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(JPMNT) Journal of Process Management – New Technologies, International Vol. 5, No 2, 2017. ACCOUNTING AND FINANCIAL REPORTS IN THE FUNCTION OF CORPORATE GOVERNANCE Jugoslav Ani čić,1 Dušan Ani čić,2 Aleksandar Majstorovi ć,3 1, “Union-Nikola Tesla University”, Faculty of Entrepreneurial Business, Serbia 2DSN Consalting, Belgrade, Serbia 3 “Union-Nikola Tesla University”, Faculty for Real Estate Management, Belgrade, Serbia [email protected] ; [email protected] ; [email protected] Professional Paper doi:10.5937/jouproman5-13302 Abstract: Market economy development is made according to the accounting highly dependent upon accounting data reliability standards accepted in most developed and financial report quality because the investors decide more easily on investments in the market countries. The need for international which had earned trust and safety in the previous standard acceptance has its practical period. Big financial scandals from the beginning dimension because they equalise the of the 21st century and still actual financial crisis at accounting practices around the world, the global level have especially contributed to that. simplify stock exchange business outside The information prepared on the basis of high quality, transparent and comparable international the national borders and enable national standards considerably reduce investment risks as and international market growth, as well as well as the cost of raising capital. On the other the complete economy. hand, the management of a large number of companies is focused on the creation of short-term True and honest financial reporting personal benefits as opposed to the investors represent a first class public interest so the primarily interested in company survival and principle of the objective reporting should growth, that is, long-term goals. Information be the leading principle for the financial asymmetry is often present in the financial markets, reports creators. Blurring and feigning of and its damaging results, as a rule, are borne by shareholders and other stakeholders of the the results leads to the decisions of the company. Corporate governance depends on legal, investors, which are not in the function of regulative and institutional environment, and it efficient capital allocation, and we can see should balance the interests of the shareholders, that in a number of financial frauds in capital owners, managers as well as company large and powerful companies in the business managers. developed countries. The consequences of Key words: accounting, financial reporting, the false representation of successful corporate governance results are the failure of the seemly Introduction successful companies overnight, where the Financial reports represent the basic burden of the great losses is first suffered ways for companies to report on the by shareholders, and then other investors success of their business and financial and as well, and the side effect is the spread of property conditions for external interested distrust in financial market functioning. parties. The companies that want to invest On the other hand, the existence of the in other countries or collect funds in the information asymmetry is a regular international capital market have to catalyst of the market inefficiency and compile financial reports understandable instability of the complete financial for business partners and investors. system. Therefore, the financial reports have to be 45 www.japmnt.com (JPMNT) Journal of Process Management – New Technologies, International Vol. 5, No 2, 2017. Corporate governance is one of the users. However, the financial reports do key elements in economic efficiency and not offer all the information the users growth improvement, as well as investor might need to make economic decisions, trust increase. Corporate governance offers because they largely reflect financial the structure with company goals set and effects of the previous events, and they do allocate the resources to achieve the goals not necessarily contain non-financial and performance monitoring. Adequate information; business management should provide the • To show the results of the appropriate encouragement for the board management work, that is, their of directors and management to focus on responsibility for the available resources the goals of interest for the company itself entrusted to them. The users of the as well as its shareholders. The existence information who want to evaluate the work of the appropriate system of corporate or responsibility of the management do governance, within individual companies that in order to be able to make important and the economy as a whole, helps in economic decisions, the trust to the providing a certain level of trust necessary existing management among other things. for the market economy to function in the appropriate way. In order to achieve the above mentioned goals, the information about The importance of accounting and property, liabilities, capital, cash flow, financial reporting in a market economy income and costs are contained in the Investors need transparent and financial reports of companies.These reliable information that accurately reflects information, with other data cited in the the financial situation of a company in notes of the financial reports, help the order to enable the smooth functioning of users to understand the company's the market and efficient capital allocation. business in the previous period and predict In the world that is becoming more the future flow of the company's results, globalised, the investors seek opportunities especially the cash flow. to compare the companies in important Accounting is the means through parameters in order to make rational which we measure and describe the results business decisions about investments. of the economic activity. It is the way in Accounting is becoming more globalised which the business people define the as the companies are becoming more business goals, measure the achieved multinational, and the scope of trade and results and assess the future performance. investments between the companies The basic purpose of accounting is to increases all the time. These factors provide the information for the decision reinforce the need for financial reports makers useful for making the vital which will be internationally comparable economic decisions. Therefore, we can and consistent. rightfully say that the economic activity in According to the Committee for the terms of business transactions appears as international accounting standard frame, the input in the process of accounting, and the point of all financial reports is: the output or result is the useful • To present the information on the information (Martac, S. 1998, International financial position, business and changes in financial reports – similarities and the financial position of the entity. The differences, XXIX Symposium of the financial reports prepared for these Association of Accountants and Auditors purposes satisfy the usual needs of most of Serbia, Zlatibor, Proceedings). 46 www.japmnt.com (JPMNT) Journal of Process Management – New Technologies, International Vol. 5, No 2, 2017. The primary goal of accounting services and capital. (Lekovi ć, M., consists of providing complete Arsenovi ć, S., (2013). The role and understanding of the nature of the importance of good-quality financial accounting information, as well as to reporting, Banking, no 4, pp 79-93). nurture the ability to use the information efficiently. It serves as a buckle that Business entities gained access to a directly connects the decision makers with large number of markets around the world the economic activities – and thus, and opportunities to make a geographical indirectly, with the results of such selection at raw material procurement and decisions. The efficient usage of the their own product placement, whereby accounting information assumes the they often decide to do that outside their complete understanding of the nature of own countries. These modern terms of the economic activities included in the doing business offer a whole spectre of financial reports, the understanding of new development and advancement assumptions and measuring techniques opportunities for business entities. used in the accounting process, as well as However, it includes widening the circle of understanding the ways of linking the stakeholders who are trying to gain insight current accounting information with future into the way of doing business within the business decision making. company and its performances. The possession of the relevant information on The purpose of financial reporting is, the efficiency of the use of capital in the primarily, the creation of information company in the previous period, as well as useful for making decisions of financial business potential to be used in the future, nature. Thereby, the decisions of the is of crucial importance for investors when investors, creditors and other external they choose the way for the placement of stakeholders of the company are primarily their funds. taken into account (Stefanovi ć, 1995). They have different information needs The investors’ interests are in depending upon the nature of the decisions collision with the differences in the way of made on the basis of the acquired formatting accounting information which information. It is in the investors’ interest makes them one of the key driving forces to make a portfolio which consists of such of change in the
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