The absorption capacity is one of key indicators on which the allocation of financial resources to sponsored projects is based. The purpose of this paper is to point out that capacity is influenced not only by the ability of the public sector applicants to prepare projects in time and in accordance to the requested call for proposal application forms (documentation, filing and record keeping) but also by the whole system of monitoring and auditing the use of funds. Thus, starting from a point that a well structured financial management is crucial for the success of EU-funded projects, in this paper we discuss the EU’s initiatives and practice in public sector accounting and financial reporting reforms, the process of EU accounts modernization and the importance of developing a sound financial management. In addition we provide the overview of governmental accounting and reporting models in chosen Western Balkan countries (where emphasis is given to Croatian example) that influence the existing EU funded projects’ reporting practice, and on future perspectives of modernising the accounts.