REPORT BY THE COURT on the operational efficiency of the management of the European Monetary Institute for the financial year 1996, together with the Institute's replies (98/C 42/01)

CONTENTS

Paragraph Page

1. INTRODUCTION 1.1-1.2 2

2. THE MANAGEMENT OF THE INSTITUTE IN 1996 2.1-2.6 2

Administration 2.1-2.2 2

The budgetary management and the accounts 2.3-2.6 2

3. THE INSTITUTE'S ACTIVITIES DURING 1996 3.1-3.3 3

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1996 4.1-4.7 3

The changing operating conditions 4.1-4.3 3

The management systems and procedures: follow-up of previous observations 4.4-4.6 3

Control of expenditure 4.7 4

5. CONCLUSION 5.1 4

ANNEXES 5

Replies of the Institute 7

1. INTRODUCTION

1.1. This is the third consecutive year in which the Court has presented its report (1) on the results of the audits carried out as part of its examination of the operational efficiency of the management of the European Monetary Institute (EMI) (2). The accounts of the EMI for the financial year ending 31 December 1996 were approved by the Council of the EMI on 4 March 1997 and published in April 1997 (3) after they had been audited and certified, without qualification, on 12 February 1997 by a private audit firm.

1.2. The Council of the EMI, which is the budgetary authority of the Institute, consists, in accordance with Article 109f of the Treaty establishing the European Community, 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 its Council.

2. THE MANAGEMENT OF THE INSTITUTE IN 1996

Administration

2.1. The Institute continued the preparatory work for the third stage of economic and monetary union (EMU) and the administrative organisation proved adequate for these activities. On the other hand, as the deadlines for transition to the third phase approach, the preparation of the future European Central Bank's structures (ECB) is becoming a matter of ever greater urgency, since the ECB must be established and prepare to commence work in 1998 (4). In fact, the logistical aspects of these preparations still lacked momentum during 1996, because of the uncertainty surrounding the political debate on the degree of decentralisation and on Member States' participation in the European System of Central Banks (ESCB).

2.2. The permanent staff of the EMI rose from 193 persons on 31 December 1995 to 217 on 31 December 1996. On the latter date the staff consisted of six senior managers, 36 managers, 90 operational staff and 85 administrative and technical support staff. During 1996, 33 people were recruited and nine left. The average number of permanent staff over the year was 202 persons in 1996, as against 166 in 1995.

The budgetary management and the accounts

2.3. Total expenditure in 1996 was ECU 38,6 million compared with estimates of ECU 42,1 million, leaving ECU 3,5 million, or 8,3 %, unused. In 1995 these figures were, respectively, expenditure totalling ECU 32,6 million and estimates of ECU 42,4 million, with ECU 9,8 million (23,1 %) unused.

2.4. The balance sheet of the EMI at 31 December 1996 (see table in Annex 1) shows, firstly, the assets and liabilities relating to the Institute's activity in connection with the European Monetary System (EMS), i.e. total holdings of gold and US dollars of ECU 59 527 million, corresponding to an identical amount of ecus issued to the central banks of the Member States of the European Union (EU). This is followed by the assets and liabilities relating to the EMI's day-to-day administration, totalling ECU 648 million compared with ECU 639 million at 31 December 1995.

2.5. The main items under operating assets include time deposits (ECU 628,0 million), the interest from which supplies the funds needed by the EMI in order to cover its operating expenditure, cash balances of ECU 11,9 million and tangible assets of ECU 7,8 million. In addition to the contributions from the EU central banks (ECU 615,6 million), liabilities relating to the day-to-day administration consisted mainly of ECU 4,2 million for creditors and other liabilities, provisions amounting to ECU 10,8 million, the general reserve fund totalling ECU 12,5 million (corresponding to the allocation of the surplus for the financial year 1995) and the surplus for the financial year 1996, which amounted to ECU 4,6 million.

2.6. As far as the profit and loss account is concerned (see table in Annex 2 which gives a presentation adapted by the Court for the purposes of this report), investments generated interest income of ECU 44,5 million. Current expenses for the financial year totalled ECU 39,2 million, of which ECU 21,3 million was staff costs, ECU 15,8 million other administrative expenses and ECU 2,1 million was accounted for by depreciation of tangible assets. Taking into account extraordinary expenses of ECU 0,8 million, resulting from the valuation loss caused by the fluctuation of the German mark against the ecu, and extraordinary income of ECU 0,1 million from the release of provisions existing at the end of 1995, the difference between income and expenses was ECU 4,6 million, which the EMI Council, at its meeting of 4 March 1997, decided to transfer in full to the general reserve fund.

3. THE INSTITUTE'S ACTIVITIES IN 1996

3.1. In 1996 the EMI continued its preparations to ensure that the ESCB is able to commence operations at the beginning of the third stage of EMU. The activities in question were mainly concerned with monetary policy, exchange-rate policy, statistics, payment systems, the issue of banknotes, accounting rules and standards, information and communications systems and legal questions. The EMI also continued the tasks related to the introduction of the euro, following the adoption, by the European Council in Madrid in December 1995, of the procedures for transition to the single currency. All these tasks were conducted jointly, in working groups and subcommittees, by staff of the EMI and of the national central banks.

3.2. The Institute provided a detailed account of its activities in its Annual Report for 1996, which was published in April 1997. During 1996 the EMI also published reports on specific subjects, including three which are of particular significance with regard to the fundamental objectives of the EMI: the report on statistical requirements for monetary union, published in July 1996, the progress report on the system of cross-border payments (Target), published in August 1996, and the report on the progress made towards convergence, published in November 1996 in accordance with Article 7 of the Statute. This last report described the current state of progress made by the Member States in meeting the criteria for transition to the single currency.

3.3. In accordance with the second subparagraph of Article 109f(6) of the Treaty and Article 5.3 of its Statute, the Institute responded to requests for consultation on matters which lie within the Institute's competence, from the Council in the case of proposed Community acts and from the authorities of EU Member States, in the case of draft national legislative and statutory provisions. It received 16 requests for consultation in 1996 (six from the Council of the EU, three from the European Commission and seven from authorities in EU Member States). EMI staff members were also involved in conferences, seminars and presentations on the inception of the third stage of EMU.

4. THE OPERATIONAL EFFICIENCY OF THE MANAGEMENT OF THE INSTITUTE IN 1996

The changing operating conditions

4.1. Due to the persisting uncertainty in 1996 surrounding the nature (centralised or decentralised) and the scope (participating countries) of the future ECB's operations, the preparatory work on its actual structure is somewhat difficult and the timetable has become increasingly tight. Under these conditions, the main concern is to find solutions that will ensure that the time-limit set for the start of the third stage is adhered to. Owing to time pressure the cost aspect of the chosen solutions has become a secondary criterion, as shown by the frequent exceptions to tendering procedures for building equipment and information systems as well as the use of external consultants to carry out tasks for which EMI staff would normally be responsible.

4.2. Sensitive questions such as the facilities at the disposal of the Institute and the structure of the Central Bank received only provisional solutions, especially as regards the building and information and communications systems.

4.3. The Court audited the systems and procedures and carried out tests of transactions. The results obtained were generally satisfactory. There were, nevertheless, a number of points where improvement was possible and the Court has submitted observations and made recommendations to the EMI management in this regard. Some of the representations warrant inclusion in this report.

The management systems and procedures: follow-up of previous observations

4.4. As regards the management of fixed assets (5), the Institute has still not implemented a physical inventory procedure; taking into account the fact that all or part of the EMI's fixed assets are likely to be taken over by the future ECB, this procedure should be finalised quickly.

4.5. The weakness detected last year (6) in connection with the salary payment procedure has still not been remedied, inasmuch as the duties of calculating remuneration on the one hand, and authorising its payment on the other, are not separate.

4.6. The system for reimbursing travel expenses (7), has been modified and lump-sum payments have been replaced by reimbursements based on actual costs as of 1 January 1997.

Control of expenditure

4.7. The budget was amended during the year but did not form the subject of a formal amending budget in 1996. The presentation of outturn compared the final expenditure with the initial budget but did not take the revised budget figures into account. For 1996 the amounts of supplementary expenditure authorised were relatively modest. Nevertheless, in the interest of efficient, transparent, budget management the Institute should, in future, draw up a statement amending the initial budget in cases where amendments are adopted during the year and the revised figures should be included in the analysis of budget implementation.

5. CONCLUSION

5.1. In 1996, the EMI continued the preparations for the third stage of EMU. The administrative organisation lending support to this work appeared generally satisfactory (see paragraph 4.3), although certain aspects of the management procedures still needed to be strengthened (see paragraphs 4.4, 4.5 and 4.7). Preparations concerning logistical aspects of the future ECB have been hindered by the uncertainty regarding the nature and scope of the specific tasks for which it will be responsible. In the short and medium-term there is a danger that this situation will have a negative impact on the overall cost/efficiency of the structures that must be set up within the very short time-limit prescribed (see paragraphs 4.1 and 4.2).

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 10 and 11 December 1997.

For the Court of Auditors

Bernhard FRIEDMANN

President

(1) The reports on the 1994 and 1995 financial years were published in the Official Journal (OJ C 394, 31.12.1996).

(2) Report compiled pursuant to Article 17.4, second subparagraph, of Protocol (No 4) annexed to the Treaty on European Union (on the EMI Statute).

(3) Accounts drawn up and published pursuant to Articles 11 and 17 of Protocol (No 4) annexed to the Treaty on European Union (on the EMI Statute).

(4) Article 109l (1), second subparagraph, of the Treaty on European Union.

(5) See paragraph 4.4 of the Report by the Court on the operational efficiency of the management of the EMI for the financial year 1995 (OJ C 394, 31.12.1996, p. 9).

(6) See paragraph 4.5 of the Report by the Court on the operational efficiency of the management of the EMI for the financial year 1995 (OJ C 394, 31.12.1996, p. 9).

(7) See paragraph 4.8 of the Report by the Court on the operational efficiency of the management of the EMI for the financial year 1995 (OJ C 394, 31.12.1996, p. 9).

ANNEX 1

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ANNEX 2

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REPLIES OF THE INSTITUTE

The European Monetary Institute notes that the audit of its operational efficiency for the year 1996 produced generally satisfactory results. During the course of 1997 and in accordance with the planned timetable, decisions have been reached by the Council of the EMI on several fundamental aspects of the future organisation and functions of the European Central Bank. These have given a clear framework for the logistical preparations that are now proceeding apace, and they will therefore limit the risk of an inefficient use of resources. Meanwhile, the Institute continues to strengthen its administrative procedures in the light of the Court's comments.