REPORT BY THE COURT on the operational efficiency of the management of the European Monetary Institute for the financial year 1995, together with the Institute's replies (96/C 394/02)

CONTENTS

Paragraph Page

1. INTRODUCTION . 1.1-1.2 7

2. THE MANAGEMENT OF THE INSTITUTE IN 1995 . 2.1-2.13 7

The administrative management . 2.1-2.2 7

The budgetary management and the accounts . 2.3-2.13 8

3. THE INSTITUTE'S ACTIVITIES DURING 1995 . 3.1-3.3 8

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1995 . 4.1-4.8 9

The changing operating conditions . 4.1-4.2 9

The management systems and procedures . 4.3-4.5 9

The internal control systems and procedures . 4.6 9

The control of expenditure . 4.7-4.8 9

5. CONCLUSION . 5 9

ANNEX . 11

The Institute's replies . 12

1. INTRODUCTION

1.1. The accounts of the European Monetary Institute (EMI) for the financial year ended on 31 December 1995 were approved by the Council of the EMI on 6 February 1996 and published in April 1996, after they had been audited and certified, without qualification, by a private audit firm on 14 February 1996. This report contains the findings of audits conducted by the European Court of Auditors in the context of its examination of the operational efficiency of the management of the EMI for the financial year 1995, the second year of the Institute's existence.

1.2. The Council of the EMI is the budgetary authority of the Institute and consists, in accordance with Article 9 of the Statute, of a president and the governors of the national central banks, one of whom is appointed vice-president. The Institute is subject to the financial provisions contained in its Statute, the detailed interpretation of which has been set out in the decisions of the Council.

2. THE MANAGEMENT OF THE INSTITUTE IN 1995

The administrative management

2.1. Whereas 1994 was the year in which the Institute came into existence, 1995 saw a phase of consolidation, insofar as most of the organizational structures were already in place. As a result, during 1995 these structures took on a more definitive and worked-out form.

2.2. The number of permanent staff employed by the EMI rose from 127 (the President and 126 staff) on 31 December 1994 to 193 on 31 December 1995. On the latter date, the staff consisted of six senior managers (including the President), 26 managers, 81 operational staff and 80 who were supplying technical support services. During 1995, 73 new members of staff were recruited and 7 left. Over the year staff numbers averaged 166.

The budgetary management and the accounts

2.3. Overall expenditure for 1995 came to ECU 32,6 million compared with an estimate of ECU 42,2 million. Thus, a net amount of ECU 9,8 million, i.e. 23 %, remained unutilized. This difference was mainly due to lower than estimated expenditure on the following items: staff (ECU 2,9 million, i.e. 15,7 % lower than estimated), investments (ECU 2,8 million, i.e. 48 % lower), official travel and installation expenses (ECU 2,3 million, i.e. 55,7 % lower) and expenses in connection with the library, meetings and conferences (ECU 1,9 million, i.e. 51,1 % lower).

2.4. As far as staff expenditure is concerned, the discrepancy is mainly the result of a lower than expected rate of recruitment in the first quarter of the year, and of lower than estimated total expenditure on expatriation and installation allowances.

2.5. The low level of investments, which were ECU 1,3 million below provisions, can be explained, for the most part, by the reduction in the number of computers and the amount of software purchased, compared with the estimates, as a result of the postponement of internal projects. The costs involved in fitting-out the building and installing technical equipment fell ECU 0,9 million short of the forecasts.

2.6. Although the overall rate of utilization of the budget was 77 %, spending was slightly in excess of available appropriations for the budget headings covering communications (due to additional investments), fees (following a decision to charge certain expenditure to profit and loss account rather than capitalize it), and sundry administrative expenses (following a decision by the German tax authorities to restrict VAT reimbursements).

2.7. The balance sheet of the EMI as at 31 December 1995 (see table in Annex 1) shows firstly the assets and liabilities relating to the activities of the Institute in connection with the European Monetary System (EMS), i.e. total holdings of gold and dollars of ECU 54 220 million, corresponding to an identical amount of ECUs issued to the central banks of the EU's Member States. This is followed by a statement of the assets and liabilities relating to the EMI's day-to-day administration, totalling ECU 639 million, compared with ECU 20,7 million as at 31 December 1994.

2.8. This increase is almost entirely attributable to the contributions received from the national central banks during the month of January, totalling ECU 605,4 million, in compliance with Article 16.2 of the Statute. Of this sum of ECU 605,4 million, ECU 597,2 million were invested in three-year time deposits so that the interest generated would supply the EMI with the necessary income to cover its operating expenditure.

2.9. Other main items under the operating assets include ECU 31,8 million of cash balances and ECU 8,8 million of tangible assets. In addition to the contributions from the EU central banks, liabilities related to day-to-day administration consist mainly of debts of ECU 3,5 million, provisions amounting to ECU 7,2 million and the out-turn for the financial year, amounting to ECU 12,5 million.

2.10. As far as the profit and loss account is concerned (see table in Annex 2, which gives an overview adapted by the Court to the requirements of the present report), investments generated interest income of ECU 45,4 million. Expenditure for the financial year totalled ECU 33,3 million, of which ECU 18,4 million was on staff costs, ECU 12,4 million on other administrative expenditure, whilst ECU 2,5 million was accounted for by depreciation of tangible assets. Taking into account an exceptional profit of ECU 0,4 million resulting from the withdrawal of excess provisions related to the financial year 1994, the difference between revenue and expenditure came to ECU 12,5 million, which the EMI Council, at its meeting of 5 March 1996, decided to pay in full into the general reserve fund.

2.11. The growth of the item 'Direct staff costs`, in comparison with the year before, is attributable to the increase in wage and salary costs, including both salaries and general allowances paid to the staff of the EMI (ECU 12,9 million in 1995 compared with ECU 2,8 million in 1994), as well as employer's contributions to the pension, sickness and accident insurance schemes (ECU 2,1 million compared with ECU 0,4 million).

2.12. In 1994 the item 'Other staff costs` included costs incurred for staff employed by the Bank for International Settlements (BIS) and charged by the latter to the EMI, which explains the decrease in the total entered under this item in 1995.

2.13. As for the item 'Other administrative expenditure` (ECU 12,4 million in 1995 compared with ECU 9,0 million in 1994), the cost of occupying the building (rent, fixtures/appliances and installations, etc.) rose from ECU 3,2 million to ECU 8,0 million, the difference being largely due to the rent for the building, which had to be paid for a full year in 1995.

3. THE INSTITUTE'S ACTIVITIES DURING 1995

3.1. In addition to its Annual Report for 1995, published in April 1996, the EMI produced reports and prepared a large number of documents in its working groups and sub-committees, which were set up to create a structure for cooperation with the national central banks for the preparation of the third phase of economic and monetary union. These working groups and sub-committees make use of preparatory studies and analyses prepared by members of the Institute's staff, who also draft their final reports.

3.2. Among the reports published in 1995, two are of particular importance with regard to the fundamental objectives of the EMI: the report on the progress achieved towards convergence, published in November 1995 in compliance with Article 7 of the Statute, and the report on the change-over to a single currency, also published in November 1995 in response to the request of the Cannes European Council meeting in June 1995. The Commission has, by and large, adopted the main elements of this report and the Madrid European Council meeting of December 1995 adopted an outline plan for the transition to a single currency which follows the Institute's proposals.

3.3. As it is required to do by Article 109f(6), second indent, of the Treaty and Article 5 (3) of its Statute, the Institute had to respond to requests from the Council, in the case of proposals for Community regulations, or from the Member States of the EU, in the case of draft texts of legislation or national regulations, for consultation on matters which lie within the Institute's competence. These requests for consultation numbered eighteen in all for 1995. In addition, the Institute organized ten conferences and seminars in 1995, Finally, more and more presentations are being given by members of the EMI's staff in educational establishments and before political and professional associations on the subjects of economic and monetary union and the single currency.

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1995

The changing operating conditions

4.1. During the financial year 1995, staff numbers at the EMI reached their budgeted level, which enabled the Institute to pursue its operational tasks to the full while, at the same time, finalizing its structures and procedures. Compared to the preceding financial year, therefore, operating conditions improved significantly. At the same time, the level of expenditure approached that of a working year with a full complement of staff.

4.2. This being the situation, the Court carried out audits on the systems and procedures on the one hand and checks on the operations on the other, both of which produced generally satisfactory results. Nevertheless, as certain elements of the systems and procedures can still be improved, the Court has addressed certain observations and recommendations on this subject to the management of the EMI. Some of them merit mention in this report.

The management systems and procedures

4.3. Procedures for dealing with the purchasing and the security of information systems had not yet been officially put in place at the end of the financial year 1995. As these are very important procedures, the introduction of them should be speeded up.

4.4. As far as records of fixed assets are concerned, the Institute does not have a minimum procedure for drawing up a physical inventory; the EMI should rapidly adopt such a procedure, especially in view of the fact that all or part of its fixed assets are likely to be taken over by the future European Central Bank.

4.5. There is one weakness in the procedure for the payment of salaries, inasmuch as the separation of duties between the calculation of remunerations on the one hand, and the authorisation of their payment on the other, is insufficient. This weakness should be remedied.

The internal control systems and procedures

4.6. The measures taken by the various departments which exercise control functions, i.e. financial control, legal department and internal audit, lack coordination. The EMI must define these measures more precisely and improve their planning, especially from the point of view of their complementarity, and ensure that ex ante controls are complemented by independent ex post controls.

Control of expenditure

4.7. The implementation of the budget for 1995 revealed a 77 % rate of utilization, leaving ECU 9,8 million unutilized. In such conditions, the manager of a departmental budget can easily compensate overspending against any individual budget heading by recourse to amounts which remain unutilized under other headings. Consequently, the necessary budgetary discipline must be maintained by a body of well-defined rules concerning the authorization of transfers between budget headings and carry-overs of appropriations from one financial year to the next. Such rules, however, do not exist at present in a formalized way at the Institute.

4.8. After examining the system of lump-sum reimbursements of official travel expenses, the Court has reached the conclusion that the present system is too expensive for the Institute because the lump-sum amounts are too high and considers that the system must be reviewed.

5. CONCLUSION

In comparison with the previous financial year, the management activities of the EMI benefited in 1995 from a strengthening of the organizational structures, which allowed operations to be carried out in a generally satisfactory manner; certain features, however, need improvement, especially in the field of administrative procedures, internal control, budgetary management and official travel expenses.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 21 November 1996.

For the Court of Auditors

Bernhard FRIEDMANN

President

ANNEX 1

>TABLE>

ANNEX 2

>TABLE>

THE EUROPEAN MONETARY INSTITUTE'S REPLIES

The European Monetary Institute notes that the audit of its operational efficiency for the year 1995 produced generally satisfactory results. Following the year in question, the Institute has continued to refine and consolidate its systems and procedures. The observations and recommendations of the Court with regard to these are welcomed, and have been fully taken into account as this work has progressed.

REPORT BY THE COURT on the operational efficiency of the management of the European Monetary Institute for the financial year 1995, together with the Institute's replies (96/C 394/02)

CONTENTS

Paragraph Page

1. INTRODUCTION . 1.1-1.2 7

2. THE MANAGEMENT OF THE INSTITUTE IN 1995 . 2.1-2.13 7

The administrative management . 2.1-2.2 7

The budgetary management and the accounts . 2.3-2.13 8

3. THE INSTITUTE'S ACTIVITIES DURING 1995 . 3.1-3.3 8

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1995 . 4.1-4.8 9

The changing operating conditions . 4.1-4.2 9

The management systems and procedures . 4.3-4.5 9

The internal control systems and procedures . 4.6 9

The control of expenditure . 4.7-4.8 9

5. CONCLUSION . 5 9

ANNEX . 11

The Institute's replies . 12

1. INTRODUCTION

1.1. The accounts of the European Monetary Institute (EMI) for the financial year ended on 31 December 1995 were approved by the Council of the EMI on 6 February 1996 and published in April 1996, after they had been audited and certified, without qualification, by a private audit firm on 14 February 1996. This report contains the findings of audits conducted by the European Court of Auditors in the context of its examination of the operational efficiency of the management of the EMI for the financial year 1995, the second year of the Institute's existence.

1.2. The Council of the EMI is the budgetary authority of the Institute and consists, in accordance with Article 9 of the Statute, of a president and the governors of the national central banks, one of whom is appointed vice-president. The Institute is subject to the financial provisions contained in its Statute, the detailed interpretation of which has been set out in the decisions of the Council.

2. THE MANAGEMENT OF THE INSTITUTE IN 1995

The administrative management

2.1. Whereas 1994 was the year in which the Institute came into existence, 1995 saw a phase of consolidation, insofar as most of the organizational structures were already in place. As a result, during 1995 these structures took on a more definitive and worked-out form.

2.2. The number of permanent staff employed by the EMI rose from 127 (the President and 126 staff) on 31 December 1994 to 193 on 31 December 1995. On the latter date, the staff consisted of six senior managers (including the President), 26 managers, 81 operational staff and 80 who were supplying technical support services. During 1995, 73 new members of staff were recruited and 7 left. Over the year staff numbers averaged 166.

The budgetary management and the accounts

2.3. Overall expenditure for 1995 came to ECU 32,6 million compared with an estimate of ECU 42,2 million. Thus, a net amount of ECU 9,8 million, i.e. 23 %, remained unutilized. This difference was mainly due to lower than estimated expenditure on the following items: staff (ECU 2,9 million, i.e. 15,7 % lower than estimated), investments (ECU 2,8 million, i.e. 48 % lower), official travel and installation expenses (ECU 2,3 million, i.e. 55,7 % lower) and expenses in connection with the library, meetings and conferences (ECU 1,9 million, i.e. 51,1 % lower).

2.4. As far as staff expenditure is concerned, the discrepancy is mainly the result of a lower than expected rate of recruitment in the first quarter of the year, and of lower than estimated total expenditure on expatriation and installation allowances.

2.5. The low level of investments, which were ECU 1,3 million below provisions, can be explained, for the most part, by the reduction in the number of computers and the amount of software purchased, compared with the estimates, as a result of the postponement of internal projects. The costs involved in fitting-out the building and installing technical equipment fell ECU 0,9 million short of the forecasts.

2.6. Although the overall rate of utilization of the budget was 77 %, spending was slightly in excess of available appropriations for the budget headings covering communications (due to additional investments), fees (following a decision to charge certain expenditure to profit and loss account rather than capitalize it), and sundry administrative expenses (following a decision by the German tax authorities to restrict VAT reimbursements).

2.7. The balance sheet of the EMI as at 31 December 1995 (see table in Annex 1) shows firstly the assets and liabilities relating to the activities of the Institute in connection with the European Monetary System (EMS), i.e. total holdings of gold and dollars of ECU 54 220 million, corresponding to an identical amount of ECUs issued to the central banks of the EU's Member States. This is followed by a statement of the assets and liabilities relating to the EMI's day-to-day administration, totalling ECU 639 million, compared with ECU 20,7 million as at 31 December 1994.

2.8. This increase is almost entirely attributable to the contributions received from the national central banks during the month of January, totalling ECU 605,4 million, in compliance with Article 16.2 of the Statute. Of this sum of ECU 605,4 million, ECU 597,2 million were invested in three-year time deposits so that the interest generated would supply the EMI with the necessary income to cover its operating expenditure.

2.9. Other main items under the operating assets include ECU 31,8 million of cash balances and ECU 8,8 million of tangible assets. In addition to the contributions from the EU central banks, liabilities related to day-to-day administration consist mainly of debts of ECU 3,5 million, provisions amounting to ECU 7,2 million and the out-turn for the financial year, amounting to ECU 12,5 million.

2.10. As far as the profit and loss account is concerned (see table in Annex 2, which gives an overview adapted by the Court to the requirements of the present report), investments generated interest income of ECU 45,4 million. Expenditure for the financial year totalled ECU 33,3 million, of which ECU 18,4 million was on staff costs, ECU 12,4 million on other administrative expenditure, whilst ECU 2,5 million was accounted for by depreciation of tangible assets. Taking into account an exceptional profit of ECU 0,4 million resulting from the withdrawal of excess provisions related to the financial year 1994, the difference between revenue and expenditure came to ECU 12,5 million, which the EMI Council, at its meeting of 5 March 1996, decided to pay in full into the general reserve fund.

2.11. The growth of the item 'Direct staff costs`, in comparison with the year before, is attributable to the increase in wage and salary costs, including both salaries and general allowances paid to the staff of the EMI (ECU 12,9 million in 1995 compared with ECU 2,8 million in 1994), as well as employer's contributions to the pension, sickness and accident insurance schemes (ECU 2,1 million compared with ECU 0,4 million).

2.12. In 1994 the item 'Other staff costs` included costs incurred for staff employed by the Bank for International Settlements (BIS) and charged by the latter to the EMI, which explains the decrease in the total entered under this item in 1995.

2.13. As for the item 'Other administrative expenditure` (ECU 12,4 million in 1995 compared with ECU 9,0 million in 1994), the cost of occupying the building (rent, fixtures/appliances and installations, etc.) rose from ECU 3,2 million to ECU 8,0 million, the difference being largely due to the rent for the building, which had to be paid for a full year in 1995.

3. THE INSTITUTE'S ACTIVITIES DURING 1995

3.1. In addition to its Annual Report for 1995, published in April 1996, the EMI produced reports and prepared a large number of documents in its working groups and sub-committees, which were set up to create a structure for cooperation with the national central banks for the preparation of the third phase of economic and monetary union. These working groups and sub-committees make use of preparatory studies and analyses prepared by members of the Institute's staff, who also draft their final reports.

3.2. Among the reports published in 1995, two are of particular importance with regard to the fundamental objectives of the EMI: the report on the progress achieved towards convergence, published in November 1995 in compliance with Article 7 of the Statute, and the report on the change-over to a single currency, also published in November 1995 in response to the request of the Cannes European Council meeting in June 1995. The Commission has, by and large, adopted the main elements of this report and the Madrid European Council meeting of December 1995 adopted an outline plan for the transition to a single currency which follows the Institute's proposals.

3.3. As it is required to do by Article 109f(6), second indent, of the Treaty and Article 5 (3) of its Statute, the Institute had to respond to requests from the Council, in the case of proposals for Community regulations, or from the Member States of the EU, in the case of draft texts of legislation or national regulations, for consultation on matters which lie within the Institute's competence. These requests for consultation numbered eighteen in all for 1995. In addition, the Institute organized ten conferences and seminars in 1995, Finally, more and more presentations are being given by members of the EMI's staff in educational establishments and before political and professional associations on the subjects of economic and monetary union and the single currency.

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1995

The changing operating conditions

4.1. During the financial year 1995, staff numbers at the EMI reached their budgeted level, which enabled the Institute to pursue its operational tasks to the full while, at the same time, finalizing its structures and procedures. Compared to the preceding financial year, therefore, operating conditions improved significantly. At the same time, the level of expenditure approached that of a working year with a full complement of staff.

4.2. This being the situation, the Court carried out audits on the systems and procedures on the one hand and checks on the operations on the other, both of which produced generally satisfactory results. Nevertheless, as certain elements of the systems and procedures can still be improved, the Court has addressed certain observations and recommendations on this subject to the management of the EMI. Some of them merit mention in this report.

The management systems and procedures

4.3. Procedures for dealing with the purchasing and the security of information systems had not yet been officially put in place at the end of the financial year 1995. As these are very important procedures, the introduction of them should be speeded up.

4.4. As far as records of fixed assets are concerned, the Institute does not have a minimum procedure for drawing up a physical inventory; the EMI should rapidly adopt such a procedure, especially in view of the fact that all or part of its fixed assets are likely to be taken over by the future European Central Bank.

4.5. There is one weakness in the procedure for the payment of salaries, inasmuch as the separation of duties between the calculation of remunerations on the one hand, and the authorisation of their payment on the other, is insufficient. This weakness should be remedied.

The internal control systems and procedures

4.6. The measures taken by the various departments which exercise control functions, i.e. financial control, legal department and internal audit, lack coordination. The EMI must define these measures more precisely and improve their planning, especially from the point of view of their complementarity, and ensure that ex ante controls are complemented by independent ex post controls.

Control of expenditure

4.7. The implementation of the budget for 1995 revealed a 77 % rate of utilization, leaving ECU 9,8 million unutilized. In such conditions, the manager of a departmental budget can easily compensate overspending against any individual budget heading by recourse to amounts which remain unutilized under other headings. Consequently, the necessary budgetary discipline must be maintained by a body of well-defined rules concerning the authorization of transfers between budget headings and carry-overs of appropriations from one financial year to the next. Such rules, however, do not exist at present in a formalized way at the Institute.

4.8. After examining the system of lump-sum reimbursements of official travel expenses, the Court has reached the conclusion that the present system is too expensive for the Institute because the lump-sum amounts are too high and considers that the system must be reviewed.

5. CONCLUSION

In comparison with the previous financial year, the management activities of the EMI benefited in 1995 from a strengthening of the organizational structures, which allowed operations to be carried out in a generally satisfactory manner; certain features, however, need improvement, especially in the field of administrative procedures, internal control, budgetary management and official travel expenses.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 21 November 1996.

For the Court of Auditors

Bernhard FRIEDMANN

President

ANNEX 1

>TABLE>

ANNEX 2

>TABLE>

THE EUROPEAN MONETARY INSTITUTE'S REPLIES

The European Monetary Institute notes that the audit of its operational efficiency for the year 1995 produced generally satisfactory results. Following the year in question, the Institute has continued to refine and consolidate its systems and procedures. The observations and recommendations of the Court with regard to these are welcomed, and have been fully taken into account as this work has progressed.