REPORT BY THE COURT on the operational efficiency of the management of the European Monetary Institute for the financial year 1994, together with the Institute's replies (96/C 394/01)

CONTENTS

Paragraph Page

1. INTRODUCTION

The Institute's role . 1.1-1.2 2

The external audit of the Institute . 1.3 2

The audit by the European Court of Auditors . 1.4 2

2. THE MANAGEMENT OF THE INSTITUTE IN 1994

The administrative management . 2.1-2.2 2

The budgetary management and the accounts . 2.3-2.5 2

3. THE INSTITUTE'S OUTPUT DURING 1994

The working documents . 3.1 3

The 1994 annual report . 3.2 3

4. ASSESSMENT OF THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1994

The particular circumstances . 4.1-4.2 3

The systems and procedures . 4.3-4.4 3

The expenditure for the financial year . 4.5-4.6 3

Contributions to the objectives . 4.7 4

5. CONCLUSION

ANNEX . 5

The Institute's replies . 6

1. INTRODUCTION

The Institute's role

1.1. Article 109f of the Treaty establishing the European Community provided for the creation of a European Monetary Institute (EMI). Its main task is to prepare for the third stage of EMU, i.e. the establishment of a European System of Central Banks (ESCB), the introduction of a single monetary policy and the creation of a single currency. In order to achieve these aims, the Institute also has the task of strengthening the coordination of the national monetary policies, with the aim of increasing convergence between the economies of the Member States and ensuring price stability.

1.2. In addition to the studies the Institute carries out itself, its work is also delegated to a structure of sub-committees and working groups made up of experts from the Institute and the national central banks and covers, inter alia, the spheres of monetary and foreign exchange policy, bank supervision, payment systems and macroeconomic and monetary statistics. As part of the implementation of the European Monetary System (EMS), which was formerly managed by the European Monetary Cooperation Fund (EMCF), the EMI now holds the monetary reserves associated with participation in the EMS.

The external audit of the Institute

1.3. With regard to the external audit of the EMI, Article 17 of the Statute stipulates firstly that the annual accounts shall be audited by independent external auditors approved by the Council of the EMI, shall be approved by the Council of the EMI and shall thereafter be published. To this end, a certificate is issued by a private audit firm for publication with the accounts. Secondly, the same Article specifies that the provisions of Article 188 C of the Treaty (concerning auditing by the European Court of Auditors) 'shall only apply to an examination of the operational efficiency of the management of the EMI`. This report is based on the Court's audit work concerning the financial year 1994.

The audit by the European Court of Auditors

1.4. In addition to auditing the organization and operation of internal control systems, the Court has audited the procedures concerning the areas set out below:

- staff recruitment and management,

- supply of premises,

- fixtures/appliances and installations,

- computing equipment,

- office furniture and equipment,

- contract work, external services and specialist advice,

- drafting of the budget and the monitoring of its implementation.

Since the EMI is not subject to the provisions and the implementation procedures of the Financial Regulation applicable to the General Budget of the European Communities, the Court was not required to check whether these provisions had been observed.

2. THE MANAGEMENT OF THE INSTITUTE IN 1994

The administrative management

2.1. Under the terms of the Treaty, the EMI was created on 1 January 1994. On that date, it was only in existence to the extent that its President had been appointed on 11 December 1993 and that it had a Council, which met for the first time on 11 January 1994. Although its seat (Frankfurt) had been chosen at the end of October 1993, the building to house the EMI was not selected until April 1994 and renovation of the former was completed only towards the end of 1994.

2.2. During the intervening period, most of the EMI's work was carried out with the support of the logistical and administrative departments of the Bank for International Settlements (BIS) in Basle, which, until 31 December 1993, had housed the Secretariat of the Committee of Central Bank Governors, which was abolished after the creation of the EMI. During those early days, the EMI relied mostly on the staff of the former Committee's Secretariat and then began to recruit mainly from the staff of this Secretariat and of the national central banks, mostly on the basis of secondment from these institutions. The rationale was both the need for staff with the professional qualifications required who were immediately available, and the temporary nature of the Institute itself. At the end of the financial year 1994, the staff employed by the Institute numbered 126.

The budgetary management and the accounts

2.3. The uncertainties characterizing the financial year 1994 made it particularly difficult to provide an accurate estimate of the Institute's expenditure. Taken as a whole, out of a budget of ECU 28,1 million, actual expenditure was ECU 5,1 million, i.e. 18 %, lower than estimated. In the main categories, actual expenditure was 23 % lower for investments in tangible assets, 8 % lower for staff costs and 17 % lower for other administrative expenditure.

2.4. The total expenditure charged to the financial year 1994 (see Annex 1) amounts to ECU 18,3 million, which may be broken down into ECU 9,1 million for staff costs (see paragraph 4.6), ECU 9,0 million for other administrative expenditure (ECU 6,9 million of which accounts for start-up expenses) and ECU 0,2 million for depreciation of tangible assets. Taking into account ECU 0,3 million of interest received, the difference between the expenditure and revenue for the financial year amounts to ECU 18,0 million. This outstanding balance was covered by contributions from the national central banks. In fact, the Institute's capital (ECU 615,6 million) was not paid in until the beginning of 1995.

2.5. The EMI's balance sheet as at 31 December 1994 (table in Annex 2) first shows the assets and liabilities relating to activities connected with the EMS, i.e. a total of ECU 56 576 million of assets in gold and US dollars, corresponding to an identical amount in ecus issued to the Community's central banks. These assets account for 20 % of the gold and dollar reserves of the national central banks. The balance sheet then shows those assets and liabilities that relate to the Institute's day-to-day operations. This section of the balance sheet totals ECU 20,7 million, the main items being, on the assets side, ECU 12,9 million in cash balances and ECU 6,6 million in tangible assets, and, on the liabilities side, debts of ECU 3,6 million, provisions of ECU 3,9 million and ECU 13,0 million of advances received from national central banks.

3. THE INSTITUTE'S OUTPUT DURING 1994

The working documents

3.1. In addition to the four documents that were published under the financial year 1994 and the annual report concerning the same financial year, the EMI drew up internal and preparatory working documents that were submitted to the Council, the sub-committees and the working groups. Moreover, the management was largely occupied with fitting-out the Institute's Head Office in Frankfurt.

The 1994 annual report

3.2. The Institute's activities during 1994 were reported on in its annual report, which was published in all the official languages of the Union in April 1995. This report first reviews the economic, monetary and financial situation within the Union over the period 1993 to 1994, in accordance with the Statute. Lastly, the report contains the Institute's annual accounts for the financial year 1994, which are accompanied by the certificate issued by its auditors.

4. ASSESSMENT OF THE EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1994

The particular circumstances

4.1. Throughout the year the Institute was working against the clock in an effort to develop its organization as quickly as possible, i.e. recruit staff, fit out its premises and set up its administrative and operational structures, while simultaneously continuing the work of preparing for the third stage of EMU that had already been started by the former Board of Governors and embarking on the new tasks laid down in its Statute.

4.2. The financial year 1994 was, therefore, characterized at managerial level by a state of continuous change. The Institute's organization, systems and procedures took shape as matters proceeded, so as to meet the requirements of the moment. This explains why provisional measures were often taken which needed finalizing at a later date.

The systems and procedures

4.3. The Court audited the main management systems and procedures in operation at the Institute in 1994, particularly after it had moved to Frankfurt, when it was operating using its own resources. Whilst these systems and procedures could be considered acceptable by the Court, given the circumstances, there was, nevertheless, room for improvement in several areas, for which reason the Court sent a letter of observations and recommendations, covering several elements of the administrative organization and the internal control, to the Institute's management.

4.4. The tests carried out by the Court on the files relating to individual operations in the main expenditure categories provided confirmation that the EMI's administrative services were making a satisfactory effort to ensure a good quality/price ratio. However, the systems for settling expenditure on a lump-sum basis call for regular monitoring so that the adequacy of the lump sums can be assessed.

The expenditure for the financial year

4.5. The amount of expenditure for the financial year reflects the fact that the EMI was still taking shape, on the one hand, and the fact that it has only been created for a limited period, on the other. Budgetary implementation therefore remained below the estimates owing to delays, particularly in the fitting-out work (about half of the amount of unspent appropriations was accounted for in this way and was spent in 1995), and also to the desire not to hamper the task of setting up the Institute by having too restrictive a budgetary framework. According to the terms of the Treaty, the Institute is due to be wound up between 1 January 1997 and 1 January 1999. This obviously affects the investment capitalization policy. At the same time, the annual accounts have been drawn up on a very prudent basis particularly with regard to provisions.

4.6. The expenditure for the financial year 1994 breaks down as follows: 49,9 % for labour costs (amounting to ECU 9,13 million, ECU 5,74 million of which is shown in the financial statements under 'other administrative expenditure`), 37,5 % for start-up expenses (ECU 6,86 million), 11,4 % for administrative expenditure (ECU 2,09 million) and 1,2 % for depreciation (ECU 0,23 million). This break-down reflects the fact that the Institute started work with the support of staff who were still employed by the BIS at the time.

Contributions to the objectives

4.7. In view of the fact that the Institute was taking shape throughout 1994, its fundamental work was undertaken as and when the operational staff were taken on. The EMI ensured that the cooperation between national central banks that was already in existence when it was set up continued. Some documents were published and others were prepared and submitted to the Council for approval. The latter included a Master Plan setting out a consistent framework for carrying out preparatory work in the various spheres of activity.

5. CONCLUSION

The year 1994 was difficult for the EMI, given that it had only started to take shape at the time it was supposed to be operational, and the managerial activity during the year obviously reflected this state of affairs. If this unusual factor is taken into account, the findings of the Court's audits were satisfactory on the whole. Some recommendations have been made to the Institute's management with a view to improving certain aspects of the systems and procedures when the time comes for them to take a more definitive form.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 26 September 1996.

For the Court of Auditors

Bernhard FRIEDMANN

President

ANNEX 1

>TABLE>

ANNEX 2

>TABLE>

THE INSTITUTE'S REPLIES

The European Monetary Institute notes with satisfaction that the tenor of the above report is positive, and that the particular circumstances of the first year of existence of the Institute have been taken into account.

The EMI is aware that, due to its provisional infrastructure during the start-up period, the operational systems and procedures needed improvement. The observations and recommendations with regard to the administrative organization and to the internal control addressed to the management of the Institute were considered particularly helpful.

REPORT BY THE COURT on the operational efficiency of the management of the European Monetary Institute for the financial year 1994, together with the Institute's replies (96/C 394/01)

CONTENTS

Paragraph Page

1. INTRODUCTION

The Institute's role . 1.1-1.2 2

The external audit of the Institute . 1.3 2

The audit by the European Court of Auditors . 1.4 2

2. THE MANAGEMENT OF THE INSTITUTE IN 1994

The administrative management . 2.1-2.2 2

The budgetary management and the accounts . 2.3-2.5 2

3. THE INSTITUTE'S OUTPUT DURING 1994

The working documents . 3.1 3

The 1994 annual report . 3.2 3

4. ASSESSMENT OF THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1994

The particular circumstances . 4.1-4.2 3

The systems and procedures . 4.3-4.4 3

The expenditure for the financial year . 4.5-4.6 3

Contributions to the objectives . 4.7 4

5. CONCLUSION

ANNEX . 5

The Institute's replies . 6

1. INTRODUCTION

The Institute's role

1.1. Article 109f of the Treaty establishing the European Community provided for the creation of a European Monetary Institute (EMI). Its main task is to prepare for the third stage of EMU, i.e. the establishment of a European System of Central Banks (ESCB), the introduction of a single monetary policy and the creation of a single currency. In order to achieve these aims, the Institute also has the task of strengthening the coordination of the national monetary policies, with the aim of increasing convergence between the economies of the Member States and ensuring price stability.

1.2. In addition to the studies the Institute carries out itself, its work is also delegated to a structure of sub-committees and working groups made up of experts from the Institute and the national central banks and covers, inter alia, the spheres of monetary and foreign exchange policy, bank supervision, payment systems and macroeconomic and monetary statistics. As part of the implementation of the European Monetary System (EMS), which was formerly managed by the European Monetary Cooperation Fund (EMCF), the EMI now holds the monetary reserves associated with participation in the EMS.

The external audit of the Institute

1.3. With regard to the external audit of the EMI, Article 17 of the Statute stipulates firstly that the annual accounts shall be audited by independent external auditors approved by the Council of the EMI, shall be approved by the Council of the EMI and shall thereafter be published. To this end, a certificate is issued by a private audit firm for publication with the accounts. Secondly, the same Article specifies that the provisions of Article 188 C of the Treaty (concerning auditing by the European Court of Auditors) 'shall only apply to an examination of the operational efficiency of the management of the EMI`. This report is based on the Court's audit work concerning the financial year 1994.

The audit by the European Court of Auditors

1.4. In addition to auditing the organization and operation of internal control systems, the Court has audited the procedures concerning the areas set out below:

- staff recruitment and management,

- supply of premises,

- fixtures/appliances and installations,

- computing equipment,

- office furniture and equipment,

- contract work, external services and specialist advice,

- drafting of the budget and the monitoring of its implementation.

Since the EMI is not subject to the provisions and the implementation procedures of the Financial Regulation applicable to the General Budget of the European Communities, the Court was not required to check whether these provisions had been observed.

2. THE MANAGEMENT OF THE INSTITUTE IN 1994

The administrative management

2.1. Under the terms of the Treaty, the EMI was created on 1 January 1994. On that date, it was only in existence to the extent that its President had been appointed on 11 December 1993 and that it had a Council, which met for the first time on 11 January 1994. Although its seat (Frankfurt) had been chosen at the end of October 1993, the building to house the EMI was not selected until April 1994 and renovation of the former was completed only towards the end of 1994.

2.2. During the intervening period, most of the EMI's work was carried out with the support of the logistical and administrative departments of the Bank for International Settlements (BIS) in Basle, which, until 31 December 1993, had housed the Secretariat of the Committee of Central Bank Governors, which was abolished after the creation of the EMI. During those early days, the EMI relied mostly on the staff of the former Committee's Secretariat and then began to recruit mainly from the staff of this Secretariat and of the national central banks, mostly on the basis of secondment from these institutions. The rationale was both the need for staff with the professional qualifications required who were immediately available, and the temporary nature of the Institute itself. At the end of the financial year 1994, the staff employed by the Institute numbered 126.

The budgetary management and the accounts

2.3. The uncertainties characterizing the financial year 1994 made it particularly difficult to provide an accurate estimate of the Institute's expenditure. Taken as a whole, out of a budget of ECU 28,1 million, actual expenditure was ECU 5,1 million, i.e. 18 %, lower than estimated. In the main categories, actual expenditure was 23 % lower for investments in tangible assets, 8 % lower for staff costs and 17 % lower for other administrative expenditure.

2.4. The total expenditure charged to the financial year 1994 (see Annex 1) amounts to ECU 18,3 million, which may be broken down into ECU 9,1 million for staff costs (see paragraph 4.6), ECU 9,0 million for other administrative expenditure (ECU 6,9 million of which accounts for start-up expenses) and ECU 0,2 million for depreciation of tangible assets. Taking into account ECU 0,3 million of interest received, the difference between the expenditure and revenue for the financial year amounts to ECU 18,0 million. This outstanding balance was covered by contributions from the national central banks. In fact, the Institute's capital (ECU 615,6 million) was not paid in until the beginning of 1995.

2.5. The EMI's balance sheet as at 31 December 1994 (table in Annex 2) first shows the assets and liabilities relating to activities connected with the EMS, i.e. a total of ECU 56 576 million of assets in gold and US dollars, corresponding to an identical amount in ecus issued to the Community's central banks. These assets account for 20 % of the gold and dollar reserves of the national central banks. The balance sheet then shows those assets and liabilities that relate to the Institute's day-to-day operations. This section of the balance sheet totals ECU 20,7 million, the main items being, on the assets side, ECU 12,9 million in cash balances and ECU 6,6 million in tangible assets, and, on the liabilities side, debts of ECU 3,6 million, provisions of ECU 3,9 million and ECU 13,0 million of advances received from national central banks.

3. THE INSTITUTE'S OUTPUT DURING 1994

The working documents

3.1. In addition to the four documents that were published under the financial year 1994 and the annual report concerning the same financial year, the EMI drew up internal and preparatory working documents that were submitted to the Council, the sub-committees and the working groups. Moreover, the management was largely occupied with fitting-out the Institute's Head Office in Frankfurt.

The 1994 annual report

3.2. The Institute's activities during 1994 were reported on in its annual report, which was published in all the official languages of the Union in April 1995. This report first reviews the economic, monetary and financial situation within the Union over the period 1993 to 1994, in accordance with the Statute. Lastly, the report contains the Institute's annual accounts for the financial year 1994, which are accompanied by the certificate issued by its auditors.

4. ASSESSMENT OF THE EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1994

The particular circumstances

4.1. Throughout the year the Institute was working against the clock in an effort to develop its organization as quickly as possible, i.e. recruit staff, fit out its premises and set up its administrative and operational structures, while simultaneously continuing the work of preparing for the third stage of EMU that had already been started by the former Board of Governors and embarking on the new tasks laid down in its Statute.

4.2. The financial year 1994 was, therefore, characterized at managerial level by a state of continuous change. The Institute's organization, systems and procedures took shape as matters proceeded, so as to meet the requirements of the moment. This explains why provisional measures were often taken which needed finalizing at a later date.

The systems and procedures

4.3. The Court audited the main management systems and procedures in operation at the Institute in 1994, particularly after it had moved to Frankfurt, when it was operating using its own resources. Whilst these systems and procedures could be considered acceptable by the Court, given the circumstances, there was, nevertheless, room for improvement in several areas, for which reason the Court sent a letter of observations and recommendations, covering several elements of the administrative organization and the internal control, to the Institute's management.

4.4. The tests carried out by the Court on the files relating to individual operations in the main expenditure categories provided confirmation that the EMI's administrative services were making a satisfactory effort to ensure a good quality/price ratio. However, the systems for settling expenditure on a lump-sum basis call for regular monitoring so that the adequacy of the lump sums can be assessed.

The expenditure for the financial year

4.5. The amount of expenditure for the financial year reflects the fact that the EMI was still taking shape, on the one hand, and the fact that it has only been created for a limited period, on the other. Budgetary implementation therefore remained below the estimates owing to delays, particularly in the fitting-out work (about half of the amount of unspent appropriations was accounted for in this way and was spent in 1995), and also to the desire not to hamper the task of setting up the Institute by having too restrictive a budgetary framework. According to the terms of the Treaty, the Institute is due to be wound up between 1 January 1997 and 1 January 1999. This obviously affects the investment capitalization policy. At the same time, the annual accounts have been drawn up on a very prudent basis particularly with regard to provisions.

4.6. The expenditure for the financial year 1994 breaks down as follows: 49,9 % for labour costs (amounting to ECU 9,13 million, ECU 5,74 million of which is shown in the financial statements under 'other administrative expenditure`), 37,5 % for start-up expenses (ECU 6,86 million), 11,4 % for administrative expenditure (ECU 2,09 million) and 1,2 % for depreciation (ECU 0,23 million). This break-down reflects the fact that the Institute started work with the support of staff who were still employed by the BIS at the time.

Contributions to the objectives

4.7. In view of the fact that the Institute was taking shape throughout 1994, its fundamental work was undertaken as and when the operational staff were taken on. The EMI ensured that the cooperation between national central banks that was already in existence when it was set up continued. Some documents were published and others were prepared and submitted to the Council for approval. The latter included a Master Plan setting out a consistent framework for carrying out preparatory work in the various spheres of activity.

5. CONCLUSION

The year 1994 was difficult for the EMI, given that it had only started to take shape at the time it was supposed to be operational, and the managerial activity during the year obviously reflected this state of affairs. If this unusual factor is taken into account, the findings of the Court's audits were satisfactory on the whole. Some recommendations have been made to the Institute's management with a view to improving certain aspects of the systems and procedures when the time comes for them to take a more definitive form.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 26 September 1996.

For the Court of Auditors

Bernhard FRIEDMANN

President

ANNEX 1

>TABLE>

ANNEX 2

>TABLE>

THE INSTITUTE'S REPLIES

The European Monetary Institute notes with satisfaction that the tenor of the above report is positive, and that the particular circumstances of the first year of existence of the Institute have been taken into account.

The EMI is aware that, due to its provisional infrastructure during the start-up period, the operational systems and procedures needed improvement. The observations and recommendations with regard to the administrative organization and to the internal control addressed to the management of the Institute were considered particularly helpful.