**4. Accounting**

Public companies implement other forms of occasional public communications with different announcements of expected business results. It is a tendency that these announcements become more frequent. Because there is no standardized and verified form of communication with the investor's public, such announcements should be taken with a grain of salt because they are largely targeted to attract investors. So, for example, disclosures of the expected sales growth without a good explanation how it will track the growth of profits significantly alters

Periodic financial market crises significantly influence the volume and the frequency of the public company communications with investors, because it represents the opportunity to detect manipulation and deceit. Perfect example is the significant interest in corporate governance, which began after the great depression, so that even today the monograph [4] affects the academic debates about corporate governance. Similar event happened at the turn of the Millennium, after the collapse of the capital markets. This was primarily due to the collapse of the dot.com companies markets and scandals involving large world-known companies such as, for example, Enron, which ranked seventh in 1999 Fortune 500 list of best American companies [24]. This led to the passage of the Sarbanes-Oxley Act (SOX). The law was passed July 30, 2002, and named after Senator Paul Sarbanes and Representative

The reform in the area of corporate governance continued once again soon after the global world economic crisis started breaking down the American mortgage markets. Among the many legal acts and plans for the salvation of the economy, this reform resulted in a "Financial Regulatory Reform" [26]. The legislation seeks to restore confidence in the integrity of the American financial system and create a foundation for financial regulation and supervision that is simpler and more efficient, while protecting consumers and investors. The reform of the financial regulation seeks to achieve five objectives: (1) introduce stricter supervision and regulation of financial firms; (2) to establish a comprehensive supervision of financial markets; (3) to protect consumers and investors from financial abuse; (4) provide the Government with the necessary tools for managing financial crises; and (5) to raise international regulatory standards and improve international cooperation. With regard to communications of public company with investors, this reform underlines the importance of reporting on the risks and

In public company communications with investors, it is important to emphasize that it is often burdened by short-term requirements from the financial markets, in particular, in case markets which are overheated or, on the other hand, cooled down. One should look for the company's operation goal in long-term stocks value maximization in the market. In a long run, it is important, as much for the company's stability in generating new values, as it is for the threat to realize suboptimal result for stockholders by focusing on short run and cyclical effects [24]. This problem is associated with the problem of rewarding managers, as well as the whole corporate governance system that should emphasize long-term goals of public companies. It is necessary to emphasize the need to intensively focus on the company's com-

the expected business future of the company.

122 Firm Value - Theory and Empirical Evidence

Michael G. Oxley [25].

the risk management in the society.

munication with its long-run operations.

Accounting is the most comprehensive and the best record of a company, encompassing various aspects of its business and, as such, serves as the basis for the preparation of financial statements. It can be defined in many different ways. Most definitions highlight bookkeeping as essential component of accounting. In this chapter, we define accounting as the art of communicating financial information of a business entity to the users of that information [27]. This communication takes a form of statements. Mathematical aspects of bookkeeping allow us to treat accounting as a field of mathematics [28]. Furthermore, accounting has to be viewed as an important part of corporate governance, because it is the starting point of company's communication with investor's public. We can distinguish three stages of accounting: bookkeeping, accounting statements, and auditing.

#### **4.1. Bookkeeping**

Even though it is not the only element of accounting, bookkeeping is the corner stone of the accounting [29]. It is the most comprehensive and detailed economic record of the company and therefore, every business event that is the subject of that evidence must be recorded properly through bookkeeping. Although bookkeeping practice changed throughout the course of history, today, the way we think about it is based on the paradigm of dual-sided bookkeeping. The double-sided entry of business events, which are also the subject of bookkeeping, admired the great writer [30], who declared it as one of the most beautiful inventions of mankind. The magic attraction of bookkeeping provides a system of equations which keeps track of the business enterprise that is, in its implicit form, manifested through eternal equality between the assets and the liabilities. On the other hand, in its explicit form, it demonstrates the interest of the owner in the company, evaluated, of course, from the book value perspective.

Throughout the history of a company, bookkeeping takes continuous snapshot of the state of affairs and operations. When put together, these snapshots animate the history of the company. In that sense, the images of this history present the means for public company communication with investor's public. In this way, the history becomes the baseline for predicting the future, in the extent that it relates business data as a result of business events which are the subject of bookkeeping records. The documentary nature of the bookkeeping notes reduces the possibility of legal manipulation in an effort to make it more appealing to investors, by using the two-sided bookkeeping technique, and through it, it allows easier detection of irregularities. Of course, this applies only to those who are familiar with the bookkeeping math assumptions and canons.

The documentary nature and ability of data checking based on it, in the base has a premise, that is, the double-sided entry values are estimated on the basis of the occurrence of a business event. Thus, bookkeeping is the base for judging quantity and, in part, quality of the company's economy. For a public company, as the most demanding form of business organization, it arises as the basis of the company communication with investor's public.

#### **4.2. Accounting statements**

To be able to communicate with different information users about the affairs and business of the company, bookkeeping data need to be presented in a particular shape that is formatted like standard information. On the mathematical basis of bookkeeping, this standard information is provided in the form of accounting statements. The largest number of such statements should be prepared constantly to run all business operations. This makes public company managers on all executive levels who supervise operations, and employees who execute tasks, their basic users. Based on the mathematics principals, bookkeeping and accounting derivatives have become a standard business language for communication with business people, financial experts, and economists, in general. Therefore, accounting statements are an integral part of any organized businesses.

communications of a public company by disclosing data concerning realized and expected business through public announcements on the financial markets are also a means to attracting investors in the company. Speaking from a completely theoretical perspective, only an objective disclosure of data and information about the existing and the expected operations of

Public Company Communications with Equity Investors and Firm Value

http://dx.doi.org/10.5772/intechopen.76171

125

In the competitive real world surroundings, public companies struggle to attract as much capital under as favorable conditions as possible by communicating with the public. For a public company, the communication thus becomes the means for a competitive struggle in the money and capital markets. Therefore, it is logical to expect that the company will endeavor to send tampered reports to the public in order to paint a more attractive image of the company. With such an image, the company stands a better chance at raising money and capital on the relevant financial markets. Therefore, the distrust from the investment public toward

Due to the existence of distrust toward the publicly posted information and data that the company communicates with the investor's public about itself, the third component of public company accounting is auditing. Auditing, of course, applies only to that part of the communication that is based on the bookkeeping evidence and encompasses accounting statements. The audit should provide the legitimacy of accounting reports that will be published in the financial statements. It helps to inform the public investor more correctly; however, it is constrained with the basic formats of accounting statements as well as the logic of the business success of the companies that perform the audit. The wider the basis for the valuation of items in the financial statements and the more it is possible to endeavor in creative accounting, the more it is expected that the data will be more improved, or even worsen, depending on the need. The success of the companies performing audit depends on their fees. Furthermore, the company is represented by the management which has personal interest in painting a better picture of the company for their own reward [23]. Regardless of the fact that the company performing audit must seek to perform it *lege artis,* it is difficult to expect that it will not reach to a compromise agreement with the public company or its management in order to survive in the market, and in turn agree to lower

Financial reporting is certainly one of the most important and the most intriguing area of finance standardization. For financial analysis, it is the basic analytical framework based on which it is possible to isolate and determine the underlying fundamental value factors of public companies and their stocks, as well as other instruments of financing. An important part of the financial reporting is the accounting of public companies. However, financial reporting as a whole goes beyond the scope of accounting. Financial supervision and various local practices significantly impact the content and the scope of financial reporting. As a means of communication with the investors, public company financial reporting is strongly influenced

by the problem of agents in the conditions of asymmetry of information.

the society ensures uninterrupted external financing of the company.

the information is distributed from within the public company.

the bar in some respects.

**5. Communication in financial statements**

Users of accounting information are the owners of the company, individuals, or a particular group of individuals. In the conditions of separation of entrepreneurial from ownership functions, especially in the conditions when the company becomes public, bookkeeping and the accounting statements based on it, become the basis of communication of public companies with a wide range of existing and potential owners. In this way, bookkeeping and accounting statements become an integral part of corporate management. Statements are subject to standardization and have a responsibility to the public; so, in a certain sense, one can talk about public accounting and public accountants.

Sole creation of accounting statements assumes one acquires the art of classifications and summary of bookkeeping data. This makes the data significant, relevant, and informative to the users enabling them to interpret it with a generally accepted business language [31]. The accounting statements which will communicate the bookkeeping information with the investor's public are those that summarize the entire business of the company: the balance sheet as well as the profit and loss statement. By expanding the requirements for communication and through modern systems of financial reporting, cash flow statements are becoming ever more common form of communication. These accounting statements are used to communicate with the investor's public through ranked statements of changes in financial positions.

Accounting statements are certainly an important part of corporate governance. They are the corner stone of public company communication with all stakeholders that have a direct interest in the company, as well as with potential stakeholders. This includes all those individuals and institutions who may find interest in that company through the mechanism of the financial markets. The corporate governance should focus on supporting to achieve the basic objectives of the company operations, which, for a public company is shown by increasing its common stock value in a long run. For corporate management, this is the most significant of those accounting statements, since through it they ensure continuous public company communication with its investor public over financial reporting mechanism. These are, therefore, the balance sheet and profit and loss account, and cash flow statement.

#### **4.3. Auditing**

We mentioned earlier that public company communication with investors' public on financial markets is, among other things, a means of attracting money and capital. In other words, communications of a public company by disclosing data concerning realized and expected business through public announcements on the financial markets are also a means to attracting investors in the company. Speaking from a completely theoretical perspective, only an objective disclosure of data and information about the existing and the expected operations of the society ensures uninterrupted external financing of the company.

In the competitive real world surroundings, public companies struggle to attract as much capital under as favorable conditions as possible by communicating with the public. For a public company, the communication thus becomes the means for a competitive struggle in the money and capital markets. Therefore, it is logical to expect that the company will endeavor to send tampered reports to the public in order to paint a more attractive image of the company. With such an image, the company stands a better chance at raising money and capital on the relevant financial markets. Therefore, the distrust from the investment public toward the information is distributed from within the public company.

Due to the existence of distrust toward the publicly posted information and data that the company communicates with the investor's public about itself, the third component of public company accounting is auditing. Auditing, of course, applies only to that part of the communication that is based on the bookkeeping evidence and encompasses accounting statements. The audit should provide the legitimacy of accounting reports that will be published in the financial statements. It helps to inform the public investor more correctly; however, it is constrained with the basic formats of accounting statements as well as the logic of the business success of the companies that perform the audit. The wider the basis for the valuation of items in the financial statements and the more it is possible to endeavor in creative accounting, the more it is expected that the data will be more improved, or even worsen, depending on the need. The success of the companies performing audit depends on their fees. Furthermore, the company is represented by the management which has personal interest in painting a better picture of the company for their own reward [23]. Regardless of the fact that the company performing audit must seek to perform it *lege artis,* it is difficult to expect that it will not reach to a compromise agreement with the public company or its management in order to survive in the market, and in turn agree to lower the bar in some respects.
