Financial risk management in state-owned enterprises and public establishments

The issue of effective financial risk management has become particularly relevant after the bankruptcy of bank Snoras in 2011, so Financial Risk Management Guidelines for State-Owned Enterprises were developed in 2012 at the initiative of the Ministry of Finance. The National Audit Office conducted an audit to assess whether state-owned enterprises are applying financial risk management measures.

“The audit findings showed that the Financial Risk Management Guidelines encouraged enterprises to regulate financial risk management: more than half of the enterprises which had corporate documents on financial risk management in place approved these documents following the publication of the Guidelines. Nevertheless, there is still insufficient management of the financial risk in state-owned enterprises, with too little emphasis laid on the development and implementation of the financial risk management policy,” said Auditor General Giedrė Švedienė summing up the audit results.

The audit revealed that eleven enterprises (out of 29 ones subject to the assessment) within the management areas of the Ministers of the Interior, Agriculture, Health, Education and Science, Finance, and Culture do not have any corporate documents on financial risk management. Two enterprises within the management areas of the Minister of the Interior and the Minister of Education and Science failed to approve the said document even after they had lost almost LTL 17 million due to the bankruptcy of bank Snoras.

One of the factors of successful management of this risk is to establish a financial risk management process. However, the audit revealed that half of the audited enterprises have not designated persons and/or units to be responsible for the preparation and submission of investment proposals and decision-making, also, no accountability for investment has been provided for to the senior management of the enterprises.

The fact that nine enterprises (out of 29 ones subject to the assessment) have not been diversifying, or have been inadequately diversifying, their financial resources by economic entities also points to inadequate management of financial risk. These enterprises held 80–100 per cent of all their funds in the accounts of one commercial bank.

The audit found that the enterprises did not always follow public procurement procedures for purchasing banking and investment services, because it is not clear how to estimate the purchase value in such cases and how to implement the recommendations provided in the Financial Risk Management Guidelines without breaching the Public Procurement Law.

One of the key indicators assessed by the enterprises when making their investment decisions is the long-term credit rating of the commercial bank or the issuer – an indicator which provides information about the debtor’s ability to meet its financial obligations. It is difficult for enterprises to evaluate changes in the condition of banks and the credibility of financial banks in due time because not all credit risk indicators of the bank are publicly available and not all banks indicate the credit rating and the date of its approval.

In order to improve the financial risk management in state-owned enterprises, the National Audit Office made recommendations to the Government, ministries and the Public Procurement Office.
 

Executive summary of the public audit report: Financial risk management in state-owned enterprises and public establishments