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 base | Article 248 EC
|
| Deposited in Parliament |
13 December 2005 |
| Department | International 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 assessment | Politically important
|
| Committee's decision | Not 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
| 
