The Risk-mitigating Role of Financial Controlling at Local Government Entities – Modelling Profitability and Liquidity Aspects

Abstract

The modernisation of international and Hungarian financial and economic controlling tools and of the entities using them requires enhanced management tasks to be performed. The high quality performance of management tasks contributes to the increased development of public finances audit. This actually includes a repositioning of the financial management and functions of enterprises run by local governments. Control systems (both external and internal) play an important role in the implementation of the value-creating phases of development. However, while efficiency, effectiveness and economy are given prominence, the issues above also play an ever more important role in institutional management. This paper describes the roles and supporting function of controlling methodology in respect of the financial management of local governments. Empirical modelling is used to demonstrate the role of financial controlling and its function in the financial management of local governments, including the relationship of liquidity, profitability and solvency. The paper calls special attention to the fact how much performance and costs matter in setting up local government controlling, and it also points out the positive effects of a clear strategic focus on financial management, like common asset management (with a holding nature) or the use of strategic indicators (e.g. creating a BSC at local governments).