antwort.
Heidelberg: Industrie-Verlag Carlheinz Gehlsen GmbH, vorra
Spaeth & Linde.

D/203

-38-

Appendix

BUDGET GROUPINGS SUMMARY

(#10 HGrG; #13 BHO)

Grouping
Number Receipts

0 Taxes, General Grants

000 Land Tax A

001 Land Tax B

002 Land Tax Support

003 Local Business Tax on Capital and Profits

004 Payroll Tax

01 Local Government Share of Income Tax

02,03 Other Taxes and Tax-Like Receipts

04 Property Tax Support Grants from:

041 the State

042 Local Governments

05 Grants for Contingencies from:

051 the State

052 Local Governments

06 Other General Grants from:

060 the Federal Government

061 the State

062 Local Governments

1 Receipts from Administration and Services

10,11,12 Fees and Similar Charges, Restricted Taxes

13,14,15 Receipts from Sales, Rents, Leases, Other

Administrative and Service Receipts

16 Reimbursements of Administrative and Service

Outlays from:

160 the Federal Government

161 the State

162 Local Governments

163 Joint Authorities

164 Other Public Sectors

165 Public Enterprises

166 Private Enterprises

167 Remaining Sectors
169 Internal Transactions

-39-

17 Grants and Advances for Current Purposes from:

170 the Federal Government

171 the State

172 Local Governments

173 Joint Authorities

174 Other Public Sectors

175 Public Enterprises

176 Private Enterprises

177 Remaining Sectors

2 Other Financial Receipts

20 Interest Receipts from:

200 the Federal Government

201 the State

202 Local Governments

203 Joint Authorities

204 Other Public Sectors
205,206,207 Other Sectors

209 Internal Loans

21,22 Shares of Profits from Enterprises and Concessions

23 Debt Service Assistance from:

230 the Federal Government

231 the State

232 Local Governments

233 Joint Authorities

234 Other Public Sectors
235,236,237 Other Sectors

24,25 Compensation for Institutional and External
Social Services

26 Other Receipts

27 Imputed Receipts

28 Transfer from Capital Budget

3 Receipts of the Capital Budget

Transfer from Operating Budget
31 Reserve Withdrawals

Loan Repayments from:

the Federal Government
321 the State

Local Governments

Joint Authorities

Other Public Sectors
325,326,327 Other Sectors

-40-

33 Receipts from Disposal of Shares and Returns

on Capital Contributions

34 Receipts from the Disposal of Fixed Assets

35 Contributions and Similar Payments

36 Grants and Advances for Investments and Promotion

of Investment Activities from:

360 the Federal Government

361 The State

362 Local Governments

363 Joint Authorities

364 Other Public Sectors
365,366,367 Other Sectors

37 Receipts from Credit and Internal Loans from:

370 the Federal Government

371 the State

372 Local Governments

373 Joint Authorities

374 Other Public Sectors

378 Credit Market

379 Internal Loans

4 Outlays

40 Expenditures for Honorary Activity

41 Service Salaries
42,43 Pension

44 Premiums for Statutory Social-Insurance

45 Assistance and Support

46 Personnel Related Outlays

47 Reserved to Cover Personnel Outlays

5,6 Non-Personnel Administration and Services

50,51 Maintenance of Real Estate and Structures and
Other Unmoveable Assets

52 Equipment, Fixtures, and Similar Functional Objects

53 Rents and Leases

54 Management of Real Estate, Structures, etc.

55 Vehicle Maintenance

56,57/63 Special Expenditures for Public Employees,

Additional Outlays for Administration and Services

64,65,66 Taxes, Business Outlays

67 Reimbursements of Administrative Service Outlays to:

670 the Federal Government

671 the State

672 Local Governments

-41-

673 Joint Authorities

674 Other Public Sectors
675,676,677 Remaining Sectors
679 Internal Transactions

68 Imputed Costs

Grants and Advances (not for Investments)

70 Advances for Current Purposes to Social or

Similar Institutions

71 Grants and Other Advances for Current Purposes to

710 the Federal Government

711 the State

712 Local Governments

713 Joint Authorities

714 Other Public Sectors
715,716 Private and Public Enterprises
717 Remaining Sectors

72 Debt Service Assistance to:

722 Local Governments

723 Joint Authorities

725,726 Public and Private Enterprises

727 Remaining Sectors

73,74,75 Social Welfare
76,77,78

8 Other Financial Outlays

80 Interest Outlays to:

800 the Federal Government

801 the State

802 Local Governments

803 Joint Authorities

804 Other Public Sectors
308 Credit Market

809 Internal Loans

81 Tax Sharing

810 Local Business Tax Sharing
815 Property Tax Equalization

-42-

82 General Grants to:

822 Local Governments

823 Joint Authorities

83 General Contributions to:

831 the State

832 Local Governments

833 Joint Authorities

84 Additional Financial Outlays

85 Coverage Reserve

86 Transfer to Capital Budget

9 Outlays of the Capital Budget

90 Transfer to the Operating Budget

91 Transfers to Reserves

92 Granting of Loans to:

920 the Federal Government

921 the State

922 Local Governments

923 Joint Authorities

924 Other Public Sectors

925 Public Enterprises

926 Private Enterprises

927 Remaining Sectors

93 Acquisition of Assets

930 Acquisition of Shares, Capital Contributions

932 Acquisition of Real Estate

935 Acquisition of Moveable Capital Assets

94,95,96 Buildings

97 Repayments of Credit and Other Loans to:

970 the Federal Government

971 the State

972 Local Governments

973 Joint Authorities

974 Other Public Sectors

978 Credit Market

979 Internal Loans

98 Grants and Advances for Investments to:

980 the Federal Government

981 the State

-43-

982 Local Governments

983 Joint Authorities

984 Other Public Sectors

985 Public Enterprises

986 Private Enterprises

987 Remaining Sectors

99 Other Outlays of the Financial Budget

990 Costs of Raising Credit

991 Settlement of Long-Term Charges

992 Coverage of Deficits

SOURCE: Stefan Depiereux. Grundriss des Gemeindehaushaltsrechts

(Recklinghausen: Kommunal-Verlag GmbH, 1973), pp. 284-291,

CKMAN

OERY INC.

JUN95

, * N. MANCHESTER.
.T„.lW 1ND|ANA 46962