How communities deal with risks

Risk management and internal control mechanisms are particularly important in the municipal organization. Risk management (RM) and internal control systems (ICS) in the public sector are not unknown, but in the case of financial scandals, damage caused by natural disasters or cost overruns in investment projects, accusations arise that ICS and RM are not used sufficiently to better safeguard assets and use resources more efficiently.

The Institute of Management Accounting and Control (IUC) at the University of Bern has conducted a broad-based questionnaire study to assess for the first time the impact of risks on Swiss municipalities and to identify benchmarks for the implementation of ICS and RM. 196 municipalities with more than 2000 inhabitants from three different language regions participated in the study. The majority (82 %) of the participants work as financial administrators. In addition, 14 experts were consulted.

Different perceptions among communities and experts
The financial managers from the municipalities rated social risks, foreigner/asylum risks, financing risks and tax risks as the highest. However, there are regional differences: German-speaking municipalities rate social risks, foreigner/asylum risks and demographic change risks higher. Financing risks and tax-related risks, on the other hand, are rated higher in French-speaking municipalities, although French-speaking cantons in particular have above-average proportions of foreigners.

The view of the financial authorities does not always coincide with the experts' opinions either: In addition to social risks and foreigner/asylum risks, the additional experts surveyed for Swiss municipalities rated risks from demographic change as the highest. A comparison of these assessments shows that, on average, the municipalities overestimate risks relating to construction, taxes and misconduct in the municipal administration, while underestimating above all social risks and risks of demographic and social change. "If financial managers consider risks in their own area of experience to be too important and pay less attention to other, relevant risks, this can lead to a misplaced focus of the municipal strategy in risk management," says Prof. Dr. Markus Arnold, Director of the Institute of Corporate Accounting and Controlling.

Internal control little used
The questionnaire also included a survey of which ICS and RM management instruments currently exist in Swiss municipalities and how they are used in the event of damage. This revealed that, on the one hand, many of the documents required for successful internal management, such as target agreements and specifications, have already existed for a long time in many Swiss municipalities.

On the other hand, more specific instructions, some of which could be useful additions in the area of internal control and risk management - such as a risk catalogue or instructions for crisis management - are rarely available. In addition, ICS and RM are currently used mainly in a reactive-defensive manner to preserve current assets, but not in a proactive-anticipatory manner as an internal control instrument to increase efficiency in municipal processes.

Damage could be prevented
The analysis of damage cases in Swiss municipalities shows that such control instruments can make sense. Over the last 10 years, only just under a quarter of the municipalities have recorded incidents of damage. However, the more control mechanisms are used, the greater the differences: While in the municipalities that implement the fewest control mechanisms, loss events occur in 31 percent of cases, the risk of a loss event is reduced to around 15 percent in the municipalities that use the most control mechanisms.