REPORT on the financial statements of the European Monitoring Centre for Drugs and Drug Addiction (EDMC-Lisbon) (Financial year 1996), together with the Centre's replies (97/C 393/06)

1.1. This report is addressed to the Management Board of the European Monitoring Centre for Drugs and Drug Addiction pursuant to Article 11 (11) of Council Regulation (EEC) No 302/93 of 8 February 1993 (1).

1.2. The Court has examined the financial statements of the European Monitoring Centre for Drugs and Drug Addiction for the financial year 1996. In accordance with the requirements of Article 11 (8) of Regulation (EEC) No 302/93 (2), the budget was implemented under the responsibility of the Director. His responsibilities include the preparation and presentation of the accounts (3) in accordance with Article 11 (10) of Regulation (EEC) No 302/93, as amended by Regulation (EC) No 3294/94 of 22 December 1994 (4). Article 188c of the Treaty establishing the European Community requires the Court of Auditors to audit these accounts.

1.3. The Court has conducted its audit in accordance with generally accepted auditing standards in so far as they are applicable in the Community context. It carried out checks on the account books and records and also such additional auditing procedures as it considered necessary in this context. The main observations resulting from the Court's audit are presented in the second part of this report.

1.4. The observations set out in paragraphs 1.14, 1.15, 1.17 and 1.18 show that the Centre is applying practices that do not comply with the regulations and that there were certain sums for which no justification could be found at the time of the audit.

1.5. Subject to the facts set out in the previous paragraph, the financial statements concerning the financial year 1996 are reliable and the legality and regularity of the underlying transactions are, on the whole, guaranteed.

MAIN OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE BUDGET OF THE EUROPEAN MONITORING CENTRE FOR DRUGS AND DRUG ADDICTION FOR THE FINANCIAL YEAR 1996

Budget accounts

1.6. Although 1996 was the Monitoring Centre's third year of activity, the Centre's accounts department still does not possess any real budget accounting software. Monitoring the implementation of the budget is carried out with the aid of a tool which is not a real accounting system (changes may be made to entries with no subsequent record of their having been made, absence of any connection with the general accounts, etc.).

General accounts

1.7. The controls carried out showed that there had been considerable delays in entering data in the general accounts. Moreover, the monthly reconciliation between the general accounts and the budget accounts provided for in Article 136 (4) (2) of the implementing rules of the General Financial Regulation had not been carried out.

1.8. The accounts were not monitored to ensure that reimbursements of VAT which had been applied for were actually received. The balance shown in the balance sheet at the end of the financial year (ECU 210 000) was not entered in the accounts until they were closed.

1.9. At the EDMC, only the accounting officer knows the accounting procedures followed (accounting mechanisms, the operation of the software system used, where accounting documents are stored, etc.). This situation could lead to administrative problems when the accounting officer is absent.

1.10. The accounting officer also has managerial duties, acts as imprest administrator and signs invoices to authorize payment (contravention of Article 15 (1) of the implementing rules of the general Financial Regulation).

1.11. In the light of the observations set out in the report, the accounting situation must be improved as soon as possible.

Contracts and ACPC

1.12. In the absence of any representative of the legal department, the composition of the Monitoring Centre's ACPC does not comply with the provisions of the general Financial Regulation applicable to the general budget of the European Communities (Article 64 (1)).

1.13. Many of the contracts examined were concluded by private treaty or following a restricted invitation to tender (sometimes in the absence of a preliminary invitation to interested parties to apply). Moreover, the period allowed for the submission of tenders was, for the majority of contracts, too short (approximately 14 days).

Subsidy from the Portuguese Government

1.14. In 1996 the value of fitting-out work exceeded the amount of the subsidy granted by the Portuguese Government in 1995. In defiance of the applicable financial regulations, the deficit was financed by the Centre from its own funds outside its budget.

1.15. The net claim on the Portuguese Government shown in the balance sheet is unfounded. It corresponds in reality to fitting-out expenditure which ought to have been charged to the budget.

The financial statements for the financial year 1996 (balance sheet and revenue and expenditure account)

1.16. The controls carried out on the financial statements for the financial year 1996 revealed several errors, the majority of which were subsequently corrected following the Court's observations (except for the comments made in paragraphs 1.14 and 1.15).

1.17. The accounts department of the Monitoring Centre entered payments totalling ECU 400 000 in the budget accounts which cancelled out the differences existing between the budget accounts and the general accounts. The supporting documents received by the Court during its audit did not provide evidence to justify these entries.

1.18. In addition, the Centre has not given justification of an amount of about ECU 0,1 million distributed over various balance sheet headings (liabilities and assets).

Appropriations carried over

1.19. Appropriations carried over to 1997 total ECU 2,56 million (ECU 2,43 million of automatic carry-overs and ECU 130 000 of non-automatic carry-overs), i. e. 42,6 % of the budget for 1996 (ECU 6,01 million).

1.20. Most of the carry-overs concerned headings relating to the Centre's administrative expenditure.

Banks

1.21. The Monitoring Centre uses the intermediate 'Transfers in progress` account to account for cash movements. The balance on this account should be reconciled on a monthly basis in accordance with the provisions of the regulations. No such reconciliation had been conducted at the time of the audit. The information supplied subsequently on the movements making up the balance of this account at the end of the financial year, and the clearance of them showed that certain transfers, totalling ECU 60 000, had still not been completed at the end of May 1997 (this sum is part of the balance indicated in paragraph 1.18).

Observations on the financial statements at the end of the financial year

1.22. That part of the Commission subsidy which had not yet been drawn down but was entered on the assets side of the balance sheet at the end of the financial year, namely ECU 160 000, should not have been included in the revenue for the financial year as the Monitoring Centre's Financial Regulation stipulates in Article 5 (2) that 'Revenue shall be entered in the accounts for the financial year in which it is collected`. The balance of these accounts should appear on the liabilities side of the balance sheet in an adjustment account.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 15 and 16 October 1997.

For the Court of Auditors

Bernhard FRIEDMANN

President

(1) OJ L 36, 12. 2. 1993, p. 6.

(2) As required by Article 11 (10) of Council Regulation (EEC) No 302/93, the accounts of all the revenue and expenditure of the Monitoring Centre for the financial year 1996 were drawn up on 26 March 1997, which was also the date on which the accounts were signed by the Director of the Monitoring Centre and forwarded to the Commission, the Management Board and the Court of Auditors. These accounts were received by the Court on 31 March 1997. A summary of these financial statements is presented in the tables annexed to this report.

(3) OJ L 341, 30. 12. 1994, p. 7.

ANNEX

TABLE 1 BALANCE SHEET FOR THE FINANCIAL YEARS 1995 AND 1996

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Source: Drawn up by the Court on the basis of information supplied by the Monitoring Centre.

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(1) This amount corresponds to the total of fixed assets and operating assets.

REPLIES OF THE EUROPEAN MONITORING CENTRE FOR DRUGS AND DRUG ADDICTION

1.4 and 1.5. The European Monitoring Centre for Drugs and Drug Addiction has taken note of the general observation made by the Court concerning the reliability of the financial statements and the legality and regularity of the underlying transactions and will do all it can to remedy the specific faults mentioned in paragraph 1.4.

1.6. The EMCDDA is in complete agreement with the Court regarding its observation concerning the absence of any proper budget accounting tools. The EMCDDA, along with the other Agencies, has been looking for appropriate budget accounting software since the beginning of 1995. An invitation to tender issued jointly by all the Agencies to that end in 1995 unfortunately produced no result of any merit.

In this context the Agencies planned to adapt the Sincom 2 system, the use of which is being examined by the European Commission. This system was considered to exceed the needs of the Agencies, given their size, in consequence of which Cedefop decided to make the adaptations to the system it considered necessary to meet the specific needs of the Agencies; this initiative is supported by the EMCDDA.

In view of the progress being made with this new process, the EMCDDA anticipates that it will have a proper budget accounting system available in 1998.

1.7 to 1.11. The EMCDDA agrees with the observations of the Court concerning the general accounts. It is true that during the financial year 1996 the operational capacity of the Monitoring Centre's administrative services was extremely limited. For the whole of the first six months there were only two members of staff to deal with all administrative work: personnel management, contract management, implementation of the budget, payments and accounts. It was unavoidable that this situation should give rise to some delays in entering data in the general accounts and prevent the reconciliation between the accounts and the monthly recording of VAT. Equally, given the human resources available, it was unavoidable that the accounting officer should be responsible for an accumulation of functions.

In the course of 1996 the EMCDDA took the necessary steps to improve this situation and to acquire sufficient human resources to ensure sound financial management. The Administration, Finance and Logistics Department was thus created and gradually equipped with the necessary staff to carry out the various responsibilities with due respect for the principle of the separation of functions.

In view of the recruitment procedures involved and the need to work through the backlog, it will only be in the financial year 1997 that the progress made will produce visible results.

1.12. The EMCDDA is not subject to the provisions of the Financial Regulation applicable to the general budget of the European Communities but to those of its own Financial Regulation, adopted following the opinion of the Court of Auditors, in accordance with Article 11 of its Founding Regulation.

These provisions (see Article 88 of the implementing rules of the Financial Regulation of the EMCDDA) govern the composition of the ACPC of the EMCDDA. Moreover, they provide for the Head of the Administration of the Monitoring Centre to be among the members of the ACPC, as the person responsible (hierarchically) for internal legal issues at the EMCDDA; he or she is considered to be the 'representative of the department responsible for legal matters`, whose presence in the ACPC is recommended by Article 64 of the Financial Regulation applicable to the general budget of the European Communities. However, the EMCDDA is prepared to examine the possibility of including in the ACPC the member of staff directly responsible for legal matters concerning procurements and contracts.

1.13. The EMCDDA agrees with the observations of the Court. It is true that in the start-up phase the EMCDDA had to deal with urgent requirements (security services, cleaning, insurance, etc.), in respect of which it concluded contracts by private treaty with the companies which were already providing services to the office of the Commission in Lisbon (following invitations to tender launched in the normal way by the Commission).

As regards the period for the submission of tenders, the EMCDDA changes the period to four weeks in 1997 in accordance with the observations of the Court.

1.14 and 1.15. The EMCDDA agrees with the observations of the Court. The problem in question derives from the fact that the subsidy from the Portuguese Government was entered in the accounts in 1995 outside the budget. The EMCDDA recognizes that it would have been more correct to integrate it in the budget. On the other hand, the additional work which exceeded the subsidy was charged to the 1997 budget.

1.16. The EMCDDA's comments on paragraphs 1.7 to 1.11 concerning the general accounts are equally applicable to the observations concerning the financial statements.

1.17. The differences between the budget accounts and the general accounts mentioned by the Court were regularized when the definitive financial statements were drawn up. The EMCDDA has all the documents supporting these entries and the Court will be able to verify that they were well-founded during its next audit.

1.18. The EMCDDA now has all the documents relating to the charges made to both the budget accounts and the general accounts. The EMCDDA considers that the Court's next audit will allow it to establish that the entries made were well founded.

1.19 and 1.20. 1996, which was effectively the first year of operation of the EMCDDA, was characterized by serious delays, due in particular to the late adoption by the Management Board of the relevant work programmes. In particular, the 1995 to 1996 operational work programme was not adopted by the Management Board until its meeting in November 1995, thus obliging the EMCDDA to implement as a first priority in 1996, the budget carried over from 1995. This snowball effect continued until 1997, despite the gradual correction of this serious initial handicap.

It was not therefore possible to start implementing the 1996 operational programme until the last quarter of 1996.

The carry-overs in question mostly concern payment appropriations (automatic carry-overs) and to a lesser extent commitment appropriations (non-automatic carry-overs). In 1996 the EMCDDA nevertheless succeeded in committing ECU 5,826 million, or 97 % of its available budget.

1.21. The failure to conduct monthly reconciliations of the 'transfers in progress` account resulted from the delays regarding the general accounts examined in paragraph 1.7.

As regards the movements that had still not been completed to which the Court referred, the EMCDDA now has all the supporting documents and considers that the Court's next audit will allow it to establish that the entries made were well-founded.

1.22. The EMCDDA agrees with the observations of the Court. The 1997 balance sheet will be presented accordingly.