10 European Agency for Reconstruction:
2005 Accounts
| (28065)
15548/06
—
| European Court of Auditors' Report on the annual accounts of the European Agency for Reconstruction for the financial year 2005
|
| Legal base | Article 248 EC
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| Deposited in Parliament | 24 November 2006
|
| Department | International Development
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| Basis of consideration | EM of 4 December 2006
|
| Previous Committee Report | None: but see (27092): HC 34-xv (2005-06) para 6 (18 January 2006)and (27092) and (27183): HC 34-xviii (2005-06) paras 14 and 15 (8 February 2006)
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| Discussed in Council | 28 February 2007 ECOFIN Council
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| Committee's assessment | Politically important
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| Committee's decision | Clear
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Background
10.1 The European Agency for Reconstruction (EAR) was set up in
February 2000 in response to the urgent need for reconstruction
in Kosovo following the 1999 conflict and was initially responsible
for managing the EU's aid programmes there.
10.2 Following extensions to its mandate in 2001, 2002 and 2004,
the EAR became responsible for implementing the regional Community
Assistance for Reconstruction, Development and Stabilisation programme
(CARDS) in Serbia and Montenegro and the Former Yugoslav Republic
of Macedonia, as well as in Kosovo. CARD
aims to foster institution-building and good governance, to promote
the development of a market economy and essential infrastructure
and to consolidate civil society. The Agency's head office is
in Thessaloniki and it has operational centres in Belgrade, Podgorica,
Pristina and Skopje.[26]
10.3 From 1 January 2007, all pre-accession assistance
is due to be delivered by the Instrument for Pre-accession Assistance
(IPA) — one of a small number of new Instruments for EU
External Assistance (the other relevant ones being the European
Neighbourhood and Partnership Instrument, the Development Cooperation
Instrument and the Instrument for Stability) which will replace
a plethora of instruments and budget lines. The IPA will replace
PHARE (implementing the acquis communautaire, economic
restructuring and political capacity-building), ISPA (environmental
and transport projects) and SAPARD (agriculture and rural development).
All involve a staged, quality-assured process, which, over time,
ensures that candidate countries are prepared for and finally
enabled to access post-accession funding effectively and efficiently
on their own. This is called EDIS — Extended Decentralised
Management System. Successive Court of Auditors' Reports have
shown that this process works.
10.4 The EAR mandate was due to expire on 31 December
2006. In the case of these beneficiary countries, the focus was
shifting from post-conflict reconstruction to capacity building
— the purpose of the IPA. There was no case for retaining
EAR in order to do this for some countries, rather than EC Delegations
via a tried and tested process. But there was a need for a transitional
period, to enable the EAR to complete its ongoing programmes and
handle the inevitable legal, administrative and personnel issues
arising. So the EAR mandate was extended to 31 December 2008.
Thereafter, all pre-accession assistance, in all aspirant countries,
would be delivered under the IPA via Commission Delegations.
10.5 When we considered the Commission report that
recommended this extension, the Minister described it as a broadly
sensible way forward for implementing EU assistance to the Western
Balkans, and particularly welcomed the prospect of a single coherent
Commission point of contact that could address aid alongside other
issues for the EU and the region. We, too, agreed that it was
a well-made case.[27]
The report of the Court of Auditors (ECA)
10.6 The report was drawn up, as in previous years,
following an examination of the Agency's accounts and consists
of the Court's Statement of Assurance and Observations, together
with a table summarising the Agency's competencies and activities
and 3 other tables of information from the Agency's financial
statements for the year 2005. The Court is required to give its
Opinion on the reliability of the accounts and the legality and
regularity of the underlying transactions.
10.7 The report finds that:
— the
accounts are in all material respects reliable; and
— the
underlying transactions are, taken as a whole, legal and regular.
10.8 As always, the Court also makes a number of
observations — in this instance, on internal audit, financial
control and procurement procedures —upon which the Agency
comments.
10.9 It observes that the roles and tasks of the
internal auditors are not sufficiently defined and do not
always correspond to their duties. Also, internal audit work carried
out in 2005 was not formally reported to management. The Agency
replies that it has been a pioneer in establishing an Internal
Audit Capability, a function that does not yet exist in most of
the EU's 27 other Agencies (which are set up to carry out specific
tasks for the EU); and that the internal auditor's role and responsibilities
follow the evolution of the Commission's approach to the subject.
The new regulatory framework of the Instrument for Pre-Accession
(IPA) will lead to further formalisation of this work.
10.10 On procurement, the Court acknowledges
that the Agency has taken measures to improve the way contracts
are awarded. This has resulted in increased transparency; for
instance, important decisions made during the evaluation process
which affect the contract award are better documented. This in
turn has improved the overall discipline over the evaluation and
contract award procedures. However, the Court noted several cases
of anomalies arising because of selection criteria which are unrealistic
and ill-suited to the circumstances in which the Agency is operating.
The Agency stresses that further refinements of the selection
criteria are being continuously made in order to have consistently
realistic and verifiable criteria in tender documents. This also
facilitates the preparation of appropriate offers by tendering
parties. The Court welcomes the progress made in the area of tendering
and encourages the Agency to further intensify its efforts in
order to ensure that the contracts awarded fully comply with all
regulatory provisions.
10.11 In its 2004 Report the Court noted, regarding
operations entrusted to the United Nations Mission in Kosovo
(UNMIK), a lack of adequate financial control by the Agency in
making payments, as well as serious difficulties in closing operations,
mainly due to an absence of adequate project accounts and sufficient
justification for expenditure.[28]
They note that the Agency made significant efforts in 2005 to
resolve this, but problems in closing operations remained. Audits
carried out by private firms on behalf of the Agency confirmed
that funds had to be recovered from beneficiaries in a number
of projects, an issue the Agency had not yet addressed. The Court
believes that these problems could have been resolved if the Agency
had ensured that the terms of relevant agreements were complied
with.
10.12 The Agency replies that, to the extent that
this was allowed by the Financial and Administrative Framework
Agreement (between the EC and the UN) and by the administrative
situation, the Agency has followed a stricter approach that has
often led to refusing or delaying payments in the absence of adequate
justification or proof of expenditure. Audit reports have been
made obligatory, and UNMIK has been firmly reminded that final
payments on completed projects will only be made up to the amount
certified by a valid external audit. They point out that recovery
processes have been launched for funds advanced but not used correctly.
The Government's view
10.13 In his helpful Explanatory Memorandum of 4
December 2006, the Parliamentary Under-Secretary of State at the
Department for International Development (Mr Gareth Thomas) says
that, though the Report expresses concern at the lack of clarity
over the role of the internal auditor, the Agency contends
that it is following Commission practice, and that further formalisation
of internal audit work will take place. From in-depth discussions
with the Agency he understands that previously there was a lack
of knowledge of the formal requirements for the function of the
internal auditor; now that the Court has clarified what it expects,
the Agency is fully committed to implementing what he says should
be a relatively simple task, which he will monitor to ensure that
the Agency achieves in good time.
10.14 He notes that procurement was an area
of particular concern in the 2003 and 2004 Reports, and is "therefore
pleased that the Court commends the Agency for the action that
it has taken to ensure increased transparency in the award of
contracts". He also welcomes the Court's observation of an
improvement in "the overall discipline over the evaluation
and contract award procedures". He is concerned that the
Court has made the same criticisms of certain selection criteria
this year as they did in their 2004 Report, although he notes
that the Court "welcomes the progress made in the area of
tendering". The issues arising from the 2004 Report have
been raised at the EAR Governing Board meetings; as a result the
Agency is producing periodic reports on procurement; he will ask
that regular reports continue to be produced on the Agency's actions
to improve this area of its performance.
10.15 Although the Court criticises the Agency's
control of transactions managed by UNMIK for the second
successive year, the Minister points to the Court's acknowledgement
of significant efforts in 2005 to resolve the situation.
10.16 "The Agency has introduced tighter procedures,
including insisting on audit reports and refusing or delaying
payments where there is not adequate justification of expenditure.
It also claims to have launched recovery procedures in certain
cases. We therefore accept the Agency's reply, but will continue
to press to ensure that the correct procedures are complied with".
10.17 He is also encouraged that no mention is made
of problems with the Agency's policy on long-term receivables
and treasury management, which had been criticised in the
2004 Report. He says that this reflects significant efforts on
the part of the Agency, about which it has regularly informed
the Governing Board (at the UK's request).
10.18 Overall, he says, "we are satisfied that
the Agency is sufficiently focused on rectifying weaknesses in
its systems and activities. We consider that it needs to intensify
its efforts in using suitable selection criteria for contracts,
and in exercising better control over Agency funds managed by
UNMIK. We will monitor these over the coming year through our
place on the Governing Board".
Conclusion
10.19 We, too, are pleased to note the significant
improvements since we considered the Court's Report on the 2004
accounts in January and February this year.[29]
10.20 Looking ahead, the new pre-accession financial
instrument, the IPA, will come into operation on 1 January 2007.
When we considered the Commission Report on the EAR's future,
we noted the Commission forecast that the switch from EAR to "deconcentrated"
delivery via EC Delegations will be resource-neutral, as well
as the more general point about their capacity to implement the
IPA Instrument. Even if the Court of Auditors' Report on the 2006
Accounts does not have anything specific to say on these issues
(though it should, as the Agency says that the IPA will be an
important factor in embedding its internal audit function), it
would be useful to have some feedback from the Minister, which
should be possible by then.
10.21 In the meantime, we now clear the document.
26 For historical reasons, the CARDS programmes for
Albania, Bosnia and Herzegovina, and Croatia are implemented in
what is known as a "directly centralised but deconcentrated
way", by the Commission Delegations. Back
27
See headnote; (27183) 5275/06 ; HC 34-xviii (2005-06) para 15
Back
28
See headnote. Back
29
See headnote Back
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