Select Committee on European Scrutiny Fifteenth Report


6 EUROPEAN AGENCY FOR RECONSTRUCTION: 2004 ACCOUNTS

(27092)
15518/05
European Court of Auditors' Report on the annual accounts of the European Agency for Reconstruction for the financial year 2004


Legal baseArticle 248 EC
Deposited in Parliament 13 December 2005
DepartmentInternational Development
Basis of consideration EM of 12 January 2006
Previous Committee Report None
To be discussed in Council 24 January 2006 Economic and Financial Council
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested.

Background

6.1 The European Agency for Reconstruction (EAR) was set up in February 2000 and 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)

6.2 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 2004 budget; and income and expenditure accounts and balance sheets for the financial years 2004 and 2003. The Court performed its audit in accordance with its auditing policies and standards, based on international standards adapted to the Community context. The Court has "thus obtained a reasonable assurance" in support of its opinions.

6.3 The report finds that:

a)   the accounts are reliable except that, "in the absence of effective internal control procedures for long-term receivables, the Court cannot be certain that the transactions relating to counterpart funds, credit line schemes and special funds have been completely recorded"; and

b)  operations are legal and regular, except for renewed concern over continuing anomalies in tendering, deriving particularly from the use of selection criteria in calls-for-tender that "were unsuited to the practical situation". It says that the Agency should "thus be particularly attentive when setting selection criteria to avoid unrealistic requirements which would later lead to interpretation and ineffective procedures".

6.4 With regard to a), the Agency says it has entered in the final 2004 accounts the original value of the investment less a provision for bad debts for all counterpart funds and credit line schemes and the unspent amount for special funds, and considers that the accounts provide a fair and complete view of the EAR long term receivables. It notes that all of these activities have undergone or are undergoing external audits in 2005, and "any minor adaptation needed will be made in the 2005 balance".

6.5 With regard to b), the Agency says that it operates under difficult circumstances in a demanding environment and is fully aware of the risk involved in managing substantial amounts of assistance under such conditions. It therefore established "an elaborated procurement system with clear division of tasks amongst its operational, procurement and finance staff". It says it has taken appropriate measures to address the issues raised by the Court in its annual report for 2003, and that the improvements could not be visible in 2004 but will be appreciated in the context of the audit for the 2005 exercise. "The EAR in particular provided central guidance to the actors involved in calls for tenders across the Agency and improved the coherence of applicable standards and approaches. Such efforts will continue in order to ensure that the relevant recommendations of the Court are complied with".

6.6 In terms of financial management, the report expresses concern at the lack of an active treasury management policy. The Agency says that the funds it holds are commensurate with its disbursement needs, which are subject to peaks of as much as €45m in a single month and to disruptions caused by delays in receiving funds; and that it follows a treasury practice in line with the Commission's practice, but will seek guidance from the Directorate General Budget.

6.7 The Court further remarks that bank reconciliations are not regularly carried out and, with the introduction of accruals accounting in 2005, need to be made monthly. The Agency, while noting that reconciliations are frequent, agrees to do so.

6.8 The Court also calls for a standardised system of dealing with payments requests and criteria set for the supporting evidence that is necessary for a payment to be made. The Agency says that it uses a dual signature verification process and "standard checklists", and updated the detailed procedure for processing invoices in mid-2004. It promises continued efforts to improve these rules.

6.9 A review of the operations entrusted by the Agency to the United Nations Mission in Kosovo (UNMIK) covered all 16 operations still open in the Agency's accounts, totalling €30.7 million. In those cases where UNMIK is directly managing the contracts, "the Agency made payments without exercising adequate financial control. The frequent absence of audit trail requires an in-depth review of the applicability of the agreement signed between the Commission and the United Nations". In the cases of funds where UNMIK was acting on behalf of the local government departments, where "the management of these operations was entirely left to these departments", the Court says that "the Agency has not paid sufficient attention to the proper financial organisation of the beneficiaries because it assumed this was the legal responsibility of UNMIK and was then faced with serious difficulties in closing the operations mainly due to an absence of adequate accounts for the projects and of sufficient justification for the expenditure".

6.10 The Agency responds that it "attempts by all means to ensure that UNMIK respects its relevant obligations" — timely and appropriate reports; rejection if inappropriate; no further payment without checking the financial data and documents required; final payments made conditional on meeting financial requirements, based on reports by independent auditors, which it funds at the most appropriate stage of implementation — in line with the Financial and Administrative Framework Agreement between the EC and the UN. It argues that the terms of the EAR grant agreements with UNMIK are clear on the respective shares of responsibility, with UNMIK being the responsible organisation regarding government departments. The Agency nonetheless provided technical and financial advice on certain grant agreements and will extend this practice in future.

6.11 The Court notes that one of "the main problems the Agency faces is the difficulty in recruiting agents capable of carrying out the difficult tasks with which it is entrusted. The policy of renewing the mandate of the Agency for short periods of time increases this problem as very few individuals with the required profile will relocate under these circumstances".

The Government's view

6.12 The Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) does not comment on this important point in his 12 January 2006 Explanatory Memorandum, nor on much else in the Report. He says that the activities of the Agency are monitored through Department for International Development representation on the Board and is satisfied that EAR "continues to deliver substantial programmes efficiently under decentralised authority". Issues on financial monitoring and evaluation of Agency activities, the Court's earlier comments on tendering, and the need for more effective co-ordination with other donors, including UNMIK, have "all been subjects of the Board's deliberations". The Board will discuss this report at its first 2006 meeting, as will the Economic and Financial Affairs Council on 24 January.

Conclusion

6.13 The Court's Opinion and Observations on the Agency's annual accounts for the financial year ended 31 December 2003 were that:

  • the Agency's accounts did not present a true and fair view of the Agency's actual economic and financial situation;
  • 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 was unable to express an opinion on the legality and regularity of the underlying transactions for payments of €21.4 million; and
  • the remainder of the transactions underlying the Agency's annual accounts were "legal and regular" save for some qualifications concerning supporting documentation, "the observance of contractual provisions and delegations of public authority powers" and "procedural anomalies" in tendering.[20]

6.14 There have plainly been significant improvements in the first two key areas. But there are still concerns over some basic accounting and contracting issues that, after four years of operation, ought perhaps to have been overcome by now, notwithstanding the Agency's area of operation. Moreover, the Agency appears to reject some of the Observations, or promise that the situation will be better by the time of the 2005 Report, or that it is bound by or the victim of standard Commission procedures, agreements and funding failings.

6.15 It would have been helpful to have had the Minister's views on the Report and the Agency's response, rather than on the efficiency of its operations, particularly as they were presumably among the deliberations to which he refers but about which he does not elaborate. A year ago, he noted that the Commission was due to submit a report on the future of the EAR to the European Parliament and Council before June 2005, and that work was ongoing into potential mechanisms to ensure a more direct responsibility for the Commission over the agencies which execute EU funds. But he makes no mention of this now, although it is plain that the Agency's operations are hampered by the uncertainty over its mandate.

6.16 We should therefore be grateful to have his views on the Report and the Agency's response, and for clarification of its prospects, and in the meantime will keep the Report under scrutiny.





20   (26297), 15808/04: HC 38-x (2004-05), para 3 (2 March 2005) and HC 38-xv (2004-05), para 12 (6 April 2005). Back


 
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