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
Date: 1997-12-11
Institutions: European Court of Auditors
Subjects: European Monetary Institute, auditing, budgetary control, financial year, management, report

9.2.98

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C 42/1

I

(Information)

COURT  OF  AUDITORS

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

1.

INTRODUCTION

2. THE  MANAGEMENT  OF  THE  INSTITUTE  IN  1996

Administration

The  budgetary  management  and  the  accounts

3. THE  INSTITUTE’S  ACTIVITIES  DURING  1996

4. THE  OPERATIONAL  EFFICIENCY  OF  THE  MANAGEMENT  OF  THE

INSTITUTE  IN  1996

The  changing  operating  conditions

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

Control  of  expenditure

5. CONCLUSION

ANNEXES

Replies  of  the  Institute

Paragraph

Page

1.1—1.2

2.1—2.6

2.1—2.2

2.3—2.6

3.1—3.3

4.1—4.7

4.1—4.3

4.4—4.6

4.7

5.1

2

2

2

2

3

3

3

3

4

4

5

7

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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
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.

the  management  of 

The  Council  of  the  EMI,  which  is  the  budgetary
1.2.
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 
the  detailed
interpretation  of  which  has  been  set  out  in  the  decisions
of  its  Council.

its  Statute, 

in 

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

(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 

second
subparagraph,  of  Protocol  (No  4)  annexed  to  the  Treaty  on
European  Union  (on  the  EMI  Statute).

to  Article  17.4, 

(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.

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.

The  balance  sheet  of  the  EMI  at  31  December
2.4.
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.

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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.

The  Institute  provided  a  detailed  account  of  its
3.2.
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.

to 

the 

requests 

Institute 

responded 

3.3.
In  accordance  with  the  second  subparagraph  of
Article  109f(6)  of  the  Treaty  and  Article  5.3  of  its
for
Statute, 
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
for
statutory  provisions. 
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 
in  conferences,  seminars  and
presentations  on  the  inception  of  the  third  stage  of
EMU.

received  16 

involved 

requests 

It 

4. THE  OPERATIONAL  EFFICIENCY  OF  THE

MANAGEMENT  OF  THE  INSTITUTE  IN  1996

The  changing  operating  conditions

to 

Due 

the  persisting  uncertainty 

in  1996
4.1.
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.

Sensitive  questions  such  as 

4.2.
facilities  at
the  disposal  of  the  Institute  and  the  structure  of  the
solutions,
Central  Bank 
especially  as  regards  the  building  and  information  and
communications  systems.

received  only  provisional 

the 

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

As  regards  the  management  of  fixed  assets (5),  the
4.4.
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.

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

inasmuch  as 

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

(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).

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9.2.98

Control  of  expenditure

5. CONCLUSION

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.

to 

5.1.
In  1996,  the  EMI  continued  the  preparations  for
the  third  stage  of  EMU.  The  administrative  organisation
lending  support 
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

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ANNEX  1

BALANCE  SHEET  FOR  THE  FINANCIAL  YEAR  ENDED  31  DECEMBER  1996

Assets

(in  ECU  1 000)

Liabilities

(in  ECU  1 000)

1996

1995

1996

1995

I EMS-related  assets

Holdings  of  gold

27 816 645

27 204 932

Ecus  issued  to  EU  central  banks

59 527 180

54 220 013

I EMS-related liabilities

Holdings  of  US  dollars

31 710 535

27 015 081

59 527 180

54 220 013

59 527 180

54 220 013

II Other  assets

II Other liabilities

(1) Cash  and  bank  sight  accounts

11 014

491

(1) Creditors  and  other  liabilities

4 200

3 469

(2) Time  deposits

(3) Securities

(4) Tangible assets

(5) Other  assets

628 044

597 169

(2) Provision  for  pensions  and

7 815

842

31 326

8 810

1 243

647 715

639 039

similar obligations

(3) Other  provisions

(4) Contribution  from  EU  central
banks  (pursuant  to  Article
16.2  of  the  Statute)

(5) Revaluation  account

(6) General  reserve  fund

(7) Surplus  for  the  year

3 743

7 074

1 958

5 258

615 574

615 574

12 536

4 588

244

12 536

647 715

639 039

Total  assets  (I  and  II)

60 174 895

54 859 052

Total  liabilities  (I  and  II)

60 174 895

54 859 052

Memo  items:

FWD  claims  in  ECUs  (from
revolving  quarterly  swaps)

59 527 180

54 220 013

Memo  items:

FWD  liabilities  in  gold  and
US  dollars  (from  revolving
quarterly  swaps)

59 527 180

54 220 013

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9.2.98

ANNEX  2

PROFIT  AND  LOSS  ACCOUNT (1)  FOR  THE  FINANCIAL  YEAR  ENDED  31  DECEMBER  1996

Expenses

(in  ECU  1 000)

Income

(in  ECU  1 000)

1996

1995

Direct  staff  costs

Other  staff  costs

Other  administrative  expenses

Depreciation  of  tangible  asets

Revaluation loss

Surplus  for  the  year

18 158

3 103

15 833

2 085

862

4 588

15 039

Interest  income

3 346

Extraordinary  income

12 429

2 450

12 536

1996

1995

44 533

45 439

96

361

(1) Presentation  adapted  by  the  Court  for  the  purposes  of  its  report.

Total

44 629

45 800

Total

44 629

45 800

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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.