Report on the financial statements of the European Agency for Reconstruction for the financial year 2001, together with the Agency's replies
Date: 2002-10-24
Institutions: European Court of Auditors
Subjects: European Agency for Reconstruction, financial control, financial year, report

27.12.2002

EN

Official Journal of the European Communities

C 326/1

I

(Information)

COURT OF AUDITORS

on the financial statements of the European Agency for Reconstruction for the financial year
2001, together with the Agency’s replies

REPORT

(2002/C 326/01)

CONTENTS

Paragraph

Page

THE COURT’S OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MAIN OBSERVATIONS CONCERNING FINANCIAL MANAGEMENT . . . . . . . . . . . . . . . . . . . .

Implementation of the budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Drawing up the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Application of financial provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The housing programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5

6-16

6-10

11-12

13-15

16

FOLLOW-UP OF PREVIOUS OBSERVATIONS CONCERNING THE AGENCY’S EFFICIENCY . . .

17-23

Tables 1 to 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Agency’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

2

2

2

3

3

3

5

8

C 326/2

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Official Journal of the European Communities

27.12.2002

THE COURT’S OPINION

1.
This report is addressed to the Council and the European
Parliament, in accordance with Article 8 of Council Regulation
(EEC) No 2667/2000 (1) of 5 December 2000.

The Court has examined the financial statements of the
2.
European Agency for Reconstruction for the financial year ended
31 December 2001 (see paragraph 11).
In accordance with
Article 8 of Council Regulation (EC) No 2667/2000, the Agency’s
budget was implemented under the responsibility of its Director.
This responsibility includes the drawing up and presentation of
the financial statements (2), in accordance with the internal finan-
cial provisions provided for under Article 9 of the same Regula-
tion. The Court of Auditors is required under Article 248 of the
Treaty establishing the European Community to examine these
accounts.

3.
The Court undertook its audit in accordance with its audit
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 applied such 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.

This examination has allowed the Court to obtain reason-
4.
able assurance that the accounts for the financial year ended
31 December 2001 are reliable and that the underlying opera-
tions are, taken as a whole, legal and regular.

5.
Without calling into question the audit opinion expressed
in paragraph 4, the Court nevertheless draws attention to the situ-
ation described in paragraphs 10 and 11.

MAIN OBSERVATIONS CONCERNING FINANCIAL
MANAGEMENT

Implementation of the budget

6.
The Agency’s budgetary appropriations are managed as
non-differentiated appropriations. In order to achieve its objec-

(1) OJ L 306, 7.12.2000, p. 7.
(2) As required under Article 8 of Council Regulation (EC) No 2667/2000,
the accounts for all the Agency’s revenue and expenditure for the
financial year 2001 were drawn up on 29 March 2002 to be for-
warded to the Agency’s Management Board, the European Parliament,
the Commission and the Court of Auditors. The final corrected ver-
sion of these accounts was drawn up on 4 October 2002 and received
by the Court on 7 October 2002. A summarised version of the finan-
cial statements is presented in the tables annexed to this report.

tives, the Agency receives a subsidy from the Commission in the
form of non-differentiated appropriations, of which a maximum
percentage may be used to cover administrative and staff expen-
diture. The Agency became operational at the beginning of 2000.
One of the main features of the year 2001 was that the Agency
extended its activity to the Republic of Serbia and the Republic of
Montenegro. Table 1 (3) shows the implementation of the appro-
priations for the financial year 2001.

7.
The appropriations entered in the budget for the financial
year 2001 amounted to 410,6 million euro. In reality, after taking
into account 0,6 million euro in counterpart funds, which were
not entered in the budget, the appropriations available for expen-
diture in the 2001 financial year came to 411,2 million euro.

The Agency had an outstanding balance of 411,6 million
8.
euro to be committed against appropriations granted by the
Commission in 2000. This amount included an estimate of the
appropriations required to continue the programmes of assis-
tance to Serbia managed by the Commission. More precise esti-
mates by the Agency led to its cancellation of 120,7 million euro
of the appropriations related to these programmes.

9.
In its Annual Report concerning the financial year 2000,
the Court pointed out weaknesses in the Agency’s budgetary
accounting. The Agency began installation of the SI2 computer-
ised budgetary accounts system during the second half of 2001.
In addition, the Agency also had to incorporate into this system
the financial data relating to numerous projects which had previ-
ously been managed by the Commission.

10.
The Agency took the accumulated values for the projects
as its basis for the purpose of incorporating the existing data into
the SI2 system. Because of this, it is not always possible, in the SI2
context, to identify the original financial year of the appropria-
tions used and, in the case of the payments made in 2001 for the
projects initiated by the Commission, to distinguish between those
payments made by the Agency and those made by the Commis-
sion. Although the Court was able to obtain reasonable assurance
that the basic data were reliable, in order to obtain an accurate
impression of the implementation of the budget, auxiliary tools
constructed on the basis of electronic data sheets must be used.
These tools are not easy to apply. The Agency should reduce or
even eliminate the necessity of resorting to these tools, which
have a definite inherent risk of error.

Drawing up the financial statements

The financial

sent by the Agency on
11.
29 March 2002 contained errors. These were pointed out to the

statements

(3)

It should be noted that the allocated appropriations include 65,9 mil-
lion euro in appropriations not used by TAFKO.

27.12.2002

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Official Journal of the European Communities

C 326/3

Agency and an amended version was sent on 4 October 2002.
The Court’s opinion concerns the revised versions of the revenue
and expenditure account and balance sheet, which are shown in
summary form in Tables 2 and 3.

FOLLOW-UP OF PREVIOUS OBSERVATIONS CONCERNING
THE AGENCY’S EFFICIENCY

12.
In 2001, each Agency establishment kept its own accounts.
Reconciliations should have been made regularly to ensure that
these accounts were consistent with the central accounts. In addi-
tion, the Agency continued to use spreadsheets for the purpose of
keeping its general accounts, with all the risks that this entails.

Application of financial provisions

In its Annual Report concerning the financial year
17.
2000 (2), the Court analysed various aspects of the Agency’s effi-
ciency and the sustainability of both the actions it finances in
Kosovo and their impact.

18.
From the point of view of efficiency, the Agency has been
able to maintain a high level of commitments and payments,
whilst keeping staff and operating costs low by pursuing its policy
of reducing the advances paid to its contractors, but paying them
promptly once work has been completed.

13.
The difficult environment in which the Agency operates
meant that a financial controller could not be appointed by the
Commission during the first half of 2001.

In line with the recommendation made by the Court (3),
19.
the Agency continued to focus its efforts on areas deemed to be
priority areas. As of 2001, emphasis was placed on institutional
measures (4).

14.
Recovery orders for sums owed to the Agency are not
issued on a systematic basis, contrary to the provisions of the
Financial Regulation.

At the Commission’s request, on 26 July 2001, a con-
15.
tract (1) lasting 15 months was signed with an expert by private
treaty to provide technical assistance to the departments of the
presidency of the Federal Republic of Yugoslavia. Despite the
principle of recruiting an expert having been agreed in late 2000,
the latter had been recruited without an invitation to tender on
grounds of urgency. The contract was also partly retroactive in
nature, since the expert had begun working two months prior to
contract signature.

The housing programme

16.
One of the priorities ascribed to the Agency concerns the
repair or rebuilding of housing damaged during the hostilities,
especially amongst the poorest sections of the population. The
Court has analysed the results achieved as a result of implement-
ing this action in 2000 (Table 4 sets out the principal related data).
Although the total number of houses rebuilt exceeded the target
initially set by 4 %, the breakdown of these houses in accordance
with the type of work to be carried out diverges considerably
from that envisaged in the contracts and subsequent amendments.
For example, the number of units viewed as needing to be com-
pletely rebuilt is practically double. Such information should
prompt the Agency to look into ways of improving the selection
of the work to be carried out, so that genuine needs are met more
effectively.

(1) Contract 01/06/009.

20.
A second recommendation (5) made by the Court was
that the frequency of the meetings of the Governing Board should
be reduced, because of the extra workload and administrative
costs these incurred. This has been done and no unfavourable
consequences were experienced as a result.

A third and final recommendation (6) concerned the mea-
21.
sures to be taken to assure the sustainability of actions financed
by the EU. To this end, the Commission, in cooperation with the
United Nations Organisation, prepared action plans for five key
sectors (7). At the end of 2001, it decided that the actions plans
would now include objectives and performance indicators. The
European office of the United Nations Interim Administration
Mission in Kosovo (8) monitors the implementation of these plans
by means of quarterly reports. The Commission should continue
to develop and intensify its cooperation with the United Nations
Organisation for the purpose of monitoring and evaluating the
programmes and thus ensuring the sustainability of their impact.
Monitoring systems have been set up at Agency level. However,
there is no global monitoring plan which would ensure that all
projects were monitored systematically. An evaluation unit has

(2) OJ C 355, 13.12.2001, paragraph 21 onwards.
(3) See paragraphs 72 and 73 of the report concerning the financial year

2001 (OJ C 355, 13.12.2001).

(4) The programmes foreseen in this area are aimed, firstly, at encourag-
ing the private sector within a market economy and, secondly, at sup-
porting actions fostering respect for democratic rules, human rights
and legality in general.

(5) See paragraphs 74 and 75 of the report concerning the financial year

2001 (OJ C 355, 13.12.2001).

(6) See paragraphs 76 and 77 of the report concerning the financial year

2001 (OJ C 355, 13.12.2001).

(7) Energy, transport, enterprise development, water and health.
(8) The United Nations Interim Administration Mission in Kosovo is
organised into four offices: ‘justice and police’, ‘civil administration’,
‘democratisation and institutional measures’ and ‘economic develop-
ment’, that latter of which is managed by the European Union.

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Official Journal of the European Communities

27.12.2002

been set up and has issued its first evaluation reports. Recommen-
dations made in these reports are applied when future activities
are programmed.

With regard to infrastructure, particularly transport infra-
22.
structure, the results achieved may be deemed satisfactory. How-
ever, the plan to decrease financing for Kosovo after the rebuild-
ing phase could have repercussions as regards maintenance of the
road network and hinder its development.

23.
Over the 1999-2001 period, the energy sector received
aid amounting to 287,5 million euro, 74 million euro of which
were for financing imports. In this connection, the United Nations

Mission in Kosovo has estimated the investments that are still
needed at 200 million euro. The Commission has decided to
reduce its aid to the ‘energy sector’. Aid to this sector is to be con-
centrated on accompanying measures, which are introduced all
too slowly, especially as regards debt collection. According to sta-
tistics drawn up by the United Nations Interim Administration
Mission in Kosovo in December 2001, only 62 % of electricity
supplies are invoiced and only 28 % of invoices are actually paid;
on an annual basis, the difference between the value of the elec-
tricity supplied and that of the revenue collected is estimated at
some 100 million euro. A shortfall of this nature is unacceptable
and increased efforts to ensure that revenue is collected properly
would considerably reduce the need for external financing in the
energy sector.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 24 October 2002.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

Implementation of the budget for the financial year 2001

Table 1

Expenditure

(Mio EUR)

Revenue
received

Allocation of
expenditure

Appropriations for the financial year

Appropriations carried over from the previous financial year

available

committed

paid

carried
over

cancelled

balance to
be com-
mitted

commit-
ments car-
ried over

paid

cancelled

commitments
outstanding

Revenue

Revenue entered
in the final
budget for the
financial year

Source of revenue

Commission
subsidy

Other subsidies

Financial
revenue

405,6

447,4

Title I
Staff

2,5

2,5

0,1

2,9

Title II
Administration

Title III
Operating activities

15,1

13,8

13,4

8,9

7,1

5,9

0,3

1,2

—

—

1,4

1,8

0,1

1,7

119,7

121,5

0,1

1,4

88,7

90,2

0,0

0,2

3,9

4,1

Total

410,6

450,4

Total

411,2 (1)

285,0

159,6

125,4

387,2

264,1

140,9

123,6

0,2

0,2

122,9

126,0

Commitment
appropriations car-
ried over from 2000

Total
2000 and 2001

411,6

240,1

187,0

53,0

120,7

50,8

—

—

—

822,8

525,1

346,7

178,4

120,9

176,8

121,5

90,2

4,1

(1) Amount entered in the budget for the financial year 2001, to which was added the 0,6 million euro not taken into account in the budget (see paragraph 7).
NB: Any discrepancies in totals are due to the effects of rounding.
Source: Data compiled by the Agency — These tables summarise the data supplied by the Agency in its own financial statements.

—

—

27,1

27,1

—

27,1

.

.

2
7
1
2
2
0
0
2

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s

C
3
2
6
/
5

C 326/6

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Official Journal of the European Communities

27.12.2002

Revenue and expenditure for the financial years 2001 and 2000

Table 2

2001

2000

(1 000 EUR)

517 633 (2)
2 915
135
5 787

257 933
680
175

Total revenue (a)

526 469

258 788

Revenue received during the financial year
Commission subsidy
Financial revenue
Miscellaneous revenue
Counterpart funds

Budgetary expenditure for the financial year
Staff — Title I of the budget
Payments
Appropriations carried over

Administration — Title II of the budget
Payments
Appropriations carried over

Operating activities — Title III of the budget
Payments
Balance of the appropriations available for commitments
Appropriations automatically carried forward to 2002

Total expenditure (b)

Outturn for the financial year (a-b) (1)

Balance carried over from the previous financial year
Payments on behalf of the Commission (TAFKO)
Cancellation of payment appropriations for 2000
Appropriations carried over from 2000 which lapsed (Titles I and II)
Exchange-rate differences

Balance for the financial year

– 73 127

(1) The negative balance of the outturn and own capital does not constitute a loss of capital. It arises from the application of the Financial Regulation concerning revenue (only

revenue collected) and expenditure (payments plus appropriations carried over).

(2) Includes 70 050 278 euro received for payment against commitments previously entered into by the Commission. The Agency is responsible for the management of the

payments.

NB: Any discrepancies in totals are due to the effects of rounding.
Source: Data compiled by the Agency. These tables summarise the data supplied by the Agency in its own financial statements.

13 418
337

5 908
1 217

140 309
187 036
176 863

525 088

1 381

– 35 768
– 70 050
31 061
254
– 5

4 633
131

2 077
1 670

139 786
119 733

268 030

– 9 241

0
– 26 861
0
0
334

– 35 768

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Official Journal of the European Communities

C 326/7

Balance sheet as at 31 December 2001 and 31 December 2000

Table 3

Assets

2001

2000

Liabilities

2001

2000

(1 000 EUR)

Fixed assets
Equipment and furniture
Computer equipment
Depreciation

Current assets
Sundry accounts receivable
Advances
Recoverable VAT

Cash accounts
Banks
Cash

Subtotal

1 664
1 409
– 992

2 081

247
30
0

875
841

1 716

133
0
61

Fixed capital (1)
Own capital
Balance for the financial year

2 082
– 73 127

1 716
– 35 768

Subtotal – 71 045

– 34 052

Current liabilities
Automatic carry-overs of appropriations
(Title III) Automatic carry-overs of appropriations
(Titles I + II) Sundry accounts payable
VAT

176 863
1 554
560
0

119 733
1 801
86
61

Subtotal

277

194

Subtotal

178 977

121 681

Suspense accounts (2)
Counterpart funds

105 553
20

87 632
21

Subtotal

105 574

87 653

Total 107 932

89 563

Subtotal

1 934

1 934

Total 107 932

89 563

(1) The negative balance of the out-turn and own capital does not constitute a loss of capital. It arises from the application of the Financial Regulation in respect of revenue (only

revenue received) and expenditure (payments plus appropriations carried over).

(2) In 2001 the counterpart funds were entered in the budget and their utilisation is taken into account in the revenue and expenditure account.
NB: Any discrepancies in totals are due to the effects of rounding.
Source: Data compiled by the Agency — These tables summarise the data provided by the Agency in its own financial statements.

Table 4

Number of housing units to be repaired (1)

Category III

Category IV. A

Category IV. B

Forecasts adjusted according to contracts and amendments (a)

Latest estimate according to contracts and field data (b)

Units regarded as habitable (c)

Units actually occupied (d)

Rate of implementation planned in the forecasts (e = b/a)

Actual rate of implementation (f = c/b)

Rate of occupancy (g = d/c)

3 700

3 468

3 403

3 078

94 %

98 %

90 %

3 408

2 626

2 465

2 064

77 %

94 %

84 %

1 079

2 338

2 223

1 900

217 %

95 %

86 %

Total

8 187

8 432

8 091

7 042

103 %

96 %

87 %

(1) Category III housing basically requires roofing work. In the case of category IV. A housing, the remaining structural elements can be re-used, and in that of category IV. B,

complete rebuilding is needed.

Source: European Agency for Reconstruction.

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THE AGENCY’S REPLIES

Budgetary implementation

Application of financial rules

10.
The Agency entered the cumulative amounts of payments
prior to the introduction of SI2 because it was impracticable to
reproduce one by one the whole history of payments for several
years of assistance (Kosovo, Serbia and Montenegro since 1998
and the former Yugoslav Republic of Macedonia since 1996). The
distinction between payments made by the Commission and by
the Agency, regarding the historical data for Kosovo (1998 to Feb-
ruary 2000) is available in the Agency’s files.

Financial accounts set-up

The Agency recovered all debts from third parties using

14.
specific internal forms as recovery orders.

Housing programme

The financial year 2002 started with the new accounting
12.
system (SI2) which is centralised and eliminates the risks men-
tioned when closing the financial year.

The fact that the objectives were exceeded is particularly
16.
significant considering that for the 2001 programme over 80 %
of the reconstructed houses were classified as fully destroyed.