52003TA1230(01)

Report

on the financial statements of the European Agency for Reconstruction for the financial year 2002, together with the Agency's replies

(2003/C 319/01)

CONTENTS

>TABLE>

THE COURT'S OPINION

1. This report is addressed to the European Parliament and to the Council in accordance with Article 185(2) of Council Regulation (EC, Euratom) No 1605/2002(1).

2. The Court of Auditors has examined the financial statements of the European Agency for Reconstruction ("the Agency") for the financial year ended 31 December 2002. In accordance with Article 8 of Council Regulation (EC) No 2667/2000, the budget was implemented under the responsibility of the Director. This responsibility includes the drawing-up and presentation of the financial statements(2) in accordance with the internal financial provisions adopted on the basis of Article 9 of the same Regulation. The Court of Auditors is required pursuant to Article 248 of the Treaty establishing the European Community to examine these accounts.

3. The Court performed its audit in accordance with its auditing policies and standards. These have been adapted from generally accepted international auditing standards to reflect the specific characteristics of the Community context. The Court carried out such tests of the accounting records and applied such other audit procedures as it deemed necessary in the circumstances. Through this audit the Court obtained a reasonable basis for the opinion expressed below.

4. This examination has enabled the Court to obtain reasonable assurance that the annual accounts for the financial year ended 31 December 2002 are reliable and that the underlying transactions, taken as a whole, are legal and regular.

5. Without prejudice to the opinion expressed, the Court would like nonetheless to draw the attention of the discharge authority to the situations described in paragraphs 13 to 15.

OBSERVATIONS

Introduction

6. The European Agency for Reconstruction was set up by Council Regulation (EC) No 2454/1999 of 15 November 1999(3). It manages the Union's aid programmes in Kosovo and Serbia and Montenegro and in the former Yugoslav Republic of Macedonia. The seat of the Agency is in Thessaloniki and it has operational centres at Pristina, Belgrade, Podgorica and Skopje. The objectives of the programmes managed by the Agency are to foster institution-building and good governance, to promote the development of a market economy and essential infrastructure and to consolidate civil society.

Implementation of the budget

7. The implementation of the appropriations for the financial year 2002 and of the appropriations carried over from the previous financial year is shown in Table 1.

8. At the end of 2002, the Agency found that it had made payments amounting to 2,7 million euro which were not covered by budgetary commitments. The payments related to the carrying-out of projects that the Commission had transferred to the Agency in the course of the year.

9. The budget forecasts for Title II (administrative expenditure) should be given careful attention, so as to ensure that the carryovers and appropriations which lapse do not account for too great a part of the total budget (50 % in the financial year 2002).

Financial statements

10. The revenue and expenditure account and balance sheet published by the Agency in its activity report for the financial year 2002 are presented in summary form in Tables 2 and 3. It should be noted that, in 2002, the Agency's internal control system was strengthened by the introduction of the SI2 budget accounting system.

11. In 2002, despite the Court's previous observations(4), the Agency was still using a spreadsheet for its general accounts. The introduction of a reliable general accounting tool in all the centres should be a matter of priority.

12. The Agency makes funds available to specialised bodies for the financing of loan programmes in specific fields (development of SMEs, agri-industry undertakings, etc.). Either these funds remain the property of the Agency, in which case they are placed in bank accounts opened in its name, or, where the Agency intends to transfer the funds to the authorities concerned following implementation of the programme, they are paid as subsidies and recorded as Agency expenditure.

13. In one case where an account had been opened in the Agency's name, the accounting officer had not been advised of the existence of the account, the balance of which was 205000 euro at the end of the financial year. Since the Agency was set up, funds totalling 13,3 million euro have been assigned to this type of project; as at 31 December 2002 the cumulative balance of the bank accounts concerned (including the balance of 205000 euro not reported to the accounting officer) was 3,7 million euro and is included under the item "Bank accounts" on the balance sheet.

14. In one case concerning funds to be paid to a public-sector bank as a subsidy for the development of SMEs in Serbia (5 million euro), the provisions of the contract specify that the funds disbursed remain the property of the Agency. The Court considers that the Agency must seek a suitable means of providing information on these funds in its balance sheet or the annexes thereto(5).

Legality and regularity of the underlying transactions

15. As of the end of the 2002 year, the director had issued no fewer than 67 delegations for the implementation of the budget(6). Even allowing for the dispersal of the Agency centres, the number of delegations seems likely to weaken the internal control system. For example, several cases were found where commitments and payments had been signed by employees who had not been duly authorised to do this.

16. Each centre has a petty cash fund or imprest account, sometimes involving large sums of money(7). The rules and procedures that apply to these funds should be the subject of a decision by the director in accordance with the provisions of the financial regulation.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 15 and 16 October 2003.

For the Court of Auditors

Juan Manuel Fabra Vallés

President

(1) OJ L 248, 16.9.2002, p. 1.

(2) As laid down in Article 8 of Council Regulation (EC) No 2667/2000, the accounts for all the Agency's revenue and expenditure for the financial year 2002 were drawn up on 29 September 2003 and sent to the Court of Auditors. The accounts were received by the Court on 29 September 2003. A summarised version of the financial statements is presented in the tables attached to this report.

(3) OJ L 299, 20.11.1999.

(4) See paragraph 12 of the report for the financial year 2001, OJ L 326, 27.12.2002, p. 3.

(5) Since the Agency was set up, the total amount identified as funds committed for subsidies of this sort is 17,1 million euro, 12,5 million of which was actually disbursed and recorded as expenditure.

(6) The delegations concerned 45 employees, almost half of the category A staff.

(7) 50000 euro.

Table 1

European Agency for Reconstruction - Implementation of the budget for the financial year 2002NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Agency data. The tables summarise the data supplied by the Agency in its own financial statements.

>TABLE>

>TABLE>

Table 2

European Agency for Reconstruction - Revenue and expenditure account for the financial years 2002 and 2001

>TABLE>

NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Agency data.

Table 3

European Agency for Reconstruction - Balance sheet at 31 December 2002 and 2001NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Agency data.

>TABLE>

>TABLE>

The Agency's replies

Budgetary implementation

8. These payments were made on the basis of figures stated in a formal decision of the Commission. A delay which occurred in committing these funds in the Commission accounts is expected to be regularised in 2003.

9. The unspent funds for Title 2 in 2002 are mainly due to the starting-up of the Agency in the former Yugoslav Republic of Macedonia and the difficulties of estimating better the costs of this type of exercise.

Financial accounts set-up

11. The Agency expects to close the 2003 accounts with an already installed professional application for the general ledger.

13. This case was a miscommunication between the accountant based in headquarters and a deputy accountant in an operational centre.

Legality and regularity of the transactions

15. The Agency is spread over five locations and manages a budget divided into three distinct titles. Within assistance programmes, there are six to eight distinct sectors of activity in each of the four operational centres. Therefore, in each centre, the number of staff in Operations with a delegation of signature for each relevant sector is the minimum. The Agency undertook a streamlining of its procedures in order to avoid any omission of delegation of signature in the future.

16. Further to the mission of the Court, the Agency reduced the petty cash in Belgrade from EUR 50000 to EUR 20000 for payments in cash. All other payments are made by cheque or bank transfer. The formalisation of the petty cash will be made as recommended by the Court.