Report on the annual accounts of the European Agency for Reconstruction for the financial year 2004 together with the Agency's replies
Date: 2005-10-05
Institutions: European Court of Auditors
Subjects: European Agency for Reconstruction, European Court of Auditors, administration of the Institutions, financial control, interinstitutional relations (EU), operating result, report

28.12.2005

EN

Official Journal of the European Union

C 332/15

on the annual accounts of the European Agency for Reconstruction for the financial
year 2004 together with the Agency’s replies

REPORT

(2005/C 332/03)

CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-2

3-6

7-14

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

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

16

16

16

18

22

Paragraph

Page

C 332/16

EN

Official Journal of the European Union

28.12.2005

INTRODUCTION

Reliability of the accounts

1.
The European Agency for Reconstruction (hereinafter
called the Agency) was established pursuant to Council Regula-
tion (EC) No 1628/96 (1). This Regulation was replaced by Coun-
cil Regulation (EC) No 2068/2004 (2). The Agency, which was
actually set up in February 2000, was initially responsible for
managing the EU’s aid programmes in Kosovo. Following three
extensions to its mandate in 2001, 2002 and 2004, its operations
now also cover Serbia and Montenegro and the former Yugoslav
Republic of Macedonia. The Agency’s head office is in Thessal-
oniki and it has operational centres in Belgrade, Podgorica, Pris-
tina and Skopje. It implements programmes to foster institution-
building and good governance, to promote the development of a
market economy and essential infrastructure and to consolidate
civil society. Table 1 summarises the Agency’s powers and activi-
ties based on information provided by the Agency itself.

Except for the issue mentioned in paragraph 9, the Agency’s
accounts for the financial year ended 31 December 2004, in
all material respects, are reliable.

Legality and regularity of underlying transactions

Except for the issue mentioned in paragraph 11, the transac-
tions underlying the Agency’s accounts, taken as a whole, are
legal and regular.

OBSERVATIONS

2.
For information purposes the annual accounts drawn up
by the Agency for the financial year 2004 are summarised in
Tables 2, 3 and 4.

7.
Although significant funds were maintained throughout
the year (6), the Agency has no active treasury management policy
in place; considerable amounts are maintained on current bank
accounts without their earnings being checked by the Agency.

THE COURT’S OPINION

3.
The Court’s opinion is addressed to the European Parlia-
ment and the Council in accordance with Article 185(2) of Coun-
cil Regulation (EC, Euratom) No 1605/2002 (3); it was drawn up
following an examination of the Agency’s accounts, as required
by Article 248 of
the Treaty establishing the European
Community.

4.
The Agency’s accounts for the financial year ended
31 December 2004 (4) were drawn up by its Director, pursuant
to Article 8(2) of Council Regulation (EC) No 2667/2000 (5), and
sent to the Court, which is required to give its opinion on their
reliability and on the legality and regularity of the underlying
transactions.

5.
The Court conducted an audit in accordance with its poli-
cies and standards, which are based on international auditing
standards that have been adapted to the Community context. The
audit was planned and performed to obtain reasonable assurance
that the accounts are reliable and the underlying transactions are
legal and regular.

The Court has obtained a reasonable basis for the opinion

6.
expressed below.

(1) OJ L 204, 14.8.1996, p. 1.
(2) OJ L 358, 3.12.2004, p. 2.
(3) OJ L 248, 16.9.2002, p. 1.
(4) These accounts were drawn up on 13 October 2005 and received by

the Court on 18 October 2005.

(5) OJ L 306, 7.12.2000, p. 7.

Reconciliations between bank accounts and the Agency’s
8.
accounting records are not regularly carried out. With the intro-
duction of accruals accounting in 2005, it is even more relevant
that bank accounts be reconciled with the accounting records on
a monthly basis.

9.
In the absence of effective internal control procedures for
long-term receivables the Court cannot be certain that the trans-
actions relating to counterpart funds, credit line schemes and spe-
cial funds have been completely recorded.

One of the main problems the Agency faces is the diffi-
10.
culty in recruiting agents capable of carrying out the difficult tasks
with which it is entrusted. The policy of renewing the mandate of
the Agency for short periods of time increases this problem as
very few individuals with the required profile will relocate under
these circumstances.

11.
In its 2003 report (7), the Court noted anomalies which
had affected decisions in awarding contracts. In 2004 this situa-
tion was again observed. Tenders are the subject of formal pro-
cedures which constitute the main guarantee against unequal
treatment between tenderers. It is therefore essential to ensure
that procedures are strictly applied. Many of the difficulties
encountered were due to the fact that criteria set in calls for ten-
der were open to interpretation because they were unsuited to the
practical situation. The Agency should thus be particularly atten-
tive when setting selection criteria to avoid unrealistic require-
ments which would later lead to interpretation and ineffective
procedures.

(6) The bank account balance at 31 December 2004 was 158 million

euro — see Table 4.

(7) Issued on 10 December 2004.

28.12.2005

EN

Official Journal of the European Union

C 332/17

A review of operations entrusted to the United Nations
12.
Mission in Kosovo (UNMIK) was carried out. It has covered all
16 operations still open in the Agency’s accounts totalling
30,7 million euro (2004 payments 2,5 million euro). In those
cases where UNMIK is directly managing the contracts, the
Agency made payments without exercising adequate financial
control. The frequent absence of audit trail requires an in-depth
review of the applicability of the agreement (1) signed between the
Commission and the United Nations.

of the beneficiaries because it assumed this was the legal respon-
sibility of UNMIK and was then faced with serious difficulties in
closing the operations mainly due to an absence of adequate
accounts for the projects and of sufficient justification for the
expenditure.

13.
In the cases of funds where UNMIK was acting on behalf
of the local government departments, the management of these
operations was entirely left to these departments. The Agency has
not paid sufficient attention to the proper financial organisation

14.
Concerning supporting documentation for payments, a
standardised system of dealing with payment requests needs to be
adopted and criteria set on the kind of supporting evidence that
is necessary for a payment to be made.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 10 Novem-
ber 2005.

For the Court of Auditors
Hubert WEBER
President

(1) Financial and Administrative Framework Agreement (FAFA) signed
between the European Commission and the United Nations on
29 April 2003.

C 332/18

EN

Official Journal of the European Union

28.12.2005

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C 332/19

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C 332/20

EN

Official Journal of the European Union

28.12.2005

European Agency for Reconstruction — Revenue and expenditure account for the financial years 2004 and 2003 (1)

Table 3

2004

2003

(1 000 euro)

Revenue

EC subsidy

Recovery of expenses (reuse Title III)

Revenues from administrative operations (reuse Titles I and II)

231 909

1 229

181

6 113

Total operating revenue

239 432

Other operating revenue

Expenditure

Administrative expenses

— Staff expenses

— Other administrative expenses

Operational expenses

— Centralised direct management

Extraordinary gains

Extraordinary losses

Total administrative and operational expenditure

Surplus/(Deficit) from operating activities

(1) The figures for 2003 have been adjusted from those previously presented to reflect a change in accounting practices.
NB: Any discrepancies in totals are due to the effects of rounding.
Source: The Agency’s data — This table summarises the data provided by the Agency in its annual accounts.

Economic result of the year

274 221

1 318

199

28 413

304 151

17 333

6 475

297 168

320 976

– 16 825

0

– 4 118

– 20 943

17 575

6 290

268 965

292 830

– 53 398

738

– 1 269

– 53 929

28.12.2005

EN

Official Journal of the European Union

C 332/21

European Agency for Reconstruction — Balance sheet as at 31 December 2004 and 31 December 2003 (1)

Table 4

Assets

2004

2003

Liabilities

2004

2003

(1 000 euro)

Fixed assets

Fixed assets at net book value

Long-term receivables

Fixed capital

Subtotal

1 652

1 652

1 771 Own capital (2)

1 771

Accumulated surplus

Counterpart funds, credit line schemes and
special funds

61 619

Current receivables

Current receivables

Cash accounts

Subtotal

61 619

Subtotal

1 761

1 761

0

0

Current liabilities

Employee benefits

Current payables

135 Other accounts payable

135

Cash and cash equivalents

158 254

210 708

Subtotal

158 254

210 708

Total

223 286

212 614

(1) The figures for 2003 have been adjusted from those previously presented to reflect a change in accounting practices.
(2) Own capital is calculated as the sum of Fixed assets and Long-term receivables.
NB: Any discrepancies in totals are due to the effects of rounding.
Source: The Agency’s data — This table summarises the data provided by the Agency in its annual accounts.

63 270

1 771

150 332

204 261

Subtotal

213 602

206 032

28

9 619

37

0

6 067

515

Subtotal

9 684

6 582

Total

223 286

212 614

C 332/22

EN

Official Journal of the European Union

28.12.2005

THE AGENCY’S REPLIES

The funds available in the Agency’s bank accounts are
7.
commensurate with its disbursement needs, taking into account
that payments may reach peaks of 45 million euro in a single
month and that there was in December 2004 a total outstanding
amount of 345 million euro to be paid on contracted funds. Dis-
ruption in treasury due to delays in receiving the requested
tranches of the EC subsidy also needs to be avoided. The Agency
follows a treasury policy in line with the Commission’s practice.
Following the Court’s observation, guidance from DG Budget will
be sought. Recovery orders are issued to ensure proper recording
in the accounts. In 2004, 2,9 million euro was earned on the EAR
bank accounts.

8.
Bank reconciliations were frequently carried out by the
Agency before the introduction of the new double entry comput-
erised accounting tool in mid-2004. The Agency agrees to per-
form them on a monthly basis.

In accordance with its commitments taken in the context
9.
of the 2003 discharge procedure, the Agency has entered in the
final 2004 accounts the original value of the investment less a
provision for bad debts for all counterpart funds and credit line
schemes and the unspent amount for special funds. All of these
activities have undergone or are undergoing external audits in
2005. The Agency considers that the accounts provide a fair
and complete view of the EAR long term receivables. Any minor
adaptation needed will be made in the 2005 balance.

11.
The Agency operates under difficult circumstances in a
demanding environment and is fully aware of the risk involved in
managing substantial amounts of assistance under such condi-
tions. It therefore established an elaborated procurement system
with clear division of tasks amongst its operational, procurement
and finance staff. The EAR has taken appropriate measures to
address the issues raised by the Court in its annual report for

2003 finalised and published end of 2004; thus the improve-
ments could not be visible in 2004 but will be appreciated in the
context of the audit for the 2005 exercise. The EAR in particular
provided central guidance to the actors involved in calls for ten-
ders across the Agency and improved the coherence of applicable
standards and approaches. Such efforts will continue in order to
ensure that the relevant recommendations of the Court are com-
plied with.

12.
The Agency attempts by all means to ensure that UNMIK
respects its relevant obligations. The EAR’s policy is to insist in
particular on receiving in due time and form the reports provided
for in the contracts, and to reject them if inappropriate. No fur-
ther payments are made without checking the financial data and
documents required. The EAR also funds audits at the most
appropriate stage of
implementation, normally in view of,
or immediately after, the closure of a contract. These audits are
‘subject to the internal and external auditing procedures laid down
in the Financial Regulations, rules and directives of the United
Nations’ as stipulated in Article 1(a) of the FAFA.

13.
The terms of the EAR grant agreements with UNMIK are
clear on the respective shares of responsibility. UNMIK is the
responsible organisation regarding government departments.
Conscious of the difficulties mentioned, the Agency provided
technical and financial advice in the framework of certain grant
agreements. This practice will be further extended in future. The
Agency’s final payments to UNMIK are conditional to the respect
of financial requirements, based on reports by independent
auditors.

14.
The Agency uses a workflow (financial circuit) with two
verifications prior to authorisation and standard checklists. An
Instruction Note with the detailed procedure for processing
invoices was updated in mid-2004. Efforts to further strengthen
and standardise these rules will continue.