14 EUROPEAN AGENCY FOR RECONSTRUCTION:
2004 ACCOUNTS
(27092)
15518/05
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| 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
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| Basis of consideration |
Minister's letter of 1 February 2006 |
| Previous Committee Report |
HC 34-xv (2005-06), para 6 (18 January 2006) |
| Discussed in Council | 24 January 2006 Economic and Financial Council
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
14.1 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 extensions to its mandate
in 2001, 2002 and 2004, 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)
14.2 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, and "thus obtained a reasonable
assurance" in support of its opinions.
14.3 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".
14.4 In terms of financial management, the report expresses concern
at the lack of an active treasury management policy.
14.5 The Court remarks that bank reconciliations are not regularly
carried out and, with the introduction of accruals accounting
in 2005, need to be made monthly.
14.6 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.
14.7 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".
14.8 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
14.9 In his 12 January 2006 Explanatory Memorandum, the Parliamentary
Under-Secretary of State at the Department for International Development
(Mr Gareth Thomas) did not comment on this important point, nor
on much else in the Report. He referred to the activities of the
Agency being monitored through Department for International Development
representation on the Board and said he was 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, had "all been subjects of
the Board's deliberations".
14.10 When we considered the document and the EM on 18 January
2006,[23] we noted that
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;
- 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.[24]
14.11 While there had plainly been significant improvements in
the first two key areas, there were 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, in its responses the Agency
appeared to reject some of the Observations, or promised that
the situation would be better by the time of the 2005 Report,
or said that it was bound by or the victim of standard Commission
procedures, agreements and funding failings.
14.12 We also felt that 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 referred
but about which he did not elaborate. A year earlier, he had 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 executed EU funds; but he made no mention of this now, although
it was plain that the Agency's operations were hampered by the
uncertainty over its mandate.
14.13 We therefore asked him for his views on the Report and the
Agency's response, and for clarification of its prospects, and
in the meantime kept the Report under scrutiny. He has responded
to the first of these requests in his letter of 1 February 2006.
The Minister's letter
14.14 Referring to the Committee's Conclusions, the Minister responds
as follows:
"In particular, you highlighted the ECA's 'concerns over
some basic accounting and contracting issues', including a) the
accounting of long-term receivables b) failings in the EAR's tendering
procedures and c) the lack of an active treasury management policy;
and the EAR's response to these criticisms. You also asked for
d) information on the status of a report on the future of the
EAR due to be submitted to the Parliament and Council.
"a) The ECA noted that 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'. The
EAR considers that the accounts provide a fair and complete view
of the EAR's long-term receivables, because most counterpart funds,
credit line schemes and special funds were externally audited,
with the remainder to be audited during 2005.
"DFID is encouraged that significant improvements
have been made in the EAR's accounting procedures since 2003 (when
the ECA considered that 'the accounts did not provide a true and
fair view of the EAR's actual economic and financial situation').
On the treatment of long-term receivables, DFID officials have
confirmed with the EAR, that the provisional sum entered into
the 2004 accounts has been fully audited over the course of 2005,
and was in fact conservative.
"Given this, and expected reductions during
2005 in the level of credit lines outstanding, we accept the EAR's
view that despite the uncertainty noted by the ECA, this aspect
of the accounts is materially fair and complete, so we do not
consider this area to be a cause for particular concern. However,
DFID will continue to monitor progress on the reduction in the
level of outstanding credit lines and we will ensure that the
provisional sums are properly audited again this year.
"b) The ECA states that operations are legal
and regular, except for continued concern over certain anomalies
in tendering, deriving particularly from the use of certain selection
criteria in calls for tender that 'were unsuited to the practical
situation'. The EAR says that it has taken appropriate measures
to address the issues raised by the 2003 report, and that improvements
will be visible in 2005.
"DFID remains concerned that the tendering
procedures of the EAR should continue to improve. However, we
note substantial progress since the 2003 Report, which was released
too late to affect the 2004 accounting year, and recognise that
there is a real risk that a stricter approach to procurement may
lead to greater rigidity, with an attendant reduction in the effectiveness
of assistance. DFID is also encouraged that the European Anti-Fraud
Office have investigated all the instances where the ECA's work
raised concerns and found no case to answer; and that the ECA
stated in October 2005 that they had come across less cases of
concern so far in 2005.
"In the light of this, we consider that
the ECA's concerns, while valid, should not call into question
the propriety of the EAR's accounts. DFID plans, along with like-minded
Member States, to request feedback from the EAR at the next Board
meeting in March (where we expect the 2004 Report to be officially
discussed) on what further actions they have taken to address
these concerns.
"c) The ECA Report also expresses concern
at the lack of an active treasury management policy. The EAR notes
that large cash holdings are necessary considering the cash flow
situation, but has agreed to seek advice from DG Budget.
"There are valid arguments in pushing for
an active treasury management system: it would probably entail
some additional risk; the balances concerned are not very large;
and the expensive staff necessary in an area which is not at the
core of the EAR's business would probably not be cost-effective,
particularly considering the proposed life-span of the EAR. We
are, however, keen to see continued pressure on the EAR to keep
its balances as low as is operationally efficient, and are pleased
to learn that they are markedly reduced in 2005. In further Board
meetings, DFID will request regular reporting on this aspect.
"d) 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".
"This situation is now being clarified,
beginning with a Commission report published on 26 December 2005,
and DFID's full position on the future of the EAR is laid out
in the accompanying Explanatory Memorandum (5275/06). Resolution
of the uncertainty over the future of the Agency should significantly
ease the difficulty over ensuring appropriate staffing levels".
Conclusion
14.15 We consider the Minister's Explanatory Memorandum
on the EAR's future elsewhere in this Report.[25]
14.16 Since, under those proposals, the EAR would
continue to operate until the end of 2008, the issues relating
to its accounts will continue to be relevant. We are reassured
by much of what the Minister says. We accept that a balance has
to be struck between procurement procedures and the delivery of
effective assistance. Like him, we are reassured that the European
Anti-Fraud Office's subsequent examination of ECA's concerns has
found no case to answer, and that the situation appears to have
improved even further in 2005. However, although the ECA's concerns
are said to be reduced in number, the Minister nonetheless accepts
that they are valid, and notes that, at the March Board meeting
that is to consider the Report, DFID will be seeking feedback
on what further actions are being taken to address them.
14.17 There is also the question of the operations
entrusted to UNMIK, where the ECA says that the absence of an
audit trail requires an in-depth review of the applicability of
the agreement between the Commission and the United Nations.
14.18 We accordingly hope that, when he comes
to consider the report on the 2005 Accounts, the Minister will
be able to confirm further improvements.
14.19 We now clear the document.
23 See headnote. Back
24
(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
25
See paragraph 16. Back
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