3 European Agency for Reconstruction:
2003 Accounts
(26297)
15808/04
| European Court of Auditors' Report on the annual accounts of the European Agency for Reconstruction for the financial year 2003
|
Legal base | |
Deposited in Parliament | 20 January 2005
|
Department | International Development
|
Basis of consideration | EM of 23 February 2005
|
Previous Committee Report | None
|
To be discussed in Council | 8 March 2005 Ecofin Council
|
Committee's assessment | Politically important
|
Committee's decision | Not cleared; further information requested
|
Background
3.1 The European Agency for Reconstruction (EAR), which was set
up in February 2000, was initially responsible for managing the
EU's aid programmes in Kosovo. Following two extensions to its
mandate in 2001 and 2002, its operations now also cover Serbia
and Montenegro and the Former Yugoslav Republic of Macedonia.
The Agency's head office is in Thessaloniki and it has operational
centres in Belgrade, Podgorica, Pristina and Skopje. It implements
programmes to foster institution-building and good governance,
to promote the development of a market economy and essential infrastructure
and to consolidate civil society.
The report of the Court of Auditors (ECA)
3.2 The report consists of the Court's Opinion and Observations,
together with tables on the Agency's areas of responsibility,
powers, governance, resources and activities; information on the
implementation of the 2003 budget; and income and expenditure
accounts and balance sheets for the financial years 2002 and 2003.
It says that "The Court of Auditors has examined the Agency's
annual accounts for the financial year ended 31 December 2003
and the underlying transactions. The Court performed its audit
in accordance with its auditing policies and standards. These
are based on international standards adapted to the Community
context. The Court has thus obtained a reasonable assurance in
support of the following opinions".
3.3 The key findings are:
Reliability of the accounts
"In the Court's opinion, the Agency's accounts
do not present a true and fair view of the Agency's actual economic
and financial situation
"Article 1 of the Agency's Financial Regulation
stipulates that its budget should be authorised according to the
principle of differentiated appropriations, which distinguishes
between commitment appropriations and payment appropriations.
Article 3 of this same regulation lays down that total revenue
should cover total payments, which implies that the budget should
be shown to balance and that implementation should be as close
as possible to equilibrium. In practice, however, the Agency's
budget as adopted by the Governing Board does not observe the
principle of differentiated appropriations, as a result of which
the Agency presents as expenditure not only payments for the period
charged to the appropriations for the financial year but also
all the outstanding payments in respect of commitments for the
financial year, irrespective of the extent to which these commitments
have been implemented. The accounting out-turn for the financial
year therefore bears no relation to the economic reality of the
Agency's operations. The cumulative deficit as at 31 December
2003, i.e. 140.95 million euro, is thus largely artificial since
it is due to outstanding commitments concerning economic transactions
which have not yet been implemented.
"In 2003 the Agency's accounting system still
exhibited serious weaknesses. For example, the general accounts
were still being kept on a single-entry basis despite all the
risks of error that involves for the integrity of the data and
in spite of the fact that Article 55 of the Agency's Financial
Regulation lays down that the accounts should be kept on a double-entry
basis.
"Despite the observation made by the Court in
its report concerning the financial year 2002, funds paid out
to financial intermediaries under loan programmes have not been
entered on the assets side of the balance sheet. The use made
of these funds is merely the subject of an information note in
the report annexed to the accounts. Since its creation, the Agency
has paid out 52.4 million euro under these programmes. Moreover,
various programmes which were still being implemented in 2003
provide for the management of funds by contractors to the Agency.
The funds thus paid out, which have been identified by the Court,
amounted to 43.38 million euro. In both cases, the balances still
available at the end of the financial year 2003 should have appeared
on the assets side of the Agency's balance sheet.
Legality and regularity of the underlying transactions
"Owing to the lack of the requisite information
on the final use of funds entrusted by the Agency to external
bodies (both national and international), the Court is unable
to express an opinion on the legality and regularity of the underlying
transactions for payments of 21.4 millions euros made in 2003
For the remainder and except for the qualifications set
out below, the Court is of the opinion that the transactions underlying
the Agency's annual accounts were legal and regular.
"As far as payments are concerned, the Court
noted errors relating to the validity of supporting documents,
the observance of contractual provisions and delegations of public
authority powers
"With regard to procurement, the Court noted,
for one out of five of the operations it has examined, procedural
anomalies that call into question the respect of the principle
of equality of opportunity between tenderers
"
3.4 The report then continues with its observations.
These deal with presentation of the accounts (paras 8-11); with
the management of one financial body that the Agency had set
up in Kosovo (para 12); with procedural anomalies in respect of
payments, the awarding of contracts, documentation needed to assess
the legality and regularity of the underlying transactions in
the case of agreements the Agency concluded with "public
or semi-public, national or international, third parties"
(paras 13-15); and with what the Court describes as "the
excessive number of authorising officers by delegation and sub-delegation"
(para 16).
3.5 The EAR's response is attached to the report,
which the ECA adopted on 8 and 9 December 2004.
3.6 In his Explanatory Memorandum of 23 February
2005, the Parliamentary Under-Secretary of State at the Department
for International Development (Mr Gareth Thomas) says that:
"the report points to some shortcomings in the
EAR's financial practices. Following this criticism, the Enlargement
Commissioner, Olli Rehn, appeared before the European Parliament's
Budgetary Control Committee (COCOBU) on 10 January. The Agency's
Director, Richard Zink, also appeared before COCOBU on 18 January.
The following problems were highlighted:
- Deficiencies in the presentation of accounts
Both the hearing and the report exposed some technical
problems which needed to be addressed, but there have been no
irregularities or fraud. The EAR has since taken steps to improve
the presentation of its accounts in accordance with the requirements
of the new accrual-based accountancy rules. It received approval
of its new accounting systems in June 2004 by the Commission and
its board members. The final accounts for 2003 have been established
on the basis of a double entry general accounting system. The
Commission is also working to ensure that all future accounting
arrangements are compliant with the rules and regulations.
- Implementation of the budget
The ECA report criticised the agency's budget as not "observing
the principle of differentiated appropriations". The Agency
has since taken steps to clarify the financial presentation of
its operation.
- Statement of Assurance
Of the over 300m (£207.4m) allocated by the
EAR, only 21.4m (£14.8m) given to international organisations
was found not to have the relevant documentation. This points
to organisational weaknesses of these organisations rather than
the EAR. The ECA has requested appropriate recording of these
funds in the agencies' financial statements.
- Contract Management
The ECA highlighted problems likely to affect decisions
to award contracts. The EAR has taken action to address these
issues, and this has been welcomed by the ECA. The ECA felt the
EAR had consistently responded appropriately where irregularities
had been identified and their systems now appear to be working
satisfactorily."
3.7 He adds that "The Commission is due to submit
a report on the future of the EAR to the European Parliament and
Council before June 2005. Work is ongoing into potential mechanisms
to ensure a more direct responsibility for the Commission over
the agencies, which execute EU funds".
The Government's view
3.8 The Minister says:
"The report points to some problems in the financial
management of the Agency. We will make clear that we expect to
see clear improvements when the 2004 report issues given that:
- The EAR has already taken corrective action to
meet the ECA's criticisms.
- The 2003 report is the first audit report on
EAR to contain adverse remarks. The Commission's 2004 evaluation
of the EAR was favourable, highlighting the strength of the agency
as a vehicle for relatively rapid disbursement of assistance.
- There has been no indication of any irregularity
or fraud.
- EAR administers spending in difficult situations,
in areas that have weak institutions. The EAR has consistently
responded appropriately in the past when irregularities had been
identified.
- DFID will use its position on the EAR board to
monitor progress in addressing any concerns raised."
Conclusion
3.9 It is clear from the replies of the European
Agency for Reconstruction (EAR) that it has responded promptly
and appropriately to the observations of the Court of Auditors
(ECA). It is also clear that the issues relate to the application
of procedures in circumstances that were far from ideal, especially
in post-conflict Kosovo, and to the way in which the accounts
were presented at a time of change in accounting systems. But
there are aspects of the Minister's Explanatory Memorandum upon
which we should be grateful for clarification.
3.10 Most importantly, as the Minister points
out, there has been no sign of fraud, but it is not clear why
he says there has been "no indication of any irregularity".
The Minister says that it was "only" 21.4m (£14.8m)
given to international organisations that was found not to have
the relevant documentation: nonetheless, this amounts to 7% of
the expenditure in question. He also says that action taken to
address the issues relating to contract management "has been
welcomed by the ECA" and that "the ECA felt the EAR
had consistently responded appropriately where irregularities
had been identified and their systems now appear to be working
satisfactorily", but it is not clear where or when the ECA
gave this view. He goes on to say the Commission is due to submit
a report on the future of the EAR to the European Parliament and
Council before June 2005, but without explaining who commissioned
the report or why, or what its terms of reference are. In setting
out the Government's view, he says that the ECA has already taken
corrective action to meet the ECA's criticisms, but that "we
will make clear that we expect to see clear improvements".
He also says that this is the first audit report "to contain
adverse remarks", but that "the EAR has consistently
responded appropriately in the past when irregularities had been
identified" despite what the Court has to say about
the Agency's continuing failure to respond to the comments made
by the Court in its 2002 report regarding some 95 million
of funds paid out to financial intermediaries under loan programmes
still not being entered on the assets side of the balance sheet.
Finally, he says that "DFID will use its position on the
EAR board to monitor progress", even though, it seems, DFID
was not able to prevent a situation arising in which, despite
the requirement in the EAR financial regulations that the Agency's
budget observes the principle of differential appropriation, the
board adopted a budget that did not do so (paragraph 8 of the
report).
3.11 Pending the Minister's response we shall
keep the report under scrutiny.
|