REPORT on the financial statements of the Office for Harmonisation in the Internal Market (OHIM - Alicante) for the financial year ended 31 December 1997, together with the Office's reply (98/C 406/10)

1.1. This report is addressed to the Budget Committee of the Office for Harmonisation in the Internal Market in conformity with Article 137(2), of Council Regulation (EC) No 40/94 (1).

1.2. The Court has examined the financial statements of the Office for Harmonisation in the Internal Market for the financial year ended 31 December 1997. In accordance with Article 119(2)(c) of Council Regulation (EC) No 40/94, the budget was implemented on the responsibility of the President of the Office. This responsibility included the drawing-up and presentation of the financial statements (2) in accordance with the internal financial provisions, as provided for in Article 138 of Council Regulation (EC) No 40/94. The Court of Auditors is required under Article 188c of the Treaty establishing the European Community to audit these accounts.

1.3. The Court performed its audit in accordance with its auditing policies and standards. These have been adapted from generally accepted international auditing standards to reflect the specific characteristics of the Community context. The Court carried out such tests of the accounting records and other audit procedures as it deemed necessary in the circumstances. By means of this audit, the Court obtained a reasonable basis for the opinion expressed below.

1.4. With the exception of the fact mentioned in paragraph 1.11, this examination has enabled the Court to obtain reasonable assurance that the annual accounts for the financial year ended 31 December 1997 are reliable and that the underlying transactions, taken as a whole, are legal and regular.

MAIN OBSERVATIONS ON THE IMPLEMENTATION OF THE BUDGET OF THE OFFICE FOR HARMONISATION IN THE INTERNAL MARKET FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 1997

Accounting software

1.5. Although 1997 was the Office's fourth year of activity (including three full years), the budgetary accounts are still kept by means of a spreadsheet rather than appropriate accounting software. The use of a spreadsheet had already been criticised in the Court's Report on the previous financial years (3). The Office should also introduce a system of analytical accounts in order to be able to establish the real cost of the services that it provides.

Other observations

1.6. Payments (ECU 26,0 million) amounted to only 48 % of the appropriations for the financial year (ECU 54,0 million after the adoption of the third supplementary and amending budget); 48,5 % (ECU 26,2 million) of these appropriations were automatically carried over to the financial year 1998 and 3,5 % (ECU 1,8 million) were cancelled.

1.7. The volume of carry-overs was mainly due to the accounting practice followed by the Office. This consists in committing all expenditure relating to each trade mark registration application right from the establishment of the relevant revenue. Under this approach, the year-end balance for these commitments is automatically carried over to the following financial year, regardless of the actual date of the request for services from the Office (research, translation, publication, etc.) - whether the request is made before the end of the financial year or only during the following year. This practice is an interpretation of the regulations which does not strictly comply with the budgetary principles of annuality and universality.

1.8. With regard to the appropriations carried over from the financial year 1996 (ECU 14,5 million), it is noted that 27,6 % of these (ECU 4,0 million) had to be cancelled. A large percentage (88,0 %) of these cancellations related to expenditure for translation, postage and publication. If these carry-overs had corresponded to more specific commitments, these cancellations would not have been necessary.

1.9. Article 13 of the Office's Financial Regulation provides for its budget to be published in the Official Journal of the European Communities. This was done only for supplementary and amending budget No 3.

1.10. Part of the cash balance (ECU 0,35 million out of ECU 42,50 million) was not entered in the general accounts until it came to the closure of the accounts. Receipts are first entered in the trade mark management software (EUROMARC) and then recorded in the general accounts only once the payer has been identified.

Headquarters

1.11. In 1997, the Office signed a contract with Cosoami, the intermediary office of the Spanish Government, for the construction of its future headquarters. If the Office does not receive a sufficient number of trade mark registration applications, it will be possible to complete the building work only with the help of a subsidy from the general budget. Irrespective of the Budget Committee's agreement to the launching of this operation, it would have been desirable for the Office to have obtained the Commission's consent before signing the contract with Cosoami.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 29 October 1998.

For the Court of Auditors

Bernhard FRIEDMANN

President

Table 1 Balance sheet for the financial years 1996 and 1997

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Source: Prepared by the Court of Auditors on the basis of the Office's data.

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Source: Prepared by the Court of Auditors on the basis of the Office's data.

(1) OJ L 11, 14.1.1994, p. 33.

(2) As required under Article 137(1), of Council Regulation (EC) No 40/94, the accounts for all the Office's revenue and expenditure in respect of the financial year 1997 were drawn up on 21 January 1998 and forwarded to the Office's Management Board, the European Parliament, the Commission and the Court of Auditors. These accounts were received by the Court on 27 January 1998. A summarised version of these financial statements is presented in the tables attached to this report.

(3) OJ C 393, 29.12.1997, p. 47.

(4) This amount corresponds to fixed assets.

REPLY OF THE OFFICE

1.5. Accounting software

With regard to budget accounts, the Commission, contrary to what it had said, was unable to make the various SINCOM 2 software modules available to the agencies. The Office had therefore to undertake the necessary preparations for implementation by 1 January 1999 of the ISPS accounting module developed for the Commission by SAP. The costs are relatively low, given the investments already made as regards the general accounts.

Concerning analytical accounts, the Office continued to work on this matter in 1998. Analytical accounting will be operational by the end of 1998.

1.6. See the explanations given in Point 1.7.

1.7. Appropriations carried over

Expenditure relating to trade mark registration is expenditure which is certain to be undertaken once a filing date has been attributed to a trade mark application, in accordance with the Office's obligations under the CTMR.

A number of these services, such as translation, national searches and publication, are undertaken by outside agencies or bodies imposed on the Office. The Office therefore felt it was appropriate to undertake the corresponding expenditure commitments upon receipt of trade mark application fees.

The Office believed that this practice, based on automatic carry-over, complied with:

- the principle of annuality, with the exceptions set out in the Financial Regulation, which enables appropriations to be carried over;

- the principle of universality since the revenue is not allocated to any particular item of expenditure.

It also reflects the specific nature of the Office which, as an intellectual property rights office, only receives fees against the provision of services to users.

Because of the unexpected influx in 1996 of 43 000 trade mark applications, as opposed to 15 000 forecast by authorised professionals and by the Commission, the Office had to prioritise, and process this mass of trade mark applications on a first-in first-out basis. Inevitably, it took longer to complete the various trade mark application processing stages, resulting in significant carry-overs at the end of 1997, permitted under Article 6.2 of the Financial Regulation.

Conclusion: In the light of the remarks made by the Court of Auditors, the OHIM will take the necessary steps to ensure that the time between commitment to expenditure for each processing stage and payment is as short as possible in the future.

1.8. Lapsed appropriations

The significant volume of appropriations carried over from the 1996 financial year which lapsed in 1997 (ECU 4 million) results primarily from a decline in translation and publication costs, over which the Office has no control. The reduction in expenditure reflects in particular the average number of pages translated and published for each trade mark application, which proved to be three and one respectively rather than the 4,5 and three initially forecast.

In addition, the appropriations lapsed because of exceptional circumstances relating to the launch of the Office's activities in 1996. As a result of the changes in the situation cited in Point 1.7 above, a proportion of the appropriations for 1996 carried over to the 1997 financial year could not be used.

1.9. Publication of the budget

Because of the time limits imposed under the CTMR in this regard, the Office had prepared the 1997 budget at the end of 1995, based on estimates of the Office's activities which by 1996 proved to have been completely underestimated. Thus, at the beginning of the 1997 financial year, OHIM decided to present a supplementary and amending budget (SAB) for 1997 which totally revised the overall budget. This SAB, which was more realistic and reflected the number of trade mark applications actually filed in 1996, was published in the Official Journal of the European Communities.

The 1998 budget was indeed published in the Official Journal of the European Communities (OJ L 64, 5.3.1998). Preparations are being made for the publication of the first SAB for 1998, which will also be published in the Official Journal of the European Communities.

1.10. The recording of individual receipts

To ensure that the time limit for recording receipts is as short as possible, the Office is giving priority to identification of customer accounts and is endeavouring to reduce to a minimum (three to four days) the time taken to record the receipts in the SAP R-3 accounting system.

1.11. The Office's headquarters

1. The procedure underlying the conclusion of an agreement between OHIM and Cosoami

The agreement binds the OHIM to the COSOAMI consortium created by the Spanish authorities (Ministry of Industry, Generalitat of Valencia, Diputación of the Province of Alicante and the Town of Alicante) as part of the follow-up to the agreement reached in 1994 between the Spanish Government and the Commission on the provision by Spain, free of charge, of a provisional seat for the Office and the purchase by the latter of the future permanent seat.

2. Purchase of the headquarters

With regard to the financing of the building work, this will be met from the Office's revenue, based on an average of 27 000 to 30 000 trade mark applications per year, and through overdraft facilities contracted to this end in 1998.

Should the annual number of trade mark applications fall to 25 000 over several financial years, the Office would, once the ceiling on its credit facilities had been reached, have to apply for a Community subsidy, possibly at the end of 2003 or at the beginning of 2004.

3. Consultation of the Commission

Having noted the Commission's remarks regarding the contract signed between the OHIM and the COSOAMI, the Budget Committee decided to give its approval for the acquisition of the building.