Financial Risk Management in Commonwealth Organisations

Abstract

In the last decade financial risk management in public sector organisations has become of greater interest to the public, politicians and regulators. Derivatives are commonly used to manage financial risk but little is known about the reasons why financial risk is managed, particularly through the use of derivatives. Furthermore, little is known about the reasons for and extent of derivative use in public sector organisations. To the authors knowledge this paper represents one of the first studies into the use of derivatives in Australian Commonwealth public sector organisations. A sample of Commonwealth organisations is surveyed on attitudes towards the use of derivatives for hedging. A variety of tests including ANOVA and t-tests are used to analyse the results. The two most important issues in the use of derivatives for hedging in the Commonwealth public sector include budgeting and reducing risks faced by management. Reducing the risks faced by management is often cited as a reason for derivative use in the private sector. It is unclear if budgeting is linked to this. Respondents from Commonwealth organisations rank other private sector reasons for derivative use, such as reducing bankruptcy and taxation relatively unimportant. Results also indicate that there are significant differences in the level of importance in some issues regarding derivative use across different organisations, particularly those with and without a documented risk management plan.