Report on the annual accounts of the European Agency for Reconstruction for the financial year 2005 together with the Agency's replies
Date: 2006-09-28
Institutions: European Court of Auditors
Subjects: European Agency for Reconstruction, European Court of Auditors, administration of the Institutions, financial control, interinstitutional relations (EU), report

C 312/18

EN

Official Journal of the European Union

19.12.2006

on the annual accounts of the European Agency for Reconstruction for
the financial year 2005 together with the Agency’s replies

REPORT

(2006/C 312/04)

CONTENTS

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

STATEMENT OF ASSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

1-2

3-6

7-11

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

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

19

19

19

21

23

Paragraph

Page

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Official Journal of the European Union

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INTRODUCTION

The Court has thus obtained a reasonable basis for the

6.
Statement below.

established

by Council Regulation

1.
The European Agency for Reconstruction (hereinafter the
(EC)
Agency) was
No 1628/96 (1), as amended by Council Regulation (EC)
No 2068/2004 (2). When it was set up in 2000, the Agency was
responsible for managing the EU’s aid programmes in Kosovo. Its
mandate was later extended to Serbia and Montenegro and the
former Yugoslav Republic of Macedonia. The Agency’s head
office is in Thessalonica and it has operational centres in Belgrade,
Podgorica, Pristina and Skopje. It implements programmes to fos-
ter institution-building and good governance, to promote the
development of a market economy and essential infrastructure
and to consolidate civil society. Its mandate is scheduled to end
on 31 December 2006 (3).

Reliability of the accounts

The Agency’s accounts for the financial year ended 31 Decem-
ber 2005 are, in all material respects, reliable.

Legality and regularity of underlying transactions

Except for the cases referred to in paragraph 9, the transac-
tions underlying the Agency’s annual accounts, taken as a
whole, are legal and regular.

2.
Table 1 summarises the Agency’s competences and activi-
ties. Key information from the financial statements drawn up by
the Agency for the financial year 2005 is presented in Tables 2, 3
and 4.

OBSERVATIONS

7.
The role and tasks of the internal auditor are not suffi-
ciently defined and do not always correspond to the duties
assigned to this post (7). The internal audit work carried out in
2005 is not formally reported to management.

STATEMENT OF ASSURANCE

3.
This Statement of Assurance is addressed to the European
Parliament and the Council in accordance with Article 185(2) of
Council Regulation (EC, Euratom) No 1605/2002 (4). It was
drawn up following an examination of the Agency’s accounts, as
required by Article 248 of the Treaty establishing the European
Community.

8.
Following the Court’s observations raised in the 2003
and 2004 annual reports, the Agency took measures to improve
the way contracts are awarded. This resulted in increased trans-
parency in various areas; for instance, important decisions made
during the evaluation process which affect the contract award are
better documented. This in turn has improved the overall disci-
pline over the evaluation and contract award procedures.

4.
The Agency’s accounts for the financial year ended
31 December 2005 (5) were drawn up by its Director, pursuant
to Article 8(2) of Council Regulation (EC) No 2667/2000 (6), 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.

(1) OJ L 204, 14.8.1996, p. 1.
(2) OJ L 358, 3.12.2004, p. 2.
(3) Article 1(4) of Regulation (EC) No 2068/2004.
(4) OJ L 248, 16.9.2002, p. 1.
(5) These accounts were drawn up on 11 July 2006 and received by the

Court on 21 July 2006.
(6) OJ L 306, 7.12.2000, p. 7.

Notwithstanding the above, the Court noted several cases
9.
where anomalies were due to the fact that the selection criteria
chosen are unrealistic as they are ill-suited to the circumstances
in which the Agency is operating.

10.
The Court welcomes the progress made in the area of
tendering and encourages the Agency to further intensify its
efforts in order to ensure that the contracts awarded fully comply
with all regulatory provisions.

In its 2004 report the Court noted, in a review of opera-
11.
tions entrusted to the United Nations Mission in Kosovo (UNMIK),
an absence of adequate financial control by the Agency in mak-
ing payments and serious difficulties in closing operations, mainly
due to an absence of adequate accounts for the projects and of
sufficient justification for the expenditure. Although the Agency
made significant efforts in 2005 to resolve the situation, the prob-
lems for closing operations remained. The audits carried out by

(7) He also advises the management.

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Official Journal of the European Union

19.12.2006

private audit firms on behalf of the Agency on a number of
projects confirmed that funds had to be recovered from benefi-
ciaries, an issue the Agency has not yet addressed. These

problems could be resolved if the Agency ensured that the terms
of the agreement applicable to the management of these funds
were complied with (1).

This report was adopted by the Court of Auditors in Luxembourg at
28 September 2006.

its meeting of

For the Court of Auditors
Hubert WEBER
President

(1) Financial and Administrative Framework Agreement (29 April 2003).

Areas of Community
competence
deriving from the Treaty

The Community shall
carry out, within its
spheres of
compe-
tence,
economic,
financial and technical
cooperation measures
with third countries.
Such measures shall
be complementary to
those carried out by
the Member States
and consistent with
the
development
policy of the Commu-
nity.

(Article 181a)

Table 1

European Agency for Reconstruction (Thessalonica)

Competences of the Agency as defined in Council Regulation (EC)
No 2667/2000 of 5 December 2000

Governance

Resources available to
the Agency in 2005
(2004)

Activities and services provided in 2005

Objectives:

Application:

Tasks:

— to

advise
the
Commission of
priority needs,

— to devise pro-
for

grammes
reconstruction
and the return of
refugees and dis-
placed persons,

every
— to take
possible
step
to implement EU
assistance.

To provide EU assis-
tance:

(i)

(ii)

for reconstruction
and the return of
refugees and dis-
placed persons;

to promote sound
administration,
stronger
institu-
tions and the rule
of law;

(iii) to

support
the
development of a
market
economy
and investment in
essential physical
infrastructure and
environmental
measures;

(iv) to support social
and
development
consolidate
civil
society.

The agency manages
the principal aid pro-
grammes in Serbia
Montenegro
and
(Republic of Serbia,
Kosovo and Repub-
lic of Montenegro)
and in the Former
Yugoslav Republic
of
Macedonia
(FYROM). Beneficia-
ries may
include
States, bodies under
UN administration,
federated
regional
and local bodies,
public
semi
and
-public bodies, both
industry,
sides of
business
support
organisations, coop-
eratives,
mutual
companies, charities,
foundations
and
NGOs.

1. Governing
Board

Comprises one rep-
resentative from
each Member State,
two representatives
from the Commis-
sion and an
observer from the
European Invest-
ment Bank.

2. Director

Appointed by the
Governing Board
on a proposal from
the Commission.

Operational Cen-
tres in Belgrade,
Pristina, Podgorica
and Skopje with a
high level of man-
agement autonomy.

3. External control

Court of Auditors.

4. Discharge
Authority

The Parliament fol-
lowing a recom-
mendation from the
Council.

Final Budget:

By operational centre (main developments):

307,5 million euro
(374,6 million euro)

Staff at 31 Decem-
ber 2005:

114 (114) TA posts
listed in the estab-
lishment plan

TA posts occupied:
88 (88)

Other posts:

170
staff:
Local
(195) posts of which
162
(173) were
occupied.

Contract staff: 28 (0)
posts of which 26 (0)
were occupied.

Total staff: 276 (261)

Responsible for

Operational
169 (184)

tasks:

Administrative tasks:
107* (77)

* includes all staff in
Administration,
Finance, and IT.

KOSOVO: a) Start-up grants, loans, training and business advice for
small businesses; b) Assistance for vulnerable persons,
including
minorities and returnees; c) Management of loans provided earlier
from EAR credit schemes; d) Rehabilitation of the heating sub-station
in Mitrovica; e) Another six bridges reopened between Pristina and the
border crossing with FYROM; f) Support in the areas of JHA and pub-
lic administration reform.

SERBIA: a) Draft laws in public administration reform; b) Supply of
equipment to border police; c) Rehabilitation and supply of equip-
ment to courts; d) Rehabilitation programme for hospitals; e) New
jobs created due to loans from the Revolving Credit Fund; f) Training
support for enterprises; g) Regional training centres for adults; h) Con-
clusion of rehabilitation of Sloboda bridge (Danube, Novi Sad) and of
the Horgos border crossing point with Hungary; i) Renovation of
municipal infrastructures; j) Reform of the statistics office; k) Support
for foreign direct investment management; l) Support for active labour
measures to secure employment and reduce unemployment; m) Sup-
port for European integration activities; n) Support for vulnerable
groups such as refugees and internally-displaced persons.

MONTENEGRO: a) Completion of waste management master plan;
b) Border crossing with Croatia completed within the framework of
assistance with integrated border management; c) Central IT database
of the Ministry of the Interior; d) Agency for Human Resources Man-
agement, regional centres for vocational education and training; e)
New Roads Directorate and transport
f) Electric utility
unbundling/restructuring, energy efficiency strategy.

laws;

FYROM: a) Assistance with the strengthening and creation of new
public administration institutions (internal audit function, Data Pro-
tection Agency); b) Police reform; c) Strengthening of veterinary and
phytosanitary services; d) Assistance with decentralisation of compe-
tences to municipalities; e) Upgrade of municipal infrastructure; f)
Training of civil servants, mainly ethnic Albanians, to become public
servants; g) New jobs created and jobs preserved due to loans to SMEs
from the Revolving Credit Fund.

Source:

Information submitted by the Agency.

.

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EUROPEAN AGENCY FOR RECONSTRUCTION

Table 2

Implementation of the budget for the financial year 2005

Revenue

Expenditure

Available appropriations

Source of revenue

Revenue entered in
the final budget for
the financial year

Revenue
collected

Allocation of expenditure

entered

committed

paid

carried
over

cancelled

(1 000 euro)

Appropriations carried over from
the previous financial year

balance
for
commit-
ment

commit-
ments
carried
over

paid

cancelled

outstanding
commit-
ments

Community subsidies

306 200

97 800

0

1 312

1 637

1 312

Title I
Staff

Title II
Administration

Title III
Operating activities

18 481

17 155

16 660

495

1 360

6 831

5 299

4 799

500

1 532

—

—

317

283

1 073

1 011

34

62

—

—

282 200

78 551

18 879

59 672

0

203 649 345 342 186 474

13 307

145 561

p.m.

617

Sub-total

307 512 101 005

40 338

60 667

2 892

203 649 346 732 187 768

13 403

145 561

Total

307 512

101 366

Total 616 651 244 054

74 378

226 757

Appropriations carried over
from 2004

309 139 143 049

34 040

166 090

4 749

7 641

170 838

0

0

0

0

374 487 346 732 187 768

13 403

145 561

Revenue and expenditure account for the financial year 2005 (1)

Balance sheet at 31 December 2005 and 31 December 2004 (1)

Table 3

Table 4

(1 000 euro)

2005

261 009
1 832
262 841

Total (a)

15 727
7 212
243 442
266 381
– 3 540

Assets
Fixed assets
Long-term assets
Receivables
Cash accounts

Liabilities
Cumulative surplus/deficit
Economic result for the year
Commission advances
Current liabilities

(1 000 euro)

2005

2004

1 276
40 002
164 859
57 917
264 054

166 840
– 3 540
74 169
26 585
260 054

Total

Total

1 652
61 619
118 118
223 860
405 249

166 840
0
205 933
32 476
405 249

(1) Data for the financial year 2004 have been restated to allow for comparison with those for 2005.

Total (b)
Economic result (c = a – b)
(1) Data for the financial year 2004 are not shown as they are not comparable with data for 2005 because of the change

in the accounting principles applied.

Source: Agency data — These tables summarise the data provided by the Agency in its annual accounts.

Other grants and
counterpart funds

Remaining funds

Miscellaneous revenue
(re-use)

Operating revenue
Community subsidies
Other subsidies/revenue

Operating expenditure
Staff
Administration
Operating activities

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6

.

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Official Journal of the European Union

C 312/23

THE AGENCY’S REPLIES

The Agency has been a pioneer in establishing an Internal
7.
Audit Capability, a function that does not yet exist in most of the
Agencies. The role and responsibilities (as per Article 38.4 of the
FR) follow the evolution of the Commission’s approach to the
subject. The new regulatory framework will lead to a further for-
malisation of this work. This function, however, contributed to
the improvement of the internal controls in the Agency.

The Agency appreciates the acknowledgements of the

8.
improvements.

9.
Further refinements of the selection criteria are being con-
tinuously implemented in order to have consistently realistic

and verifiable criteria in tender documents. This also facilitates the
preparation of compliant offers by tenderers.

11.
To the extent that this was allowed by the applicable pro-
visions of the Financial and Administrative Framework Agree-
ment between the EC and the UN, and by the administrative situ-
ation on the ground, the Agency followed a stricter approach that
often led to refusing or delaying payments in the absence of
adequate justification or proof of expenditure. Audit reports are
rendered obligatory, and the UNMIK or other UN instances con-
cerned are firmly reminded that final payments on accomplished
projects will only be made up to the amount certified by a valid
external audit. For advanced funds which have not been used in
accordance with the provisions of the relevant grant agreement,
the recovery process has been launched.