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STUDIES
542 Public Finance Quarterly 2019/4
S
Anita Boros
Compliance Audit Issues
of State-owned Business
Associations
Summary: State-owned business associations have a peculiar role in the system of governmental exercising of (public)
functions. They have to comply with the legislative regulations, the objectives set for the business association concerned
already upon the formation, the regulations set on owner or - as the case may be - government level, the policy (sector)-level
regulations and standards, the expectations of the parties using the public service, the short, medium and long-term strategic
objectives the organisation set for itself, the corporate values set for the managers and the employees. Our study is aimed at
answering the question whether there are any guidelines for the state-owned business associations, or how the compliance
of the state-owned business associations could be audited at all. As a result of our research we found that the Hungarian
regulation disposes of the topic of compliance only partially, and there is uniform normative regulation hiatus in respect of
the state-owned business associations. Based on the review of the regulation applicable to the state administration entities,
to the insurance and credit institution sector we drew up those regulatory topics which we propose for consideration in order
to establish the compliance audit foundations of state owned business associations.
KeywordS: state-owned business association, internal control system, compliance, integrity, compliance audit
JeL codeS: G38, K20, M14, H83, M48
doI: https://doi.org/10.35551/PFQ_2019_4_6
State-owned business associations are unique
entities in the system of state functions: they
are operated using public funds, they perform
public function mainly, in most cases their
activity is very costly and usually are not
protable directly. However, state-owned
business association cannot fall out of the
scope of the new type of audit policy of the
state either, moreover, they are subject to even
stricter rules. Our hypothesis is that in case
of state-owned business associations control
functions which belong to the broader concept
of compliance audit shall be established in
addition to the traditional public funds and
owner’s audit.
Firstly, our study shows how the scope
of state audit mechanisms has developed
regarding state-owned business associations
since 2010. Afterwards, we will examine which
background compliance audit has in Hungary,
and how the results thereof can be implemented
in the current state-owned corporate system.
Finally, regulatory recommendations will be
E-mail address: boros.anita@uni-nke.hu
STUDIES
Public Finance Quarterly 2019/4 543
presented based on our own system of criteria,
highlighting that the synergic features of the
control mechanisms fragmented above the
state-owned business associations shall be
reinterpreted.
THE CHARACTERISTIC OF STATE-
OWNED BUSINESS ASSOCIATIONS -
PREMISE
e system of Hungarian state-owned business
associations shows a very heterogeneous
picture. As opposed to the acquisitions of
the private sector, the state founds business
associations for business considerations, or
acquires company participation for investment
purposes or in order to gain prots very
rarely. Such companies are founded more if a
function to be performed by the stated can be
realised more eciently through a budgetary
institution owned by the state than within the
frameworks of the budgetary institution. In
case of such company formations the measures
necessary in the interest of the public good -
such as various national strategy, security of
supply or security of continuous public utility
supply, or national economy-level security
policy aspects - are relevant. Consequently,
there is only an insignicant number of state-
owned business associations which are of
for-prot character, as well as there is a wide
range of so-called dormant companies, which
do not pursue any actual activity, but which
fell under the scope of state-owned business
associations typically through inheritance.
e majority of these dormant companies
are undergoing strike-o, winding-up and
compulsory liquidation procedure. e rate of
the companies is rather signicant with regard
to the scope of companies in the portfolio of
Hungarian National Asset Management Inc.
(hereinafter referred to as HNAM Inc.), more
than forty percent (see Table 1).1
As a general rule, HNAM Inc. attempts to
sell the unnecessary company participations
- i.e. which are no longer necessary for
performing the public function - through
electronic auction. According to the website
of HNAM Inc., only half of the participations
of nearly 80 companies put up for auction
during the Summer of 2018 could be sold
during the rst bidding.2 A sale is made more
dicult by the heterogeneous character,
ability for corporate operation and value
of the companies,3 since these are often
companies which had not been in operation
for several years. It is also worth to mention
that these data do not show the entire state-
owned company portfolio, since the number
of operational business association (company
participations) is also increased by companies
where HNAM Inc. is not the one exercising the
proprietary rights (not even indirectly4). is
is possible, for example, where the exercise of
proprietary rights had been allocated the entity
performing the specic policy supervision.
With regard to such companies it is permanent
dilemma whether the uniform professional
and proprietary enforcement of rights or the
opposite, the separation thereof is the more
ecient solution. After 2010, the proprietary
enforcement of rights was more typical in
the Hungarian practice (namely, apart from
some exceptions, the minister responsible for
the supervision of state property and HNAM
Inc. exercised the proprietary rights). Policy
interest and expectations started to resolve
this model a few years later and it became
more and more frequent that in addition to
the entities mentioned, other - mainly the
body exercising professional supervision -
became the exerciser of proprietary rights as
well. After 2018, the model mentioned above
was replaced by a more fragmented owner -
exerciser of rights structural model. Obviously,
the two extreme solutions have their
advantages and disadvantages, however, with
STUDIES
544 Public Finance Quarterly 2019/4
respect to our topic one aspect denitively has
to be highlighted: if the number of entities
exercising the proprietary rights is low, then it
is signicantly easier to develop the principles
of uniform corporate governance and to have
those principles controlled by the owner, while
in case of a lot of exercisers of proprietary
rights aligning these principles uniformly and
unifying the proprietary actions is dicult due
to the participation of numerous operators,
and thereby dierences may arise in case of the
companies allocated to dierent exercisers of
proprietary rights. is results in dierences
not only in operation but in terms of system
or criteria, planning and strategy as well. is
is relevant to our topic because one of the key
issues of compliance is with which system of
criteria, objectives, expectation and rules a
business association owned by the state have
to comply, and which governmental control
mechanisms the actual control of these
presume.
e primary purpose of business
associations owned by the stated is supporting
the performance of public functions. For this
very reason all companies or company groups
require dierent management methodologies,
adjusted to the (public) function performed
by them. For example, the management
of a large public service provider company
(group) which has been generating loss for
decades and the management of a company
which is the only one on the market, has
monopoly, and which actually belongs to
the 'more comfortable' segment of state
functions cannot be compared. However, it is
undoubted, that 'Only well-managed, eectively
and eciently governed state (...) government-
owned enterprises serve the interest of the public.
e assets managed by these companies are
public assets, on the one hand their activities
and the quality, eectiveness and eciency of
their nancial management contribute to the
responsible management of public funds, and on
Table 1
THE SUMMARY DATA OF THE COMPOSITION OF THE COMPANIES WHICH BELONG
TO THE PORTFOLIO OF HNAM INC.
Company participations Amount of company
participation (pcs)
Rate of company
participation (%)
The companies which belong to the portfolio of HNAM Inc. 303 100.00
including the companies managed directly by HNAM Inc. 296 97.69
including the companies assigned or submitted for
asset management
7 2.31
Total of those companies managed directly by HNAM Inc.
in which the state has majority ownership (50% +1 vote)
154 52.03
Those companies managed directly by HNAM Inc. in
which the state has minority ownership
142 47.97
Companies which are operated using the company
participations managed directly by HNAM Inc.
176 59.46
From among the companies managed directly by HNAM
Inc. non-operational companies
120 40,54
Source: www.mnv.hu (12 06 2019)
STUDIES
Public Finance Quarterly 2019/4 545
the other hand the goods and services produced
by them aect the quality of life, security, health
and welfare of the population.' – states the study
written by László Domokos and his co-authors
(Domokos, Várpalotai, Jakovác et al., 2016).
Simultaneously, it follows from the above that
the state must nd the instruments with which
it can facilitate that the state-owned business
associations manage the public property
entrusted with them actually eciently and
eectively.
Due to the nature of the task such companies
are in a unique situation also in the sense that
they have to ensure the fullment of some kind
of - mostly costly - state function by using the
public property entrusted with them. In their
case, the prot can in fact be measured in the
increase of the level of standard of the public
service and the satisfaction of the citizens. Since
the funding of these public assets is funded by
the taxing of original income (Zéman, 2017),
special attention shall be paid - even on national
economy level - to the appropriate profound
audit of the specic partial areas related to the
performance of (public) functions of state-
owned enterprises.
THE AUDIT ROLE OF THE STATE WITH
REGARD TO STATE-OWNED BUSINESS
ASSOCIATIONS
e state-owned business associations
determine the economy and the5 policy
regulation methodology of any given state.
e relationship between the state and its
own enterprises had been examined by the
OECD as well, and in its recommendation6 it
highlighted the key signicance of the public
policy purpose for which the given state-owned
enterprise had been founded.7 e OECD
considers this fact as the starting point, and it
is of special importance that the appropriate
owner’s governance mechanisms are developed,
which serve the realisation of these purposes
the most, without the restricting the liability
of the leaders of the state-owned enterprises by
interfering in the management. e increasing
governmental supervision and the appreciation
of the owner’s instruments established by the
OECD with respect to the member states
examined had been noticeable in our country
as well after 2010 (Boros, 2017).
Since the beginning of the 2000s, the
Hungarian national economy has had
deepening problems: the debts of the public
nances, the low eciency of the budget
policy and the poor audit potential deepened
further during the 2007-2008 crisis (Lentner,
2018; Lentner, 2019). As it had been explained
by Csaba Lentner in his well-known study
(Lentner, 2015b), substantial changes have
occurred in the eld of public nances since
the crisis that erupted in 2007. ‘ese are new
times that we living, which require new solutions,
and this is especially true for the eld of public
funds. Change and establishing new rules and
founding new institutions are necessary because
neither the State Audit Oce of Hungary, nor
the other independent institutions were able to
prevent the chronic governmental overspending
and the drastic increase of the public debt of the
previous years.' – explains the 2011 study of the
chairman of the State Audit Oce of Hungary
(Domokos, 2011). e change appeared in
number of areas (Lentner, 2015b), therefore
•in particular on institutional level, for
example in the regulation related to
the central bank and state audit oce
regulation adopted as the rst cardinal act
(Domokos, 2016) Domokos, Pulay, Pető
et. al, 2015),
•in supporting the strengthening of the
trust vested in the functioning of the state,
•in the development of the ecient tax
system (Lentner, 2015b),
•in making the debt ceiling a constitutional
matter (Domokos, 2011),
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546 Public Finance Quarterly 2019/4
•in developing the eective and useful
audit system, and last but not least, in
strengthening the Fiscal Council in the
Fundamental Law (Kovács, 2016; Kovács,
2014; Domokos, 2011).
In the Hungarian model based on the active
role of the state, the purpose of the audit
system prevailing in national economy level
has changed in a direction which facilitated
the actual intervention of the entity authorised
thereto in the nancial processes. As it is
explained by Csaba Lentner: ‘it is a fundamental
national interest that the management of
Hungarian public funds and national assets is
transparent, ecient and accountable. e rise of
Hungary and overcoming the current economic
and social issues are inconceivable without
professional and regular audit.' (Lentner,
2015b) ese changes lead to that the state
has to set new types of audit requirements for
its business association which belong to its
own assets. ese requirements appear with
ever increasing strength - on the one hand -
on the regulatory level (external factors), and
- on the other hand - on the level of corporate
governance and internal control mechanisms
(internal factors).
In respect of the external factors, having
examined the regulatory side briey, it can be
established that the proper management of
public funds is an obligation deducible from
the Fundamental Law (Domokos, Várpalotai,
Javovác et.al., 2016). e constitutional rules
are complemented by the acts related to assets.
On the one hand, Act CXCVI of 2011 on
National Assets (hereinafter referred to as
National Assets Act), Act CVI of 2007 on
State-owned Assets (State-owned Assets Act)
and the implementation decree thereof. In
addition to the general regulations governing
assets, the civil law provisions stipulating the
general rules of corporate functioning also
have a key role, as well as the rules of Act
CXXII of 2009 on the Economical Operation
of Public Business Organisations pertaining
especially to state-owned enterprises.
Another important scope of sources of
law are those sources of law which set the
normative rules pertaining to public nances,
in particular the acts on public nances,
accounting, rules of taxation, the specic types
of tax and duties, as well as the implementation
decrees thereof, the public procurement and
competition regulations, and also the various
sector-specic regulations as well, which
stipulate additional requirements in respect
of the business associations which provide the
specic public services (Lentner, 2015a).
Naturally, in addition to the above,
numerous other normative regulations and
regulations not deemed as normative - which
often arise from international implementation
obligations - determined the frameworks of
the functioning of state-owned enterprises
(especially in the public service sectors).
However, the unique, special purpose of
the business associations does not lie in the
regulations mentioned above. Namely, in the
Hungarian practice, in case of the formation
of the new state-owned business association,
usually a government decision species
the purposes of establishing the business
association, in addition to determining the
main features necessary for the formation. e
provisions of the government decisions are
then formulated by the exerciser of proprietary
rights to the state-owned enterprises, in
form of an act which is suitable to result in
legal eects in terms of company law, i.e. in
owner’s decision.8 Consequently, the owner’s
resolutions are relevant as well. Such owner’s
resolutions are mirrored by each and every
company through the acts of their own
decision-making forums as well. However,
these can be deemed as legal statements made
within the company, which legal statements
we classify in the category of internal factors.
One should not forget about the multi-layered
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Public Finance Quarterly 2019/4 547
– sometimes casuistic – internal policy system
of state-owned business associations either,
which could also aect the exible, or – as the
case may be – rigid operational methodology
of this type of business association. Finally, this
category also includes the acts of the executive
ocer or the corporate bodies of various
legal status, which again may contribute
signicantly to the establishment of the
modern state-owned corporate operational
criteria.
In fact, the enforcement of all regulations
and requirements determining the system of
objectives of the operation of state-owned
enterprises constitutes separate topics, the
hiatuses of which may give rise to questioning
the justication of the existence of the company
concerned. In contrast to the manager-like
state functioning which took root in the
neoliberal economic system (Polanyai, 2001)
and which relies on the passivity of the state,
the economic system which has gained ground
recently, relies on active state participation and
which may be understood as the renaissance
of the Keynesian philosophy ’means the
foundation of good state functioning’ (Lentner,
2019). us, the activity of the state on the
appropriate level is essential (Lentner, 2019).
e questions is how the state can audit
the compliance and appropriateness of the
operation of state-owned enterprises?
COMPLIANCE AUDIT IN CASE
OF STATE-OWNED ENTERPRISES
In the private sector, compliance can be
considered as an already widespread eld
which had been developed in practice as
well- At larger privately-owned companies,
a separate compliance department manages
the issue of corporate compliance. However,
the issue of compliance is not characteristic
only to the corporate sector, since numerous
scientic disciplines study how the regulations
applicable to the given sector can be enforced
(Cramer, Roy, Burrell et al., 2008; Simon,
Clinton, 2009). Compliance is a rather
complex concept, since it includes – among
others – nancial, economic, tax, business,
legal, ethical, sustainability and proprietary
compliance as well.
In course of compliance audits, the State
Audit of Hungary examined whether the
‘activity or operation subject to the audit complies
with the regulations and requirements applicable
to the audited entity in all signicant respects’
(e Principles of Compliance Audit, 2015).
It is worth mentioning here that State Audit
Oce of Hungary distinguishes between two
sub-types of compliance audit: regulatory
audit and appropriateness audit. In course of
the audit procedures, the two methods may
be combined as well. e regulatory audit
is aimed primarily at the examination of
compliance with legal regulations, while the
appropriateness audit pertains to areas where
some kind of normative regulatory hiatus is
experienced, and the principles constitute
that sub-type of compliance audits which
shall be applied in cases where the legislative
regulations cannot be applied, or where
obvious legislative deciencies are noticeable
with regard to the consideration of specic
issues, and the issue concerned cannot be
deliberated upon based on the principles of
the recognised practices.
In course of the assessment of the
compliance of an organisation the question we
are actually aiming to answer is whether the
operating mechanisms of the organisation can
be subordinated to all regulations applicable
to the organisation, and the objectives and
requirements set for it. In the narrower
sense compliance means the observance and
enforcement of the legal regulations – including
the decisions of the owner – applicable to the
business association. However, in the broader
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548 Public Finance Quarterly 2019/4
sense, it means so much more: it also means
compliance with the objectives set for the
business association concerned already upon
the formation, the regulations set on owner or
- as the case may be - government level, the
policy (sector)-level regulations and standards,
the expectations of the parties using the public
service, the short, medium and long-term
strategic objectives the organisation set for
itself, the corporate values set for the managers
and the employees.
Currently there is no concrete regulations
which would give guidelines on the internal
regulation of compliance for publicly-
owned business associations, although the
examination of this topic is becoming more
and more widespread on international level as
well.
In Hungary, the topic of compliance and
the elaboration of the control function related
thereto has appeared in recent years mainly
in the eld of the law of credit institutions
and insurance law (Kovács, Szóka, 2016). In
these sectors, the rules of legal compliance
have been developed on a very high level, in
acts. Naturally, there are aides for state-owned
business associations as well, however, due
to the dierences in terminology, companies
do not even realise that they are facing a
compliance topic.
According to Act CXCV of 2011 on Public
Finances (hereinafter referred to as Public
Finances Act), the purpose of public nances
controls is to ensure proper, economical,
ecient and eective management of the
funds of public nances and the national
assets, as well as the proper fullment of the
reporting and data provision obligations.9
According to Article 10 (2) of the National
Assets Act, the exerciser of owner’s rights shall
regularly audit the management of the national
assets by the user of the national assets, and
it shall notify the user of the national assets
of its ndings, furthermore, if the ndings
of the exerciser of owner’s rights concern
the competence of the State Audit Oce of
Hungary, then it shall notify the State Audit
Oce of Hungary as well. e activity related
to the exercising of proprietary rights attached
to state-owned assets is audited by the State
Audit Oce of Hungary annually.10 In
addition to the above, HNAM Inc. regularly
audits the management of the state-owned
assets by persons, entities or other users which
are contracted partners of HNAM Inc., and
it noties the supervisory board of HNAM
Inc., the entity audited, and if necessary,
the minister and the State Audit Oce of
Hungary of its ndings.11
e Public Finances Act species dierent
levels of public nances controls, thus it
pertains to
•external – the State Audit Oce of
Hungary, and in cases specied by the
Public Finances Act, the treasury -,
•the governmental – governmental control
entity, the entity auditing the European
subsidies, and the treasury - ,
•and internal audit functions, with regard
to the entities within its scope (Domokos,
Várpalotai, Javovác et.al., 2016).
Based on the INTOSAI internal control
standards applicable to the public sector it can
be established that ‘internal control is a dynamic
and complex process, which adjusts to the changes
occurring in the organisation constantly. e
management and levels of the employees shall
participate in the process in order to determine
risks and to provide reasonable securities for
the fullment of the mission of the organisation
and for the achievement of its goals set.'.12 In
the COSO Framework, internal control is a
process which is inuenced by the board of
directors, the management and the employees
of the company, and which had been
established to provide reasonable assurances
in respect of organisational objectives such as
ecient and eective operation, the reliability
STUDIES
Public Finance Quarterly 2019/4 549
of internal and external nancial reporting,
as well as compliance with the relevant laws,
regulations and internal policies.
e relation between the public nances
controls and the state-owned business
associations is essentially established by –
in addition to the rules of assets mentioned
above – Article 69/A of the Public Finances
Act, according to which the rules applicable
to the internal control system of the
budgetary institutions shall be applicable to
the internal control system of other entities
classied as parts of the public sector.13 e
other entities classied as parts of the public
sector are currently specied by a Minister of
Finance Announcement (Ocial Gazette No.
2018/36). Point 12 of Article 1 of the Public
Finances Act species the denition of other
entities classied as parts of the public sector.
is scope includes those organisations which
are not part of the public nances under the
Public Finances Act, which however belong
to the government sector under Council
Regulation (EC) No 479/2009 of 25 May
2009 on the application of the Protocol on
the excessive decit procedure annexed to the
Treaty establishing the European Community.
Other organisations classied as parts of
the government sector are bound by more
obligations since they are obliged to provide
data to the minister responsible for public
nances for the purpose of preparation of
the act on the central budget, shall full
data provision for the preparation of the
compilations to be presented mandatorily in
the act on the implementation of the central
budget, they shall full the regular data
provisions specied in Government Decree No.
368/2011 (XII.31.) on the Implementation
of the Public Finances (hereinafter referred
to as Implementation Decree for the Public
Finances Act), and these organisations may
conclude any debt-generating transaction
under Article 9 of Act CXCIV of 2011 on
the Economic Stability of Hungary validly
only upon the prior approval of the minister
responsible for public nances, in accordance
with the provisions of Gov. Decree No.
353/2011 (XII:30.) on the Detailed Rules of
Approval of Debt-generating Transactions.
Part I of the announcement14 includes the
other organisations classied as parts of the
government sector which are in operation at
the time of the issuance of the announcement,
and which therefore are obliged to enforce
the regulations presented according to the
act. Point A) of the announcement species
the organisations classied in the Central
government sub-sector.15 e majority of the
one hundred and forty-seven organisations is
a business association subject to some kind of
state ownership.16
e rules applicable to internal audit are
specied by Sub-heading 47 of the Public
Finances Act, while the detailed rules of the
internal control system are specied by Gov.
Decree No. 370/2011. (XII. 31.) on the
Internal Control System and Internal Audit of
Budgetary Institutions (hereinafter referred to
as Internal Control Decree), the scope of which
extends to the other organisations classied as
parts of the government sector as well.17
At the same time, the Internal Control
Decree does not pertain to the topic of
compliance but species the specic rules
applicable to the elements of the internal
control system.
Actually, it can be established that there is
no unique legal regulation for the compliance,
integrity and internal control of state-owned
business associations which had been developed
specically for this scope but through various
referring provisions, the specic rules of the
public nances legislation related to budgetary
institutions shall be applicable. Another point
to think about is whether it would be practical
to determine the rules applicable to the lines of
defence of the external audit and the internal
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550 Public Finance Quarterly 2019/4
control mechanisms of state-owned business
associations in a separate law, taking into
consideration the particularities we outlined.
Our answer is evidently that the development
of such a agship law would ll a gap, since
the audit of state-owned business associations
is a very complex process. e functioning
thereof is determined partially by property
law and (public) nance law, and partially by
civil law, as well as partially by administrative
law, especially the specic administration, i.e.
special part thereof. It follows from the above
that control mechanisms are concentrated
to such control focus areas, and therefore
the controlling synergy often fails to prevail
between them. For example, owner’s control
should extend to each and every partial areas,
however – in addition to the assessment of
the nancial or legal compliance – it should
denitively extend to whether the organisation
concerned complies with the expectation
and needs of the owner – i.e. the state – and
the users of its services – the citizens and
organisations – as well as with the objectives set
at the time of the formation. e diculty of
the audits which cover the entire range of the
operation of state-owned business associations
is that division of control and the exercising
of owner’s rights of such companies among
multiple entities. erefore, it may be possible
that the exerciser of owner’s rights and the
entity exercising professional supervision are
completely separate from one another, which
causes numerous diculties in the operation,
in funding, and not least in controlling as
well. In addition, the creation of synergy
among the exercisers of owner’s rights of often
cumbersome, too: the acts of exercising owner’s
rights established along the lines of dierent
legal grounds cause the content particularities
thereof to dier signicantly from each other
as well. Just one example. we emphasised how
important business planning and the owner’s
guidance related thereto are. In this regard,
in connection with the structure, content
and main element of the business plans some
exerciser’s of owner’s rights develop planning
guidelines, while other do not participate
in the operation thereof at all, apart from
supporting the company concerned.
Undoubtedly, the scope of laws with which a
state-owned business association must comply
is versatile. Naturally, the control functions
specied in the laws have a wide range of
measures, however, the countless supervisory,
controlling and proprietary authorisations also
causes the fragmentation of the controlling
authorisations simultaneously, and several
segments remain which have to be controlled
internally by the business association
concerned. is requires the development
of an ecient internal control system. e
internal control system is a system of processes
which includes all those principles, procedures
and internal policies which the budgetary
institution must develop and operate in
order to ensure that its activity is proper and
is compliant with the requirement of cost-
eciency, eciency and ecacy (Kovács,
2007; cited by: Gyüre, 2012; Kis, 2015). In
our opinion, the framework of this shall be
determined on statutory level.
With regard to the terminological
distinction of compliance and integrity, it is
worth to refer to the following: according to
the Methodological Guidelines developed
by the State Audit Oce of Hungary for
surveying the anti-corruption situation of
state administration bodies, the establishment
of the anti-corruption controls thereof and for
the audit of the enforcement of such controls18,
the word ’intergity’ derived from Latin means
intactness, incorruption and immaculacy.
Accordingly, in terms of organisation integrity
means the operation of a given entity in
compliance with the social expectations
and to be subordinated to strict values. e
purpose of the Integrity Survey launched by
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Public Finance Quarterly 2019/4 551
the State Audit Oce of Hungary in 2011 is
‘to identify the risk which adversely aect ethical,
transparent operation, as well as exploring
the controls designated to manage such risks’
(Németh, Bartus, Szabó, 2016). In short, this
means that ‘it does what it had been established
for, in a way it is expected from it and fulls
its mission’ (Pulay, Jenei, 2016). is shows
that organisational integrity and compliance
are close concepts, and an opportunity for
distinction may be if the compliance denition
we explained is compared to the what we wrote
about integrity. Undoubtedly, the objectives
appearing in both concepts are on the same
vertical. e higher the level of the integrity of
an entity is, the more ecient the compliance
controls are (see Table 2).
THE OPPORTUNITIES FOR SUPPORTING
ORGANISATIONAL INTEGRITY AND
COMPLIANCE IN CASE OF STATE-
OWNED BUSINESS ASSOCIATIONS –
CONCLUSION AND RECOMMENDATIONS
As we have already mentioned, the operation
of state-owned business associations and the
social trust factor concerning them are crucial
in respect of the functioning of the state, its
international or even social reputation, as well
as its competitiveness and eciency. For this
reason we think it is very important to examined
which criteria, objectives, expectations and
rules state-owned business associations have
to comply with, and which state control
mechanisms are worth establishing for these. It
is certain that the operation of these companies
shall be subjected to enhanced and actual
control: from the aspects of lawfulness, asset
management, ownership and public nances.
e control mechanisms shall also cover
numerous issues which relate only partially to
specic areas of control, therefore in particular
to the system of objectives giving rise to the
formation of the company, for in the event a
company is no longer able to full its purpose,
it is unable to comply with the fundamental
system of objectives set for it by the state, then
the justication of the existence of the company
concerned may be called into question. We also
emphasised that in course of the assessment of
the compliance of an organisation the question
we are actually aiming to answer is whether the
operating mechanisms of the organisation can
be subordinated to all regulations applicable
to the organisation, and the objectives and
Table 2
THE EVT, FIV AND FRC INDEXES REFLECTING THE INTEGRITY VULNERABILITY
AND THE ESTABLISHMENT OF THE CONTROLS OF THE PARTICIPANTS OF THE 2016-2018
INTEGRITY SURVEY
Index
The value of the
index in 2016
(%)
The value of the
index in 2017
(%)
The value of the
index in 2018
(%)
Inherent Vulnerability Index (EVT) 48.4 41.4 41.6
Factors Increasing Vulnerability (FIV) 35.2 25.0 27.8
Factors Reinforcing Controls (FRC) 60.0 49.8 46.6
Source: own compilation based on the 2016-2018 integrity surveys of the State Audit Office of Hungary
STUDIES
552 Public Finance Quarterly 2019/4
requirements set for it. We formulated the
narrower and broader denition of the
compliance to be enforced in respect of
state-owned enterprises: in the narrower
sense, compliance means the observance and
enforcement of the legal regulations – including
the decisions of the owner – applicable to the
business association. However, in the broader
sense, it means so much more: it also means
compliance with the objectives set for the
business association concerned already upon
the formation, the regulations set on owner or
- as the case may be - government level, the
policy (sector)-level regulations and standards,
the expectations of the parties using the public
service, the short, medium and long-term
strategic objectives the organisation set for
itself, the corporate values set for the managers
and the employees. We could also see that a
process for the regulation of legal compliance
has already started in the legal system, with
respect to the credit institution and insurance
industries.
We also pointed out that the controlling
of the numerous regulations to be enforced
with regard to state-owned enterprises is
based on the cooperation of the organisations
which have dierent controlling competences.
However, the roles of the executive ocers of
the companies in ensuring compliance should
not be disregarded. e Public Finances
Act, the Internal Control Decree and the
Integrity Management System19 already
provide normative bases for this. is scope
is complemented by the gap-lling research20
and surveys of the State Audit Oce of
Hungary, which – year by year – serve as
guidelines for ensuring the organisational
integrity and compliance of state-owned
companies (Németh, Martus, Vargha et al.,
2019), (see Table 3).
Undoubtedly, the improvement of the
compliance and structural integrity, as well
as increasing the eciency of state-owned
business associations may be achieved through
numerous measures (Németh E., Martus B.,
Vargha B., 2018). Such measures include
which presume the intra-organisational
commitment of the manager and employees
of the state-owned enterprise, and their need
for establishing a compliance culture. ere is
a group of measures which may be formulated
from outside, by the exerciser of the owner’s
rights and/or the entity exercising policy control
or supervision. Naturally, the organisational
integrity of these is the responsibility of the
manager of the company. Finally, these issues
may be inuenced by legislative measures as
well, just to mention the most important ones
(Pulay, Kovács, 2019). In order to improve the
eciency of the audit, these control mechanisms
shall be used in a harmonised manner, and the
cooperation among the entities conducting the
audit shall be ensured.
As we have mentioned, the adoption of a
separate law for the internal control system of
state-owned companies would we progressive.
e already mentioned Article 69/A of the Public
Finances Act already provides opportunity to
adopt such law (government decree).
Taking into consideration the rules of the
Internal Control Decree and the Integrity
Management System in addition to the
rules of the credit institution and insurance
legislation, it would be advisable to regulate
the following.
•the executive ocer of the state-owned
business association is responsible for the
establishment, operation and improvement
of the internal control system,
•in course of the establishment of the
internal control system, the unique
characteristics of the organisation shall be
taken into consideration,
•it is advisable to integrate those rules of the
Internal Control Decree which are well-
established in respect of the budgetary
institutions,
STUDIES
Public Finance Quarterly 2019/4 553
•similar to the provisions regulated
on statutory level in the law of credit
institutions and insurance law, it is
advisable to specify the requirement
of legislative compliance on legislative
level as well, however, in addition to
the above and relying on the denition
of compliance in the broader sense, the
compliance expectations of the values
and objectives of state-owned business
associations and the realisation of the
related public functions, as well as the
necessity of specifying the measures
necessary to ensure ethical operation,
Table 3
THE AREAS OF ESTABLISHMENT OF INTEGRITY (2016-2018)
The areas of establishment
of the integrity controls
in 2016
The areas of establishment
of the integrity controls
in 2017
The areas of establishment
of the integrity controls
in 2018
• Property management,
management of public funds,
•Corporate governance,
supervision,
•Activity, provision of public
services,
•Organisational structure,
•Procurements, public
procurements,
•Legal environment,
•Internal regularity,
•Human resources management,
•Internal controls, risk
management,
•Special anti-corruption systems
and procedures.
•Responsible management (provision of the
owner’s property, legal environment, role
of the supervisory board, reporting to the
owner, discretion of the owner, company
management, development of the company
structure, management information
system);
•Performance of public functions, external
relations (performance of public function,
provision of public service, specification
of fees, support provided to external
organisations, acceptance of support from
such organisations, risks of contractual
partner, outsourcing, disclosure,
publicity);
•Financial management (property
management, European Union funding,
partnership contracts, company group,
financial management efficiency);
•Compliance, audit (internal regularity,
public procurement, bidding, accounting
audit, external and internal audits);
•Organisational culture, ethical conduct
(integrity culture in the internal policies,
allowances for private purposes,
selection of employees, conflict of
interest, performance evaluation, ethics
proceedings, media presence).
In addition to the areas specified in
the 2017 analysis:
•External relations: receiving
external support, or providing
support, accounting of
the support, surveying
the satisfaction of clients,
disclosure of data of public
interest.
•External and internal audits:
accounting audit, audits
conducted by external bodies,
level of standard and utilisation
of the internal audits, risk
analysis and risk management.
•Organisational culture: human
resources management,
regulation and assessment of
conflicts of interest during the
selection of the employees,
remuneration system,
performance evaluation, ethics
proceedings.
Source: own compilation based on the 2016-2018 integrity surveys of the State Audit Office of Hungary
STUDIES
554 Public Finance Quarterly 2019/4
•the operation of compliance reporting/
complaint management system is a well-
established practice among the business
associations of the private sector. In
some places, these kinds of reports are
examined by a completely independent
person or body. Institutionalising this
is recommended in case of state-owned
business associations as well,
•it is advisable to develop the issues
concerning compliance and organisational
integrity according to the uniform
guidelines of the exerciser of owner’s
rights, taking into consideration the
unique corporate particularities and on
the level of organisational regulations,
•specifying the provisions applicable
to internal control for state-owned
companies on the level of the regulation
mentioned above shall also be taken into
consideration. In connection with this it
is advisable to strengthen the relationship
and the cooperation of the internal
controller and the bodies, organisations
fullling other control functions (for
example, with the supervisory board, the
auditor or compliance organisation),
•the integration of the contents of the
integrity reports of the State Audit
Oce of Hungary and the international
compliance standards into the corporate
regulation shall be handled as an
issues which belongs to the controlling
competence of the exerciser of owner’s
rights.
We hope that through our study we
contributed to highlighting the topic of
compliance from the state, enterprise aspect
and to the cornerstones of the establishment
of the regulatory environment.
1 Source: www.mnv.hu (12.06.2019)
2 Online: http://www.mnvzrt.hu/felso_menu/
tarsasagi_portfolio/elektronikus_aukcios_rend-
szer_portfolio/ear_portfolio.html (03.06.2019)
3 See the auction surface of HNAM Inc. Online:
https://e-arveres.mnv.hu/index-meghirdetesek-
uzletresz.html?.actionId=action.common.Select
AuctionTypeAction&item=partnerMainPage&
FRAME_SKIP_DEJAVU=1&auctionType=3
(03.06.2019)
4 Understood as company participations assigned or
submitted for asset management.
5 See Preamble Article (9) of Regulation (EC) No
77/2008 on establishing a common framework
for business registers for statistical purposes
and repealing Council Regulation (EEC) No
2186/93
6 OECD Guidelines on Corporate Governance
of State-Owned Enterprises. Online: http://
www.oecd.org/corporate/guidelines-corporate-
governance-SOEs.htm 3. (25.05.2019)
7 In 2013, in its exploratory opinion on
‘e unexplored economic potential of EU
competitiveness — reform of state-owned
enterprises’, the European Economic and
Social Committee argued that the state should,
ensure that there is proper public scrutiny and
regulation, which requires putting in place a
system of governance for its public undertakings,
underpinned by the participation of all
N
STUDIES
Public Finance Quarterly 2019/4 555
stakeholders, as well as representatives of the sta
of those undertakings.
8 According to Article 29(3) of the State-owned
Assets Act, unless any ministerial decree under
Article 3(2a) of the State-owned Assets Act
stipulated otherwise, the entity authorised
to found economic organisations, to acquire
participation in such organisations, as well
as to exercise the proprietary (member’s,
shareholder’s, founder’s) rights on behalf of
the state is HNAM Inc. In addition, HNAM
Inc. may grant authorisation to other persons
and organisations to proceed in course of the
formation of the economic organisation, and
the acquire company participation on behalf of
the state.
9 See Section 61 of the Public Finances Act.
10 See Section 2 (4) of the State-owned Assets
Act.
11 See Section 17 (1) d) of the State-owned Assets
Act.
12 https://allamhaztartas.kormany.hu/belso-
ellenorzesi-szakmai-anyagok (21.05.2019).
13 In compliance with Council Directive 2011/85/
EU on requirements for budgetary frameworks of
the Member States.
14 Part II of the Announcement includes those
government-sector other organisations terminated
or phased out in 2017 in respect of which the
legal successors thereof – or in the absence of legal
successor the party obliged to prepare its annual
account in accordance with the accounting rules –
is subject to subsequent data provision obligation
for 2017.
15 Meanwhile, Point B) of the Announcement is
about the organisations classied in the Local
government sub-sector.
16 In addition, foundations, foundations for public
benet, credit institution organisations, funds and
authorities may also be found in this part.
17 See Article 1 of the Internal Control Decree.
18 Methodological guidelines for surveying the anti-
corruption situation of state administration bodies,
the establishment of the anti-corruption controls
thereof and for the audit of the enforcement
of such controls. https://korrupciomegelozes.
kormany.hu/download/3/70/41000/M%C3%
B3dszertani%20%C3%BAtmutat% C3%B3.pdf
(13 07 2019)
19 Government Decree No. 50/2013 (II.25.) on
the Integrity Management System of State
Administration Bodies and on the Procedures
Applicable to the Acceptance of Lobbyists.
20 State Audit Oce of Hungary: Analysis of
the results of the integrity survey conducted
among the business associations in majority state
ownership 2016 Available at: https://www.asz.
hu/storage/files/files/Publikaciok/Elemzesek_
tanulmanyok/2016/gt_integritas_tanulmany.
pdf?ctid=976 (25.04.2019); State Audit Oce of
Hungary: Study on the 2017 integrity situation of
publicly owned business associations. Available at:
https://www.asz.hu/storage/les/les/Publikaciok/
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