MONTENEGRO STATE AUDIT INSTITUTION ANNUAL REPORT. on Performed Audits and Activities of the. State Audit Institution of Montenegro

Transcription

1 MONTENEGRO STATE AUDIT INSTITUTION SAI : Podgorica, 29 th October 2013 ANNUAL REPORT on Performed Audits and Activities of the State Audit Institution of Montenegro for the period of October 2012 October 2013 Podgorica, October 2013

2

3 Annual Report of the State Audit Institution for the Period October October 2013 CONTENTS I II III AUDIT REPORT ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2012 OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Legal basis, objective, subject and scope of audit Analysis and mathematical accuracy Budget receipts Budget expenditures Capital budget State property Public procurements 97. SAI REPORT ON IMPLEMENTATION OF CONCLUSIONS ADOPTED BY THE PARLIAMENT OF MONTENEGRO ON PASSING THE LAW ON FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2011 EXCERPTS FROM THE FINAL AUDIT REPORTS ON INDIVIDUAL AUDITS PERFORMED IN THE PERIOD OCTOBER OCTOBER 2013 Excerpt from the Audit Report on State Guarantees of the Government of Montenegro issued in and Excerpt from the Audit Report on Annual Financial Statements of the PE Center for Vocational 2. Education for Excerpt from the Audit Report on Annual Financial Statements of the PE Center for 3. Contemporary Art for Excerpt from Audit Report on Annual Financial Statements of the PE Institute for Textbooks and 4. Teaching Aids of Montenegro for Excerpt from the Audit Report on Annual Financial Statements of the Privatization and Capital 5. Projects Council for Excerpt from the Audit Report on Managing Business Premises Excerpt from the Audit Report on Annual Financial Statements of the Social Council for Excerpt from the Audit Report on Donation Funds of the Kingdom of Denmark (Project - Programme of Organic Agriculture Development in Montenegro from 1 st January st May Excerpt from the Audit Report of the Agency for the Peaceful Settlement of Labour Disputes for Excerpt from the Audit Report on Annual Financial Statements of the Ministry of Health for Compilation Audit Report on Annual Financial Statements of Political parties for Compilation of the Audit on Reports on the Origin, Amount and Structure of the Funds Raised and 12. Spent on Election Campaigns of Submitters of Election Lists for Excerpt from the Audit Report on Annual Financial Statements of the Agency for the Protection of 13. Personal Data and Free Access to Information for Excerpt from the Audit Report on Annual Financial Statements of the Ministry for Human and 14. Minority Rights for Page 3

4 Annual Report of the State Audit Institution for the Period October October 2013 Excerpt from the Individual Audit Reports on Annual Financial Statements of Political Parties for : Social Democratic Party of Montenegro Socialist People s Party of Montenegro New Serbian Democracy of Montenegro Democratic Party of Socialists of Montenegro Positive Montenegro Movement for Changes New Democratic Power (Forca) NGO Perspective Ana e Malit Bosniak Party NGO Civic Initiatives Croatian Civic Initiative Democratic League in Montenegro Democratic Union of Albanians Excerpt from Audit Report on Final Statement of Budget Accounts of Municipality of Plav for Excerpt from Follow Up Audit Report of the Municipality of Kotor 351. Excerpt from Audit Report on Annual Financial Statements of Maritime Safety Department of 18. Montenegro, Bar, for Excerpt from Audit Report on Final Statement of Budget Accounts of Municipality of Bijelo Polje 19. for IV OTHER ACTIVITIES OF THE STATE AUDIT INSTITUTION 375. Page 4

5 Annual Report of the State Audit Institution for the Period October October 2013 Pursuant to Article 144 of the Constitution of Montenegro, Article 38 in relation to Articles 18 and 19 of the Law on State Audit Institution, the Senate of the State Audit Institution, at its session held on 29 th October 2013, adopted the following ANNUAL REPORT ON PERFORMED AUDITS AND ACTIVITIES OF THE STATE AUDIT INSTITUTION OF MONTENEGRO FOR PERIOD OCTOBER 2012 OCTOBER 2013 According to the Constitution of Montenegro the State Audit Institution (hereinafter: SAI) has been defined as an independent and supreme authority of state audit, which shall audit the legality and effectiveness of the management of state property and commitments, the budget and all financial transactions of legal entities financed by public sources of finance, or by those sources generated from the usage of state property. As stipulated by the Law, the Senate of the State Audit Institution has adopted the Annual Audit Plan for the year The following table presents: the auditee and/or the subject of audit, audit type, type of opinion and number of recommendations. Auditee and/or Subject of Audit Audit Type Type of Opinion Number of recommendations Government of MNE Final Budget Accounts of Montenegro for year 2012 Compliance audit Qualified opinion 21 State Guarantees of the Government of Cross-section and Montenegro issued in 2010 and 2011 compliance audit Opinion was not given 15 Adverse opinion on financial PE Center for Vocational Education General audit statement; Qualified opinion on conformity of operations 14 PE Centre for Contemporary Art General audit Adverse opinion 14 PE Institute for Textbooks and Teaching Aids General audit Qualified opinion on financial statement; Adverse opinion on compliance of operations Privatization and Capital Projects Council General audit Qualified opinion 11 Property Administration Ministry of Finance Cross-section audit (thematic audit)) 15 Opinion was not given 10 Social Council General audit Unqualified opinion 7 Agency for the Peaceful Settlement of Labour Disputes Donation Funds of the Kingdom of Denmark: (Project of Organic Agriculture Development in Montenegro General audit Qualified opinion 8 Compliance audit Qualified opinion 1 Ministry of Health General audit Qualified opinion 9 Ministry for Human and Minority Rights Financial audit Qualified opinion 6 Page 5

6 Annual Report of the State Audit Institution for the Period October October 2013 Auditee and/or Subject of Audit Audit Type Type of Opinion Agency for Personal Data Protection and Free Access to Information Maritime Safety Department Municipality of Bijelo Polje Municipality of Plav Financial audit Financial audit and compliance audit Financial audit and compliance audit Financial audit and compliance audit Unqualified opinion on financial statement; Qualified opinion on compliance of operations Number of recommendations Unqualified opinion 9 Qualified opinion 14 Adverse opinion 20 Municipality of Kotor Follow up audit Over the given reporting period, the SAI has also carried out the Audit on Annual Financial Statements for 2011 of 11 parliamentary political parties and the two NGOs that have been funded from the budget of Montenegro, based on the number of parliamentary seats won, as well as drafted a final Compilation Report on Audits with 50 individual and 10 joint recommendations given. SAI has also performed the Audit on Reports on the Origin, Amount and Structure of the Funds Raised and Spent on Election Campaigns of Submitters of Election Lists at the national level (13 election lists) and local level (20 election lists), and accordingly published 15 individual Final Reports and a Compilation Report with the closing findings and recommendations (6 joint recommendations). During the reporting period, SAI has also conducted the Audit on Annual Financial Statements of Political Parties for 2012, which included 13 political parties and provided 20 recommendations and 15 opinions (6 unqualified, 8 qualified and 1 adverse). Furthermore, the SAI has drafted a Preliminary Report regarding the audit on Annual Financial Statements of the Liberal Party for 2012, and sent it to this party for their comments. In the fourth quarter of 2012 the SAI has been auditing the following: - Revenues of the Budget of Montenegro for 2010 and 2011, based on concluded concession contracts for the usage of natural wealth - Final Budget Account of Municipality of Pluzine - Annual Financial Statements for the 2012 of the following Parties: People s Party, Party of Pensioners, Disabled People and Social Justice of Montenegro, Yugoslavian Communist Party, Party for Gusinje, Serbian Homeland Party, Albanian Alternative (AA) Tuzi, Democratic Centre of Montenegro, Democratic Serb Party, Democratic Party of Unity, Democratic Party. The Annual Report of the State Audit Institution represents a comprehensive and summarized integral document on all the performed activities of the State Audit Institution in the reporting period October October 2013, with the special attention to activities related to the implementation of the Annual audit. On the basis of individual audits performed in 25 legal entities, the Audit of the Final Statement of Accounts of the State Budget of Montenegro for 2012 included mathematical accuracy control, budget revenues and expenditures, capital budget and financing transactions control. A total of 21 recommendations have been given, aiming at improving budget users working methods and strengthening fiscal discipline. Over the reporting period the SAI has also performed 19 individual audits which resulted in 31 opinions given (9 unqualified, 5 adverse, 17 qualified) and 243 recommendations. Page 6

7 Annual Report of the State Audit Institution for the Period October October 2013 All the reports on performed audits have been integrally made public at the website of the State Audit Institution Annual Report of the SAI comprises of four parts: The first part of the Annual Report titled Audit Report on the Final Statement of Accounts of the State Budgets of Montenegro for year 2012 presents the report on this audit. The second part of the Annual Report provides SAI Report on the Implementation of Conclusions of the Parliament of Montenegro Regarding the Adoption of the Bill on Final Statement of Accounts of the State Budgets of Montenegro for year The third part, entitled Excerpts from Audit Reports on Individual Audits Performed in 2012, provides excerpts from 19 performed audits representing the most significant findings, recommendations and measures recommended to eliminate irregularities in business practices of the audited entities encompassed by the reporting period. The fourth part of the Annual Report entitled Other activities of the State Audit Institution presents the cooperation with the Parliament and the Government of Montenegro, international cooperation and activities on development of performance audit, as well as other activities of the State Audit Institution in the period October 2012 October As a member of the International Organization of Supreme Audit Institutions (INTOSAI) and European Organization of Supreme Audit Institutions (EUROSAI), the SAI has continued its cooperation on both, international and regional level, with the aim of strengthening development of external audit in Montenegro. Page 7

8

9 PART I AUDIT REPORT ON FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2012 Audit type: Audited entity: General audit Compliance audit Government of Montenegro Ministry of Finance Subject of audit: Final Statement of Accounts of the State Budgets of Montenegro for 2012 Audit duration: Collegium members: 140 auditing days Mr Milan Dabovic, PhD, President of the Senate Head of Collegium Mr Dragisa Pesic, member of the Senate member of the Collegium

10

11 Based on performed audit, determined factual state and deliberation of the audited entity s Opinion regarding Preliminary report of the State Audit Institution ( /99 as of 2 nd September 2013), and pursuant to Art. 9. of the Law on State Audit Institution and Art 50 of the Rules of Procedure of the State Audit Institution, the authorized Collegium, comprising of the following members: Milan Dabovic, PhD (President of the Senate Head of Collegium) and Mr Dragisa Pesic (member of the Senate member of the Collegium), at its session held on 30 th September 2013 passed the following: FINAL AUDIT REPORT on the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 O P I N I O N The Audit of the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 has been conducted in compliance with the International Standards of Supreme Audit Institutions (ISSAI standards) and applicable Montenegrin regulations. The audit has found that the Draft Law on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 does not present an entirely true and fair view of the stated results, as well as of cash-based expenses. The aforementioned discrepancies primarily refer to the following materially significant segments: the result stated in the budget deficit, overspending in budget expenses, inappropriate use of budget funds and the procedure of implementation Amendments to Annual Budget Law for Therefore, according to the established irregularities and stated comments, the competent Collegium of the State Audit Institution expresses QUALIFIED OPINION. DETERMINED IRREGULARITIES AND RECOMMENDATIONS I VARIANCE ANALYSIS AND MATHEMATICAL ACCURACY According to the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 cash deficit amounts to EUR millions. The cash budget deficit is a result of the deficit incurred in the current budget (negative savings EUR million), repayment of outstanding debts which do not have the character of borrowings in the amount of EUR million and capital expenditure of EUR million. Execution of the Budget for 2012 shows that fiscal adjustments planned by the Revised budget have not been appropriate, which led to the higher rate of cash deficit in relation to the one projected by the Revised budget, amounting up to EUR million (projected deficit amounted to EUR million, while the realized deficit was EUR million. Execution of the budget has shown an additional decline in the main source of finance amounting to EUR million and an increase in public spending amounting to EUR million, i.e. data presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 indicate that the realized cash deficit for 2012 amounted to EUR million. Cash basis of deficit, derived based on data from the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012, adjusted per net changes in the balance of outstanding debts, shows the budget result as stipulated by Article 16 of the Law on Budget ("Official Gazette of Montenegro", 46/10). Corrected deficit amounts to EUR million. i. An additional analysis of the cash deficit has found a recorded amount of EUR million charged to repayment of securities, which represents capital budget expenditure. Thus, the budget result has been improved by the same amount and repayment of principal debt has unrealistically been presented. After these adjustments the final deficit amounts to EUR million. Page 11

12 a) Recommendation: Develop the Rulebook on records of outstanding debts and their repayment in compliance with the Rulebook, establish a centralized record of occurrence and repayment of outstanding debts at the Ministry of Finance. Make corrections in the Bill on the Final Statement of Accounts of the State Budget for 2012 regarding the presented amount of the deficit, as well as adjustments relating to: Increasing capital expenditures up to EUR million, reducing principal debt repayments in the same amount, with the corresponding updates in financing transactions; Reducing the repayment of debts in the amount of EUR 7.10 million, increasing in transfers to individuals, NGOs and public sector amounting EUR 1.84 million and other expenses and / or reserves in the amount of EUR 5.26 million; Reducing subsidies in the amount of EUR 4.56 million and increasing transfers for social protection in the same amount. ii. State budget overrun has been found in 17 consumer units in the total amount of EUR million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 has presented consumption by specified users which was increased by EUR 9.98 million in relation to the legally approved. State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court decisions. However, the amount of EUR 1.36 million accounts for the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Correction of current and capital expenditures leads to further budget overrun, which exceeds the amount reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012 by EUR million, without the possibility of full allocation of costs per specific user. These procedures led to violation of Paragraph 3 of Article 11 of the Law on the State Budget ("Official Gazette of Montenegro", 40/01 as of 14 th August 2001, 44/01 as of 17 th September 2001, 28/04 as of 29 th April 2004, 71/05 as of 28 th November 2005, "Official Gazette of Montenegro", 12/07 as of 14 th December 2007, 73/08 as of 2 nd December 2008, 53/09 as of 07 th August 2009, 46/10 as of 06 th August 2010, 49/10 as of 13 August 2010), which states: No expenditure from the Consolidated Treasury Account shall not be paid unless approved by the Law on the State Budget. b) Recommendation: After the correction of results, consumption that increases the allowed amount can only partially be justified by repayments of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual State Budget Law irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and the Ministry of Finance to take into consideration the fiscal limitations as defined by the Annual Law on Budget in the current and the forthcoming period. iii. Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 has not been standardized accurately. Namely, pursuant to Article 14a, the revised budget for 2012 has foreseen that the planned amount of resources, set out in the programmes at the line ministries, shall be reduced by the amount of spent resources outlined in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for However, the same Article has not defined the following: Page 12

13 timeline covering the calculation of spent funds which have been deducted from the amounts earmarked for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law, the status of the budget plan for spending units that have ceased to function as autonomous bodies, in which the Ministry of Finance increased the current budget plan for the amounts corresponding to those the programmes, referred to in Article 14a, have been reduced by. In addition to these deficiencies, in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 there was an error identified in application of the plan set out by the Law on Amendments to the Law on Budget of Montenegro for Projected amounts specified as "the Plan" in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for Represent the current budget plan, which contains an error caused by the misapplication of the projected amounts defined by the Law on Amendments to the Law on Budget of Montenegro for These discrepancies question the adequacy of redirections which were carried out during 2012 and the consistent alignment of Montenegrin budget execution in 2012 with the plan laid down by the Law on Amendments to the Law on Budget of Montenegro for c) Recommendations: Make corrections in the Bill on the Final Statement of Accounts of the State Budgets for 2012 and specify the following: timeline covering the calculation of spent funds which have been deducted from the appropriations for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law, the status of the budget plan for spending units that have ceased to function as autonomous bodies. Appropriations for compensation should be planned within the competent institution - the Compensation Fund. The Compensation Fund is an institution that provides for appropriate analytical documentation and information crucial for projecting expenditure arising from compensation. II BUDGET REVENUES i. The Audit has found certain irregularities in the collection of public revenues, reflected in the fact that a part of particular revenues is either not being paid into the payment accounts or not identified in a timely manner, or it has not been recorded properly. a) Recommendation: It is recommended to the Ministry of Finance to ensure prompt and complete records of public revenues in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations. It is also recommended to the Ministry of Finance to consider the possibility of providing a more adequate control of collection of public revenues from user fees paid for the use of the domain "ME", by transferring the bank accounts for the purpose of collecting these fees within the group of accounts for concessions and other fees, whose collection is under the responsibility of the Department of Public Revenues. In addition, the integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank. Page 13

14 ii. Off-balance sheet settlements, which are implemented by a document on compensation, without cash flow, and thus are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. b) Recommendation: It is recommended to the Ministry of Finance to keep all compensations recorded in the State Treasury General Ledger and to implement them in accordance with the spending restrictions defined by annual laws on budget. iii. The lack of consistency in proceeding refunds of overpaid or incorrectly paid funds has been noted in cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer s detailed (analytic) card, which is often being corrected once the inspection control has been completed. c) Recommendation: It is recommended to the Ministry of Finance to develop Rules of Procedure in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms, prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure. iv. There is an obvious problem in redirecting other types of public revenues into the Central account, as well as in redirecting funds from the Central account to other structures of public revenues, connected to Conclusions passed by Department of Public Revenues and forwarded to the Ministry of Finance. d) Recommendation: It is recommended to provide consistent IT system of Department of Public Revenues and the Ministry of Finance, which would enable settling other tax payables by overpayments made in one part of the tax liabilities. It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt, which is not yet settled according to the amount of overpaid taxes based on justified taxpayers claims, in accordance with Decisions made by the Department of Public Revenues. III BUDGET EXPENDITURES i. The audit has found that a certain number of spending units irregularly submits the IOPPD form to the Department of Public Revenues, which is a monthly report on personal income, paid out per month, accrued and withheld personal income taxes and contributions on and from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid out regularly, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies, on the grounds of paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues. Page 14

15 a) Recommendation: Require of all the users of public funds to duly submit the IOPPD form - a monthly report on paid personal income, accrued and withheld personal income taxes and contributions on and from this income for all employees. ii. The audits carried out on a sample basis have determined improper spending, contrary to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, with the following spending units: charged to expenditures for material at the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 208,704.82; charged to business trips in the Transport Directorate, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Forestry, Forest Administration and Water Directorate in the amount of EUR 150,485.12; EUR charged to contracted services at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, the Concessions Commission, Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 576, charged to capital expenditure in Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amount of EUR 35, debited to repayment of securities to residents in the amount of EUR 16,564, for the Transport Directorate and EUR 740, for Telecom. charged to subsidies paid for redundant labour in the amount of EUR 4,564, b) Recommendation: Perform adjustments in the reported amount of improper spending, identified by the audit, in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for iii. The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority Rights, the General Secretariat of the Government and the Department for Protection of Competition have not recognized their consumption in the reports on the use of the current reserve, even though they used the funds. Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31 st of the current year for the previous year, a mutual weakness in the functioning of the system of internal controls has been identified. Recommendation: It is deemed necessary to perform reporting on the use of the current budget reserve funds in compliance with Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments units on Form 9 - Report on using current budget reserve funds. Page 15

16 IV CAPITAL BUDGET i. According to its conclusions, the Government has reallocated funds from the capital budget to other purposes, not provided for by the annual Law on the Budget. The audit has identified improper payments executed by the Transport Directorate from the Project Expropriation of land for the construction of highway Bar-Boljare, road section from Smokovac to Verusa and Project Solving the problem of bottlenecks in transport network in Montenegro - Bridge Port Milena, Boulevard Bar, bypass around Niksic phase II and bypass Golubovci. a) Recommendation: It is recommended to ensure full implementation of the Law on Budget in planning and execution of the capital budget, and not to charge any executed payment which belongs to the current budget to the account of the capital budget. ii. Despite the fact that the State Audit Institution had already given recommendations that projects for funding from the capital budget shall not be proposed without appropriate planning documentation, urban technical conditions and revised project documents, in the Audit Report on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, the audit has found that the same irregularities were repeated in It is also recommended to foresee codes for subprojects within particular projects within the capital budget of the Transport Directorate and Directorate of Public Works for 2012, which would facilitate the monitoring process of expenses by location and type of occurrence. b) Recommendation: Before the adoption of the annual Law on Budget, it is necessary to check whether the requirements regarding planning and application of specific projects are recognized as realistic. Special attention should be paid to identified irregularities which have been repeating over a longer period, thus suggesting that a certain number of projects have not been realized due to improperly examined requirements in part of the urban technical conditions, planning documentation and revised project documents. V STATE PROPERTY a) It is recommended to spending units to keep separate records of movable and immovable assets in their bookkeeping, based on valid documentation, in accordance with the Rulebook on Unique Classification of the Accounts of the State Budget and the Classification of Assets by Groups and Methods for Determining Depreciation. b) It is necessary to ensure consistent implementation of the Law on Property and the Regulation on Keeping Records of Movable and Immovable Assets and Taking Inventory of State-Owned Property, so far as it relates to the obligation of entering data in the prescribed forms and their submission to the competent state authority Real Estate Administration. In accordance with Art. 11 of the Rulebook on Terms and Performance of the Inventory and Harmonization of Bookkeeping Records with the actual situation ( Official Gazette of Montenegro, 34/09 as of May 29 th, 2009) it is necessary to draw up a report on the inventory. Page 16

17 c) When it comes to investment and technical maintenance, it is recommended to delegate these tasks to the Real Estate Administration, as defined by the Regulation, given that this state body has organizational, professional and staff capacity to be considered qualified for the mentioned task. More expensive solutions are usually used in practice, such as entrusting this task to other legal entities or individuals. VII PUBLIC PROCUREMENT a) It is recommended to the spending units which have not done so yet, to appoint a person to act as a Procurement Officer in accordance with Article 58 of the Law on Public Procurement, as well as to timely adopt a procurement plan in accordance with the legally established deadlines, with an obligation to deliver it to the Public Procurement Administration. b) It is recommended to spending units to conduct public procurement using the appropriate procedure in relation to the nature and estimated value of the subject of public procurement, in accordance with Article 20 and Article 21 of the Law on Public Procurement ( Official Gazette of Montenegro, 42/11). c) It is recommended to all spending units to ensure that the annual scope of public procurement executed by direct agreements does not exceed the prescribed limit stipulated by Article 30 of the Law on Public Procurement. d) It is recommended to all spending units to provide accurate recording of required data on awarded public procurement contracts and thus enable the compiling of a complete and accurate Report, in accordance with Article 117 and Article 118 of the Law on Public Procurement. Page 17

18 1. LEGAL BASIS, OBJECTIVE, SUBJECT AND SCOPE OF AUDIT 1.1 Legal basis Pursuant to the Article 4 and 9 of the Law on State Audit Institution ( Official Gazette of Montenegro, 28/04, 27/06 78/06, 17/07, 73/10 and 40/11, hereinafter: the Law on State Audit Institution) and Article 51 of the Law on Budget ( Official Gazette of Montenegro, 40/01, 44/01, 71/05, 12/07, 73/08, 53/09, 46/10 and 49/10, hereinafter Law on Budget) and in accordance with the International Auditing Standards (INTOSAI) and Annual Audit Plan for 2013, the Audit of the Final Statement of Accounts of the State Budgets of Montenegro for 2012 was performed (hereinafter: Final Budget Account). 1.2 Objective and Subject of Audit The main objective to the audit is to collect reliable evidence on significant facts related to regularity (compliance) of the work of responsible individuals within spending budget unit and examination of the objective and accurate presentation of public revenues and public expenditures presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for Subject of the audit is Final Statement of Accounts of the State Budget drafted in accordance with Article 51 of the Law on Budget, Articles 1, 2, 3 and 4 of the Rulebook on Consistent Accounts Classification for the State Budget, Extra-budgetary Funds and Municipal Budgets ( Official Gazette of Montenegro, 35/05, 37/05 and 81/05) and Article 6 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments ( Official Gazette of Montenegro, 32 / 10, 14/11, 16/13). In accordance with the abovementioned, the data and reports on the following issues were audited: opening and closing balance of the Consolidated State Treasury Account; review of discrepancies incurred in relation to the planned amounts; report on borrowings taken; report on outlays from the budgetary reserves; report on guarantees given during the fiscal year; report on capital investments; report on implementation of programme budget; report on public debt and guarantees issued; report on writing off tax claims and non-tax receivables incurred prior to August 15 th, 2009 and the report on receipts and expenditures of public institutions, which are not included in the Consolidated Treasury Account. Annual financial statements are prepared and submitted at latest by March 31 st of the current year for prior fiscal year, as stipulated by the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments, on the following forms: Cash flow statement I economic classification, Cash flow statement II functional classification, Cash flow statement III, Cash flow statement IV, Report on Outstanding Debts, Consolidated Report of a Spending Unit Structured of Public Institutions, Report on Consolidated Public Expenditure, Statement on the manner of spending funds submitted upon the expiry of a fiscal year and Report on the manner of spending funds from the current budgetary reserve. 1.3 Scope of Audit Apart from documents and reports controlled within the Ministry of Finance State Treasury, audit of Final Statement of Accounts of the State Budget of Montenegro for 2012 covers separate financial reports, records and documentation of the spending units. Auditing of individual financial statements is based on controlling the compliance with respective regulations relating to the procedures of issuing and completing documents, keeping records and reconciliation with the State Treasury General Ledger, in order to verify whether the executed transactions have been supported by the relevant documents. The audit has been performed in the following spending units: Ministry of Finance, Reserves, Ministry of Interior Affairs, Ministry of Page 18

19 Economy, Ministry of Agriculture and Rural Development, Ministry of Transport and Maritime Affairs, Ministry of Culture, Ministry of Information Society and Telecommunications, Human Resources Administration, Department of Public Revenues, Forest Administration, Water Directorate, Port Administration, Administration for Inspection Affairs, Directorate for Protection of Cultural Property, Games of Chance Administration, Real Estate Administration, Transport Directorate, Directorate of Public Works, Concession Commission, Montenegrin Olympic Committee, Montenegrin Music Center, Central Bank of Montenegro Budget Revenues, Pension and Disability Insurance Fund and Compensation Fund. 1.4 Audit Procedure The audit of the Final Statement of Accounts of the State Budget has been made in accordance with International auditing standards for the public sector (ISSA) and it includes sample-based testing of evidence that confirm the stated data and information on the Final Statement of Accounts of the State Budget. The audit also provides assessment of accounting principles and disclosure of data in compliance with International accounting standards for the public sector. In the audit process special attention was paid to collecting evidence which enable the expression of opinion on the truthfulness and objectivity of the total revenues and expenditures stated in the Bill on Final Statement of Accounts of the State Budget of Montenegro for Accounting System The Accounting System of the Montenegrin Budget is organized on a modified cash basis pursuant to the provisions of Articles 2 and 47 of the Law on Budget, Article 1 of the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments ( Official Gazette of Montenegro, 35/05 and 37/05) and Instructions on the State Treasury ( Official Gazette of Montenegro, 80/08, 02/09; 45/10, 15/11 and 17/12). The accounting system is based on the records kept in the State Treasury General Ledger under the Ministry of Finance and the accounting departments of the spending units. Based on their expenditures (payments) and revenues records, spending units compose Financial Statements by the end of the year, which are then submitted to the Ministry of Finance State Treasury Department, no later than March 31 st of the current year for the prior fiscal year. The State Treasury General Ledger and Financial Statements from the spending units represent document basis for drafting the Final Statement of Accounts of the State Budgets of Montenegro. 2. ANALYSIS AND MATHEMATICAL ACCURACY A preliminary control of compliance of the reported results with the laws and bylaws, as well as realitybased control of the planning process and conformity with the budget execution has been carried out by the general analysis and verification of mathematical accuracy. The general analysis has shown the structure of public spending through its execution, as well as the structure of financing and the reasons for the incurrence of cash deficit. Mathematical accuracy verification has been performed by analyzing cash flows and their adjustment for the amount of outstanding debts. As a special segment, the audit for 2012 has included amendments to the Law on Budget for 2012 ( Official Gazette of Montenegro, 29, 6 th June 2012). 2.1 General Data Starting from the data in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, there has been a cash deficit of EUR million recorded. The cash budget deficit resulted from deficit in current expenditures (negative savings EUR million), repayment of outstanding debts that do not have the character of a borrowing in the amount of EUR million and capital expenditure of EUR million. Page 19

20 Current Revenues 1, Current Expenditures 1 1, Repayment of Outstanding Debts In M EUR = Savings Savings Capital Expenditures = Cash Surplus/Deficit According to the figures in the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012, total sources of finance and the level of public expenditure amounted to EUR 1, million. Sources of financing public expenditure have been provided from current revenues in the amount of EUR 1, million, from borrowings EUR million, sales of assets EUR 3.48 million, donations EUR 5.02 million and cash amounting EUR 0.9 million. Public expenditure for 2012 in part of current expenditures totalled at EUR 1, million, in part of capital expenditure at EUR million, while for repayment of outstanding debts the amount of EUR million has been allocated, while for repayment of principal debt it amounted to million EUR. The structure of public spending is shown in the following table: Table 1 Cash Deficit and the Structure of Financing as recorded by the Ministry of Finance In M EUR Sources of finance 1, Public expenditure 1, = Principle of balance 0.00 = = Current expenditures 1, Current revenues 1, Capital expenditures = Cash surplus/deficit Repayment of outstanding debts Borrowings Repayment of principle = Net borrowings Property sale 3.48 Property sale Donations 5.02 Donations Cash 0.90 Cash 0.90 = Sources of deficit financing Deficit in the amount of EUR million has been financed from net borrowings, amounting to EUR million, the sales of assets EUR 3.48 million, donations EUR 5.02 million, and by reducing the cash in the amount of EUR 0.9 million. Respectively, the deficit has been defined by the current expenditures 1 in the amount of EUR million, the capital expenditures amounting to EUR million and repayment of outstanding debts amounting to EUR million. The analysis of the structure and finance sources of deficit shows that due to deficit in state funds, most of the borrowings have been used to finance liabilities arising from social protection. 1 Current expenditures include current spending, reserves and transfers; Page 20

21 TOTAL Capital budget Total current expenditure State funds budgets Liabilities from previous period Repayment of guarantees Current budget Table 2 Structure and sources of financing deficit in million EUR DESCRIPTION Deficit Surplus Deficit financed by surplus Insufficient funds Deficit financed by donations Deficit financed by sale of property Deficit financed by loans Deficit financed by deposits Insufficient funds The total amount of net borrowings amounting M EUR was used for financing current expenditure of the state funds in the amount of EUR million (73%), while EUR million or 27% was allocated for financing the capital budget. This statement is confirmed by an analytical overview shown in the following table: Table 3 Structure of finance sources arising from borrowings Column1 Column2 Column3 In M EUR DESCRIPTION Residents Non-residents TOTAL Short-term loans Short-term securities Short-term sources - Total Repayment of securities to residents Balance Long-term loans Long-term securities Long-term sources - Total Repayment of securities to residents Repayment of securities to non-residents Net indebtedness Project loans Total net indebtedness for financing deficit Short-term loans, realized by issuing short-term securities, have completely been used for repaying securities to residents. Long-term loans and foreign market securities have provided liquidity for the repayment of securities to residents and non-residents in the amount of EUR million. The rest of the long-term financial sources and project loans, amounting EUR million, have mainly been used for current expenditures and social benefits financing. 2.2 Cash Deposits Cash on public accounts has been controlled by verifying the opening and closing balance, which is then reconciled with the cash inflows and outflows, confirmed by the Central Bank of Montenegro and commercial banks where, according to the consent of the Ministry of Finance, bank accounts have been opened. Page 21

22 Table 4 Cash control at the Consolidated Treasury Account No. DESCRIPTION AMOUNT (in EUR) 1 Funds carried over from previous year Receipts 1, I Total 1, Expenditures 1, Cash expenditures recognized on 31/12/ Cash balance at the year-end Total cash at the year-end II Net cash flow change Bank confirmations Cash expenditures recognized on 31/12/ II Total (6+7) III Difference (II-6) IV Difference found by audit Ministry of Defence deposits Donations and project loans Privatization Council deposits Directorate for Development of SMEs deposits Interest bearing and non-interest bearing demand deposits of Government of Montenegro Courts deposits Schools deposits Election commission deposits Deposits for public procurement procedure National Tourism Organization deposits Funds not included in cash balance Other V Difference (III-IV) The discrepancy found in the deposit balance on December 31 st, 2012 amounted to EUR 3.5 million. The difference between the cash balance reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012 and the cash recorded through bank confirmations, subsequently reconciled with the Ministry of Finance, shows that cash has mostly been explained by the analytical data presented in Table 4. The audit has also found a certain number of accounts at commercial banks which are not listed in the Overview of budget users' accounts at commercial banks reported by the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and by the report submitted by the Ministry of Finance. In addition, we draw attention to the interest-bearing and non-interest bearing deposits (ordinal 12, Table 4), presented through the bank confirmations, which have not been kept and recorded as cash at the Consolidated Treasury Account. Recommendation: It is necessary for the Ministry of Finance to perform in cooperation with spending units a detailed analysis of the state accounts at commercial banks, make a list of total cash available at these accounts and close those ones that are not in function of public expenditure. Page 22

23 2.3 Cash Flows Summarized data on budget execution reported in Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 are shown in the following table: Table 5 Cash Flows and Mathematical Accuracy Control Summary Tables by Economic Classification DESCRIPTION Plan Rebalance (Official Gazette of MNE, No. 6/12) CASH DEFICIT IN 2012 FINAL STATEMENT OF ACCOUNTS FOR 2012 Plan by Final Statement of Accounts of State Difference Executed Correction (+) Correction (-) Budget of MNE for 2012 In M EUR Audited state of facts = (4-3) = Cash inflows 1, , , , , Taxes Social protection contributions Donations Other inflows Repaid loans inflows Cash outflows 1, , , , , Wages and other personal earnings Other personal income Material and services supplies Ongoing maintenance Interests Rents Subsidies Transfers to individuals and non-governmental sector Social protection transfers Other Reserve expenditures Granted borrowings Capital expenditures and securities purchase Purchase of non-financial assets Purchase of financial assets Repayment of liabilities from previous period Repayment guarantees expenditures Cash deficit/surplus Sources of finance cash deficit Non-deposit Internal sources of finance Increase of credit debt based on loans Debt increase by loans Repayment of principle Net indebting of securities Issuance of securities Repayment of principle Sale of assets Sale of non-financial assets Sale of financial assets Net cash flow changes External sources of finance Increase of credit debt based on loans Debt increase by loans Repayment of principle Net indebting of securities Issuance of securities Repayment of principle Donations Summarizing materially significant findings shows that it is necessary make adjustments that can provide for a more objective view and presentation of the reported financial results of the previous year, by passing Amendments to Bill on Final Statement of Accounts of the State Budgets of Montenegro for We use this opportunity to emphasize that the Government of Montenegro considered Bill on Final Account of the Budget of Montenegro for 2012 submitted by the Ministry of Finance, at its session on June 13 th, Accordingly, the Government of Montenegro passed the Conclusion 2 determining the Bill on Final Annual 2 Number: /3, Podgorica, June 20th, 2013 Page 23

24 Statement of Accounts of the Budget of Montenegro for 2012, provided that the following text: Programme: Transport Directorate, from the Explanatory Report, the part of Ministry of Economy, is replaced by: Programme: Directorate for Development of Small and Medium Sized Enterprises. Correction of results is suggested for a part of materially significant irregularities determined by checking mathematical accuracy or for those identified by the fieldwork through the auditors records, and which are listed within the text of this Report. Corrections determined at the level of four digit code have been excluded, while the corrections that exceed the amount of one million EUR have been stressed as significant in the proposal of summarized corrections. Cash deficit analysis shows the following: recorded expenditure amounting to EUR million, which represents the capital budget expenditure, has been charged to repayment of securities, so it is necessary to reduce repayment of the principal debt in the same amount and increase the amount of capital expenditures; In addition to determined deficit adjustment, it is necessary to make corrections in part of improper consumption of subsidies in the amount of EUR 4.56 million. Namely, this expenditure has been charged for the amount referring to redundant labour. It is necessary to reduce subsidies and increase the amount provided for social protection transfers-redundant labour, for the same amount; It is necessary to make correction of the amount of EUR 7.1 million charged to repayment of commitments from the previous period and increase amounts for transfers to individuals, NGOs and public sector for the amount of EUR 1.84 million, as well as the amount for other expenses and / or reserves of EUR 5.26 million. Given the aforementioned corrections, it is necessary to increase the cash deficit presented in the Bill on Final statement of account of the state budget, in the amount of EUR million. Cash deficit analysis shows a recorded expenditure charged to repayment of securities in the amount of EUR million, which is a capital budget expenditure. In this way, the budget outcome has been improved by the same amount, thus presenting an unreal amount of principal debt repayment, i.e. better financial results in part of deficit financing. Contrary to the current budget plan, keeping records of capital budget expenditures at the position of repayment of securities resulted in overcoming the problem of budget overrun, as well as in better budget result. Keeping records of improper expenditure on the position of repayment of commitments from the previous period in the Bill on the final statement of accounts of the state budget for 2012 has not affected the final budget result, as an increase in commitments has been recorded in the same amount. However, budgetary restrictions defined by the revised budget for 2012 have been avoided in this way. Recommendation: On the basis of the audit findings, it is necessary to revise the Bill on the final annual statement of accounts of the State budget of Montenegro for 2012 in the segments that are materially significant and consequently take appropriate systemic measures on preventing the possibility of repeating the failure in fiscal discipline in the following years. Page 24

25 2.4 Cash deficit and outstanding debts Deficit cash base, derived according to data from the Bill on the final statement of accounts of the State budget of Montenegro for 2012 and revised for the net changes in outstanding debts 3, shows the budget result compliant with Article 16 of the Law on Budget ( Official Gazette of Montenegro, 46/10). Deficit corrected in the amount of EUR million, along with data on net change in outstanding debts, is shown in the following tabular overview: Table 6 Deficit modified by the data of the Ministry of Finance Sources of financing 1, Public expenditure 1, = Principle of balance In M EUR 0.00 Current expenditures 1, Current revenues 1, Capital Expenditures Increase in outstanding liabilities = Modified Surplus/Deficit Repayment of Net change of Increase in outstanding outstanding liabilities = outstanding liabilities from previous period liabilities Borrowings Repayment of principle = Net borrowings Sale of assets 3.48 Sale of assets Donations 5.02 Donations Cash 0.90 Cash 0.90 = Deficit financing sources Data shown in Table 7 show a misbalance in the part relating to: presenting expenditures for repayment of outstanding debts, and an increase in the amount of outstanding debts in It has been ascertained by the Explanatory memorandum on the Bill on the final statement of accounts of the state budget of Montenegro for 2012 that repayment of commitments from the previous period includes the following: repayment of regular instalment arising from restitution in the amount of EUR 1.84 million, and repayments by Government Conclusions in the amount of EUR 5.16 mil. 3 Net changes in outstanding debts exclude borrowings transactions Page 25

26 Regular instalment arising from restitution is current budget expenditure, not an outstanding debt, because its maturity date is in the current year. It is also not possible to declare a current budget expenditure an outstanding obligation by exercising discretion in Government decision-making. Therefore adjustments have been made in reducing net increase and net decrease in commitments, in the amount of EUR 7.1 million. Corrected data are shown in the following table: Table 7 Modified deficit corrected according to mathematical accuracy verification Sources of financing 1, Public expenditure 1, = Principle of balance In M EUR 0.00 Current expenditures 1, Current revenues 1, Capital expenditures Increase in outstanding liabilities = Modified Surplus/Deficit Repayment of Net change in Increase in outstanding outstanding liabilities = outstanding liabilities from previous period liabilities Borrowings Repayment of principle = Net borrowings Sale of assets 3.48 Sale of assets Donations 5.02 Donations Cash 0.90 Cash 0.90 = Deficit financing sources Adjustment in current expenditures leads to further budget overrun, which has been increased in the amount of EUR 7.1 million comparing to previously reported, without the possibility of allocation of costs to a particular user. In addition, the structure of financial sources has been changed in part of net borrowings, which amount to EUR million after correction, instead of EUR million, as well as in part of increase and repayment of outstanding debts, as follows: increase in outstanding debts of EUR million; decrease in outstanding debts of EUR million. Corrected deficit amount per economic classification, as well as its financing structure, are shown in the following tabular overview: Page 26

27 Table 8 Correction of reported budget result CORRECTED DEFICIT FOR 2012 In M EUR DESCRIPTION FINAL STATEMENT OF ACCOUNTS FOR 2012 CORRECTION OF EXECUTION Plan Rebalance Executed Correction (+) Correction (-) Balance Cash inflows 1, , , , Taxes Social protection contributions Donations Other inflows Repaid loans inflows Cash outflows 1, , , , Wages and other personal earnings Other personal income Material and services supplies Ongoing maintenance Interests Rents Subsidies Transfers to individuals and non-governmental sector Social protection transfers Other Reserve expenditures Granted borrowings Capital expenditures and securities purchase Decrease in liabilities - outflows Repayment guarantees outflows Cash deficit (1-2) Sources of financing cash deficit ( ) Net borrowings Sale of assets Donations Net cash flow change Net increase/reduction of liabilities ( ) Increase of liabilities Reduction of liabilities - outflows Corrected outflows ( ) 1, , , , Cash inflows (1.) 1, , , , Modified c ash deficit (12-11) Deficit financing sources ( ) Net borrowings Sale of assets Donations Liabilities to suppliers Net cash change Corrections in the table show that reported deficit amount of EUR should be corrected, to EUR million. Corrections in the budget result consequently lead to an additional overrun in budget consumption shown in the summary table per economic classification, that should be presented with the following expenditures: Page 27

28 Recommendation: Social protection transfers...eur 3.91 mil. Capital expenditures..eur mil. Pursuant to Article 16 of the Law on Budget ( Official Gazette of Montenegro, 46/10), it is necessary to make correction of deficit in the amount of EUR million. In addition, this correction requires further changes in the Bill on the final statement of accounts of the state budget of Montenegro for 2012, which specifies budget overruns reported in the summary tables per economic classification more consistently. 2.4 Fiscal Discipline By the first verification of mathematical accuracy, in the summary tables outlaid by economic classification, it has been found that the difference between executed planned, by the revised budget, is identical to the difference between executed - planned as stated in the Bill on the final statement of accounts of the state budget of Montenegro for It can be concluded that redirections presented by the Bill on the final statement of accounts of the state budget of Montenegro for 2012, are harmonized regarding calculation at the level of the summary table in Articles 1 and 3. However, there have been overruns noted in the budgetary consumption per spending units, as well as inconsistency in the application of the Law on Amendments to the Law on Budget of Montenegro for 2012, comparing to the Bill on the final statement of accounts of the state budget of Montenegro for 2012, and for this reason a detailed data analysis by organizational and programme classification has been performed, that has shown some discrepancies Amendments to the 2012 Annual Law on Budget Certain inconsistencies were indicated in budget planning during It is significant to note inconsistencies in the part of organizational structuring of budget funds users. Pursuant to the Law on Budget for 2012 and the Decree on the State Administration Organization and Manner of Operation, some budget units are stated as separate spending units (Directorate for Anti-Corruption Initiative, the Institute for Execution of Criminal Sanctions, Police Administration, Department of Public Revenues, Customs Administration, Real Estate Department, Property administration, Games of Chance Administration, Directorate for Protection of Cultural Property, Directorate for development of small and medium enterprises, Port Administration, Maritime safety administration, Transport Directorate, Railway Directorate, Phytosanitary administration, Veterinary directorate, Forest Administration, Water Directorate, Agency for tobacco, Directorate of Public Works, Bureau for refugee care). According to revised budget as of June 2012, the aforementioned spending units have become Programmes within the competent ministries, while the State Protocol has become a Programme under the General Secretariat of the Government. In January 2012, Directorate for Youth and Sports was repealed and it became an integral part of the Ministry of Education and Sports, and it regained its status of an independent administrative authority in December The Ministry of Justice and Ministry of Human and Minority Rights were established in January Changes made by revised budget as of June 2012, as well as by Amendments on Decree on the State Administration Organization resulted in separating these units to the Ministry of Justice and Human Rights and the Ministry for Minority Rights. In December 2012, after certain organizational changes had been processed, the aforementioned spending units were returned to the status quo ante. Inconsistency in planning, caused by frequent changes in organizational structure, resulted in creation of unstable budgetary framework and significantly impeded the audit process. Page 28

29 The audit of the final statement of accounts for year 2012 determined inconsistency in the application of Article 14a of the Law on Amendments to the annual Law on Budget of Montenegro for 2012 ( Official Gazette of Montenegro, 29, as of 06 th June 2012), which states: For the following spending units: State Protocol, Directorate for Anti-Corruption Initiative, the Institute for Execution of Criminal Sanctions, Police Administration, Department of Public Revenues, Customs Administration, Real Estate Department, Property administration, Games of Chance Administration, Directorate for Protection of Cultural Property, Directorate for development of small and medium enterprises, Port Administration, Maritime safety administration, Transport Directorate, Railway directorate, Phytosanitary administration, Veterinary directorate, Forest Administration, Water Directorate, Agency for tobacco, Directorate of Public Works, Bureau for refugee care, which have become an integral part of relevant ministries as the Programmes, the planned resources specified within the programme at the relevant ministries will be reduced for the amount of spent funds presented in a separate table, until the entry into force of this Law. Pursuant to Article 14a, the Revised budget for 2012 foresees that the planned amount of resources, specified within the Programmes at the relevant ministries, shall be reduced for the amount of spent funds as presented in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for However, the same Article does not define: timeframe covering the calculation of spent funds which have been deducted from the amount earmarked for the Programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law, he status of the budget plan for spending units that have ceased to function as independent bodies, whose current budget plan was increased by the Ministry of Finance for amounts reduced from the Programmes referred to in Article 14a. In addition to these deficiencies in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012, an error was identified in the implementation of the plan set by the Law on Amendments to the Law on Budget of Montenegro for The projected amounts specified as the Plan in the Bill on final statement of accounts of the state budget of Montenegro for 2012 represent the current budget plan which contains an error caused by misapplication of the projected amounts specified by the Law on Amendments to the Law on Budget of Montenegro for These discrepancies call into question the adequacy of redirections which were carried out during 2012, as well as consistent conformity of the execution of the Budget of Montenegro in 2012 and the Plan laid down by the Law on Amendments to the Law on Budget of Montenegro for The names by organizational codes have not been consistently applied by the Bill on the final statement of accounts of the state budget of Montenegro for 2012, and in this part, it is necessary to refer to the following: The Final Statement of Accounts has not included and shown the spending unit under the organizational code 41506, Directorate of Public Works, where the Revised budget for 2012 projected appropriations for planned spending in the amount of EUR 5.56 million. The Revised budget specified an incorrect organizational code for the part of public works incorporated with the Ministry of Sustainable Development and Tourism. The Revised budget specified code 41501, while the organizational code was used for this unit in the Final Statement of Accounts for The Final Statement of Accounts presented the programme Administration under the classification number of 2401, which does not exist in the Revised budget for 2012, with the funds spent in the amount of EUR 0.18 million. Page 29

30 The Ministry of sustainable development and tourism and Directorate of Public Works have identical organizational code Revised budget has not properly located expenditures for commitments executed by the Compensation Fund. Sources allocated for compensation are planned and executed by the Ministry of Finance, while the Compensation Fund can only plan funds for administrative expenses. Recommendation: Through Amendments to the Bill on the final statement of accounts of the state budget of Montenegro for 2012, it is necessary to: accurately define Article 14a for the portion of funds, which the planned amounts of spending units, that have become programmes within the relevant ministries are reduced for, with the timeframe of their calculation, accurately define the status of the budget plan for spending units that have ceased to function as independent bodies, to plan compensation funds within the relevant institution - the Compensation Fund. The Compensation Fund is an institution that has the appropriate analytical documentation and information that is essential for projecting expenditure arising from compensation Budgetary Overrun The problem of budgetary overrun has been found in 17 consumer units in the total amount of EUR million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on final statement of accounts of the state budget of Montenegro for 2012 has presented consumption by specified users which was increased by 9.98 million EUR comparing to the legally approved, as shown in the following table: Organizational classification Table 9 Budgetary Overrun DESCRIPTION OVERRUN IN BUDGET SPENDING Rebalanced plan Final statement of accounts plan Differenc e Difference % Executio n Budget overrun Budget overrun - interests Approved overruns - donations and foreign loans = (4-3) = = JUDICIARY MINISTRY OF JUSTICE INSTITUTE FOR EXECUTION OF CRIMINAL SANCTIONS MINISTRY OF INTERIOR POLICE ADMINISTRATION CUSTOMS ADMINISTRATION REAL ESTATE ADMINISTRATION MINISTRY OF EDUCATION AND SPORTS DIRECTORATE FOR DEVELOPMENT OF SMALL AND MEDIUM- SIZED ENTERPRISES TRANSPORT DIRECTORATE MINISTRY OF AGRICULTURE AND RURAL DEVELOPMENT VETERINARY ADMINISTRATION FOREST ADMINISTRATION MINISTRY OF SUSTAINABLE DEVELOPMENT AND TOURISM NATIONAL TOURISM ORGANIZATION OF MONTENEGRO EMPLOYMENT AGENCY DIRECTORATE FOR PUBLIC WORKS In M EUR Difference TOTAL Page 30

31 State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court decisions. In 2012, the Ministry of Finance repaid these expenses charging them to the spending units that caused them, keeping records of those payments as the repayment of outstanding debts. However, the amount of EUR 1.36 million represents the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Acknowledging that the Ministry of Finance has allocated execution per spending units for expenditures arising from court decisions, which represent an outstanding debt pursuant to the recommendations of the State audit institution, those appropriations should have been planned per spending unit in the same way, given that the information on outstanding debts arising from court decisions were at disposal at the moment of passing the Revised budget. Taking into account the previously reported corrections in budgetary results adjustment, the overruns amount to EUR million, as shown in the following table: Table 10 Budgetary overrun after reporting results DESCRIPTION Overruns in M EUR Transfers to individuals and NGOs 1.45 Social protection transfers 3.91 Other Reserve expenditures 2.91 Transfers to individuals and NGOs for court rulings execution 1.36 Capital expenditures TOTAL Recommendation: Expenditure exceeding the allowed figures can only partially be justified by the payment of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual state budget plan irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and to the Ministry of Finance to strictly take into consideration the fiscal limitations as defined by the Annual Laws on Budget, in the current and the forthcoming period. Page 31

32 2.5 Materially significant irregularities and recommendations According to the data presented in the Bill on the final statement of accounts of the state budget of Montenegro for 2012, cash deficit amounts to EUR million. The cash budget deficit is a result of the deficit incurred in the current budget (negative savings EUR million), repayment of outstanding debts which do not have the character of borrowings in the amount of EUR million and capital expenditures of EUR million. Execution of the Budget for 2012 shows that fiscal adjustments planned by the Revised budget have not been appropriate, which led to the higher rate of cash deficit in relation to the one projected by the Revised budget, amounting up to EUR million (projected deficit amounted to EUR million, while the realized deficit was EUR million). Budget execution has shown an additional decline in the main sources of finance amounting to EUR million and an increase in public spending amounting to EUR million, i.e. data presented in the Bill on the final statement of accounts of the state budget of Montenegro for 2012 indicate that the realized cash deficit for 2012 amounted to EUR million. Cash basis of deficit, derived based on data from the Bill on the final statement of accounts of the state budget of Montenegro for 2012, adjusted per net changes in the balance of outstanding debts, shows the budget result as stipulated by Article 16 of the Law on Budget ("Official Gazette of Montenegro", 46 / 10). Corrected deficit amounts to EUR million. i. An additional analysis of the cash deficit has found a recorded amount of EUR million charged to repayment of securities, which represents a capital budget expenditure. Thus, the budget result has been improved by the same amount and repayment of principal debt has unrealistically been presented. After these corrections the final deficit amounts to EUR million. d) Recommendation: Develop the Rulebook on records of outstanding debts and their repayment in compliance with the Rulebook, establish a centralized records of occurrence and repayment of outstanding debts at the Ministry of Finance. Make corrections in the Bill on the final statement of accounts of the state budget for 2012 regarding the presented amount of the deficit, as well as adjustments relating to: Increasing capital expenditures up to EUR million, reducing principal debt repayments in the same amount, with the corresponding updates in financing transactions; Reducing the repayment of debts in the amount of EUR 7.1 million, increasing in transfers to individuals, NGOs and public sector amounting EUR 1.84 million and other expenses and / or reserves in the amount of EUR 5.26 million; Reducing subsidies in the amount of EUR 4.56 million and increasing transfers for social protection in the same amount. ii. State budget overrun has been found in 17 consumer units in the total amount of EUR million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on final statement of accounts of the state budget of Montenegro for 2012 has presented consumption by specified users which was increased by 9.98 million EUR comparing to the legally approved. State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court decisions. However, the amount of EUR 1.36 million represents the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Correction of current and capital expenditures leads to further budget overrun, which exceeds the amount reported by the Bill on the Final statement of accounts of the state budget of Montenegro for 2012 by million EUR 24.31, without the possibility of full allocation of costs per specific user. These procedures led to violation of Paragraph 3 of Article 11 of the Law on the State Budget ("Official Gazette of RMNE", 40/01 as of 14 th August 2001, 44/01 as of 17 th September 2001, 28/04 as of 29 th April 2004, 71/05 as of 28 th November 2005, "Official Gazette of Montenegro", 12/07 as of 14 th December 2007, 73/08 as of 2 nd December 2008, 53/09 as of 7 th August 2009, 46/10 as of 6 th August 2010, 49/10 as of 13 th August 2010), which states: No expenditure from the Consolidated Treasury Account shall not be paid unless approved by the Law on the State budget. Page 32

33 e) Recommendation: After the correction of results, consumption that increases the allowed amount can only partially be justified by repayments of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual State Budget Law irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and the Ministry of Finance to take into consideration the fiscal limitations as defined by the Annual Law on Budget in the current and the forthcoming period. iii. Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 has not been standardized accurately. Namely, pursuant to Article 14a, the revised budget for 2012 has foreseen that the planned amount of resources, laid down in the programmes at the relevant ministries, shall be reduced for the amount of spent resources presented in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for However, the same Article has not defined the following: timeframe covering the calculation of spent funds which have been deducted from the amounts earmarked for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law, the status of the budget plan for spending units that have ceased to function as autonomous bodies, in which the Ministry of Finance increased the current budget plan for the amounts corresponding to those the programmes referred to in Article 14a have been reduced for. In addition to these deficiencies, in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012, there was an error identified in application of the plan set out by the Law on Amendments to the Law on Budget of Montenegro for Projected amounts specified as "the Plan" in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 represent the current budget plan, which contains an error caused by the misapplication of the projected amounts defined by the Law on Amendments to the Law on Budget of Montenegro for These discrepancies question the adequacy of redirections which were carried out during 2012 and the consistent alignment of Montenegrin budget execution in 2012 with the plan laid down by the Law on Amendments to the Law on Budget of Montenegro for Recommendations: It is necessary to pass Amendments to the Bill on final statement of account of state budget of Montenegro for 2012, in order to specify the following: timeframe covering the calculation of spent funds which have been deducted from the appropriations for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law, the status of the budget plan for spending units that have ceased to function as autonomous bodies. Appropriations for compensation should be planned within the competent institution - the Compensation Fund. The Compensation Fund is an institution that provides for appropriate analytical documentation and information crucial for projecting expenditure arising from compensation. Page 33

34 3. BUDGET REVENUES The budget of Montenegro for 2012 recorded receipts in the amount of EUR 1,451,122,945.71, and in accordance with Article 9 of the Law on Budget they have been presented by the following figures: Table 11 Sources of financing public expenditure In EUR 1) Current revenues (taxes, contributions, fees, commissions and other revenues) 1,115,519, ) Property sale inflows 3,484, ) Loan repayment inflows 5,498, ) Donations and transfers 5,036, ) Borrowing and loans (domestic and foreign) 321,583, ) Other revenues in accordance with Law 0.00 The system of public revenues collection in Montenegro is mainly provided through Department of Public Revenues, Customs Administration, Ministry of Interior Affairs and Public Administration, Police Administration and the Ministry of Finance. Central Bank of Montenegro regularly delivers individual bank statements of daily changes on accounts, per payors: to the Department for Public Revenues from 820 group of accounts, to the Customs Administration from 805 group of accounts, to the Police Administration from 840 group of accounts and to the State Treasury from 832 group of accounts, as well as from account 825, which the State Treasury forwards to the Ministry of Internal Affairs. Department of Public Revenues, Customs Administration, Ministry of Interior Affairs and Public Administration and Police Administration after the identification of the type of income transfer the funds from clearing account to the Central Account of the State Treasury and simultaneously submit the Recipient s statement on the structure of public revenues by eco codes and by municipalities. The Finance officer in the State Treasury distributes the paid revenues either to the Central account of State Treasury (for the income that 100% belongs to the Budget), or to the accounts of the revenue beneficiaries (divisible revenues), in accordance with the regulations governing the affiliation of these revenues. The audit has found certain irregularities in the collection of public revenues, which are reflected in the fact that part of some revenues is not paid into the accounts, is not identified in a timely manner and is inadequately recorded. Decree on the method of collecting public revenues ( Official Gazette of Montenegro 32/11, 61/11 and 18/12) prescribes the accounts which public revenues, defined by the law or other regulation shall be paid to, the method of payment, as well as reporting to their beneficiaries. The audit has determined the following irregularities: Fees for the use of the domain ME were not paid to the account , but this fee, on a quarterly basis, was paid directly into the Central account of State Treasury, from the account at commercial bank CKB, , in the total amount of EUR 1,682, The audit has found that there are no appropriate control measures developed at the State Treasury for the oversight of the stated budget revenue collection. Other fees for roads were not paid in full to the account , but Transport Directorate and the Montenegrin Telekom AD made a declaration of set-off for the amount of EUR 46, Pursuant to Article 67 of the Directions on State Treasury Operations, recipients will submit their Recipient's statement to the State Treasury before 12 a.m. every business day. The audit has found that the Department of Public Revenues submits Recipient's statements to the State Treasury with a delay. It is necessary that the Ministry of Finance, in accordance with Article 72 of the Instruction on State Treasury Operations, ensure timely delivery and records of the recipients statements. Page 34

35 Recommendations: It is recommended to the Ministry of Finance to provide timely and overall records of public revenues, in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations. It is recommended to the Ministry of Finance to examine the possibility of providing more adequate control over the collection of revenues from fees for the use of the domain ME, in a way to transfer the account for the collection of these fees within the group accounts concession and other fees, whose collection is under the supervision of Department of Public Revenues. The integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank. 3.1 Records and Collection of Revenues Department of Public Revenues Decree on the method of collecting public revenues ( Official Gazette of Montenegro, 82/04, 010/05, 32/05, 49/05, 51/05, 76/05, 82/05, 11/06, 17/06, 35/06, 81/06, 42/07, 53/07 and Official Gazette of Montenegro, 06/07, 06/08, 39/08, 56/08, 72/08, 81/08, 22/09, 30/09, 42/09, 47/09, 71/09, 84/09, 04/10, 11/10, 33/10, 46,10, 72/10, 07/11, 17/11), prescribes a group of accounts for collection and the manner of collection of public revenues (taxes, contributions, fees, etc), which are collected by the Department of Public Revenues. After submission of statements of the Central Bank on daily changes on the accounts, Department of Public Revenues performs identification by type of revenue and per payers. Thereafter, on a daily basis, the funds are electronically transferred from the clearing account into the central account of the State Treasury, based on the Revenue statement of recipient. Upon the receipt of the Revenue statement, the Ministry of Finance (State Treasury) allocates the inflows on budgetary revenues of the following beneficiaries: the State Treasury, the Pension and Disability Insurance Fund, the Health Insurance Fund, Municipalities, the Union of Municipalities PI "Morsko dobro" and the Equalization Fund. According to the summarized overview of revenues per eco-codes, collected by the Department of Public Revenues as a recipient, as well as in accordance with the report of the Central Bank, the total cash inflow amounted to EUR 831,155, Data on the collected and allocated public revenues conducted through the Central Account of the State Treasury, acc , for the period 1 st January st December 2012, are shown in the following table: Page 35

36 2012 Table 12 Allocation of revenues collected by Department of Public Revenues in the period 1 st January 31 st December Code Budget user Allocated amount (in EUR) 00 State treasury of Montenegro 773,442, Podgorica 8,229, Cetinje 520, Danilovgrad 716, Niksic 1,971, Savnik 28, Pluzine 709, Pljevlja 1,648, Zabljak 246, Berane 650, Plav 145, Rozaje 738, Andrijevica 210, Bijelo Polje 1,015, Mojkovac 197, Kolasin 514, Bar 2,895, Budva 3,096, Ulcinj 934, Compensation Fund 23,198, Herceg Novi 2,510, Tivat 1,214, Kotor 2,302, PI "Morsko dobro" 3,753, The Union of Municipalities 263, TOTAL 831,155, Department for Public Revenues has not submitted its Final Statement of Account for 2012 within the legally prescribed period (deadline up to 31 st March 2013), in compliance with the obligation laid down in Article 6, Paragraph 1, Item 13 and Paragraph 2 of the Law on Tax Administration ( Official Gazette of Montenegro, 65/ /12), and Article 19, Paragraph 4 of the Rulebook on Tax Accounting ( Official Gazette of Montenegro, 81/06). Namely, the mentioned Final Statement of Account of the Department of Public Revenues was presented during the audit procedure conducted in this state authority, on July 19 th, 2013, along with the explanation given on the reasons for delay in drafting the Final Statement of Account, as follows: Both, the old and the new information system are still in use in the Department of Public Revenues, and they have not been properly integrated; By the introduction of a single deposit account, all types of public revenues collected on the basis of income are paid into a single deposit account and are experientially, (based on the percentage of participation), allocated to individual items. Upon the submission of Tax return, i.e. IOPPD forms, previous temporary postings are cancelled, and afterwards the actual debit entry is posted. This procedure takes a lot of time, causes delays and makes the work more complicated. An independent audit of the Department of Public Revenues IT system has been conducted in this state authority and an audit report, presenting analysis of the current situation, assessments and recommendations, has been completed. The audit report states that the existence of two different IT systems, ( old and new ) within the same organization is intolerable and that additional efforts should have been made on full integration of those systems into a single one. Therefore, the intention of introducing a third, unrelated system is also not justified. The Department of Public Revenues also points out that a software solution, which allows to scroll through any report from the single account on the basis of the balance on the detailed (analytic) accounts of taxpayers has not been completed yet, which, at this moment, makes it necessary for the branch offices to perform individual analysis of each taxpayer when determining the actual state. Page 36

37 3.1.1 Off-balance settlements 4 and Agreements of Cession The audit of the Final accounts of Tax bookkeeping for 2012 has found that the postings on the class 3 and 7 are balanced, which is compliant with Art. 10 of the Rulebook on Tax bookkeeping. According to the records of Department of Public Revenues, off-balance sheet settlements amounted to EUR 15,486,194.25, which mainly relate to commitments incurred due to agreements of cession and offsetting of mutual debts among: the Government of Montenegro and Montenegrin Electric Enterprise, Coal Mine Inc. Pljevlja and Aluminum Combine Podgorica. Protector of property and legal interests of Montenegro duly submitted a Statement of claim 1027/13 as of August 6 th, 2013 to the Commercial Court. Off-balance sheet settlemets are also related to the documents on compensation concluded by the Pension and Disability Insurance Fund and Health Insurance Fund with the taxpayers from commercial and non-commercial sector. The Funds submit an overview of conducted compensations on the ground of contributions to the Department of Public Revenues, including the following data: payment account, tax identification number, amount and date, and based on these data Department of Public Revenues closes entries. Off-balance sheet settlemets also include payment of tax liabilities, through the Central Depository Agency, by Compensation Fund bonds. Off-balance sheet settlements, which are implemented by compensation, without cash flow, and thus are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized document on compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. Recommendation: Ministry of Finance should record all compensations in the State Treasury General Ledger and to implement them in accordance with the spending limitations defined by annual laws on budget Refund of Value Added Tax (VAT) Povracaj poreza na dodatu vrijednost According to Decisions made by Department of Public Revenues on VAT refund, taxpayers were entitled to a total of EUR 76,999, of value added tax refund. EUR 21,501, was reimburst from the account at the Central Bank, where the inflow of funds collected by Department of Public Revenues is being recorded. Due to insufficient amount of funds on the account at the moment of issuing Decisions, the Department of Public Revenues submitted Decisions for a refund, totaling EUR 55,497,712.22, to the Ministry of Finance to be executed accordingly. Department of Public Revenues shall submit a Recipient statement to the Ministry of Finance, which shows the inflows, ie the difference between VAT collected and refunded. However, the statement does not include VAT refund taken over for execution by the Ministry of Finance, so the credit balance of Department of Public Revenues is not reduced in the the same amount. The lack of consistency in processing reimbursement of overpaid or incorrectly collected tax duties has been stated in cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer s detailed (analytic) card, which is often being corrected once the inspection control has been completed. In 2012, a total of 640 tax controls, regarding accuracy and regularity of calculation and payment of tax liabilities were conducted, where in 525 controls, ie 82.03%, there were corrections made, 4 Source:Department of Public Revenues Page 37

38 totaling EUR 13,048, According to Article 50, Paragraph 5 of the Law on Value Added Tax ( Official Gazette of Montenegro 65/ /13), the Ministry of Finance should have defined detailed conditions and manner of input VAT refund, which was not presented during the audit procedure. The same fact was identified in the audit of the Final tax accounts for Recommendation: It is recommended to the Ministry of Finance to develop Rules of Procedure in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure Refund and Reallocation of Tax Payments The time limit for refund of overpaid or incorrectly paid funds has been established by legal provisions. The refund and reallocation of tax payments to other forms of public revenues is made within the prescribed period, up to Decembre 31 st, 2012 when it comes to a refund of tax made by Department of Public Revenues. There is an obvious problem in redirecting other types of public revenue in a single payment account, as well as in redirecting from the single account to other types of public revenue with the Decisions passed by the Department of Public Revenues and forwarded to the Ministry of Finance. The audit has found that Department of Public Revenues forwarded 391 decisions totaling EUR 10,470,340.70, in order to be reallocated from the VAT payment account into the State Treasury central account. The above mentioned redirections were not carried out until the audit fieldwork had been completed, i.e. until August 3 rd, If Department of Public Revenues failed to proceed in accordance with taxpayers requests on redirecting funds from the payment account for overpaid liabilities on the grounds of public revenues to other accounts, it would certainly call into question the authority of tax administration 6. As stipulated by Law, the Department of Public Revenues charges daily interest against unsettled tax payments to the taxpayers who have filed requests for redirection of overpaid funds. Therefore, the Final tax account does not present an objective statement of public revenues. Failure of tax authority to comply with taxpayers requests in all cases, except for financial reasons, are justified by responsible persons in the Department of Public Revenues with complications caused by the use of an inappropriate IT system, so it is necessary to make additional efforts and invest resources to enable the system to meet the needs of both, tax authority and taxpayers. Recommendations: It is necessary to provide consistent IT system of the Department of Public Revenues and the Ministry of Finance, which would enable settling other types of tax payables by overpayments made in one part of the tax liabilities. It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt which is not yet settled according to the amount of overpaid taxes based on justified taxpayers claims, in accordance with Decisions submitted by the Department of Public Revenues. 5 During September 2013 the Ministry of Finance executed most of required reallocations of overpaid VAT funds to other accounts. 6 Reallocation of funds from taxes and contributions accounts, income tax account, excise on gas oils (euro disel) to a single account is not possible at the moment Page 38

39 3.2 Materially Significant Irregularities and Recommendations i. The Audit has found certain irregularities in the collection of public revenues, reflected in the fact that a part of particular revenues is either not being paid into the payment accounts or not identified in a timely manner, or it has not been recorded properly. a) Recommendation: It is recommended to the Ministry of Finance to ensure prompt and complete records of public revenues in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations. It is also recommended to the Ministry of Finance to examine the possibility of providing a more adequate control of collection of public revenues from user fees paid for the use of the domain "ME", by transferring the bank accounts for the purpose of collecting these fees within the group of accounts for concessions and other fees, whose collection is under the responsibility of the Department of Public Revenues. In addition, the integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank. ii. iii. iv. Off-balance sheet settlements, which are implemented by compensation, without cash flow, and thus are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized document on compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. b) Recommendation: It is recommended to the Ministry of Finance to keep all compensations recorded in the State Treasury General Ledger and to implement them in accordance with the spending restrictions defined by annual laws on budget. The lack of consistency in proceeding refunds of overpaid or incorrectly paid funds has been noted in cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer s detailed (analytic) card, which is often being corrected once the inspection control has been completed. c) Recommendation: It is recommended to the Ministry of Finance to develop Rules of Procedure in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms, prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure. There is an obvious problem in redirecting other types of public revenues into the single payment account, as well as in redirecting funds from the single account to other structures of public revenues, connected to decisions made by the Department of Public Revenues and forwarded to the Ministry of Finance. d) Recommendation: It is recommended to provide consistent IT system of Department of Public Revenues and the Ministry of Finance, which would enable settling other tax payables by overpayments made in one part of the tax liabilities. It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt, which is not yet settled according to the amount of overpaid taxes based on justified taxpayers claims, in accordance with Decisions submitted by the Department of Public Revenues. Page 39

40 4. BUDGET EXPENDITURES According to the Bill on the final statement of account of the State budget of Montenegro for 2012, budget expenditures amount to EUR 1,452,013,971.81, and they are structured as follows: Table 13 Structure of Public Expenditures In EUR 1) Current expenditures 658,054, ) Transfers to institutions, individuals and NGOs 31,512, ) Social protection transfers 481,633, ) Reserves 18,078, ) Capital expenditures 67,686, ) Granted borrowings 1,775, ) Repayment of liabilities from previous period 35,738, ) Expenditures for repayment of guarantees 24,719, ) Repayment of principle debt 132,815, Current Expenditures Pursuant to the Law on Budget, Article 10, Paragraph 1, Item 1, current expenditures relate to: gross earnings and contributions payable by employer, other personal income, expenses for material and services, ongoing maintenance, interests, rents, subsidies and other expenditures. According to Article 3 of the Bill on the final statement of account of the State budget of Montenegro for 2012, current expenditures amount to EUR 658,054,102.25, and their structure is shown in the following table: Table 14 Structure of current expenditures In EUR 1) Gross wages and contributions charged to employer 374,653, ) Other personal income 10,336, ) Material and services expenses 153,691, ) Ongoing maintenance 22,543, ) Interests 56,859, ) Rent 7,110, ) Subsidies 25,853, ) Other reserve expenditures 7,005, Gross Earnings and Contributions Payable by Employer Pursuant to the Law on Budget for 2012, expenditures on the ground of gross earnings of employees were planned in the total amount of EUR 382,331,203.68, which was reduced by EUR 3,313, as defined by the revision of budget, and further decisions on redirection reduced the amount set by the revised budget by an additional amount of EUR 2,432,318.74, so the current budget plan amounted to EUR 376,585, Expenditures on gross earnings of employees were realized in the amount of EUR 374,653,307.63, which was 0.51% less than planned. These expenditures account for 25.80% of the total budget expenditures and 11.22% of the gross domestic product of Montenegro for Page 40

41 Table 15 Planning and execution of funds appropriated for gross earnings of employees Column 1 DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,331, ) Reduced by revised budget for ,313, ) Reduced by reallocation 2,432, ) AVAILABLE FOR SPENDING 376,585, ) EXECUTED 374,653, ) Executed/available for spending (5 / 4 x 100) Taxes shall be determined pursuant to the Law on Tax on Income of Natural Persons ( Official Gazette of Montenegro, 65/01, 12/02, 37/04, 29/05, 78/06, 04/07 and Official Gazette of Montenegro, 86/09), depending on the amount of gross earnings and established scale according to which the tax is calculated at the rate of 9%. Contributions shall be determined in accordance with the Law on Contributions for Compulsory Social Insurance ( Official Gazette of Montenegro 13/07 and Official Gazette of Montenegro, no 79/08 and 86/09), at the following rates: contribution rate for pension and disability insurance, payable by an employee is 12% and payable by an employer is 8.50%, health insurance contribution rate payable by an employee is 5.00% and payable by an employer is 5.50%, and contribution rate for unemployment insurance payable by an employee is 0.5%, and payable by an employer is 0.5%. The audit has found that the Law on Civil Servants and State Employees ( Official Gazette of Montenegro 39/ /11), the Law on Earnings of Civil Servants and State Employees ( Official Gazette of Montenegro, 86/09..14/12) and Rulebook on the Internal Organization and Systematization, are not being fully implemented at the Administration for Inspection Affairs and Games of Chance Administration. The audit has found that a certain number of spending units irregularly submits the IOPPD form to the Department of Public Revenues, which is a monthly report on personal income paid out per month, accrued and withheld personal income taxes and contributions on and from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid out regularly, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies, on the grounds of paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues. The audit of Human Resources Administration has found that during the period from 1 st January 2012 to 31 st December civil servants and state employees were employed in the state administration through internal advertisements, public advertisements and open public competitions (in the ministries, administrations, secretariats, bureaus, directorates and agencies). However, the auditing of tested sample of budget spending units determined that restrictive employment measures have not been applied consistently. The budget users have circumvented restrictions on employment, the way they engaged individuals on the basis of agreements on temporary and provisional work and temporary service contracts. On the ground of such contracts, more than 400 persons were engaged in the state administration during 2012, as follows: 97 employees in the Real Estate Department, 89 in the Ministry of the Interior, 71 in the Forest Administration, 45 in the Directorate for Protection of Cultural Property, 32 in the Department of Public Revenues, 24 in the Ministry of Finance, 21 in the Administration for Inspection Affairs, 12 in the Ministry of Economy, 12 in the Ministry of Maritime, 12 in the Ministry of Transport and Maritime Affairs, 12 in the Human Resources Administration, 7 in the Ministry of Culture, 7 in the Games of Chance Administration, 6 in the Ministry of Agriculture and Forestry, 4 in the Water Management, 2 in the Transport Directorate and 1 in the Port Administration. Page 41

42 Recommendations: Demand of all state institutions to submit IOPPD form on a regular basis - a monthly report on personal income paid out per month, accrued and withheld personal income taxes and contributions from this income for all employees. It is necessary to reconsider the issue of engagement on the grounds of agreements on temporary and provisional work and temporary service contracts, to comply such practice with the adopted employment strategy and to adapt it to the real needs and actual demands of all the institutions Other Personal Income Budget item Other personal income, keeps records on the following payment requests and payments related to: meals, annual leave, winter supplies, housing benefits and separate life allowances, transport, fees to MPs, academic fees, jubilee awards, severance pays and other remunerations. Pursuant to the Law on Budget for 2012, budget expenditures on the grounds of other personal income of employees were planned in the total amount of EUR 10,921,650.33, which was reduced by EUR 3, as defined by the budget revision, and further decisions on redirection reduced the amount set by the revised budget by an additional amount of EUR 939,502.50, so that the final plan amounted to EUR 11,864, Budget plan was realized in the amount of EUR 10,336,327.24, which accounts for 12.88% less than planned. Table 16 Planning and execution of funds appropriated for other personal income Column 1 DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,921, ) Reduced by revised budget for , ) Increased by reallocation 939, ) AVAILABLE FOR SPENDING 11,864, ) EXECUTED 10,336, ) Executed/available for spending (5 / 4 x 100) Housing Benefits and Separate Life Allowances Budget item Housing benefits and separate life allowances, an amount of EUR 1,864, was planned, reduced by EUR 24, pursuant to revised budget plan, and further reduced by decisions on reallocation of funds for additional EUR 83,023.81, so that the final plan amounted to EUR 1,757, Budget plan was realized in the amount of EUR 1,683,507.97, i.e %. At the Ministry of Transport and Maritime Affairs, in Budget item 4124 Housing benefits and separated life allowances the planned budget appropriations amounted to EUR 19,982.86, while the realization totalled to EUR 19,910.00, or 99.64%. The audit of expenses recorded in this item has found that generated expenditures relate to participation in rent payment in 2012 on a monthly basis of EUR , for employees and certain individuals who have been engaged on the grounds of temporary service contracts. These payments were carried out pursuant to Decision /1 as of February 17 th, 2012, according to requests previously submitted by employees, along with lease agreements enclosed. The Decision was made in compliance with Article 93 of the Law on State Administration and Article 109 of the Law on Civil Servants and State Employees. Page 42

43 At Port Administration in Budget item Housing benefits and separated life allowances the planned and realized budget appropriations amounted to EUR 2, The audit control of expenses recorded in this account has found that generated expenditures relate to participation in rent payment for employees in 2012 on a monthly basis of EUR The payments were carried out for two employees pursuant to issued Decisions, in compliance with Article 93 of the Law on State Administration and Article 109 of the Law on Civil Servants and State Employees, according to requests previously submitted by employees, along with a Statements enclosed (specifying details on apartment lease, the amount of lease), certified by a notary. Pursuant to Article 1 of the Law on Salaries of Civil Servants and State Employees, it has been determined that: A civil servant or state employee shall exercise the right to salary, allowance, and other personal income in the manner and under conditions as set forth by this Law and the General Collective (Bargaining) Agreement. Conditions, manner of exercising the right and the amount of salaries and other income shall be determined by a Government regulation. Pursuant to Article 29 of the Regulation on Allowances and Other Income of Civil Servants and State Employees and Article 30 of the Regulation on Compensation Costs to Civil Servants and State Employees, which were effective during 2012, the separate life expenses shall be compensated to civil servants who are sent to operate outside their place of residence by orders of the head of a state authority and thus separated from their families.... Rental participation is not provided for pursuant to the above mentioned regulations and is considered a improper consumption Other Remunerations In Budget item other remunerations, annual planned appropriations amounted to EUR 7,832,298.17, which was reduced pursuant to the revised budget by EUR 68,286.67, while decisions on redirection of funds increased the planned amount for EUR 416,544.38, so that the final plan amounted to EUR 8,180, The plan was realized in the amount of EUR 6,923,423.38, i.e %. In Budget item 4129 other remunerations, the Ministry of finance planned expenditures in the amount of EUR 208,431.18, while the realized amount was EUR 188, The audit was performed against expenditures amounting EUR 118, or 63.29%. The audited sample completely relates to remunerations paid out to members of working bodies. The audit has determined the following irregularities: taxes and contributions were not calculated and paid for transferred remunerations, the amount of prescribed remuneration was not consistently complied with at several working groups, totalling EUR 10,104.60, provisions stipulating that the engagement in working teams shall be performed after regular working hours and outside the scope of regular duties were not complied with, and there are no working groups reports which should have served as basic documents for remunerations payments. Except for the Working Group for drafting the new Strategy of the system of internal financial control development in the public sector of Montenegro for the period , other working bodies have not submitted their Reports on activities, which is contrary to the provisions of the Decision on Criteria for determining the rate of remuneration for a member of working body or other types of work. The Administration for Inspection Affairs has duly calculated and paid tax on income of physical persons and surtax on income tax when transferring remunerations to civil servants and state employees, but they have not calculated and paid social insurance contributions. Real Estate Administration has realized payments from this position, related to remunerations for the members of the tender committees and members of the commissions for real estate evaluation, totalling EUR 9,048.00, while they failed to carry out the calculation of taxes and contributions. Ministry of Transport and Maritime Affairs has performed payments from this position within the set amount of EUR 5,020.00, for persons engaged on a temporary service contract. Page 43

44 Total Water Management Port Administration Ministry of Transport Compensation Fund Human Resources Administration Department of Public Revenues Forest Administration To be recorded at the following items Expenses for Material and Services As stipulated by the Law on Budget, estimated appropriations for expenses for material and services amounted to EUR 149,567,183.54,61, which was reduced by the revised budget by EUR 2,525,825.37, and additionally reduced by decisions on redirection amounting to EUR 389,680.00, so the final budget plan totalled at EUR 146,651, A total of EUR 153,691, was executed, which accounts for a surplus of EUR 7,040,270.06, i.e. 4.80% more than planned. Table 17 Planning and execution of appropriations for expenses for material and services Column1 DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,567, ) Reduced by revised budget for ,525, ) Reduced by reallocation 389, ) AVAILABLE FOR SPENDING 146,651, ) EXECUTED 153,691, ) Executed/available for spending (5 / 4 x 100) Budget appropriations intended for budget item 4131 expenses for material amounted to EUR 60,160,686.18, while according to the revised budget this amount was reduced by EUR 261,560.15, and decisions on redirection of funds additionally reduced it for EUR 692,612.88, so the resources available for spending finally amounted to EUR 59,206, A total of EUR 58,786,231.26, was executed, or 0.71% less than planned. After the completion of a specified sample testing on this budget item, the occurrence of improper spending has been identified in the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and the Water Management in the amounts and for the purposes as stated in the following table: Table 18 Improper spending in expenses for material and services In EUR Spending units Recorded at , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Total 167, , , , , , , , Page 44

45 Business travel expenses found by audit Budget appropriations intended for budget item 4132 business travel expenses were planned in the amount of EUR 5,971,190.98, reduced by the revised budget in the amount of EUR 357,565.44, and increased by decisions on redirection of funds in the amount of EUR 449,915.72, finally totalling to EUR 6,063, Amount of EUR 5,759, was executed or 5.01% less than planned. After completing control of a tested sample on this budget item, improper spending of small portions has been identified at the Transport Directorate (EUR 4,260.01) and the Ministry of Transport and Maritime Affairs (EUR 1,691.50). However, the audit of the Ministry of Agriculture and Forestry, Forest Administration and Water Management has identified larger expenditures for business travel comparing to the data presented in the General Ledger of spending units and the Bill on final statement of accounts of the state budget of Montenegro for An amount of EUR 145, over the planned has been spent for these purposes and reallocated from other budget items, in amounts stated in the following table: Table 19 Improper spending for business travels In EUR Spending units Ministry of Agriculture and Forest Administration Water Management Total Forestry Business travel expenses recognized by 2012 Final statement of accounts of the State budget 23, , , , , , , , , , , , , , , , , , Factual state determined by audit 131, , , , It is necessary to emphasize that during the formation of groups for negotiation chapters for the purpose of explanatory and bilateral screening, Government of Montenegro delegated task to the Ministry of Agriculture, among others, to provide the necessary funds for business travels at the expense of available funds from their own budget, and it resulted in the overrun shown in the presented table. Budget appropriations for item 4134 electrical energy expenses were planned in the amount of EUR 19,249,104.77, increased by the revised budget in the amount of EUR 11,104.77, and additionally increased by decisions on redirection of funds in the amount of EUR 325,152.88, so the final amount of resources available for spending totalled to EUR 19,585, A total of EUR 19,258, was executed, or 1.67% less than planned. The following irregularities have been identified in this budget item: At the Forest Administration electric energy expenses were estimated in the amount of EUR 240,000.00, while the execution recorded amounted to EUR 203, However, the outstanding liabilities to suppliers in 2012 account for EUR 95,596.72, which makes a total expenditure of EUR 298, in this item in 2012 or EUR 58, over the planned. At the Water Management, electric energy expenses were planned in the amount of EUR 5, and the execution was recorded in the same amount, while total energy expenses amounted to EUR 11,294.31, or EUR 5, over the planned. At Port Administration, paid electric energy expenses amounted to EUR 7,200.00, while the real expenditures amounted to EUR 5,084.00, meaning that the remaining amount of EUR 2, stands for an advance payment to supplier. Page 45

46 The budget item 4139 contractual services records payment requests and payments arising from concluded contracts aimed at supporting the execution of spending unit activities, including solicitors and legal services, consulting services, projects and studies development, professional training of employees, translation services, printing and copying, media and promotional services, audit services, insurance and other services. In the budget item 4139 contractual services, the planned appropriations amounted to EUR 56,696,362.04, which was reduced by the revised budget by EUR 4,113,929.05, and additionally reduced on the grounds of decisions on redirection of resources, amounting to EUR 1,220,502.57, so the final plan amounted to EUR 51,361, However, the execution was carried out in the amount of EUR 60,607,306.64, or 18% more than planned. Failure to comply with regulations, or an improper implementation of regulations were determined after the completion of test checking of a selected sample at this budget item, which resulted in improper spending performed from this budget position. By test checking of a selected sample on budget item of contractual services, improper spending was identified at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, Concession Commission, Montenegrin Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Management. The abovementioned budget users misused contractual services to pay expenses that do not belong to this budget item. Contractual services account was used to pay other remunerations, expenses for material, business travel expenses, business gifts expenses, expenditures for electric energy, banking services and negative exchange rate differences, current maintenance of facilities and equipment, rental of facilities, subsidies, transfers, capital expenditures, as well as for payment of debts. Review of improper spending by users is shown in the following tabular overview: Page 46

47 , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Table 20 Table of improper spending by contractual services expenditures In EUR Improper spending in budget position 4139 determined by audit Total Spending units Ministry of Economy Ministry of Finance Human Resources Administration Ministry of Interior Concession Commission Music Centre Real Estate Administration Directorate for Protection of Cultural Property Directorate for Public Works Port Administration Ministry for Information Society and Telecommunications Department for Public Revenues Games of Chance Administration Ministry of Agriculture Transport Directorate Compensation Fund Administration for Inspection Affairs Total The audit has found that at the following budget users, the Real Estate Administration, Ministry of Interior Affairs, Forest Administration, Directorate for Protection of Cultural Property, Department of Public Revenues, Ministry of Finance, Administration for Inspection Affairs, Ministry of Economy, Ministry of Culture, Ministry of Transport and Maritime Affairs, Human Resources Administration, Pension and Disability Insurance Fund, Games of Chance Administration, Ministry of Agriculture and Forestry, Water Management, Transport Directorate and Port Administration, the employees were engaged on the basis of agreements on temporary and provisional work and temporary service contracts, to perform tasks originally envisaged as regular tasks Page 47

48 by the systematization act, and which the working posts have been systematized for. The mentioned engagements are not in compliance with the provisions of the Labour Law and the Law on Civil Servants and State Employees. The Audit has identified violations of other regulations, at first place of the Law on Personal Income Tax ( Official Gazette of Montenegro, 65/01, 12/02, 37/04, 78/06, 04/07 and 86/09, 73/10, 40/11 and 14/12) and the Law on contributions for compulsory social insurance ( Official Gazette of Montenegro, 13/07, 79/08, 86/09, 78/10, 40/11 and 14/12). The audit has found that the Real Estate Administration, Human Resources Administration and the Concession Commission Concessions have not paid taxes and contributions, while the Directorate for Protection of Cultural Property and Games of Chance Administration have paid taxes, but not the contributions for compulsory social insurance and surtax, in accordance with the aforementioned regulations. The audit has also identified violations of the Law on Budget, as the two budget users, Transport Directorate and the Port Administration have paid expenditures (transfers) that were not foreseen by their budget plan Ongoing Maintenance According to the Law on Budget, expenditures for ongoing maintenance were estimated at EUR 23,620,610.39, reduced by the revised budget by EUR 287,842.66, and additionally reduced by decisions on redirection in the amount of EUR 441,103.79, so the final resourced available for spending stood at EUR 22,891, The execution amounted to EUR 22,543,512.98, or 1.52% less than estimated. Table 21- Planning and execution of funds appropriated for ongoing maintenance expenses Column DESCRIPTION AMOUNT (in EUR) 1 1) Defined by Annual plan for ,620, ) Reduced by revised budget for , ) Reduced by reallocation 441, ) AVAILABLE FOR SPENDING 22,891, ) EXECUTED 22,543, ) Executed/available for spending (5 / 4 x 100) Interests According to the Law on Budget for 2012, expenditures for interests were estimated at EUR 57,505,241.61, reduced pursuant to the revised budget in the amount of EUR 2,600, and determined amount was additionally reduced by decisions on redirection, amounting to EUR 23,142,509.73, so the plan by current budget amounted to EUR 31,762, Expenditures for interests were executed in the amount of EUR 56,859,854.54, which accounts for 79.01% more than the current budget plan. Table 22 Planning and execution of funds appropriated for other personal income DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,505, ) Reduced by revised budget for ,600, ) Reduced by reallocation 23,142, ) AVAILABLE FOR SPENDING 31,762, ) EXECUTED 56,859, ) Executed/available for spending (5 / 4 x 100) Page 48

49 Over the last five years, the share of interests in the GDP has been reporting a progressive trend of growth. This share was extended from 0.73% in the 2008 to 1.70% in Chart 1 % share of interests in the GDP Burden imposed on budget on the basis of interests paid in 2012 was increased by approximately 2.5 times compared to 2008, whereas in the same period, the cash budget deficit was increased by 11 times. A sudden increase in deficit over the recent years will have the impact on the further growth of budgetary appropriations on the grounds of interests, which will require further rational use of funds in the part of budget spending or additional borrowings that will provide liquidity for the proper implementation of current expenditures and liabilities stipulated by law in the field of social protection Interests to Residents Interest to residents were carried out in the amount of EUR 7,968, which was 51.72% more than estimated by current budget. The tested sample amounted to EUR 3,941,361.47, or 50.40% of the implemented amount. The created overrun of the estimated amount resulted from the increase in short-term borrowings at commercial banks, in order to provide for liquidity. According to the tested sample, the interest paid to resident commercial banks is mostly related to the interest paid to Erste bank Podgorica, NLB Montenegro bank Podgorica, Hypo Alpe Adria Bank Podgorica and Hipotekarna bank Podgorica. Transfers to "Erste Bank" A.D. Podgorica for repayment of interest resulted from the assumed debt, made by legal state entities in 2011 and were carried out in accordance with the following liabilities: Pursuant to Article 12 of the Law on Budget of Montenegro for 2011, ( Official Gazette of Montenegro, 78/10) and Decision on Borrowing and Issuing State Guarantees of Montenegro for 2011 ( Official Gazette of Montenegro, 16/11), the Government of Montenegro - Ministry of Finance assumed debts, totalling EUR 20,160, of the following: Railway Infrastructure of Montenegro Inc. Podgorica, in the amount of EUR 8,500,000.00; PE Regional Waterworks Crnogorsko primorje, in the amount of EUR 7,000,000.00; Montenegrin Fund for Welfare Housing Development, in the amount of EUR 3,800,000.00, as well as the obligations of the Broadcasting Company Radio-Television of Montenegro to Atlasmont Bank, in the amount of EUR 858, Page 49

50 Consequently and in accordance with the amounts included in the tested sample, the transfers from this budget item on the basis of repayment of interests amounting EUR 266, were carried out in accordance with: Loan agreements concluded between Erste Bank ad Podgorica and these legal entities and Loan Repayment Programmes, which are an integral part of the Loan Agreement; Agreements between the Government of Montenegro Ministry of Finance and these legal entities on assumption of obligations, including all the costs arising from the Loan arrangement, in force as of 1 st January 2011; Protocols on assumption of debts arising from these loans, concluded between the Government of Montenegro - Ministry of Finance and Erste Bank ad Podgorica. According to the tested sample, other transfers of funds to Erste Bank A.D. Podgorica were carried out on the basis of the following: interest paid in the amount of EUR 104, by the Loan agreement LD/10050/00082 as of February 25 th, 2010, concluded between Erste Bank A.D. Podgorica and the Government of Montenegro - Ministry of Finance. The loan is intended for the completion of construction works on the building of the Police Administration in Podgorica; interest paid in the amount of EUR 92,205.00, by the Loan agreement LD/10103/00110 as of April 14 th, 2010 concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica, approved for the restoration works on cultural monuments in Cetinje; interest paid in the amount of EUR 50,136.99, by the Loan agreement LD/12086/00089 as of March 30 th, 2012 concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica; interest paid in the amount of EUR 59,685.20, by the Loan agreement on overdraft OD/11081/00075 as of April 27 th, 2011 and the Annex 1/11 of the Loan agreement on overdraft OD/11081/00075, as of December 21 st, 2011, concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica. Transfers to NLB Montenegro bank a.d. Podgorica on the basis of interest according to the tested sample were carried out as follows: the amount of EUR 11,095.89, transferred according to the terms and conditions laid down in the Revolving loan credit agreement KR 2012/813 dated as of February 23 rd, 2012, the amount of EUR 20,342.47, transferred according to Short-term loan agreement KR 2012/1649 concluded and signed on April 3 rd, 2012, the amount of EUR 39,410.49, transferred according to Agreement KR 2007/ as of May 16 th, 2007, concluded between NLB Montenegro bank a.d. Podgorica and Municipality of Budva, for the implementation of the programme by Directorate of Public Works related to land development and infrastructure connections and works on furnishing a primary school in Budva, under the Agreement on construction as of April 4 th, 2007, transfers of funds to Hypo Alpe Adria Bank a.d. Podgorica, amounting to EUR 15,828.63, under the Agreement on short-term loan KR-425/12 as of April 6 th, As determined on the basis of the tested sample, transferred funds to Hipotekara bank a.d. Podgorica refer to repayment of interest on short-term loans, maintenance of the current liquidity of the budget in accordance with the following Loan agreements: Page 50

51 the amount of EUR 3,811.48, under the Loan arrangement /2 as of February 3 rd, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica in the amount of EUR 1,500,000.00, the loan was fully repaid on February 29 th, the amount of EUR 9,016.40, under the Loan arrangement /2 as of April 4 th, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica; the amount of EUR 7,815.91, under the Loan arrangement /2 as of June 26 th, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica; The funds from this budget item were also transferred for the interest paid on account of liquidity of the Ministry of Finance, based on T-bills issued by the State of Montenegro, as well as funds for the costs of T-bills issue on the basis of the calculation made by the Central Bank of Montenegro. The Central Bank of Montenegro was transferred funds amounting EUR 429, on the basis of T- bills issuing costs related to auctions organized and held in 2011, the, according to the memo sent by the Central Bank of Montenegro, CBM /1 as of 17 th January The stated amount should have been recorded in the budget item Bank services and negative exchange rates. This budget item was debited by the funds transferred to CBM in the amount of EUR 429,607.20, based on T-bills issuing costs related to auctions organized and held in 2011, in accordance to the calculation made by CBM, /1 as of 17 th January 2012, which should have been recorded in the budget item Bank services and negative exchange rates. Recommendation: In order to present real data of reported expenditures arising from interests paid to residents and to delimit costs, as explained in the Audit Reports of the Final Statement of Accounts of the State Budgets of Montenegro from the previous years, it is necessary to estimate and state commission, fees and other costs of banking services in budget positions prescribed by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities Interests to Non-Residents Interest to non-residents were carried out in the amount of EUR 48,891,426.40, which was 84,42% more than estimated by current budget plan. The tested sample amounted to EUR 46,908, or % of the implemented amount. According to the Law on Budget for 2012, appropriations for this budget item were projected at EUR 53,748,641.33, and this amount was reduced pursuant to the Law on Amendments on the Law on Budget for 2012 by EUR 4,100, Following Decisions of the Ministry of Finance on reallocations, the amount was additionally reduced by EUR 23,137,809.73, so the current budget amounted to EUR 26,510,831.60, while a total of EUR 48,891, was executed. The deficit in this position, totalling EUR 22,380, has been transferred from Consolidated Treasury Account, as provided for in Article 43 of the Law on Budget, stipulating that the Government has a permanent and indefinite power to transfer payments of interest or principal arising from the debt of the State from the appropriations deposit on the Treasury Consolidated Account and pursuant to the terms and conditions previously agreed to by the Government. It is recommended to the Ministry of Finance to make reduction of estimated funds from this budget position by redirection, in percentages prescribed by the Page 51

52 provisions of Article 35 of the Law on Budget, and to the extent that will not upset the balance between projected and executed appropriations for the payment of interests. Redirections of resources, totalling EUR 23,137,809.73, were carried out based on decisions of the Ministry of Finance to programmes and expenditures, amounting EUR 363,296.43, and in compliance with the decisions of the Ministry of Finance and pursuant to the Conclusions of the Government of Montenegro, among spending units, in the amount of EUR 22, Redirections of resources from this budget position to programmes and expenditures, amounting EUR 363,296.43, based on decisions of the Ministry of Finance, were carried out in compliance with the following: within the programme Budget Management, the estimated appropriations for item 4139 contractual services were increased by EUR 166,140.00; the estimated appropriations were increased by EUR 150, for following expenditure items: budget expenditure Personal income tax, in the amount of EUR 35,537.00; The employees contributions, in the amount of EUR 74,990.43; The employers contributions, in the amount of EUR 20,530.00; Municipal surtax in the amount of EUR 5,331.00; Municipal surtax in the amount of EUR 13,611.57; the projected expenditures for Commission Programmes (organizational code 1732) were increased by EUR 47,156.66, for the following outlays: 4112 Personal income tax, in the amount of EUR 12,873.30; 4113 The employees contributions, in the amount of EUR 25,761.53; 4114 The employers contributions, in the amount of EUR 6,202.38; 4115 Municipal surtax in the amount of EUR 2, Pursuant to Conclusions of the Government, redirections of resources from this budget position were carried out in the amount of EUR 22,774,513.30, as follows: For the Programme Development of Energy, Mining and Industry (3041) for the outlay 4171 Subsidies for production and provision of services, the estimated appropriations at the Ministry of Economy (organizational code 40901) were increased by EUR 1,140,415.36; For the Programme Development of Energy, Mining and Industry ( ) for the outlay 4171 Subsidies for production and provision of services, the estimated appropriations at the Ministry of Economy (organizational code 40901) were increased by EUR 4,191,993.16; For the Programme Fund for Pension and Disability Insurance (organizational code 2481), the outlay: Old age pension, the estimated appropriations at the Fund for Pension and Disability Insurance (organizational code 60101) were increased by EUR 1,502,104.55; the estimated appropriations for the Ministry of Labour and Social Welfare (organizational code 41601), for the implementation of the Program: Social, Veterans and Disability Insurance (organizational code 2971), were increased by EUR 1,940,000.00, for the following outlays: outlay Children allowance, in the amount of EUR 205,366.54, expenditure 4213 Family welfare, in the amount of EUR 1,252,702.37, expenditure Maternity leave, in the amount of EUR 479,273.53, expenditure 4217 Residential and nursing care services in the amount of EUR 2,657,56; the estimated allocations for the Ministry of Labour and Social Welfare (organizational code 41601), for the implementation of the Program: Social, Veterans and Disability Insurance (organizational code 2971), were increased by EUR 2,500,000.00, for the outlay 4214 Maternity leave, in the amount of EUR 2,500,000.00; the allocations for Reserves (organizational code 40502) were increased by EUR 11,500, Page 52

53 The amount of interests paid on external debt during 2012 increased by 18.17% in relation to amount of fulfilled obligations arising from the interests on external debt in the previous year (absolute value stated EUR 8,883,442.40), largely due to the repayment of obligations regarding interest for Eurobond bonds in the amount of EUR 28,800, (in 2011 it amounted to EUR 15,750,000.00). These obligations for the interest payments amounting EUR 28,800, were executed for repayment and interest paid in the amount of EUR 13,050,000.00, on the basis on Eurobond issue bonds amounting EUR 180,000, and for the repayment of second interest instalment in the amount of EUR 15,750,000.00, incurred on the basis of Eurobond issue bonds in the amount of EUR 200,000, The interest rates for these bonds amount to 7.25% and 7.875%. Liabilities on the basis of interest towards Credit Suisse International were paid in the 2012 in a reduced amount in relation to the previous year, by EUR 2,695,885.48, due to refinancing of the arrears incurred on the basis of the Loan agreement signed on July 30 th, 2009, by concluding a new Loan agreement with Credit Suisse International on April 11 th, 2012, totalling EUR 150 million. On the basis of the new Contract, the refinancing of previous debt to Credit Suisse was carried out in the amount of EUR 52,185,000, as well as the payment amounting EUR 873, for the interest and other costs. Thus, obligations towards Credit Suisse on the basis of the old arrangement were fully executed. A new, third period has started for the calculation of interests on the respective amount of newly concluded arrangement with Credit Suisse totalling to 150 million EUR. Other significant transfers of funds to non-resident creditors relate to: interest payment to Paris Club of creditors; interest payment to European Investment Bank EIB, for the loans intended for the Project of Roads and Bridges Rehabilitation in Montenegro, the Project of Urgent Transport Remediation component B1, the Railways Reconstruction Project, the Project of Roads and Bridges Rehabilitation - A3, Project Waters and Sewage Systems B ; interest payment to European Bank for Reconstruction and Development - EBRD, in respect of an assumed debt of Railway Infrastructure of Montenegro, Project of Regional Roads Reconstruction; interest payment to KFW; interest payment to Austrian bank Steiermärkische Bank und Sparkassen AG, for the Purchase of Special Fire Fighting and Rescue Vehicles; interest payment to Erste Group Bank AG, for the implementation of budget commitments; interest payment to Eurofima for assumed debt of Railway Transport of Montenegro; interest payment to International Bank for Reconstruction and Development - IBRD, for the Project Energy Efficiency MEEP, Consolidation Loan D, Consolidation Loan E and Consolidation Loan F. The repayment of funds amounting EUR 674, was also carried out during the current year, for the first and second instalment of interest arising from the Development Policy Loan (DPL I), Financial sector development policy, ME as of 26 th, September 2011, concluded between Montenegro and the IBRD. The outlays from this budget position were transferred for expenditures in respect to incurring associated costs of borrowings in the current year, as it was the case in previous years. Due to this, a total transfer amounted to EUR 260, Out of the stated figure, the amount of EUR 200, refers to the costs of employment of funds, according to the following structure: the amount of EUR 185, was transferred to the International Development Association (IDA), the amount of EUR 14, to KFW - German development bank, while the amount of EUR 60, relates to engagement of a solicitor in the negotiations for the loan arrangement with Credit Suisse. From the budget position Interests to nonresidents, pursuant to decisions passed by the Ministry of Finance on redirection of estimated appropriations, the redirection of funds in the amount of EUR 23,137, was executed in the current year, which led to a total amount of EUR 26,510, of estimated current budget funds, while the executed amount was EUR Page 53

54 48,891, Redirecting decreased the amount of appropriations for these purposes, so the insufficient amount of funds was compensated by transfers from the Consolidated Treasury Account in the amount of EUR 22,380,594.80, as stipulated in Article 43 of the Law on Budget, the Government has a permanent and indefinite power to transfer payments of interest or principal arising from the debt of the State from the Treasury Consolidated Account and pursuant to the terms and conditions previously agreed to by the Government. Recommendations: It is recommended to the Ministry of Finance to make reduction of estimated funds from this budget position by redirection in percentages prescribed by the provisions of Article 35 of the Law on Budget, and to the extent that will not upset the balance between projected and executed appropriations for this budget item. According to the tested sample, an amount of EUR 260, was also paid from this budget item, related to the costs of employment of funds amounting to EUR 200,601.33, and the solicitor s services in negotiations for the loan arrangement with Credit Suisse amounting to EUR 60,294.99, which should have been recorded in items prescribed by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to present the actual status of expenditures for interests. As specified in Audit reports on the Final Statement of Accounts of the State Budgets of Montenegro for 2009, 2010 and 2011, it is of a crucial importance to estimate and recognize incurring associated borrowing costs, bank commissions, fees and other expenses in appropriate budget accounts as stipulated by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to present the actual status of expenditures for interests, i.e. the costs of employment of funds and bank commissions should have been recognized in item Bank services and negative exchange rates, while the costs of solicitor s engagement and services should have been recognized in item Solicitor s and legal services Rents As stipulated by the Law on Budget for 2012, estimated appropriations for rental expenses amounted to EUR 8,001,214.35, which was decreased by EUR 284, according to revised budget plan, and thus determined amount was additionally reduced by decisions on redirection in the amount of EUR 433,469.85, so the current budget plan amounted to EUR 7,283, Rental expenses were executed in the amount of EUR 7,110,247.58, which is 2.38 % less than defined by a current budget plan. Table 23 Planning and execution of funds for rental expenditures Column 1 DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,001, ) Reduced by revised budget for , ) Reduced by reallocation 433, ) AVAILABLE FOR SPENDING 7,283, ) EXECUTED 7,110, ) Executed/available for spending (5 / 4 x 100) Page 54

55 4.1.7 Subsidies As stipulated by the Law on Budget for 2012, projected appropriations for subsidies amounted to EUR 20,950,000.00, which was decreased by EUR 250, according to revised budget plan, and thus determined amount was increased by decisions on redirection in the amount of EUR 5,331,608.52, so the current budget plan amounted to EUR 26,031, Expenditures for subsidies were implemented in the amount of EUR 25,853,418.30, which is 0.68 % less in relation to the current budget plan. Table 24 Planning and execution of appropriations for subsidies DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,950, ) Reduced by revised budget for , ) Increased by reallocation 5,331, ) AVAILABLE FOR SPENDING 26,031, ) EXECUTED 25,853, ) Executed/available for spending (5 / 4 x 100) Subsidies Program is being implemented in cooperation with the Ministry of Economy, Ministry of Labour and Social Welfare, the Ministry of Finance and Montenegrin Electric Enterprise EPCG. The Since October 2007, the Government of Montenegro has continuously been implementing electricity bills subsidies for the socially most vulnerable citizens. Due to the increase in electricity prices at the beginning of 2012, and following its Conclusion from May 3 rd, 2012, the Government of Montenegro passed decision to expand the potential number of beneficiaries up to 25,000 7, and by the same Conclusion the Ministry of Labour and Social Welfare was obliged to quarterly submit updated information on the users of this right to Montenegrin Electric Enterprise EPCG. Pursuant to the Conclusion of the Government dated July 5 th, 2012, it was decided that the electricity bills delivered to this category of users shall be subsidized up to December 31 st, In the period January - December 2012 subsidies amounting to EUR 1,925, were calculated for electricity supplied to households based on subsidized electricity bills totalling 151,034. In the course of 2012, the amount of EUR 1,553, was paid out total accrued subsidies for 2012 (1,925,204.23). Outstanding debts on the basis of accrued electricity subsidies for the households for year 2012 amounted to EUR 372, According to the concluded Contract /12 of December 28 th, 2007 and the Framework longterm Protocol on electricity supply of Aluminium Plant Podgorica, KAP, in the period 1 st January st December 2012, the agreed subsidies for electricity supply of KAP were fully implemented in the amount of EUR 60,000,000.00, ending with December 31 st, 2012, according to the data provided by the Ministry of Economy. Based on the tested sample, it has been determined that the Ministry of Economy transferred to the KAP Podgorica a total amount of EUR 6,442, in the period 1 st January to 31 st December 2012, from this budget item. The audit has found that a portion of the costs of subsidizing electricity to the KAP Podgorica in the period 1 st January - 31 st December 2012 was paid from the Budget Reserves, amounting to EUR 2,500,000.00, in accordance with the Conclusion of the Government. Recommendations: The Law on Budget (Art. 33) stipulates that for urgent and unforeseen expenditures during the fiscal year, current and permanent reserve funds shall be used. The Ministry of Finance shall decide on usage of funds from the current and permanent reserves, with the previous approval from the Government. 7 In 2012, the number of subsidies beneficiaries varied from 8,230 in February, up to 14,096 in December. Page 55

56 Coverage for the costs of subsidizing electricity to the KAP Podgorica in accordance with the Contract /12 of December 28 th, 2007 and the Framework long-term Protocol on electricity supply of KAP in the period 1 st January st December 2012 should have been entirely planned by the Law on Budget for 2012, because the stated costs had been defined by the Contract prior to the enactment of the Law on Budget for Social Protection Transfers As stipulated by the Law on Budget for 2012, projected appropriations for social protection transfers amounted to EUR 477,450,477.02, which was reduced by EUR 784, according to revised budget plan, and thus determined amount was increased by decisions on redirection in the amount of EUR 5,614,257.49, so the available funds recognized in the current budget plan amounted to EUR 482,280, Total executed outlays for social protection transfers amounted to EUR 481,633,606.48, which was in line with the current budget. Table 25 - Planning and execution of appropriations for social protection transfers Column 1 DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,450, ) Reduced by revised budget for , ) Increased by reallocation 5,614, ) AVAILABLE FOR SPENDING 482,280, ) EXECUTED 481,633, ) Executed/available for spending (5 / 4 x 100) Expenditures for social protection transfers are intended for financing exercise of rights in the field of social protection, redundant, rights related to pension and disability insurance and other rights in the field of health insurance. Graph 2 Social Protection Transfers - Structure Page 56

57 4.2.1 Expenditures for Redundant Employees As stipulated by the Law on Budget for 2012, projected appropriations for redundant employees amounted to EUR 18,100,000.00, which was increased by EUR 849, according to revised budget plan, and thus determined amount was reduced by EUR pursuant to decisions on redirection. In the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, instead of the increase, a decline was presented according to the revision of appropriations, amounting to EUR 366, Table 26 Planning and execution of appropriations for redundant employees DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,100, ) Reduced by revised budget for , ) Reduced by reallocation 1,391, ) AVAILABLE FOR SPENDING 16,341, ) EXECUTED 16,130, ) Executed/available for spending (5 / 4 x 100) Due to aforementioned, the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012 reported the estimated amount of EUR 16,341,938.16, instead of EUR 17,558,502.74, in accordance with the information shown in the following table: Table 27 Correction of data on planned and executed allocations for redundant employees DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,100, ) Reduced by revised budget for , ) Increased by reallocation 1,391, ) AVAILABLE FOR SPENDING 17,558, ) EXECUTED 16,130, ) Executed/available for spending (5 / 4 x 100) According to the data reported in the Final account, the execution amounted to EUR 16,130, and it is equivalent to the figures reported in the Treasury General Ledger, while execution determined by the current budget is by 8.13% less in relation to estimated appropriations, and not by 1.29 %, as it was reported on the page 201 of the Reasoning for the Bill on Final Statement of Accounts of the State Budgets of Montenegro for The largest portion of expenditure within this group of accounts was paid for unemployment benefits to the Employment Agency of Montenegro, amounting to EUR 11,223,914.28, as well as for severance payments for redundant employees to the Labour Fund, in the amount of EUR 2,125, Estimated expenditure on the basis of severance payments for redundant at the Ministry of Finance amounted to EUR 1,500,000.00, the revised budget increased this amount by EUR 1,249,654.70, and according to the records in the Treasury General Ledger, the budget plan was further increased by EUR 1,348, pursuant to decisions on redirection. The plan reported by the Final budget accounts amounts to EUR 2,881,996.24, and it is necessary to make corrections of the reported data by Amendments to the Bill on Final Statement of Accounts of the State Budgets of Montenegro for The audit has identified weaknesses in the system of internal controls, as certain transfers were not accompanied by a complete documentation, which suggests the existence of payments on the basis of verbal communication among the budget users and processing of transfers without the signature of the Minister of Page 57

58 finance. In the particular case at Police Administration, there was a Request submitted by the Police Administration, for the transfer of funds amounting to EUR 1,061, for the purpose of severance payments in the Police Administration, while the Ministry of Finance transferred EUR 1,216, An official disbursement request for additional amount of EUR 155, was not presented to the audit, but an uncertified list was subsequently delivered, with the names of the Police Administration officers and the account numbers with commercial banks. The Minister did not sign the disbursement request. The audit has determined disbursements of funds from this budget account to the Municipality of Pljevlja, amounting EUR 25, and to the royal capital of Cetinje, amounting EUR 30,000.00, for settlement of liabilities arising from for other purposes, which is considered a improper spending of funds. Disbursements to municipalities as an aid funding in paying out redundant should not be applied in practice, given that municipalities have their own budget. The audit has also identified a misapplication of Decisions on the amount of severance payment to civil servants and state employees ( Official Gazette of Montenegro, 23/10 of April 29 th, 2010), as a result of disbursement of severance payments to a redundant civil servant of the PI National Museum of Montenegro Cetinje, in the amount of 10 average salaries. As Decisions on the amount of severance payment to civil servants and state employees does not envisage such an amount of disbursement, totalling to 10 average gross salaries in Montenegro, this indicates to an incorrect calculation made and the lack of an adequate system of internal control. The Minister did not signed i.e. approved of this Decision, so the disbursement was made in accordance with the Decision signed by the Director of the institution PI National Museum of Montenegro Cetinje, which does not define the criteria used for the calculation of determined amount of remuneration in respect of severance payment. Irregularity in relation to severance payments expenditures upon a consensual termination of employment, refers to the employer s obligation to develop a programme of measures to address redundancies, (retraining or additional professional training of an employee in order to perform duties at the same or another employer, the assignment to another employer within the employee s educational category level), in order to consider options for addressing the rights of individuals who have been declared redundant, while the severance pay should be disbursed only if an employee has not been provided for any of the rights foreseen by this Programme. Recommendations: It is recommended to the Ministry of Finance to disburse severance payments to civil servants and state employees in the amount and for the purposes as set forth by the Decisions on the amount of severance payment to civil servants and state employees ( Official Gazette of Montenegro, 23/10 of April 29 th, 2010), and by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to ensure earmarked spending of budget funds. In order to improve the system of control, it is recommended that disbursements are made exclusively after being signed by the Minister, in accordance with Article 20 of the Law on Salaries of Civil Servants and State Employees ("Official Gazette of Montenegro", 14/12 as of March, 7 th 2012). Before a disbursement is processed, it is necessary to provide that the authorizing officer has checked for the adequate documentation prior to certification of requirements to justify the amount of requested funds and thereby prevent the possibility of larger disbursement than the requested one, in accordance with Paragraph 35 of the Instruction on State Treasury Operations. Page 58

59 4.2.2 Pension and Disability Insurance Rights Expenditures for pensions and other rights in accordance with the Law on pension and disability insurance, disbursed in 2012 total to EUR 378,962, and have increased by EUR 22,086, or by 6.19% in relation to Overview of beneficiaries of rights in the field of pension and disability insurance, by their structure is shown in the following table 8 : Table 28 Number of beneficiaries of Pension and Disability Insurance Rights Numbers of Execution Item DESCRIPTION Share % Share % beneficiaries (amount in EUR) 423 Pension and disability insurance rights 121, % 378,962, % 4231 Old-age pensions 54, % 209,408, % 4232 Disability pensions 23, % 71,390, % 4233 Survivor's pensions 28, % 76,393, % 4234 Allowance 7, % 10,304, % 4235 Cash benefits and compensations 1, % 2,828, % 4236 Other rights 6, % 8,636, % Based on the tested sample amounting EUR 240,852, or 63.55%, there was no indication of improper spending found. Disbursement is being conducted based on valid documentation of accrued pension benefits, submitted by the Department for the calculation and payment of rights in the Fund. Controls on conformity with the procedures prescribed by the Fund are being carried out prior to the final calculation and data processing. As stipulated by the Law on Pension and Disability Insurance, the Fund of pension and disability insurance shall maintain the Main Register of Participants, contribution payers and Beneficiaries of entitlements arising from pension and disability insurance. the Main Registry for employees in the public administration body competent for police affairs and the Agency for National Security shall be maintained by those bodies in the manner stipulated by this Law, while the Fund shall perform the control over the registry maintenance. The Main Register shall be maintained in accordance with prescribed uniform methodological principles. Data shall be entered in the Main Register on the basis of applications submitted on legally prescribed forms that may also be submitted by means of electronic data processing. During 2012, Department for processing Main Register data, which operates within the Department for the implementation of pension and disability insurance, controlled and entered a total of 396,153 applications for entering data into the Main Register database of participants. During 2012, a surplus of 19,550 applications were processed in relation to 2011, when a total of 376,603 applications were entered. As reported, expenditures for pensions and other rights in accordance with the Law on pension and disability insurance, disbursed in 2012, totalled to EUR 378,962, and have increased by EUR 22,086, or by 6.19% in relation to The growth in expenditures arising from old age pensions has been influenced by the following: a) growth in number of pensioners, which has largely resulted from amendments to legal regulations implemented during 2011, significantly effecting the Fund's expenses in the reporting period. The increase in the number of pensioners in 2012 in comparison to 2011 totalled 1,940. The total number of beneficiaries regarding the exercise of all the rights at the end of 2012 was increased by 2,757 or 2.33% compared to the end of the previous year. Number of users of rights in Montenegro was increased by 2,588 and the number of beneficiaries outside of Montenegro by Source: Pension and Disability Fund Page 59

60 Table 29 - Number of beneficiaries of PDI rights in the period December Number DESCRIPTION 01/12/ /12/ /12/ /12/2012 Montenegro 1. Pensions 97,088 99, , , Other rights 9,604 9,187 8,655 8,205 I Total (1 + 2) 106, , , ,682 Abroad 3. Pensions 4,263 4,887 6,041 6, Other rights II Total (3 + 4) 4,409 5,019 6,193 6,362 III TOTAL (I + II) 111, , , ,044 b) Indexation of pensions performed as stipulated by the Law on Pension and Disability Insurance and pursuant to Decision on determining pensions and cash benefits as of 1 st January 2012 amounted to 2,6%. The indexation has been performed as follows: the pension value of one personal point is indexed as of 1 st January of the current year, on the basis of statistical data, by developments in the cost of living and average salary of those employed in the territory of Montenegro for the previous year, compared to the year prior to it, in the percentage representing the sum of 75% of the percentage increase, i.e. decline in the cost of living and 25% of the percentage of increase, i.e. decline of salaries. The financial statements of the Fund for Pension and Disability Insurance show disproportionally rapid growth in the number of beneficiaries of rights on pension and disability insurance and disbursements on those grounds, in relation to the contributions paid for pension and disability insurance. It influenced a significant increase in the Fund budget deficit, from the amount of EUR million in 2010, to EUR million in the Data regarding this difference are given in the following graph: Graph 3 The ratio of pensions and social security contributions for Pension and Disability Insurance It should also be emphasized that as of 2009, the outlays have not included health insurance contributions for pensioners due to consolidation of transactions of state funds finance under the Consolidated Treasury Account. Thus the Fund for Pension and Disability Insurance obligations on the basis of contributions for health insurance of pensioners have been reported unrealistically. Page 60

61 Recommendation: It is necessary that the Ministry of Finance and the Pension and Disability Insurance Fund write off arrears for contributions in health insurance of pensioners and to present contributions for health care of pensioners as transactions that increase public spending by the amount of accrued, collected and disbursed contributions for health insurance of pensioners. Expenditures for old-age pensions, pursuant to the initial plan, amounted to EUR 196,475, However, it was necessary to provide an additional amount of EUR 12,932,740 for the execution of this expenditure, i.e. 6.58% more than planned. In order to provide the funds necessary for the payment of the pensions, the deficit in relation to the initial plan was covered by redirection of funds in accordance with Art. 35 of the Law on Budget, so that the final budget plan for this type of expenditure amounted to EUR 209,416,905.75, while the execution totalled EUR 209,408,460.12, i.e. 100% of the current plan. A total expenditure for disability pensions amounted to EUR 71,390, in The initial plan, amounting EUR 78,765,237.64, was reduced pursuant to decisions on redirection of funds by EUR 7,372,181.62, so that the final plan amounted to EUR 71,393, Reducing the required funds for expenditure on this budget position incurred due to a decline in the number of disability pension beneficiaries. The total number of disability pensioners in December 2011 was 23,866, while in December 2012 it was 23,515. Expenditures for survivor's pensions were planned in the amount of EUR 79,000,000.00, while the plan was reduced pursuant to decisions on redirection of funds by EUR 2,597, and the final plan amounted to EUR 76,402, The execution totalled EUR 76,402, Starting from 1 st January 2012, in accordance with the Law on Pension and Disability Insurance, the indexation has been performed and cash benefit arising from survivor s pensions in the amount of 2.6%. An increasing number of beneficiaries of rights did not significantly affected the rate of executed expenditures on this grounds, given the data from the disbursement database, the number of survivor s pensions amounted to 28,733 in December 2012, while the recorded number in December 2011 amounted to 28,369 pensioners. Expenditures for cash benefits and compensations amounted to EUR 10,304, which is by 1.09% less in relation to the execution from The stated amount refers to the following payments: Occupational disability benefits to employees EUR 3,226, Funeral cost compensations EUR 3,917, The initial budget plan for 2012 amounted to EUR 11,980,226.90, and it was reduced pursuant to decisions on redirection of funds by EUR 1,667,099.88, so that the final plan amounted to EUR 10,313, The execution totalled at EUR 10,304, Allowances were realized in the amount EUR 2,828, which is by 5.4% less than in This type of payment relates to: Allowance for a memorial EUR 75, Aid and care allowance EUR 2,752, The initial budget plan for 2012 amounted to EUR 3,651, However, the initial plan was reduced pursuant to decisions on redirection of funds by EUR 822,545.22, so that the final plan amounted to EUR 2,828,571.35, which actually was the amount executed, as well. Page 61

62 Expenditures arising from exercising other rights (pensions paid on the basis of social insurance agreements) amount to EUR 8,636,087.03, which is by 0.78% less than in 2011 (EUR 8,704,079.62). Decline in these types of expenses, despite an increase in the number of pensioners outside Montenegro, resulted from a huge number of recalculations among the former states of Yugoslavia performed during 2012, which implies a different disposition of pensions, in proportion to the insurance periods spent in the particular state. A total of 23,768 requests for claim were settled in the first instance administrative proceedings in 2012, upon the requests of the insured persons to exercise their rights from pension and disability insurance in domestic insurance. A total number of 19,610 of new claims were filed, while the number of those carried over from the previous year amounted to 4, ,223 requests for claim were settled, out of which positively, and 2,460 negatively. 2,545 claims were pending. The number of pending cases at the end of 2012 was influenced by several reasons, as follows: The Pension and Disability Fund has been facing a problem with the collection of contributions for compulsory social insurance payable by the insured and by the employers. In particular, there is a problem noticed in exercising rights to pension and disability insurance for the participants who pay contributions by themselves, (self-employed individuals and farmers), who usually make payment of contributions to cover the minimum insurance period in order to acquired pension rights, even though they were employed -insured for an extended period of time, while the rest of the insurance period the obligations for contributions remain mostly unsettled. The employers, i.e. companies in liquidation procedure can also have a problem with the payment of contributions. According to the Law on compulsory social-insurance contribution, defining collection and control of taxes and contributions, as well as the establishment and management of a central registry of obligors of personal income tax, obligors of contributions for compulsory social insurance, the insured of compulsory social insurance and the system of execution are under the jurisdiction of the Department of Public Revenues. The Pension and Disability Fund has sent a written notice to the Ministry of Labour and Social Welfare and to the Ministry of Finance, as competent authorities, informing them on the problem of unpaid contributions for beneficiaries eligible to retirement, but whose contributions for pension and disability insurance have not been fully paid. In practice, for such cases who have acquired the right, but have not settled the obligations yet, the Fund notifies the Department of Public Revenues, as the competent authority. In those cases where a previous Medical expert evaluation is required to be carried out with the First instance disability commission, it is not possible to comply with the legal timeline as stipulated by the Law on General Administrative Procedure, due to procedures in scheduling immediate medical checkup. In addition, in case that the First instance disability commission confirms the right, each individual case is subject to a mandatory medical revision of the Second instance commission, so the number of these subjects affects the duration the procedure. In practice, this results in two separate procedures, evaluation of working capacity at the First and Second instance commission, and passing decisions on entitlement in the First instance (there were 909 such requests carried over to 2013). Department of Foreign Insurance of the Fund for Pension and Disability Insurance of Montenegro is currently applying 25 Agreements on social insurance with other countries, and as far as former Yugoslav republics are concerned, the recalculation has been done as of the date of secession of the former states. A certain procedure is prescribed by these Agreements, including confirmation of insurance period, obtaining other evidence through the established forms (these procedures take a long time and therefore, based on this, a number of 685 pending requests were carried over). The Department for conducting foreign insurance was working on the settlement of a total of 4,847 requests, out of which 2,637 new and 2,210 carried over from the previous year. A number of 3,327 were resolved positively, 835 negatively, while 685 requests were pending. The number of requests increased by 52% in relation to the previous year. As the Agreement on social security with Slovenia entered into force on Page 62

63 1 st January 2012, a total number of requests for resolving under the terms of this Agreement amounted to 546. Certain more favourable criteria, comparing to the general conditions, for eligibility of particular categories of participants to a pension, as well as determining the level of pension were prescribed by the Law on Pension and Disability Insurance ( Official Gazette of Montenegro, 79/08), more favourable than the general conditions. Those legal provisions ceased to be valid on December 31 st, 2012, so a larger number of requests was filed at the year-end, and they were carried over to the next year. According to previous years experience, there is always an increased number of requests at the year-end and they are carried over to the next year, as they cannot be solved (if the request is submitted on 30 th December). First instance disability commission resolved 3,529 requests for medical expertise in Number of requests filed amounted to 4,431, while 909 requests were carried over to 2013, due to delays in scheduling expertise. Out of 3,529 resolved requests, a number of 3,353 related to the assessment of working capacity, 33 to evaluation of physical impairment, while 143 requests related to the assessment of incapacity for independent life. 4.3 Transfers to Institutions Expenditures for transfers to public institutions were planned in the amount of EUR 13,782, Pursuant to the revised budget plan, the amount was reduced by EUR 148,576.79, while the decisions on reallocation additionally reduced those expenses by EUR 111,575.65, so that the final plan amounted to EUR 13,522, A total of EUR 13,467, was executed, or 0.41% less than planned. Table 30 Planning and execution of expenditures for transfers to institutions DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,782, ) Reduced by revised budget for , ) Reduced by reallocation 111, ) AVAILABLE FOR SPENDING 13,522, ) EXECUTED 13,467, ) Executed/available for spending (5 / 4 x 100) Based on a sample tested within this position, the audit has determined the following: In the position Transfers to public institutions, the Ministry of Economy planned expenditures amounting EUR 573, The execution totalled EUR 573, i.e. 100% of the planned expenditures. The tested sample amounted to EUR 234, i.e % of the executed. From this position the expenditures were executed for the transfers to: the Institute for Standardization of Montenegro...EUR 209, Montenegrin Accreditation Authority...EUR 363, The funds have been transferred to the Institute for Standardization (individual monthly requests) on the basis of the Agreement on the implementation of the Plan and Work program of the Institute for Standardization of Montenegro on passing Montenegrin standards for 2012 (Agreement on implementation) /2 dated March 15 th, 2012 and 07/5/12 dated February 27 th, 2012, concluded between the Ministry of Economy and the Institute for Standardization. Page 63

64 The funds have been transferred to the Montenegrin Accreditation Authority on the basis of the Annual agreement on the implementation of the Work program of the Montenegrin Accreditation Authority for Based on data reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012, it can be determined that expenditures planned within the Ministry of Economy referred to Functional Classification expenditures for Programme Accreditation and Programme The development and adoption of standards. The audit has found that expenditures for the Programme Accreditation and the Programme Development and adoption of standards were planned only in position Transfers to public institutions. Projected own income of the Accreditation Authority and the Institute for Standardization has not been reported as a source of funding. Therefore, it was necessary to do the following: align the classification of expenditures per programme activities for the Programme Accreditation for 2012 with the classification of expenditures reported in the Plan and work program of the Accreditation Authority for classification of expenditures per programme activities for the Programme Development and adoption of standards for 2012 should have been aligned with the classification of expenditures reported in the Plan and work program of the Institute for Standardization of Montenegro on passing Montenegrin standards for 2012, based on which the Agreement on implementation) /2 dated March 15 th, 2012 and 07/5/12 dated February 27 th, 2012 was concluded. Projected own income of these budget users for 2012 should have been included in the sources of funding, as well as the cash in the accounts at commercial banks at the beginning of the period. Recommendation: It is recommended to the Ministry of Finance to initiate amendments of regulations to allow for the annual Law on Budget to: - Align the classification of expenditures for Programmes Accreditation and Development and adoption of standards with classification of expenditures reported in the Plan and work programme for the fiscal (calendar) year, which serves as the basis for concluding the Annual agreement on the implementation. - Include projected own income of the Accreditation Authority and the Institute for Standardization in the sources of funding of the Programmes Accreditation and Development and adoption of standards, as well as the cash in the accounts at commercial banks at the beginning of the period. 4.4 Capital Expenditures Pursuant to Article 4 of the Law on Budget, expenditures for equipment were planned in the amount of EUR 8,205, The plan was reduced according to the revision of the budget by EUR 2,141, and by decisions on reallocation of resources the plan was reduced by an additional amount of EUR 224, The final budget plan totalled EUR 6,288, The execution amounted to EUR 7,366, or it exceeded the plan by 17.14%. Sources of finance in this budget position are as follows: Budget funds...eur 4,845, Loans and borrowings... EUR 813, (Project of improving the health system) Earmarked revenues...eur 958, (out of which EUR 933, or 97.39% refers to the Health Fund) Page 64

65 Own revenues...eur 749, (out of which EUR 713, or 95.19% refers to the Ministry of Defence). After completing control of a tested sample on this budget item, improper consumption has been identified at Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amounts and for the purposes as outlined in the following table: Table 31 Improper spending in account expenses for equipment Improper spending in budget position 4415 SPENDING UNITS determined by audit In EUR Human Resources Administration 27, , Department for Public Revenues 5, , Ministry of Transport and Maritime Affairs 2, , Port Administration Total 5, , , , Borrowings and Loans As initially planned, expenditures for borrowings and loans amounted to EUR 1,700, The planned amount was increased pursuant to decisions on redirection by EUR 75,634.00, so that the final plan amounted EUR 1,775, The execution was completed in line with the planned amount. Table 32 Planning and execution of allocations for borrowings DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,700, ) Increased by revised budget for ) Increased by reallocation 75, ) AVAILABLE FOR SPENDING 1,775, ) EXECUTED 175, ) Executed/available for spending (5 / 4 x 100) Total 4.6 Repayment of Debts Pursuant to the Law on Budget for 2012, planned expenditures for the repayment of debts amounted to EUR 125,836,986.92, the plan was increased by EUR 45,707, according to the revised budget, and the available resources outlined in the current budget plan totalled EUR 171,544, Expenditures for social protection transfers were realized in the amount of EUR 193,273,564.19, which is 12.67% more comparing to the amount planned by the current budget. Table 33 Planning and execution of allocations for repayment of debts DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,836, ) Increased by revised budget for ,707, ) Increased by reallocation ) AVAILABLE FOR SPENDING 171,544, ) EXECUTED 193,273, ) Executed/available for spending (5 / 4 x 100) Repayment of Securities and Loans to Residents Expenditures for the repayment of securities and loans to residents amounted to EUR 77,940, Expenditures for these purposes have been realized in the percentage higher by 59.55% in relation to the amount foreseen by the budget plan for the repayment of principal on short term loans, concluded for Page 65

66 maintenance of current liquidity of the budget. As stipulated by Article 17 of the Law on the Budget ( Official Gazette of Montenegro, 40/01, 44/01, 28/04, 71/05, Official Gazette of Montenegro, 12/07, 73/08, 53 / 09, 46/10, 49/10) and Article 4 of the Decision on borrowing and giving state guarantees of Montenegro for 2012 ( Official Gazette of Montenegro, 18/12 and 40/12), and for the purpose of financing budget deficit, the Ministry of Finance can take short-term loans from internal and external sources and issue short-term securities, the longest for the period of six months, regardless of the annual increase of debt limit stipulated by the Law on Budget of Montenegro for According to the sample tested and on the basis of commitments arising from short term loans, concluded for the purpose of providing the budget liquidity, the following transfers of funds were carried out from this budget position: a) According to tested positions, repayment of obligations to the Erste Bank A.D. Podgorica, relate to the following: Loan agreement LD/12086/00089 dated March 30 th, 2012, amounting EUR 4,000,000.00, obligation paid on May 30 th, 2012; Loan agreement LD/12198/00035 as of July 17 th, 2012, loan fully repaid in the amount of EUR 5,000, on August 1 st, 2012; Agreement on overdraft loan OD 11081/00075 dated April 27 th, 2011, which was approved in the amount of EUR 10,000, in order to improve the user s operational liquidity, and Annex 01/11 of the Agreement on overdraft loan, 11081/00075 dated April 27 th, 2011, repaid in the amount of EUR 7,000, According to the Confirmation of the Erste Bank ad Podgorica, on December 31 st, 2012, the balance of obligations under the Agreement on overdraft loan OD 11081/00075 totals EUR 10,000,000.00, out of which the amount of EUR 6,000, was repaid on 14 th January 2013, while the repayment of the amount of EUR 4,000, was not executed by the end of the audit fieldwork. Other payments to the Erste Bank A.D. Podgorica were carried out as follows: in accordance with the Loan agreement LD/10103/00110 as of April 14 th, 2010, in the amount of EUR 5,000, concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica, approved for the restoration works on cultural monuments in Cetinje; in accordance with the Loan agreement LD/10050/00082 as of February 25 th, 2010, concluded between Erste Bank A.D. Podgorica and the Government of Montenegro - Ministry of Finance, intended for the completion of construction works on the Police Administration building in Podgorica. Other transfers of funds to the Erste Bank A.D. Podgorica were carried out based on the assumed debts in 2011 related to the repayment of principal according to Loan arrangements, including the assumed debt of the Railway Transport, Montenegrin Fund for Welfare Housing Development, PE Regional Waterworks Crnogorsko primorje. The stated transfers were carried out on the grounds of debts of these legal entities to creditors assumed by the Government of Montenegro Ministry of Finance, for obligations arising from Loan arrangements, Pursuant to Article 12 of the Law on Budget of Montenegro for 2011, ( Official Gazette of Montenegro, 78/10) which prescribes that the Government of Montenegro Ministry of Finance shall assume debts totalling EUR 20,160, According to the Decision on Borrowing and Issuing State Guarantees of Montenegro for 2011 ( Official Gazette of Montenegro, 16/11) and Conclusions of the Government of Montenegro as of June 9 th, 2011, the Government of Montenegro passed the Information on assumption of debts totalling EUR 20,160,000.00, structured as follows: Railway Transport Montenegro a.d. Podgorica in the amount of EUR 8,500,000.00, Page 66

67 PE Regional Waterworks Crnogorsko primorje, in the amount of EUR 7,000,000.00, Montenegrin Fund for Welfare Housing Development, in the amount of EUR 3,800, and Broadcasting Company Radio-Television of Montenegro, in the amount of EUR 858, Pursuant to the aforementioned Conclusions of the Government of Montenegro, the Agreement on assumption and conversion of debt to equity, /1 dated June 29 th, 2011 was concluded between the Government of Montenegro - Ministry of Finance and Railway Transport Montenegro a.d. Podgorica, based on which the Government assumed the commitments of the Railway Transport Montenegro a.d. Podgorica in the amount of EUR 8,500,000.00, structured as follows: The loan at Erste Bank ad Podgorica, in the amount of EUR 7,000,000.00, with all costs arising from the Loan Agreement LD 10117/00002 dated April 30 th, 2010, effective from 1 st January 2011 year; Debt of the Railway Transport Montenegro a.d. Podgorica to the Railway Infrastructure a.d. Podgorica, on the basis of maintenance of the railway infrastructure, in the amount of EUR 1,500, On the basis of the assumed debt of Railway Transport, the Government of Montenegro increased its equity in this company by EUR 8,500, The share of the Government of Montenegro in the equity of Railway Transport has increased in accordance with the following: Decision of the Assembly of Shareholders on conversion of debt to equity, Decision 7517/2 dated October 31 st, 2011, by issuing 1,609,459 shares, the share of the Government in the equity of Railway Transport ad Podgorica has been increased from 3,845, shares to 5,454, shares, accounting for % of the total equity; Decision on issue of shares on the account of converting debt into equity, 7517/4 of October 31 st, 2011, issuing the amount of EUR 8,500,000.00, divided into 1,609,459 series D shares of nominal value of EUR ; Decision on capital increase passed by the Assembly of Shareholders, 7517/3 dated October 31 st, 2011, on increasing equity of Railway Transport Montenegro ad Podgorica to a total of EUR 32,265,816.00, while it previously amounted to EUR 23,765, According to the aforementioned Conclusions, the Government of Montenegro - Ministry of Finance concluded an Agreement /1 from June 29 th, 2011 with the PE Regional Waterworks Crnogorsko primorje, on assumption and conversion of debt into equity. Pursuant to the terms and conditions agreed under this Agreement, the Government of Montenegro has increased its capital with PE Regional Waterworks Crnogorsko primorje in the amount of EUR 7,000, and assumed liabilities of PE Regional Waterworks Crnogorsko primorje, in the amount of EUR 7,000,000.00, for repayment of loans to Erste bank ad Podgorica, with all costs arising from the Loan Agreement LD/10196/00016 from July 15 th, 2010, effective from 1 st January Thus the Government of Montenegro s share in the equity of PE Regional Waterworks Crnogorsko primorje has been increased in line with the Agreement by EUR 7,000, The funds obtained under this credit arrangement shall be used to finance the project of Regional Waterworks Crnogorsko primorje. According to the aforementioned Conclusions, the Government of Montenegro - Ministry of Finance concluded an Agreement /1 form August 31 st, 2011, with Montenegrin Fund for Welfare Housing Development Podgorica, on assumption of debt and assignment of immovable property. The Government assumed debts of the Montenegrin Fund for Welfare Housing Development Podgorica to Erste Bank A.D. Podgorica, in the amount of EUR 3,800,000.00, with all costs arising from the Loan agreement LD 10040/00086 from February 23 rd, In accordance with the terms of the Agreement, Montenegrin Fund for Welfare Housing Development Podgorica is agreed to transfer the rights to its immovable property (real estate) into the ownership of the Government of Montenegro - Ministry of Finance, for the cadastral parcels from the Real estate folio 3645 KO Niksic, registered under the number of /2011 as of February 2 nd, 2011, and in the amount of the debt assumed. Page 67

68 As a security instrument for duly repayment of obligations under the Loan agreement with Erste Bank ad, the Government of Montenegro-The Ministry of Finance issued an irrevocable and unconditional Guarantee /1 from February 23 rd, and concluded the Mortgage agreement HPP/04810 on February 23 rd, 2010 on the subject property with The Independent Trade Union of Bauxite Mine ad Niksic. The funds obtained under this Loan arrangement have been intended for financing the purchase of land plot totalling 46,038 m 2, registered in the Real estate folio 3645 KO Niksic, according to the Real estate sale Contract number from February 18 th, 2010, concluded between The Independent Trade Union of Bauxite Mines ad Niksic and the Montenegrin Fund for Welfare Housing Development Podgorica. The total land price amounts to for EUR 3,683,040.00, which equals to EUR per one square meter. As defined by the Real estate sales Contract, the Fund is purchasing the land plot with the intention of building residential and business premises, according to determined urban and technical conditions. Based on the Real estate folio 3645 KO Niksic, from March 21 st, 2013, the Ministry of Finance was entered in the cadastre register with the right 1/1 to dispose of the part of the property, registered as the State of Montenegro property 1/1, while the part of the property was registered a mortgage in favour of Erste Bank ad Podgorica. b) According to the tested sample, repayment of other obligations towards NLB Montenegro Bank ad Podgorica refers to short-term loans borrowed for the purpose of maintaining the current liquidity of the budget, including the following: Short-term loan agreement KR 2012/1649 concluded and signed on April 2 nd, 2012, amounting EUR 5,000,000.00, fully repaid on April 26 th, 2012; Revolving loan credit agreement KR 2012/813 dated as of February 23 rd, 2012, to max amount of EUR 5,000,000.00, repaid in the amount of EUR 5,000, during the year; Repayment of commitments to PODGORICKA Bank Societe Generale Group ad Podgorica refers to obligations under the Short-term revolving agreement, dated as of April 26 th, 2011, amounting to EUR 10,000, and the Annex 1 of the Short-term revolving agreement / 1 dated as of November 17 th, 2011, hereunder repaid in the amount of EUR 7,000,000.00; the Government of Montenegro, Ministry of Finance and Societe Generale Bank Montenegro ad concluded the Annex 2 of the Short-term revolving agreement Changes in Art. 2, as follows: terms, conditions and timeline of loan repayment: at maturity and due to be repaid on March 31 st, 2013 ; According to the Statement of financial positions of Podgoricka Bank - Societe Generale Group ad, the balance of outstanding payments regarding Agreement / 1 amounts to EUR 3,000, c) Repayments of commitments to Hipotekarna Bank A.D. Podgorica refer to obligations under the short-term loans intended for maintaining current liquidity of the budget, in accordance with the following loan agreements: Loan Agreement /2 dated as of February 3 rd, 2012 in the amount of EUR 1,500,000.00, repaid on February 29 th, Loan Agreement /2 dated as of April 4 th, 2012 in the amount of EUR 2,000,000.00, repaid on May 3 rd, 2012; Loan Agreement /2 dated as of June 29 th, 2012 in the amount of EUR 2,000,000.00, repaid on July 24 th, Page 68

69 d) Repayment of commitments to Hypo Alpe Adria Bank was carried out in accordance with the Short-term loan Agreement KR-425/12, dated as of April 6 th, 2012, amounting to EUR 3,000,000.00, repaid on May 4 th, e) Other transfers towards the CKB Bank AD Podgorica were carried out in accordance with the Annex to the Agreement on the assumption of debt arising from the Overdraft loan Agreement dated as of May 20 th, 2010, 1867/1, dated June 22 nd, 2012, among the Government of Montenegro - Ministry of Finance, CKB Bank and the Fund for Pension and Disability Insurance, amounting to EUR 3,000, Repayment commitments arising from the implementation of the Directorate of Public Works Programme, refers to the following: a) Repayment of commitments to NLB Bank Montenegro A.D. Podgorica, carried out in accordance with the Loan Agreement KR 2007/ as of May 16 th, 2007, concluded between NLB Montenegro bank a.d. Podgorica and Municipality of Budva, for the implementation of the programme by Directorate of Public Works related to land development and infrastructure connections and works on furnishing a primary school in Budva, under the Agreement on construction as of April 4 th, b) Repayment of commitments to CKB a.d. Podgorica, carried out in accordance with the Loan Agreement dated as of October 6 th, 2008, for the implementation of the Directorate of Public Works Programme: Development of Project plan and construction works on the reconstruction of the existing facility for the Regional School of Public Administration (RESPA). A total of EUR 5,671, has been allocated for the repayment of principal for T-bills (the in 2011 it amounted to EUR 8,000,000.00). In accordance with Art. 38 paragraph 1 of the Law on Budget, it is envisaged that the State shall borrow up to the borrowing rate determined by the annual Budget Law. Due to the issue of T-bills and taking short-term loans for liquidity, and the amount of short-term loans whose repayment period exceeds 6 months, it is necessary to define the annual amount of T-bills issue and short-term borrowings by the annual Law on Budget and Decision on borrowing and issuing guarantees of Montenegro. For the implementation of the Directorate of Public Works Programme, the following transfers have also been carried out: the commitment amounting EUR 3,620, was repaid (amount repaid in 2010 totalled EUR 2,599,416.08, amount repaid in 2011 totalled EUR 2,599,416.08) for conducting construction work on the road section Risan Grahovo-Zabljak and bypasses around cities, section: Savnik-Grabovica-tunnel Ivica, in accordance with the Contract 13/09 dated as of September 16 th, 2009 (contracted works cost total EUR 17,546,059.64, method of payment: within seven years) and the Annex of the Contract /1 dated as of December 27 th, 2011, (the Annex amount to EUR 4,086,471.76). the commitment amounting EUR 3,380, was repaid (amount repaid in 2010 totalled EUR 1,800,793.77; amount repaid in 2011 totalled EUR 2,401,058.36), for carrying out construction works on bypass around Bijelo Polje, in accordance with the Contract 19/08 as of June 5 th, 2008 (contracted works cost a total of EUR 13,806,085.54, method of payment: within six years), and the Annex of the Contract /1 as of December 6 th, 2011; the commitment amounting EUR 4,045, (amount repaid in 2010 totalled EUR 3,138,044.76; amount repaid in 2011 totalled EUR 3,138,044.76), for carrying out construction work on the road section Risan Zabljak: the entrance to the tunnel Ivica - Moticki gaj - Zabljak ( KM3 - KM ), in accordance with the Contract 05/08 as of April 24 th, 2008 (contracted works cost a total of EUR 21,181,802.19, method of payment: within eight years, according to the Annex of the Contract 1 as of June 27 th, 2008: and, method of payment: within seven years, according to the Annex of the Contract, /3 as of May 17 th, 2010); Page 69

70 the commitment amounting EUR 1,809, (amount repaid in 2010 totalled EUR 2,880,000.00; amount repaid in 2011 totalled EUR 2,880,000.00), for carrying out reconstruction work on the regional road M-2 Podgorica- Petrovac, section I: Vojisavljevica Street Crossroad to airport; section II: Crossroad to airport Golubovci (bypass beginning); section III: Bypass around Golubovci, in accordance with the Contract 27/08 as of December 18 th, 2008 and the Annex of the Contract /1 as of March 26 th, 2009, (contracted works cost a total of EUR 36,771,688.45, method of payment: within seven years); the commitment amounting EUR 3,707,727.28, (amount repaid in 2010 totalled EUR 2,595,415.99; amount repaid in 2011 totalled EUR 4,875,285.20), for carrying out construction work on the regional road Risan-Grahovo-Zabljak: section Dragalj Polje - Grahovo, (L:7KM), in accordance with the Contract 04/08 as of March 13 th, 2008 (contracted works cost a total of EUR 6,245,666.48, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 231, in accordance with the Contract), section Grahovo Osjecenica ( L=7,975 km), in accordance with the Contract 34/08 as of December 18 th, 2008 (contracted works cost a total of EUR 11,592,660.11, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 436,375.91, according to the Contract ), section Osjecenica Vilusi (L: 5.52 km) in accordance with the Contract 36/08 as of December 18 th, 2008 (contracted works cost a total of EUR 6,999,638.90, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 259,245.89). For the transfers to Telekom Montenegro A.D. Podgorica, a total of EUR ,20 was allocated or ,35 per month (amount paid in 2011 totalled EUR 740,656.20). The stated obligation incurred pursuant to the Agreement on the Transfer of Shares (of the founder's rights in the Radio Broadcast Center doo Podgorica), concluded between Telekom Montenegro ad Podgorica and the Government of the Republic of Montenegro as of December As in previous years, pursuant to the revised Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, from this position funds were transferred for expenditures including Contracts on carrying out construction works for the Transport Directorate (EUR 16,564,070.50) and for Telekom (EUR 740,656.20). Recommendation: Acknowledging that this position recognizes and records payment requests related to expenditures incurred due to outlays for the paying off of debt in respect to issued securities and loans borrowed from resident financial institutions, expenditures identified by the audit, including those on the grounds of the Agreement for Execution of Works for the Implementation of Transport Directorate Programme, in the amount of EUR 16,564,070.50, and those to Telekom Montenegro ad Podgorica, in the amount of EUR 740,656.20, should have been planned and executed within the Capital Budget. In addition, it is deemed necessary to define, pursuant to the Annual Law on Budget and Decision on Indebting and Issuing Guarantees of Montenegro, to what limit the issue of government T-bills and short-term loans used for providing current liquidity will not increase net government debt, due to amount of short-term loans whose repayment period exceeds 6 months Paying off Securities and Loans to Non-Residents At this position the execution amounted to EUR 54,874,811.39, the tested accounted for EUR 46,908, or 85.48% of the execution at this position. Obligations to creditors were carried out regularly in the current year. All the payments executed by the State on the basis of servicing debt over the debt timeline Page 70

71 are recorded in the debt management system. Provisions of the loan agreement, including the terms of debt amortization, interest payments, commissions based on the provided services, and other provisions of the agreement are recorded in the debt management system. Mostly transfers of funds for repayment of principal to the creditors were carried out over the current year, as follows: repayment of commitments to Credit Suisse International for realization of budget liabilities; repayment of obligations to Paris Club of Creditors; repayment of commitments to KFW: for the Project Water Supply and Wastewater Disposal in the Coastal Region (Phase III), for the Project Water Supply and Wastewater Disposal in the Coastal Region (Phase II), for the Project of Rehabilitation, Improvement and Expansion of Water Supply Sector and Sewage System of the Coastal Region of Montenegro and Municipality of Cetinje, repayment of commitments to Erste Group Bank AG, for realization of budget liabilities; repayment of commitments to Austrian bank Steiermärkische Bank und Sparkassen AG, for the purchase of special firefighting vehicles; repayment of commitments to Societe Generale Paris, for funding the Project Educational Information System In Montenegro; repayment of commitments to International Financial Corporation IFC, on the basis of loans , , ;; repayment of commitments to International Bank for Reconstruction and Development (IBRD), for Consolidation Loan D, Consolidation Loan E, Consolidation Loan F; repayment of commitments to EIB, for the Railways Reconstruction Project, for the Project of Urgent Transport Remediation; repayment of commitments to Czech Export Bank, for assumed obligations of the Railway Infrastructure of Montenegro a.d. Podgorica; repayment of commitments to Eurofima, for assumed obligations of Railway Transport of Montenegro ad Podgorica; repayment of commitments to UBS AG, in the amount of EUR 1,400, grounded on II instalment of the principal for API bonds. repayment of commitments to UBS AG, was carried out in accordance with the Agreement on Reconciliation signed on August 29 th, 2011, between the Government of Montenegro, Ministry of Finance and UBS AG, in order to settle obligations of Montenegro to UBS AG on the grounds of API bonds issued by the National Bank of Yugoslavia, on 29 th September As specified in the Audit Reports on Final Statement of Accounts of the State Budgets of Montenegro in 2010 and 2011, the existing information system, obtained as a guarantor of the Ministry of Finance of Bosnia and Herzegovina and used by the Debt Management Department, is a consolidated system of tracking and monitoring of external debt as of the date of loan withdrawal, through recording data from the repayment schedule, interest, fees and other costs associated with the loan, recording repayment obligations to foreign creditors. Based on the data input, the system can provide different reports, such as, reports of indebtedness, on payments to foreign creditors, as well as data on the debt balance. There are certain limitations indicated, due to the lack of technical staff to maintain the system, as well as due to insufficiently adjusted forms of reporting, while the records of domestic (internal) debt are kept in Excel, and therefore it should be improved. In conclusion, we believe that in order to improve the recording and reporting system in the Debt Management Department, it is necessary to provide licensed information system for keeping records of external and internal debt. We deem it necessary to provide an efficient and reliable information system in order to improve work in the Debt Management Department and to adopt binding management procedures which would contribute to effective and efficient performance of activities. Page 71

72 Over the year, the Ministry of Finance has had reconciliation of mutual commitments with particular international creditors. We believe that the reconciliation of mutual obligations should be performed at least once a year with all the creditors Repayment of Guarantees in the Country The payment requests and payments related to all expenditures incurred due to outlays for debt repayment in respect to guarantees issued in the country are recorded at this budget item. According to the budget, there were no appropriations for this position, while the execution amounted to EUR 1,292, The Government of Montenegro - Ministry of Finance has issued a guarantee to CKB Bank AD Podgorica, /1 as of 19 th January 2012, on behalf of the beneficiary Jadransko brodogradiliste ad Bijela, in the amount of EUR 1,050,000.00, in accordance with the Annex II, as of 17 th January 2012, of the Loan Agreement as of June 5 th, The said guarantee was planned by the Law on Budget of Montenegro for ( Official Gazette of Montenegro, 078/10 and 028/11) and the Decision on Indebting and Issuing Guarantees of Montenegro for ( Official Gazette of Montenegro, 016/11 and 066/11). Issuing of guarantee to the CKB Bank AD Podgorica on 19 th January 2012, in accordance with the Decision on Indebting and Issuing Guarantees of Montenegro for 2011, has been explained in the Montenegro 2011 Budget Bill. In 2012 the Government of Montenegro, Ministry of Finance executed payment of commitments on issued guarantees in favour of domestic beneficiaries in the amount of EUR 1,292,092.45, out of which the repayment of obligations to Podgoricka Bank Societe Generale Group AD accounted for EUR 747,351.55, on behalf of Pobjeda ad Podgorica, while the repayment of obligations to NLB Montenegro bank ad Podgorica amounted to EUR 544, on behalf of Bauxite Mines AD Niksic. The Ministry of Finance paid out the amount of EUR 747, on December 27 th, 2012 in favour of Podgoricka Bank Societe Generale ad Podgorica, in accordance with the Guarantee issued /1 as of July 10 th, 2009 on behalf of the user of guarantee Pobjeda AD Podgorica, and in accordance with the Loan Agreement as of July 10 th, 2009, concluded between Pobjeda AD Podgorica and Podgoricka Bank Societe Generale ad Podgorica and in accordance with the Conclusions of the Government of Montenegro, 06-82/2 as of December 26 th, In 2011 a total of EUR 992, was paid out. Given that the Government of Montenegro - Ministry of Finance repaid due commitments arising from issued guarantees to Podgoricka bank Societe Generale ad in Podgorica, number /1, the Ministry of Finance and the Pobjeda ad Podgorica concluded the Agreement on setoff of mutual obligations on May 16 th, 2013, which sets-off receivables of the Ministry of Finance arising from outstanding debt per guarantee, number /1 as of July 10 th, 2009 to Podgoricka Bank Societe Generale Group ad Podgorica, in the amount of EUR 1,745,904.40, in accordance with the Long-term Loan Agreement, number as of July 10 th, 2009, totalling EUR 2,970,000.00, concluded between Podgoricka Bank Societe Generale ad Podgorica and Pobjeda AD Podgorica. According to the Agreement on a set-off of mutual obligations, Pobjeda is obliged to settle a debt of EUR 1,745, to the Ministry of Finance in twenty equal, quarterly instalments, amounting EUR 87, per each, where Pobjeda transfers the first instalment to the Ministry of Finance on September 30 th, 2013 and the last one on June 30 th, 2018, whereas Pobjeda shall deliver to the Ministry Finance 20 bill of exchange statements of authorization along with 20 copies of blank bill of exchange. Page 72

73 Ministry of Finance paid out an amount of EUR 544, on October 30 th, 2012 in favour of NLB Montenegro banka ad Podgorica, in accordance with the Guarantee issued : /1 as of June 9 th, 2009 (Annex I of the Guarantee, /1 as of December 31 st, 2009, and Annex II of the Guarantee /1 as of December 31 st 2011) on behalf of Bauxite mines ad Niksic, in accordance with the Conclusions of the Government of Montenegro, 06-65/2 as of October 30 th, Pursuant to the Decision on Indebting and Issuing Guarantees of Montenegro for 2009, the Government of Montenegro - The Ministry of Finance issued a guarantee /1 as of June 9 th, 2009 in favour of NLB Montenegro bank AD Podgorica, as a security instrument for the Loan Agreement KR2009/1600 as of May 11 th, 2009 in the amount of EUR 5,000, (Annex I KR2009/ as of November 24 th, 2009 and Annex II, KR2009/ as of December 15 th, 2011), concluded between the NLB Montenegro bank ad Podgorica and Bauxite Mine AD Niksic. The Ministry of Finance guaranteed to pay out all contractual obligations to a maximum amount of EUR 5,000, plus the interest and other costs specified in the contract. The Ministry of Finance did not set off mutual obligations against Bauxite Mines ad Niksic, in respect of repaid due commitment in the amount of EUR 544,740.90, on the Guarantee issued to NLB Montenegro bank ad Podgorica. Recommendations: The Ministry of Finance should have provided funds for repayment of debts arising from domestic guarantees at the item Repayment of guarantees in the country by the Law on Budget of Montenegro for 2012 ( Official Gazette of Montenegro, 66/11 and 29/12 ), and pursuant to item 134 of the Directions on State Treasury Operations ( Official Gazette of Montenegro, 80/08, 02/09, 45/10, 15/11, 17/12), which prescribes that all payments by the Government to honour defaulted loan guarantees must be paid from the Treasury Consolidated Account against the funds planned for such purposes. We deem it necessary that the Ministry of Finance settles mutual relations with Bauxite Mines ad Niksic regarding the debt repaid in favour of NLB Montenegro bank, amounting to EUR 544,740.90, in respect of issued Guarantee /1 as of June 9 th, 2009, (Annex I of the Guarantee, /1 dated as of December 31 st, 2009, and Annex II of the Guarantee /1 as of December 31 st 2011) Repayment of Guarantees Abroad The payment requests and payments related to all expenditures incurred due to outlays for debt repayment in respect to guarantees issued abroad are recorded at this budget item. According to the budget, there were no appropriations for this position, while the execution amounted to EUR 23,427, Pursuant to Article 11, Paragraph 2 of the Law on Budget of Montenegro for 2012 ( Official Gazette of Montenegro, 66/11, 29/12), it is envisaged that the Government of Montenegro shall issue guarantees amounting up to EUR 10,000, , while the Decision on Indebting and issuing guarantees of Montenegro for 2012 ( Official Gazette of Montenegro, 18/12, 40/12) determined that the State of Montenegro shall issue a loan Guarantee in favour of the European Bank for Reconstruction and development (EBRD), for the realization of the Project Major repair and overhaul of upper structure of the railroad line Kolasin-Trebjesica in the amount of EUR 10 million. According to the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 and the Review of guarantees issued abroad performed by the Ministry of Finance, the Ministry of Finance issued the guarantee provided for the EBRD in the amount of EUR 10,000, Page 73

74 Payments amounting EUR 23,427, have been executed from this item, in accordance with the notification sent by Deutsche Bank on April 2 nd, 2012 on the activation of the Guarantee issued in respect to the Loan Agreement, signed on June 25 th, 2010, among the Parties Aluminum Plant AD Podgorica, Deutsche Bank Luxembourg S.A. and Deutsche Bank AG, London Branch. At its session held on February 13 th, 2012, the Government passed the Decision on assumption of debt of Aluminum Plant AD Podgorica to Deutsche Bank AG, London Branch ( Official Gazette of Montenegro, 11/12). Montenegrin Parliament passed the Decision on Confirmation of Decision on Assumption of Debt of Aluminum Plant AD Podgorica to Deutsche Bank AG, London Branch ( Official Gazette of Montenegro, 11/12). Accordingly, the Ministry of Finance planned appropriations for foreign guarantees at the item 4622 by revision of the Budget. Recommendation: It is deemed necessary that the Government of Montenegro - Ministry of Finance settles mutual relations with Aluminium Plant AD Podgorica against debts paid off and due debts in respect to Guarantees issued abroad to international creditors Repayment of Liabilities from the Previous Period The payment requests and payments related to all expenditures incurred due to outlays for settlement of commitments from previous period, provided that the period of commitment exceeds one year. The execution at this position amounted to EUR 35,738,087.52, out of which the allocations for the Ministry of Finance Programme budget management, the amount of EUR 24,005, was realized and the amount of EUR 11,732, was realized against the budget of spending units which caused them, up to the limit of funds available. Disbursement of funds arising from court rulings and transferred against the budget of spending units has not been predicted by the Law on Budget for According to the sample tested, outlays from this budget item mostly refer to the following: Payout of a portion of debt on the grounds of citizens foreign currency savings, which resulted by enforcement of the Law on Settling Commitments and Claims Arising From Foreign Debt and Currency Savings ( Official Gazette of Montenegro 55/03 and 11/03), Law on Paying Out Citizens Foreign Currency Savings Deposited With Authorized Banks Non-Residing In the Republic of Montenegro ( Official Gazette of Montenegro 81/06), Regulation on the Conversion of Foreign Currency Savings of Citizens Into Bonds ( Official Gazette of Montenegro ' 42/04) and on the basis of the Law on Paying Out Foreign Currency Savings of Citizens Deposited With Dafiment Bank AD Belgrade and Bank Privatne Privrede DD Podgorica, deposited through the company Jugoskandik DD Beograd ( Official Gazette of Montenegro, 20/08). The payout of foreign currency savings to citizens on behalf of the Ministry was carried out by authorized banks in accordance with the Contract on Representation in Matters of Payouts of Foreign Currency Savings of Citizens. The audit has not included verification of payments to end-users. A premature payment of converted foreign currency savings bonds OB17, OB16, OB15, OB14, in the amount of EUR 414, was carried out from this position, in favour of the Archbishop Ordinariat Bar, provided that the Ordinariat indorse said bonds to the Ministry of Finance; Payout of regular instalment on the grounds of compensation of confiscated property rights to former owners, in accordance with Article 22 of the Law on Restitution of Confiscated Property Rights and Indemnification ( Official Gazette of Montenegro, 21/04 and 49/07) and pursuant to the Regulation on Determining Payout of Compensation to Former Owners of Confiscated Property Rights in Cash Assets for 2012 ( Official Gazette of Montenegro, 33/12); Page 74

75 Transfer of funds in the amount of EUR 2,690, in favour of the EPCG Montenegro, Organizational Unit Supply Cetinje was carried out from this position, according to the Conclusions of the Government of Montenegro, 06-58, as of September 27 th, 2012, by which the Government of Montenegro assumed debt of PE Water supply and Sewage Cetinje arose from electricity supply bills. It has been determined that payment in respect to the assumed debt has been realizing from the position Repayment of debt from the previous period; In addition, the assumption of debt totalling EUR 879, was also realized from this position, in accordance with the Conclusions of the Government of Montenegro, /6 as of November 30 th, 2012, for paying out the following obligations: o debt on electricity supply EUR 147,015.43, o debt for taxes and contributions (30 th November 2012) EUR 339,640.10, and o debt to other creditors EUR 393, Article 11, Paragraph 1 of the Law on Budget of Montenegro for 2012 ( Official Gazette of Montenegro, 66/11, 29/12) prescribes that the Government shall assume debts in the total amount of EUR 10.0 million, but it does not provide for the position which assumed commitments shall be implemented from. Payment of assumed debt from the budget item Repayment of commitments from the previous period is not in compliance with the Regulation on Uniform Classification of Accounts for the Budget, Extrabudgetary Funds and Budgets of Municipalities. Other payments from the position 4630 mainly relate to the following: Transfers of funds to the Agency for Electronic Communications and Postal Services, in the amount of EUR 257, (in 2011 transfer amounted to EUR 492,727.99); Transfer to Radio Broadcasting Center, amounting EUR 1,254, (in 2011 transfer amounted to EUR 1,655,446.82), was carried out in respect to assumed debt of broadcasters / electronic media to the Agency for Electronic Communications and Postal Services and Radio Broadcasting Center in accordance with Article 12 Paragraphs 4 and 5 of the Law on Budget of Montenegro for 2011, the Law on budget of Montenegro for 2012, the Conclusions of the Government of Montenegro as of March 10 th, 2011, and pursuant to the Decision of the Commission for State Aid Control number: 01-19/1 as of February 23 rd, 2011, which assessed the Assistance Programme to help broadcasters as compliant with the Law on the Control of Granted State Aid. The Ministry of Culture submitted the application for granting State aid to all broadcasters / electronic media in Montenegro through the Government assistance programme (Letter number as of 20 th January 2011, 05-44/2 as of February 18 th, 2011). Funding for this Programme has been provided by assuming debt of electronic media / broadcasters owed to the Agency for Electronic Communications and Postal Services, generated by fees for the use of frequencies for the period , totalling EUR 1,008,774.08, and owed to the Radio Broadcasting Center, and generated by leasing infrastructure facilities and leasing transmission and broadcasting capacities of radio - signals for the period , totalling EUR 3,438, The total amount of the State aid, accounting for EUR 4,447,639.61, shall be paid over a period of three years, as follows: the amount of EUR 2,148, was paid out in 2011, the amount of EUR 1,512, was paid out in 2012, while in 2013 the amount to be paid out accounts for EUR 787, Transfer of means for repayment of debt assumed of broadcasters / electronic media, in a total amount of EUR 1,512,197.48, was appropriated by the Law on Budget of Montenegro for Recipients of State Aid from Assistance Programmes for broadcasting / electronic media are the broadcasters who are registered and have their head offices in Montenegro; Payments of commissions and fees, which used to be paid in the previous years on the basis of calculation made by CB of Montenegro, have not been executed from this position in the current year. According to the tested sample, payment of commitments arising from debt assumption in the amount of EUR 3,570, was realized in accordance with the Conclusions of the Government of Montenegro from Page 75

76 the current year, and executed from the position 4630 Repayment of commitments from the previous period, as follows: the payment of commitments of PE Water Supply and Sewage Cetinje, for the debt arising from electricity supply bills, totalling EUR 2,690, and the payment of commitments of Dairies Zora AD Berane, totalling EUR 879, These payments do not belong to commitments from the previous period, and therefore could not have been realized from the budget position Recommendations: The budget item Commitments from previous years, records expenditures for outstanding debts from previous years, in compliance with applicable legal regulations and pursuant to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. It is deemed necessary to report expenditures incurred in the current year, up to the agreed sums and appropriated resources, according to the type of expenditure through the corresponding budgetary positions. 4.7 Reserves Current budget reserves funds were projected by the Law on Budget of Montenegro for 2012 in the amount of EUR 8,556, The stated amount was reduced by EUR pursuant to the revised budget, while it was increased according to the decisions on redirection by EUR 11,730,761.47, so that the final budget plan amounted to EUR 20,189, The execution stood at EUR 18,078, or 89.54% of the plan. Table 34 Planning and execution of resources appropriated for Reserves DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,556, ) Reduced by revised budget for , ) Increased by reallocation 11,730, ) AVAILABLE FOR SPENDING 20,189, ) EXECUTED 18,078, ) Executed/available for spending (5 / 4 x 100) Reserves are intended and used for financing urgent and unforeseen expenditures during the fiscal year. In 2012 urgent and unforeseen situations occurred in February as a result of major weather disasters, as well as in September, with the organization of parliamentary elections. However, there is a significant mismatch in planning of these budget allocations in relation to current needs. The problem of planning has been overcome by bringing in a Decision on reallocation of funds from other budget positions. Thus, the allocations for budgetary position Interest to non-residents were reduced by EUR 11,500, and this sum was diverted to current budget reserve, which increased the initially projected amount by 2.38 times. Using the resources of the current budget reserve is regulated by the provisions of Art 33 of the Law on Budget and the Rulebook on Detailed Criteria for the Use of Resources of the Current and Permanent Budget Reserve. Spending of budget reserve funds has been approved by Decisions of the Government of Montenegro, Decisions of the Inner Cabinet of Ministers and Decisions of the Commission for the allocation of part of the current budget reserve funds. The approval for spending has been issued for the purpose of: Page 76

77 provision of insufficient amount of funds for financing regular activities of spending units; assistance to legal entities for financing activities; assistance to individuals (in: medical treatment, education and improving financial situation); other purposes (damage claims due to natural disasters, the allocation of funds for the organization of parliamentary elections, awarding sports federations for the results achieved, disbursement of social programmes to companies and for other purposes). The sample of EUR 15,015, was tested, i.e % of realized expenditure. Based on the inspected sample, the audit determined the following findings: Spending units used the current budget reserve in the total amount of EUR 10,678,978 to fund unforeseen expenditures, as well as for expenditures planned in an insufficient amount. Considering that Article 33 of the Law on Budget provides that the current reserve funds shall be used for emergency and unforeseen expenses, we deem it incompliant with the Law on Budget to fund expenditures planned in an insufficient amount from the current budget reserve. The Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extrabudgetary Funds and Local Governments ( Official Gazette of Montenegro, 32 / 10, 14/11, 16/13), Article 2 prescribes that a spending unit shall submit the Report on Using Current Budget Reserve Funds on the Form 9, along with their Annual Financial Statements. The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority Rights, the General Secretariat of the Government and Department for Protection of Competition have not recognized their consumption in the reports on the use of the current budget reserve, even though they used the funds. Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31 st of the current year for the previous year, a mutual weakness in the functioning of the system of internal controls has been identified. Recommendation: Reporting on the use of current budget reserve funds should be compliant with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Government Units on Form 9 - Report on Using Current Budget Reserve Funds. It has been determined by the audit that, after a conducted public procurement procedure, contractual obligations of the Ministry of Interior Affairs for the purchase of identification documents were paid from the current budget reserve. As the most effective way of funding these procurements, the Ministry of Finance proposed the following: to plan resources for the respective procurement under the current budget reserve for the period , to deliver specification of purchases to the Ministry of Finance before sending purchase orders to the supplier, to deliver copies of invoices received from suppliers to the Ministry of Finance for payment. Page 77

78 The audit has found difficulties in handling these payments by the Treasury officers in respect of reference to clauses from the contracts, as they were not submitted to the respective officers. In addition, uncertified copies of invoices has been submitted to the Ministry of Finance (without the registration seal), which indicates to mutual deficiencies in the system of internal controls. The Law on Public Procurement, Article 39, stipulates that if a public procurement procedure takes several years, the commitments that will become due in the following years must be stipulated in the amounts provided for by the regulations governing budget execution for each particular year. As stipulated by the Law on Budget, Article 31, a spending unit may enter into a contractual commitment, the implementation of which will extend into the subsequent fiscal year, provided that such expenditure is planned for the next fiscal year, i.e. if the Ministry of Finance proposed so. It is deemed necessary to revise the proposal of the Ministry of Finance to assume a commitment on planning and paying expenditures of another spending unit from the current budget reserve, contrary to Article 33 of the Law on Budget, while at the same time it has not provided the appropriate control measures in compliance with Article 9 of the Law on the system of internal controls in the public sector. The described method of budgeting, and therefore the execution of these expenditure, is not in compliance with the provisions of the Law on Budget, Public Procurement Law and the Law on the system of internal controls in the public sector. The audit has found that in accordance with Article 2, Paragraph 2 of the Rulebook on detailed criteria for the use of resources of the current and permanent budget reserve, certain legal entities (economic entities) are granted assistance from the current budget reserve each year for financing their regular activities. Article 4 of the Rulebook stipulates that the funds of current budget reserve for assistance to legal entities in financing regular activities, can be used up to the level determined by the line Ministry, which shall issue an opinion on the adequacy of the application filed. The audit has found that the documentation does not include the opinion of the Ministry on the validity of the request submitted, which suggests that the procedures, laid down in the Rulebook, have not been followed. We deem that Article 2, Item 2 of the Rulebook on Detailed Criteria for the Use of Resources of the Current and Permanent Budget Reserve is not compliant with the Law on State Aid and that a company should address to the relevant Commission in accordance with the Law and the Decree on Detailed Criteria, Conditions and Manner of Allocation of the State Aid ( Official Gazette of Montenegro, 27/10, 34/11). Pursuant to the Conclusions of the Inner Cabinet of the Government, a large number of individuals received payments for various purposes, primarily for medical treatment, education, improvement of financial situation and the improvement of housing conditions. The audit has found that due to the large number of payouts, there has been a number of cases in which payments were executed twice or more times to the same individual, which suggests the existence of a deficiency in the system. We think that the government should provide a certain amount of resources to deal with these requests, while the process of their distribution, on the principle of specific purposefulness, should be left to the competent institutions. The audit has found that the amount of EUR 2,500, was transferred to Electric Power Distribution Centre - Zabljak from the budget reserve for covering the costs of subsidizing electricity to KAP, according to the Conclusions of the Government. These expenditures should have been planned by the Law on Budget for 2012, within the resources intended for payment of subsidies, because they had been defined in the Contract, prior to passing the Law on Budget for Page 78

79 From the current budget reserve a one-time assistance fee, amounting to EUR 500,000.00, has been paid to the Bauxite Mines Union, and a sum of EUR 200, has been paid to RTCG as assistance in paying out severance to employees in RTCG. We believe that those expenditures should have been planned and executed in compliance with the Law on Labour Fund and Article 98 of the Labour Law, via the Labour Fund which provides payment of the outstanding debts to employees which incurred as a result of bankruptcy, if debts are not paid or are partially paid. By its Conclusion /2 as of February 9 th, 2012, the Government of Montenegro adopted the proposal for the allocation of financial and other assistance to local governments for the repairment of disasters caused by extremely bad weather conditions and approved funds from the current budget reserve to municipalities suffering consequences of disaster, for the purchase of fuel. In order to assist in providing a sufficient amount of fuel, the government has assumed an obligation to repay costs to supplier Jugopetrol AD by signing said Cession Agreement on ceded liabilities. In addition, pursuant to its Conclusion /3 as of February 16 th, 2012, the Government adopted the Agreement on donation of 50,000 litres of petroleum products from the donor Jugopetrol AD Kotor, which were distributed by the Commission for Assessment of Damage Caused by Natural Disasters to the following municipalities: Niksic, Pljevlja, Bijelo Polje, Berane, Plav, Rozaje, Zabljak, Mojkovac, Ansaijevci, Kolasin, Savnik, Pluzine and the royal capital of Cetinje. According to Article 10, Paragraph 2 of the Law on Financing Political Parties, all the confirmed electoral lists (13) have been paid off the amount of EUR 22, each, or a total of EUR 298,017.78, which accounts for 20% of the total sum of EUR 1,490,088.89, appropriated by the Law on Budget. In addition to these payments, the examination of the respective documentation confirmed that all electoral lists that won seats in the Parliament (seven electoral lists), have been paid off a portion corresponding to the number of seats won, or 80% of the total amount appropriated by the Law on Budget, which accounts for a total amount of EUR 1,192, The calculating formula for the portion is as follows: EUR 1,192, : 81 = EUR 14, Recommendations: Planning amounts of expenditures for each spending should be aligned with the Law on Budget - Section III Preparation and Planning of the Budget, while the current budget reserve funds are used in accordance with the Law, for urgent and unforeseen needs. Reporting on spending funds of the current budget reserves shall be carried out in accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments on Form 9 - Report on Using Current Budget Reserve Funds. The audit has found that the criterion stipulated by Article 2, Paragraph 2 of the Rulebook on Detailed Criteria for the Use of Current and Permanent Budget Reserve Resources is not compliant with the Law on the State Aid and the Regulation on that a company should address to the relevant Commission in accordance with the Law and the Decree on Detailed Criteria, Conditions and Manner of Granting State Aid, and therefore we deem said criterion should be revoked by the Ministry of Finance, as a relevant authority which adopted it. Page 79

80 4.8 Cash Transactions Treasury The State Treasury has provided cash withdrawals for covering the needs of spending units in the amount of EUR 4,115,459.37, which is by EUR 1,435, or 25.87% less than in the 2011, thus reflecting a significant continuation of cash payments reduction trend. However, the audit of budget spending units included in this year s audit plan found that there are still failures in the following: segregation of finance officers duties, keeping the cash book updated, the efficiency in cash payments, valid documentation of full travel expenses, improper spending, the annual return of advances and the cash count in the treasury Segregation of Finance Officers Duties The audit has established that at the Ministry of Culture, Directorate for Protection of Cultural Property, PI Montenegrin Music Center, the Concession Commission and Water Directorate, separation of duties is not exercised in accordance with Art. 9, Item 2, of the Law on the system of internal financial control in the public sector ( Official Gazette of Montenegro, 73/08, 20/11, 30/12), referring to the segregation of duties in a manner that does not allow the same person to be simultaneously responsible for authorization, implementation, recording and control, and the Instructions on State Treasury Operations - Chapter XIII Advances Travel Orders Documentation The audit has found that the travel orders do not contain all the prescribed documents, that they have not been discharged timely, daily allowances have not been accurately calculated, and in certain cases the advance payments have not been returned to the treasury. By the inspection of a number of cases at the Real Estate Administration, it has been identified that none of the official reports on the business travels had complete information on the calculation of the travel order expenditures (departure and arrival time), the auditors have not been able to determine, in a materially significant amount, whether the daily allowance calculation was correct. In addition, frequent justification of travel expenses for business travels in the country for a period longer than prescribed has also been found and none of the controlled accounts were approved by the director (or any other person authorized to approve the cash account). By examining travel orders and fiscal receipts used for justification of expenses at the Forest Administration, in several cases it has been found that the travel orders have not been filled - no names and surnames of the travel order user and the signature of the ordering party, no date of issue and disbursement and the business travel destination has not been entered. The Orders have been justified by cash bills for business gifts along with accrued daily allowances. Orders have not been accompanied by a report on business travel. The receipts which justify the travel orders in several cases have not been controlled-signed by the ordering party. At the Transport Directorate, travel orders have been processed after the travel was completed in certain cases, and they have not been accompanied by valid documents, such as a Letter of invitation, a Decision on an official business trip, on the basis of which the time spent on an official trip and an associated percentage for the calculation of daily allowances would have been clearly established. At the Ministry of Economy, a travel order has not defined terms on whether the use of official car or own car has been approved in certain cases, and the expenses, calculated and paid, relate to the use of own Page 80

81 car. Particular cases have been identified in which the orders were not accompanied by a report on business travel. At the Directorate for Protection of Cultural Property travel orders are incomplete, i.e. do not contain all the necessary elements prescribed by Article 5 of the Regulation on reimbursement of expenses to Civil Servants and State Employees; in addition, in certain travel orders daily allowance has been calculated contrary to Article 7 of the stated Regulation. At the Administration for Inspection Affairs, travel orders are not always submitted for disbursement within 48 hours after the completion of official business travel, while the reports on business trips are being made within seven days Improper Spending At the Water Directorate, a portion of cash needed for the treasury, amounting to EUR 3,664.66, has been charged against budget item Expenditures on generally important infrastructure, and was spent for travel expenses. This amount should have been recognized at the position 4132 Business travel expenditures. In the Ministry of Agriculture and Rural Development, in order to fund travel expenses and daily allowances, cash has been raised through the treasury from other positions in the amount of EUR 75,914.26, i.e. a total of EUR 75, of funds has been improperly spent. At the Ministry of Culture the payments withdrawn from the treasury, amounting EUR 7,230.36, referred to the IPA - projects. According to General Ledger of the Ministry, the recorded cash amounted to EUR 6, Funds in the amount of EUR 1,000.00, related to the IPA project Cultema, have been recorded as reserved to fund Donations instead of the IPA by mistake, so that the records in the General Ledger differs in the same amount comparing to outlays disbursed from the treasury. The Ministry has submitted a request for correction of the error in the SAP system to the Ministry of Finance, which has not been done. The Concession Commission raised cash for telephone bills expenses in the amount of EUR against the item 4132 Business travel expenses, and it should have been planned and realized at the position Expenditures for telephone service Cash Return The Directorate for the Protection of Cultural Property has not acted in accordance with Paragraph 162 of the Instructions on State Treasury Operations, which stipulates that unspent funds shall be returned to the Main Treasury Account no later than the last day of a fiscal year, i.e. by December 31 st, Cash Count Procedure At the Forest Administration, Water Directorate and the Concession Commission, a procedure of cash count in the treasury on December 31 st, 2012 was not performed, while the Ministry of Economy was not completed a balance of cash assets on bank accounts with commercial banks on December 31 st, In certain cases, the Ministry of Transport, Transport Directorate and Directorate for Protection of Cultural Property made calculations and carried out disbursements of business travel expenses to individuals engaged by temporary service contracts, as well as to persons who were not permanent employees of spending units, but were part of professional teams composed by the Minister's Decision, which was not in compliance with the applicable provisions of the Regulation on Compensation of Costs to Civil Servants and State Employees ( Official Gazette of Montenegro, 57/11) and the General Collective Agreement. Page 81

82 4.9 Materially Significant Irregularities and Recommendations i. The audit has found that a certain number of spending units irregularly submits the IOPPD form to the Department of Public Revenues, which is a monthly report on personal income paid per month, accrued and withheld personal income taxes and contributions payable on and deducted from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid on a regular basis, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies against the paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues. a) Recommendation: Demand all the users of public funds to duly submit the IOPPD Form - a monthly report on paid personal income, accrued and withheld personal income taxes and contributions payable on and deducted from this income for all the employees. ii. The sample-based audit has determined improper spending, contrary to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, with the following spending units: charged against expenditures for material at the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 208,704.82; charged against business travels expenses in the Transport Directorate, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Forestry, Forest Administration and Water Directorate in the amount of EUR 150,485.12; EUR charged against contracted services costs at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, the Concessions Commission, Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 576, charged against capital expenditure in the Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amount of EUR 35, charged against expenditure for repayment of securities to residents in the amount of EUR 16,564, for the Transport Directorate and EUR 740, for Telecom. charged against subsidies paid for redundant labour in the amount of EUR 4,564, c) Recommendation: Make adjustments in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, correcting the reported amount of improper spending identified by the audit. iii. The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority Rights, the General Secretariat of the Government and the Department for Protection of Competition have not recognized their consumption in the reports on the use of the current reserve, even though they used the funds. Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31 st of the current year for the previous year, a mutual weakness of the system of internal controls functioning has been identified. Page 82

83 c) Recommendation: It is deemed necessary to perform reporting on the use of the current budget reserve funds in compliance with the Rulebook on Drafting, Composing and Submitting Financial Reports on Budget, Extra-budgetary funds and Local Governments Units on Form 9 - Report on using current budget reserve funds. iv. As stipulated by the Law on Budget for 2012, projected outlays for redundant employees amounted to EUR 18,100,000.00, which was increased by EUR 849, according to the revised budget plan, and thus determined amount was reduced by EUR , pursuant to decisions on reallocation. In the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, instead of the increase, a decline was presented according to the revised plan of appropriations, amounting to EUR 366, The stated error caused the incorrect data reported by the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, wherein a final plan totalled EUR 16,341,938.16, instead of EUR 17,558, d) Recommendation: Make corrections in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, by the reported amount identified by the audit. Page 83

84 5. CAPITAL BUDGET The Capital Budget for 2012 was initially projected in the amount of EUR 70,185,000.00, the stated sum was reduced by EUR 4,699,900.01, and the final plan amounted to EUR 65,485,099.99, out of which the execution totalled at EUR 58,737, or 10.30% less than planned. Table 35 Planning and execution of resources appropriated for the Capital budget DESCRIPTION AMOUNT (in EUR) 1) Defined by Annual plan for ,185, ) Reduced by revised budget for ,699, ) Increased by reallocation ) AVAILABLE FOR SPENDING 65,485, ) EXECUTED 58,737, ) Executed/available for spending (5 / 4 x 100) The Capital Budget is being executed through the Transport Directorate, as a state body competent for the management, development, construction, reconstruction, maintenance and protection of the state roads of Montenegro, and through the Directorate of Public Works, which performs professional tasks related to the construction and reconstruction of facilities of the primary technical infrastructure, state bodies facilities, facilities in the sector of health, education, culture, as well as sports complexes and facilities located at attractive tourist sites, and other facilities which are of public interest and the construction of which is financed by the State. 5.1 Capital budget - Transport Directorate Appropriations for the Capital Budget of the Transport Directorate for 2012 amounted to EUR 34,200,000.00, this sum was reduced by EUR 1,900, according to the revised budget plan, and pursuant to decisions on reallocation, it was additionally reduced by EUR 700,000.00, so the final plan amounted to EUR 31,600, Appropriations for the Capital budget for 2012 included allocations for the implementation of projects initiated in previous years, as well as for the projects that are going to be implemented during the controlled budget year and the following years. The planned Capital Budget of the Transport Directorate for 2012, totalling EUR 31,600, (allocations for twelve programmes) was executed in the amount of EUR 25,363, (seven programmes), or 19.37% less than planned. The funds realized in the amount of EUR 25,363, have been spent on the following projects: projects that were initiated in previous years, totalling EUR 19,540, or by the rate of 61.84% of the budgeted funds, projects commenced in 2012, amounting to EUR 5,823, or by the rate of 18.43%. The realization of the Capital Budget of the Transport Directorate in 2012 was financed from two sources of revenues: general budget revenues accounting for EUR 23,762, (93.69%), withdrawal of the loan from the EIB, accounting for EUR 1,601, (6.31%). The structure of the planned and executed Capital Budget under the competence of the Transport Directorate, by projects and types of expenditures outlined according to economic classification, is presented in the following table: Page 84

85 Sample % of execution Execution Final plan Reallocated Rebalance Budget plan Expenditure item Economic classification Project classification Table 36- The Plan and execution of Capital budget of Transport Directorate In EUR Appropriations for 2012 Project Adriatic - Ionian motorway project development Contracted services 200, , , Other commissions 72, , Reconstruction of regional and main roads in Montenegro Expropriation of land for construction of motorway Bar - Boljare, road section from Smokovac to Verusa 761 Crossroads reconstruction 766 Landslide mitigation, bridges and slopes, elimination of black spots on regional and main roads Bypass Rozaje Solving the problem of bottlenecks in transport network in Montenegro - port Milena Bridge, Boulevard Bar, bypass around Niksic phase II, bridge on Tara river near Kolasin and bypass Golubovci Investment road resurfacing of regional and main roads Investment maintenance of regional and main roads, oversight, designing, expropriation, revision Construction of tunnel Tifran Construction of third lanes Programme of flood mitigation inn regional and main roads TOTAL Contracted services Expenditures for infrastructure of general importance Contracted services Contracted services Expenditures for infrastructure of general importance Contracted services Expenditures for infrastructure of general importance Expenditures for infrastructure of general importance Other commissions Contracted services Expenditures for infrastructure of general importance Expenditures for infrastructure of general importance Other commissions Contracted services Expenditures for infrastructure of general importance Contracted services Expenditures for infrastructure of general importance Expenditures for infrastructure of general importance Expenditures for infrastructure of general importance 528, , , , ,400, ,400, ,298, ,584, , , , , , , , , ,400, , ,200, , , ,470, , ,270, , , , , , , , , , , , ,500, , ,900, ,000, ,561, ,679, , , , , , , , , , , , , , , , , , ,960, ,200, ,160, ,376, ,339, , , , , , ,601, , ,200, ,900, , ,600, ,363, ,856, Page 85

86 The audit conducted on the Bill of the Final Statement of Accounts of the State Budget of Montenegro for 2012 has also verified the capital projects in the amount of EUR 21,856, or 86.17% of total capital budget execution of the Transport Directorate in 2012, and ascertained the following irregularities: Project 761- Reconstruction of Regional and Main Roads in Montenegro The reconstruction of six sections on main and regional roads in Montenegro, planned under this Project, includes the following routes: Reconstruction of the road Vilusi - Vracenovici; Reconstruction of the road Berane - Lubnice; Reconstruction of a road section Slijepac bridge-tomaševo-pljevlje / section Pavino-polje-Kovren; Reconstruction of the road Vladimir - Sukobin; Reconstruction of the road Kosanica - Bobovo (the Municipality of Pljevlja); Reconstruction of the road Berane Petnjica The Project objectives include better connection of certain undeveloped areas with major main roads and tourist centres, as well as with approaches to border crossings. The estimated value of these reconstructions in 2012 amounted to EUR 10,000, A total of EUR 8,812, or 88.13% of the amount planned was spent for these purposes. The Ministry of Sustainable Development and Tourism adopted a document on new Urban-technical conditions, /1-11 as of February 23 rd, 2011, defining new terms on the width of the roadway to 6.60 m, instead of 6.0 m, which resulted in carrying out additional construction works, according to the Annex I of the Contract /1, concluded on May 8 th, 2012, for construction works on the reconstruction of road Tuzi-Bozaj, in the amount of EUR 279, VAT included, with the new agreed price increased by 14.04% comparing to the initial contract value, thus totalling at EUR 2,267, VAT included, and newly agreed deadline for the completion of construction works, extended to May 20 th, Reconstruction of this route was not foreseen by the Law on Budget for It was concluded by the audit that, due to additional works undertaken on the respective site, the Transport Directorate did not comply with the provisions of Article 38, Article 31 and Article 25, Paragraph 1, Item 4 Indent 1 of the Public Procurement Law ( Official Gazette of Montenegro, 42/11), which stipulates that it is obligatory to act by Amendment to the Procurement plan for 2012, along with the consent of the Ministry of Finance on the provided financial resources, as well as to conduct the negotiated procedure without prior publication of a call for bidding, with previously obtained approval of the competent authority on meeting requirements for its implementation, given that the Transport Directorate had already fulfilled conditions compliant with legal provisions, defined in Articles 25, Paragraph 1, Item 4, Indent 1 of the mentioned Law, which states for public works contracts and public service contracts not included in the contract concluded after the public procurement procedure was conducted, but which, due to unforeseen circumstances, have become necessary to the provision of the services or works described therein, when such additional works or services cannot be technically or economically separated from the original contract without major inconvenience to the contracting authorities, provided that the contract, whose aggregate value may not exceed 15% of the amount of the concluded contract, is concluded with the bidder whose contract is still in force. The amount of EUR 12,300.00, charged to the position of this Project, i.e. against the budget item contracted services, was paid out for remunerations for the participation in the work of the Real Estate Administration Commission, formed for the purpose of the Transport Directorate, and delegated a task of valuation of properties necessary for the reconstruction of regional road R10, Slijepac most Tomasevo Pavino Polje Kovren Vrulja (section: Kovren Pavino Polje Crkvice), in cadastral municipality (KO) Grab, Page 86

87 KO Lekovina, KO Kovren and KO Bliskovo. In addition, the amount of EUR 5, was paid on behalf of the Real Estate Administration Commission, formed for the purpose of the Transport Directorate, and delegated a task of valuation of properties necessary for the reconstruction of the road Berane-Lubnice in KO Pesca and KO Luzac, for the expenses of the expert testimony services. Based on the evidence presented (specification of expert s report and opinion costs with instructions for payment to the members of the Commission, /1 as of December 20 th, 2012, and /1 as of May 31 st, 2012), the audit could not provide assurance of adequacy and validity of payments to individuals who were not employed by the respective spending unit, as well as for an individual who is employed by the audited entity. Given that the auditor neither had an appropriate insight into the documents, nor the required documentation in respect to incurred expenditures was provided to the auditor, this part of control procedure could not have been completed. Project Expropriation of Land for the Construction of the Motorway Bar-Boljare Section from Smokovac to Verusa The work on land expropriation for the construction of the motorway Bar-Boljare, section from Smokovac to Verusa and Matesevo, started in 2009, and was continued in 2010, the year of 2010 was scheduled as timeline for the completion of this work. However, due to undefined construction model of the motorway, the expropriation was not finished during 2011, or in According to the Capital budget for 2012, the appropriations for these purposes amounted to EUR 500, Pursuant to the revision of the Budget, the amount was decreased by EUR 250,000.00, and the execution totalled EUR 159, The audit has ascertained that the funds in the amount of EUR 159,999.99, recorded at the item contracted services and allocated for the Project 764, were spent for other purposes that had not been foreseen by the Capital Budget of the Transport Directorate for Pursuant to the Conclusion of the Government of Montenegro, /3 as of March 15 th, 2012, the amount of EUR 159, from the budget item related to the expropriation of land for the highway Bar-Boljare, was paid into account of the Fund for Pension and Disability Insurance, in order to connect the years of service for the workers of Bauxite Mine AD Niksic, who are beneficiaries of social programmes, and that is not in compliance with Article 11, Paragraph 3 of the Organic Budget Law ( Official Gazette of Montenegro, 40/01, 44/01, 28/04, 71/05, Official Gazette of Montenegro, 12/07, 73/08, 53/09, 46/10, 49/10), which stipulates that no expenditure shall be paid out of the Treasury Consolidated Account unless approved by the Law on State Budget. Project Solving the problem of bottlenecks in the transport network of Montenegro - Port Milena bridge, Boulevard Bar, bridge on the Tara river in Kolasin, bypass around Niksic Phase II and Golubovci bypass. The Project envisages construction works carried out on the construction of Port Milena bridge, the Boulevard at the entrance of Bar, construction of a bridge on the river Tara in Kolasin, bypass around Niksic Phase II and bypass Golubovci Phase III. The appropriations for these purposes amounting to EUR 15,300, were reduced according to the revised budget by EUR 600,000.00, and pursuant to decisions on reallocation, additionally reduced by EUR 1,900,000.00, so the final plan amounted to EUR 12,800, The funds were realized in the amount of EUR 11,034, As the investor, the Transport Directorate concluded a Contract (by call 21/11) on August 30 th, 2011, on the reconstruction of the main road M-2.4- Petrovac-Bar, from km to km (Boulevard Bar), registered therein under the Number /1, with the contract price totalling EUR 3,173,052.46, VAT included and the timeline for completion of six (6) calendar months. The Agreement on co-financing of works on the subject facility, concluded between the Transport Directorate and the Municipality of Bar ( /1 as of February 2 nd, 2011), provided that Transport Directorate shall fund the amount of EUR 2,000, and the Municipality of Bar the remaining amount for the implementation of the overall project. The audit has determined that the Transport Directorate Page 87

88 funded the portion of financial obligation of the Municipality of Bar, in the amount of EUR 1,173, (pursuant to the Conclusion of the Government of Montenegro, /4 as of November 29 th, 2012). Considering that the expenditures incurred as a result of disbursement of funds in the reported amount were not planned by the Capital Budget for 2012, it is deemed essential that the Government of Montenegro draw up an Annex to the Agreement with the Municipality of Bar on regulating the mutual rights and commitments. The Transport Directorate transferred a sum of EUR 293, against the allocation for this Project, the budget item Expenditure on Infrastructure of General Importance, into the account of the Ministry of Finance - Deposit for Expropriation, on the grounds of expropriation of land for the Project of Road Construction Gusinje-Grnčar and the Project of Southern Bypass Plav, as well as for commitments arising from the purchase of land for construction of the Northern bypass Plav, based on the Conclusion of the Government of Montenegro, /3 as of December 6 th, The audit has found that the allocated funds amounting EUR 293, do not correspond to the purposes determined by the Capital budget of the Transport Directorate for Pursuant to the Conclusion of the Government of Montenegro, /3 as of May 17 th, 2012, the Transport Directorate ensured funding for the Project Let s Keep it Clean transferring the amount of EUR 94, from this Project, the expenditure item contracted services to the public utility companies, for salary disbursements to employees in this public sector. The audit sampled transfers amounting EUR 58, against the item of the contracted services, and the same related to the amount paid out for the purpose of the implementation of this Project. The audit has found that the audited subject carried out payments, using the funds allocated for the Project Solving bottlenecks in transport network of Montenegro, against the expenditure item 413-9, pursuant to the Conclusion of the Government of Montenegro, /3 as of May 17 th, 2012, in the amount of EUR 58,676.48, which did not meet purposes planned by the budget. The implementation of the Project Let s Keep it Clean was not planned by the Capital Budget of the Transport Directorate for 2012, which is contrary to the above provisions of Article 11, Paragraph 3 of the Law on Budget. In addition, a sum of EUR 6, was transferred from the Project Solving bottlenecks in transport network of Montenegro, against the item Contracted services, for remunerations for the participation in the work of the Real Estate Administration Commission- Regional Office Niksic, formed for the purpose of the Transport Directorate, and delegated a task of assessing the market value of immovable property in private ownership to be expropriated for the reconstruction of the bypass around Niksic Phase II road route Grebice Vidrovan. Based on the evidence presented, the audit could not provide assurance of adequacy and validity of payments to individuals who were not employed by the respective spending unit, as well as for an individual who is employed by the audited entity. Programme Investment Maintenance of Regional and Main Roads, Oversight, Designing, Expropriation, Audits Appropriations for other remunerations, recorded at the item in 2012, amounted to EUR 240,000.00, with the execution of EUR 167, or 69.82%. Based on the presented accounting records, which served as an evidence of expenditure justification, the audit has determined recording of remuneration disbursements against this item in the controlled period, on behalf of employees engaged in Commissions which were formed in accordance with the needs of the Transport Directorate, in the amount of EUR 158, The audited entity passed a Decision 01-22/2, as of January 9 th, 2008, on determining the remuneration rate for the membership in commissions, project groups, teams and other forms of work, which defines remuneration rate arising from participation in the work of commissions appointed or composed to meet the needs of this state body (Article 6 - Article 9). By passing SAI Decision, the Transport Directorate Page 88

89 exceeded the limits of its competences, given that the terms and conditions, manner of exercising and the costs reimbursement rate and other earnings of civil servants and state employees are regulated by the Government Regulation, as stipulated by Article 19 of the Government Regulation. Namely, the terms and conditions, the manner of exercising and the costs remuneration rate and other earnings of civil servants and state employees are regulated by the Decision on criteria for determining the remuneration rate for membership in working body or other form of labour, passed by the Government of Montenegro ( Official Gazette of Montenegro, 22/11 as of April 29 th, 2011) and the Decision on Criteria for determining the remuneration rate for membership in working body or other form of labour, passed by the Government of Montenegro ( Official Gazette of Montenegro, 26/12 as of May 24 th, 2012, and 34/12 as of June 29 th, 2012). The audit of expenditures on synthetic account other remunerations, confirmed that remuneration disbursements, arising from employees membership in commissions, were carried out without accrued taxes and contributions for mandatory social insurance and surtax for 11 months in 2012, while the remuneration disbursement, arising from employees membership in commissions in December 2012, was carried out with accrued and paid tax and surtax, but contributions for mandatory social insurance were not paid. Recommendation: As stipulated by Article 14 of the Law on Income Tax of Natural Persons and Article 3a of the Law on Mandatory Social Insurance Contributions, earnings of employees, in respect of remunerations for membership in working groups and commissions, are considered to be earnings generated on the basis of labour relation, i.e. corresponding to labour relation and if reimbursed by the same employer, the employer shall be legally obliged to calculate and pay income tax of natural persons and mandatory social insurance contributions. In addition, data on reported disbursements should have been included in unified forms of Reports on calculated and paid income tax of natural persons and mandatory social insurance contributions (IOPPD) and submit them to the Department of Public Revenues within the legally prescribed deadline (by the 15 th of each month for the previous accounting period). Article 1 of the Decision on Criteria for Determining the Remuneration Rate for Membership in Working Body or Other Form of Labour ( Official Gazette of Montenegro, 22/11 as of April 29 th, 2011), prescribes the criteria for determining the remuneration rate for the members of an advisory body formed by the Government of Montenegro and the remuneration rate for the members of work teams, working groups and other types of labour, formed by the President or Vice President of the Government of Montenegro, the Minister or the Head of the other administrative authority. Article 4, Paragraph 1, Item d) stipulates that a work team, depending on the scope, complexity, multidisciplinary and timelines for the execution of delegated task, may be established a compensation rate for the preparation of proposals of by-laws, whose enactment is in charge of the ministry, and for the implementation of public procurement procedures, up to EUR 1, The Government of Montenegro passed a new Decision on Criteria for determining the remuneration rate for membership in working body or other form of labour in 2012, where it reduced the rates for determining remunerations, introduced the issuing approval for establishment of a work team and limited the remunerations to be paid per month, to disbursements payable according to a single-based payment. The Transport Directorate carried out payments against this item totalling EUR 158,050.00, in respect of remunerations disbursed to employees, members of the tender commissions, the commissions for internal technical review and monitoring of conducted construction works, the Commission for the implementation of projects financed by the international financial institutions, the Commission with the task of control and certification of timetables, price lists and itineraries in internal and international road transport, the Commission for drafting the Capital budget of the Transport Directorate for 2013 and other commissions. The audit has found that the employees compensations arising from participation in the abovementioned commissions (with the exception of the Commission for the list of cash count), were paid in amounts exceeding the limit allowed by and laid down in Article 4, Paragraph 1, Item d) of Decision on criteria Page 89

90 for determining the remuneration rate for membership in working body or other form of labour ( Official Gazette of Montenegro, 22/11 as of April 29 th, 2011), i.e. the limit laid down in Article 7, Paragraph 1, Item d) of Decision on criteria for determining the remuneration rate for membership in working body or other form of labour ( Official Gazette of Montenegro, 26/12 as of May 24 th, 2012, and 34/12 as of June 29 th, 2012), which stipulate that the work team may be paid a remuneration up to a maximum of EUR 1,000.00, i.e. EUR for performing assigned tasks. Based on the insight into the documents presented as evidence which justifies monthly payments to employees in respect of remunerations for participation in commissions formed for the implementation of projects financed by the international financial institutions PIU units, it was determined that there was no prior approval of the Government obtained, that each member of the PIU was paid monthly remuneration in the amount which exceeded 50% of the average net salary in Montenegro in the previous year, as well as that the employees who were paid monthly instalments of remuneration based on the participation in the work of PIU unit, also received payment based on other remunerations, which is contrary to the provisions of Article 4, Paragraph 1 and Article 6 of the abovementioned Decision. The provisions of Article 5 of the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour ( Official Gazette of Montenegro, 22/11 as of April 29 th, 2011), or Article 9 of the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour ( Official Gazette of Montenegro, 26/12 as of May 24 th, 2012, and 34/12 as of June 29 th, 2012), stipulate that the remuneration for the engagement in a working team may be exercised for the work performed after regular working hours and outside the scope of regular duties and on the basis of prepared and submitted Report on the activities of the working team presenting the basis for remuneration, which was often not the case at the Transport Directorate, since the working groups were mainly composed for the tasks considered to be regular tasks and duties systemized by the Act on internal organization and job classification. In addition, it was concluded that the Reports on the Activities of Working Teams (at the Commissions for internal review of conducted works and at the PIU units) were not made and submitted, which is not in compliance with Article 5, i.e. Article 9 of the abovementioned Decisions. It was determined by the audit that decisions on composing commissions for internal review of performed construction works and the Projects Implementation Unit, for the projects funded by the international financial institutions - PIU units, do not include timelines regarding a task completion and publishing the Report on activities. Recommendation: It is recommended to the Transport Directorate to act in compliance with Article 55 of the Regulation on Organization and Operation of the State Administration when composing working groups, as well as with the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour, which regulate the manner of composing project groups, teams or other forms of labour. In addition to planning resources and specifying tasks for each member, the Act on composing a project group, team or any other form of labour, should also establish timelines regarding both task completion and publishing the Report on Activities. 774 Tunnel Tifran Construction Project The construction of a tunnel through Tifran has been planned due to the impossibility of landslide mitigation and lessening of the slope in Tifran gorge. According to the Capital Budget for 2012, appropriations for realization of the Tunnel Tifran Construction Project amounted to EUR 2,000,000.00, which was increased Page 90

91 by EUR 1,200, pursuant to the Decisions on reallocation of funds, so the final plan totalled at EUR 3,200, The realization of this Project amounted to a total of EUR 2,393, The payout recorded in the controlled period at the item Expenditures for infrastructure of general importance was carried out following the certified interim status reports, with accrued value of work performed in the amount of EUR 2,339,025.13, for the works undertaken on the construction of the tunnel Tifran, according to the Contract (Call 36/11), dated November 4 th, 2011, the Ordering party registration number /1, and the Contractor registration number 10101/11, with the agreed contract value of works, amounting to EUR 4,442, VAT included, and the timeline for completion of 12 (twelve) calendar months. The audit has determined the payment according to a Prepayment Invoice in 2011, amounting to EUR 444,214.72, which accounts for 10% of the Project value, in accordance with the provisions of Art of the Contract, and following the dynamics of the completed works, the commitments under the Project were paid off in 2012 based on percentual deductions (10%) from the payments to the Contractor. Prepayment invoice 2, registered at the audited entity under the number /1 on September 14 th, 2012, was paid to the Contractor in the amount of EUR 550,000.00, based on the Conclusion of the Government of Montenegro, as of September 13 th, 2012, for the purpose of an advance payment to the sub-contractor, Bauxite Mine AD Niksic, against the item of the capital investments for the construction of Tifran tunnel, which is not compliant with the stated provisions of the Contract, according to which an advance of 10% had already been paid immediately after the conclusion of the Contract in The weaknesses noted in previous years regarding the implementation of the planned Projects, have been repeated in The audit has established the following: Development of the Project Adriatic-Ionian motorway was not initiated in 2012, as it was scheduled, since the construction documentation for the preparation of this project was not completed; Program for the purpose of elimination of bottlenecks in the regional and main roads, this project planned the reconstruction of the following intersections: Jaz, Cetinje, Morinj, Bijelo Polje, Mojkovac and Bar. Due to the delay in delivering project documentation, prepared by Municipalities or in cooperation with the Municipalities, the implementation of these projects was not initiated in Development of project documentation for the reconstruction of intersections Morinj, Cetinje and Bijelo Polje was initiated, and the amount of EUR 29, was paid out of the item Contracted services in respect of the beginning of this project. Due to delay in adopting construction documentation by the Municipality of Rozaje, there were no activities undertaken in the implementation of the Programme: Bypass Rozaje, in 2012; The EIB loan was provided for funding the Project: Investment road resurfacing of main and regional roads. Due to an uncompleted tender procedure, there was no implementation of this Project. The EIB loan was also intended for funding the Project: 755 Construction of third lane. Due to uncompleted project documentation, the implementation of this project failed in Capital Budget Directorate of Public Works Appropriations for the Capital Budget of the Directorate of Public Works for 2012 amounted to EUR 35,985, The revision of the budget reduced this amount by EUR 2,799,900.01, and Decisions on reallocation increased it by EUR 700,000.00, so the final plan amounted to EUR 33,885, A total value of the capital budget execution realized by the Directorate of Public Works in 2012 amounted to EUR 33,374, The amount of EUR 28,954, (86.76%) was financed from the general state budget revenues, while a total of EUR 4,420, or (13, 24%) was financed from loans (provided through the World Bank or the European Investment Bank), including the Project of Emergency Measures and Flood Page 91

92 Prevention, amounting to EUR 3,996,302.34, and the Project of the Real Estate Administration, amounting to EUR 423, The rest of the allocations were not realized due to the following reasons: the construction of regional sanitary landfills and wastewater treatment was not commenced due to unfinished preparation process, i.e. uncompleted procedure of obtaining urban and technical requirements, the failure in obtaining approval of the project documentation, the unfinished revisions, not provided construction permits issued by the future users of landfills and plants, so the conditions for the realization of credit lines were not created; for a certain number of projects where elaboration of project documentation was planned, the same was not performed because the users had not carried out activities preceding the development of project documentation, such as: the provision of urban-planning assumptions, resolving property legal relationship and ensuring the necessary conditions for elaboration of project documentation from the respective institutions; construction of a number of facilities started later than planned, due to provision of the new Public Procurement Law applicable as of 1 st January, and which extended timelines of public tendering procedures. According to the amount of allocations defined by the Revised Capital Budget Plan for 2012, the total sum of EUR 28,114, (82.97%) refers to the projects initiated in previous years, while the amount of EUR 5,770, (17.3%) refers to the planned projects, whose implementation began in Durin 2012, the Directorate of Public Works was carrying out activities by all programs (14 programs) included in the Capital Budget. As for the appropriation for projects whose implementation began in 2012, the execution totalled at about 81%. Page 92

93 Table 37 The Plan and execution of the Directorate of Public Works Capital budget No Project Construction and reconstruction of administrative premises for State bodies Construction, reconstruction and renewing of cultural objects Construction and reconstruction of sports facilities Construction of housing facilities Construction and reconstruction of border crossings Construction of Institute for Execution of Criminal Sanctions facility Construction of local infrastructure Projects of environmental protection Construction and reconstruction of health care facilities Construction and reconstruction of social care facilities 812 -Construction and reconstruction of educational facilities Construction and acquisition of consular mission facilities abroad Emergency aid and flood prevention Law on Petrovic Njegos Dynasty Current expenditures Revised Capital Budget for 2012 Paid by 31/12/2012 Capital expenditures Total Current expenditures Capital expenditures 972, ,399, ,371, , ,931, ,651, , ,975, ,465, , ,551, ,639, , ,383, ,535, , ,055, ,152, , , , , , , , , , , , , , , , , , ,630, ,060, , ,074, ,268, , , , , , , , ,729, ,374, , ,728, ,247, , ,113, ,273, , ,025, ,094, , ,571, ,132, , ,497, ,747, ,000, ,000, ,000, ,000, , , , , ,552, ,996, , , , , , , Total TOTAL 4,083, ,801, ,885, ,682, ,691, ,374, The verification of capital projects amounting to EUR 16,392, in 2012 has been performed by the audit of the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, and there have been no irregularities indicated, except in the part of nominating projects for funding from the capital budget without submitting construction documentation, urban technical conditions and revised project documentation. Based on the established facts, we believe that the audited entity successfully adjusted its organization to the status changes which occurred in the second half of The overall dynamics of operations, the quantity and quality of the audited entity s activities during 2012 were organized and successfully executed along with the activity of the line ministry in conducting the oversight. Page 93

94 5.2 Materially Significant Irregularities and Recommendations iii. According to its Conclusions, the Government has reallocated funds from the Capital Budget to other purposes, not provided for by the Annual Law on Budget. The audit has identified improper expenditures executed by the Transport Directorate from the Project Expropriation of land for the construction of motorway Bar-Boljare, road section from Smokovac to Verusa and Project Solving the problem of bottlenecks in transport network in Montenegro - Bridge Port Milena, Boulevard Bar, bypass around Niksic Phase II and bypass Golubovci. Recommendation: It is recommended to ensure full implementation of the Law on Budget in planning and execution of the Capital Budget, and not to perform any current budget payments against the capital budget account. iv. Despite the fact that the State Audit Institution had already given recommendations that projects for funding from the capital budget shall not be proposed without appropriate planning documentation, urban technical conditions and revised project documents, in the Audit Report on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, the audit has found that the same irregularities were repeated in v. It is also recommended to foresee codes for subprojects within particular projects in the Capital budget of the Transport Directorate and Directorate of Public Works for 2012, which would facilitate the monitoring process of expenses by position and type of origin. Recommendation: Before the adoption of the annual Law on Budget, it is deemed necessary to verify whether the assumptions regarding planning and nomination of specific projects are recognized as realistic. Special attention should be paid to irregularities identified by the audit, which have been repeating over a longer period of time, thus suggesting that a certain number of projects have not been realized due to improperly examined assumptions in part of considering the urban technical conditions, planning documentation and revised project documents. Page 94

95 6. PROPERTY Law on State Property regulates the use, management and disposing with assets and other goods belonging to the State of Montenegro or to the local self-government. The audit on the management of state property, performed in budget spending units included in the audit, has determined that there are still inconsistencies in the implementation of legal standards in respect to keeping records on state property and reporting to competent authority on the condition of the state property. Pursuant to Article 50 of the Law on State Property, the state authorities are obliged to submit the data on movable and immovable assets to the administration authority competent for property affairs in electronic form, for the purpose of keeping the Registry of Immovables, i.e. accounting records of movable assets. The audit has found that activities on the implementation of software for electronic Registry of state property have not been finalized yet. There are cases that budget spending units do not carry out the inventory of assets and do not submit data in accordance with the prescribed forms. At the Ministry of Economy, the Inventory commission did not make the list of cash count (balance) at bank accounts in commercial banks on December 31 st, 2011 and failed to carry out the list of liabilities of the Ministry (class 2 accounts), with the balance at the date of December 31 st, The Concession Commission did not make the list of assets, receivables and liabilities, with the balance at the date of December 31 st, By the completion of performing fieldwork procedure, the Real Estate Administration did not have an adopted Report on the list of assets for 2012 and did not submit the Report on value of the property at its disposal to the Ministry of Finance and Property Administration, in accordance with Article 50 of the Law on State Property. The Inventory commission was formed in the Port Administration, with the task to make an inventory list of fixed assets, immovable and movable property. The Commission prepared the inventory lists, but not the Report on the list of state property with the balance at the date of December 31 st, Pursuant to Article 50 of the Law on State Property, the information on the list of assets of the Administration, with the balance at the date of December 31 st, 2012, were not submitted to the administration authority competent for property affairs, the Property Administration. The Administration for Inspection Affairs has not finished the final inventory of assets yet, because this state authority was established during the year and it overtook the assets from a few bodies. It is deemed necessary for the Administration to harmonize the value of equipment property with the value recorded in the previous user documentation, i.e. carry out the inventory of assets and make the final calculation of depreciation. In accordance with Article 4a of Regulation on Conditions and Manner of Using Means of Transport Owned by the State of Montenegro ( Official Gazette of Montenegro, 21/10, 57/11, 63/12), the Head of the Administration for Inspection Affairs was obliged to determine the number of vehicles necessary for the smooth operation of this state body, in accordance with the Rulebook on the Use of Transportation Means. Said Rulebook, as of 28 th March 2013, governing the manner of using means of transport was presented to the auditors and submitted to the Ministry of Finance. The Ministry of Culture and the Directorate for Protection of Cultural Property carried out the inventory of movable and immovable property, but they neither assessed the property nor provided data on immovable property they disposed of. It was determined that at the Human Resources Administration, the fixed assets amounting EUR 3,178.70, were not specified in the inventory list of assets. The Human Resources Administration did not deliver the inventory lists to Property Administration within the timeframe prescribed by the Law. Page 95

96 The Department of Public Revenues does not have in its possession assets of artistic and cultural value owned by the State of Montenegro, but it uses works of art from PI Museums and Galleries Podgorica on the basis of revert. For works of art which this body uses, the state auditor was not presented an opinion on the value and way of safeguarding issued by the authority competent for protection of cultural property. Water Directorate did not make the list of cash count in the treasury and the list of cash deposits (balance) at bank accounts. The official premises which the Directorate dispose of was not recorded in the inventory of property. It has been determined that the audited spending units do not submit reports on forms prescribed by the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro, passed by the Government of Montenegro, but in accordance with the written note of the Property Administration instead, on a form created by Property Administration. 6.1 Materially Significant Irregularities and Recommendations Recommendations: It is recommended that spending units should keep separate records of movable and immovable property in their accounting, based on valid documentation, in compliance with the Regulations on Unified Classification of Account for the State Budget and Categorizing of Property by Groups and Methods for Determining Depreciation. It is deemed necessary to ensure consistent application of the Law on Property and the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro of Montenegro, in part that relates to the obligation of entering data in the prescribed forms and their submission to the competent government authority - Property Administration. Compose a Report on Inventory in compliance with Art. 11 of the Rulebook on Time Limits and Carrying Out Inventory and Alignment of the Book Value with the Factual State ( Official Gazette of Montenegro 34/09 as of May 29 th, 2009). When it comes to investment and technical maintenance, it is recommended to delegate these tasks to the Property Administration, as defined by the Regulation, given that this state body has organizational, professional and staff capacity to be considered qualified for the mentioned task. More expensive solutions are usually used in practice, such as assigning these tasks to other legal entities or individuals. Page 96

97 7. PUBLIC PROCUREMENT The audit of public procurement procedures carried out by the budget spending units identified still existing omissions, in part of: appointment of a public procurement officer, adopting public procurement plans, compliance with the legal regulations and transparency in the implementation of procedures, the scope and delivery of reports on public procurement, as well as one determined case of the lack of application of the Public Procurement Law. 7.1 Appointment of Public Procurement Officer The Directorate for Protection of Cultural Property, while it operated as an autonomous body of the state administration, did not appoint a public procurement officer, as stipulated by the Article 58 of the Public Procurement Law. 7.2 Public Procurement Plans An unrealistic ratio between planned and realized public procurements has been noticed in certain spending units, which indicates to a conclusion on inconsistent compliance with Article 38, Paragraph 2, Item 3 and 4 of the Public Procurement Law, which stipulates that public procurements plan contains the estimated value of public procurement for each individual subject of public procurement, as well as to timely amend the public procurements plan. At the Compensation Fund, public procurement plan was realized in the percentage of 31.7%; at the Real Estate Administration the realization amounted to 43.70%; at the Ministry of Economy, the amount reached 45.23%; at the Human Resources Administration it amounted to 60%; the Montenegrin Music Centre realized 68.77%. In addition, the audit has found that: the Concession Commission did not, as would be compliant with the Public Procurement Law, draw up the Public Procurement Plan for 2012; The Directorate for Protection of Cultural Property adopted a public procurements plan approved by the Ministry of Finance. However, considering that the Administration did not appoint a Public Procurement Officer, it can be concluded that the Law was not complied with in part relating to the sequence of actions and procedures in the public procurement process. The public procurement officer should have been appointed prior to adoption of the public procurement plan. 7.3 Compliance and Transparency in the Implementation of Procedure Spending units, being bound to act in compliance with the Public Procurement Law, are obliged to conduct the public procurement according to the prescribed procedure and the estimated value of the public procurement, in compliance with Article 20 and 21 of the Public Procurement Law. Sharing a single subject of public procurement during the year and avoiding the application of prescribed procedure of public procurements have been found in the Human Resources Administration, Forest Administration, the Ministry of Economy, Water Directorate, Music Centre and the Directorate for Protection of Cultural Property, which is not in compliance with Article 44, Paragraph 4 of the Public Procurement Law ( Official Gazette of Montenegro, 42/11) and the basic principles of public procurement. 7.4 The Scope and Submission of Reports on Public Procurement The audit has found that the data presented in reports on public procurements do not correspond to the actual spending of budget funds for goods, services and works, which means that all purchases have not been reported in the Annual report. Page 97

98 The audit has found that following spending units: Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Rural Development, Music Centre and the Directorate for Protection of Cultural Property, presented the incorrect Report on awarded public procurement contracts, i.e. that it does not contain information on all the realized public procurements, which is not in compliance with Article 117 of the Public Procurement Law ( Official Gazette of Montenegro, 46/06), which stipulates that the contracting authority is obliged to keep records on conducted public procurement procedures and concluded public procurement contracts. The audit has also identified certain delays in submitting the Report on public procurement to the competent authority, while the Concession Commission did not submit the Report on public procurement contracts awarded for 2012 to the Public Procurement Administration. 7.5 The Lack of Public Procurement Law Application The Montenegrin Olympic Committee (COK) has addressed to the Ministry of Finance with a request to be excluded from the list of legal entities subject to the Public Procurement Law, by referring to Article 2, Paragraph 1, Item 3 of the Law. Given that: COK is not an international organization, COK is on the list of legal entities subject to applying the Public Procurement Law, and that spending of public funds is in question, it is deemed necessary that COK should respect the principle of economy and efficiency of the use of public funds, the principle of ensuring competition and competitiveness of the procedure, as well as the principle of equality, and it should apply the Public Procurement Law. 7.6 Materially Significant Irregularities and Recommendations Recommendations: It is recommended to the spending units, which have not done so yet, to appoint a person for conducting the tasks of a public procurement officer in compliance with Article 58 of the Public Procurement Law and to adopt public procurements plan in compliance with the legally established time limits, with the mandatory submission to the Public Procurement Administration. It is recommended to the spending units to implement public procurement using the appropriate procedure in relation to the nature and the estimated value of the subject of a public procurement, in compliance with Article 20 and Article 21 of the Public Procurement Law ( Official Gazette of Montenegro, 42/11). It is recommended to the spending units to provide that the annual scope of public procurements executed by direct agreement do not exceed the prescribed limit, in compliance with Article 30 of the Public Procurement Law. It is recommended to all the spending units to ensure correct recording of the required data on awarded public procurement contracts and thus enable drawing up of a complete and accurate Report, in compliance with Article 117 and Article 118 of the Public Procurement Law. Page 98

99 PART II SAI REPORT ON THE IMPLEMENTATION OF CONCLUSIONS OF THE PARLIAMENT OF MONTENEGRO ON THE ADOPTION OF THE 2011 LAW ON FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGETS OF MONTENEGRO Page 99

100 Page 100

101 Proceeding from the SAI Recommendation, the Government of Montenegro adopted the Action Plan for the implementation of the Recommendations of the State Audit Institution at its session held on November 29 th, 2012 and assigned the Ministry of Finance to report quarterly to the Government on the implementation of the Action Plan. The State Audit Institution had the insight into the reports for the first and second quarter of 2013, while the third quarter report was not delivered to the State Audit Institution until October 30 th, Based on the responses obtained from the spending units with irregularities identified, in its Report on the implementation of the Montenegrin Parliament Conclusions, the Ministry of Finance structured its quarterly Reports according to recommendations in 14 parts, as follows: 1. Conformity of Audited Entities Business Operations with Regulations; 2. Budget planning; 3. System of Internal Controls; 4. Budgetary Accounting; 4.1. Generating and Recording Revenue; 5. Employment of civil servants and state employees and Human Resources Records; 5.1. Gross wages and other personal income; 5.2. Working Groups; 5.3. Subsidies; 6. Capital Expenditure; 6.1. Housing Policy; 7. Use of the Current Reserve Resources; 8. Improper Spending; 9. Treasury Operations; 10. Public Procurement; 11. State Property; 12. Transactions of financing; 13. Court Expenses and 14. Financial Accountability. After having the insight into the quarterly Report, Audit on the Final Statement of Accounts of the State Budgets for 2012 and other individual audits performed, as well as upon the verification of Recommendations with the audited entity, it has been determined as follows: 1. Conformity of Audited Entities' Operations with Regulations In the course of the audit procedure performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, it has been established that spending units inconsistently apply the statutory obligations and in certain cases, despite previously provided recommendations by the SAI, repeat errors in the implementation of laws and bylaws. Taking this into account, the following recommendation has been issued: Spending units should consistently apply legal regulations in order to ensure conformity of their operations with the applicable legislation, and successful management and improvement efficiency, effectiveness and economical use of public resources. The stated recommendation applies to all the budget users, as emphasized in the Action Plan of the Government. The quarterly Report of the Ministry of Finance states: All the above mentioned budget users have declared that they have fully harmonized their business operations with the applicable laws and adhered to this recommendation of the State Audit Institution. The second quarter Report of the Ministry of Finance has noted: This Recommendation has been adhered to in the first quarter of The audit has determined that 67 budget users declared themselves upon this Recommendation. However, based on budget users audited in the course of the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and individual audits, it has been ascertained that there are still inconsistencies in the application of laws and bylaws. As a result of the foregoing, it has been noted that this recommendation was not implemented, and it is deemed necessary to further insist on the full implementation of such recommendations, as well as on establishing individual responsibility for their violation. Page 101

102 2. Budget Planning It has been ascertained by the audit of the Final Statement of Accounts of the State Budgets of Montenegro for 2011 that budget planning and execution indicate that the budgets of individual spending units have not entirely been based on the factual needs analysis, by structure of expenditure and defined purposes. Budget planning includes written explanation, describing the programme activities and the consolidation of budget demands, programme objectives and programme indicators. According to the Law on Budget for 2011, spending units formally have the programmes, but those programmes do not have the programme indicators, as a tool for monitoring results achieved in the realization of the programme objectives, which is the subject of a separate project that has not been completed and implemented yet. The audit has found that the deficiencies in planning are being addressed to, in a number of cases, by using reallocations that exceed the statutory limits and purposes. Recommendation 1 It is recommended to the Ministry of Finance to carry out activities on the introduction of Programme budgeting in accordance with the Decision on the manner and contents of the Programme budget ( Official Gazette of Montenegro, 38/8 as of June 20 th, 2008). The Government Action Plan has pointed out that the above recommendation refers to the Ministry of Finance and all the line ministries. The quarterly report of the Ministry of Finance claims that this extremely complex process has been brought to a standstill due to the lack of technical assistance provided from some of the Western countries which implemented the programme budgeting, as well as that it has been noticed that the indicators, as elements of the programme budget, are too complicated and that it seems rather difficult to establish a relevant and objective criterion against which the amount of appropriations could be determined, as well as the efficiency of the spent budget resources, which, above all, is the core of the programme budgeting. As a result of the foregoing, it is concluded that the implementation of this recommendation is in progress. Based on the performed audit on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and individual audits carried out by the State Audit Institution, it has been noted that this recommendation was not implemented. Recommendation 2 The Ministry of Finance and other line ministries ought to intensify control over the institutions which carry out administrative supervision, in order to ensure a timely adoption of annual financial plans. Budgetary demands of the Ministries should also include annual financial plans of the institutions within the line ministry and should contain general revenues, earmarked revenues, income generated from regular activities and donations. The Government Action Plan has emphasized that the stated recommendation refers to all the budget users. The first quarter report of the Ministry of Finance has noted that this recommendation was accepted and that the ministries are going to intensify control over the institutions under their administrative supervision in the future. Based on the performed audit on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and individual audits carried out by the State Audit Institution, the progress in strengthening the supervisory function has been noticed, leading to a conclusion that this recommendation was partially implemented. Page 102

103 3. The Internal Control System Improper spending, determined by auditing the Final Statement of Accounts of the State Budgets for 2011, points to a lack of efficiency in the established internal control system, which particularly relates to the authorizing officer, whose signature on the most important instrument of control over expenditure payments the Payment request, should provide payment in accordance with the approved Budget, i.e. a control of earmarked use of funds. State authorities, obliged according to the Law on the System of Internal Financial Control in The Public Sector to Introduce a System of Internal Controls, should ensure consistent application of this Law. It is recommended to the Government to accelerate the process of establishing the internal audit in the public sector, in accordance with the Law on the System of Internal Financial Control in the Public Sector and the Regulation on Establishment of Internal Audit in the Public Sector, in the manner which will allow filling in the missing number of systematized posts for internal auditors. The Government Action Plan has emphasized that the stated recommendation refers to all the budget users. The quarterly reports of the Ministry of Finance have noted that these recommendations were partially implemented. Based on the budget users audited in the course of the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and individual audits, it has been ascertained that there is an ongoing process of establishing internal audit, as well as that a part of internal audit units has become operational. As a result of the foregoing, it has been noted that these recommendations were partially implemented and it is necessary to continue with the activities until their full implementation. 4. Budgetary Accounting Pursuant to Article 21 of the Law on State Audit Institution, the Institution may, in case it has found out that the existing laws produce or may produce negative consequences, or that they do not lead to expected results, give a recommendation on the amendment of the existing regulations. Given that the normative regulation of budgetary accounting includes certain understatements, the SAI recommends the following: Recommendation 1 The principles of efficiency and economy, completeness, accuracy and unique budget classification have to be adhered to in budget preparing and execution, and therefore it is necessary to prescribe additional conditions and manner of keeping business books, records of assets and liabilities, contents of financial reports, drafting, time limits, submission and publication of financial reports. Page 103

104 The Government Action Plan has emphasized that the stated recommendation refers to all the budget users. The report of the Ministry of Finance for the first quarter has stated that all the budget users have declared to follow the principles of efficiency and economy, completeness, accuracy and unique budget classification. Regarding conditions and manner of keeping business books, records of assets and liabilities, contents of financial reports, drafting, time limits, submission and publication of financial reports, these have been prescribed by the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities ( Official Gazette of Montenegro 37/05 and 81/05 and Official Gazette of Montenegro, 2/13), the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments ( Official Gazette of Montenegro, 32/10 and 14/11 and 16/13), and by the Law on State Property of Montenegro ( Official Gazette of Montenegro, 21/09), according to the information of the Ministry of Finance. Taking into account the foregoing and according to the examined findings which resulted from the audit on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and previous audits performed on the Final Account, we deem the reported manner of determined irregularities during budget preparation (planning) and execution, in cases established by auditing, as well as omissions identified in the manner of keeping business books, records of assets and liabilities and presentation of financial statements, presents a way of avoiding responsibility for carrying out obligations by both parties, budget users and the Ministry of Finance. As a result of the foregoing, it has been noted that this recommendation was not implemented and it is necessary to continue with the activities until its full implementation. Recommendation 2 Budget users with their own bank accounts for conducting their financial operations, should adjust their accounting records and enable the records from General Ledgers to synthesize and be posted in the Treasury General Ledger. This would enable adjustment of the accounting records disclosed in periodic reports and final accounts, with the accounting records in the Treasury General Ledger. Control of all the financial transactions would be ensured in this way, as well as the consistency of the accounting records of these entities to budget records, and the risk of mistreatment would be minimized. The Government Action Plan has underlined that the stated recommendation refers to all the budget users and the Ministry of Finance. The quarterly reports of the Ministry of Finance have noted that this recommendation was partially implemented. In the course of the audit on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, the audit of a budget user, the Montenegrin Music Center, has ascertained incompliance of records from the Treasury General Ledger with the records in the General Ledger of the Montenegrin Music Center. Also, individual audits conducted at the Institute for Textbooks and Teaching Aids, and the Center of Contemporary Arts have established incompliance of records from the Treasury General Ledger with the records in the General Ledgers of the mentioned budget users. For the time being, as a way of overcoming the aforementioned deficiency, the financial means of certain budget users, who have accounts with commercial banks, are being recorded within the explanation of the Law on Final Statement of Accounts of the State Budgets, through Statements on generated own revenue and donations, at the following: cultural institutions, educational institutions and public health institutions, and these funds are not included in the Treasury Consolidated Account. Page 104

105 As a result of the foregoing, it has been noted that this recommendation was partially implemented and it is deemed necessary to continue with the activities until its full implementation. Recommendation 3 Due to the complexity of the budget system, financial operation of the users and the accounting system applied in recording operational changes should be more accurately adjusted to the budget needs. As a result, it is recommended to the Government to pass a special Decree on Budgetary Accounting, which would improve procedures in the existing budget implementation. The Action Plan of the Government emphasized that the above recommendation relates to all the budget users and the Ministry of Finance, and that the time limit for its implementation is the first quarter of It has been verified by the quarterly reports of the Ministry of Finance that the implementation of this recommendation is in progress. We have already noted that the implementation of such recommendations requires a cooperation with the Ministry of Finance, as an authority which is, in accordance with Article 45 of the Law on Budget, responsible for internal control and keeping budgetary accounting on behalf of the Government. Based on information collected by the Ministry of Finance, we have ascertained that the implementation of this recommendation is under development, but that the time limit set for its implementation has significantly been exceeded. Recommendation 4 The method of recording the repayment of commitments from the previous period and the data recognized in the Report on Outstanding Debts, does not provide a sufficiently reliable evidential basis, and given that the budgetary accounting system uses the concept of modified cash-based accounting, it is deemed necessary to finally establish a system of higher quality recording of liabilities for all the budget users. The Action Plan of the Government emphasized that the above recommendation relates to all the budget users and the Ministry of Finance, and that the time limit for its implementation is the first quarter of The first quarterly report of the Ministry of Finance states that the The System of quality records of liabilities for all the budget has been set up by a software solution, the Register of invoices received, which has been applied since 1 st, January 2013, and in this respect recommendation was implemented. By carrying out control of this recommendation, it has been identified that the software Register of received invoices has included the following budget users: BUDGET USER Ministry of Justice Ministry of Finance Ministry of Education Ministry of Health Ministry of Sustainable Development and Tourism Ministry for Information Society Directorate for Prevention of Money Laundering Statistical Office Institute of Metrology Employment Agency Protector of Property and Legal Interests Labour Fund SOFTWARE WAS IMPLEMENTED WITH THE PROGRAMMES Administrative service Institute for Execution of Criminal Sanctions Customs Administration Department of Public Revenues Real Estate Administration All programmes All programmes Administrative service All programmes All programmes All programmes All programmes All programmes All programmes All programmes Page 105

106 Considering the outlined coverage of users, we note that this recommendation was partially implemented, and therefore: It is recommended to the Ministry of Finance to continue with the implementation of the software with all budget users, in accordance with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, in order to ensure that the posting to the Treasury General Ledger and to the General Ledgers of spending units is performed in a manner which would enable accurate records of liabilities in the accounts of class 2. Recommendation 5 It is recommended to the Ministry of Finance to amend the Instructions on State Treasury Operation in Items 120, 121, 122 and 123 and Article 2, Paragraph 3 of the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary Funds and Local Governments, as to limit the application of these provisions only to foreign currency accounts. The Action Plan of the Government has emphasized that the above recommendation relates to all the budget users and the Ministry of Finance, and that the time limit for its implementation is the first quarter of It has been noted by the first quarterly Report of the Ministry of Finance that the Instructions on State Treasury Operation and the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary Funds and Local Governments have been properly amended, and the application of the provisions set out in the recommendation has been limited only to accounts for payments abroad. According to the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, it has been noted that this recommendation was implemented Generating and Recording Revenues It has been asserted by the audit of the Final Statement of Accounts of the State Budgets for 2011, that the State Treasury has no adequate control measures developed for supervising the collection of particular budget revenues, as well as that the information system in the Department of Public Revenues does not operate in the manner it is supposed to, in order to meet the business and working standards of the Department of Public Revenues, along with still existing problem of ensuring the adequate staff structure. Recommendation 1 It is recommended to the Government to provide additional funding required for the improvement of human resources capacity and IT system of the Department of Public Revenues, bearing in mind the importance of this state authority and its direct impact on generating budget revenues. The Action Plan of the Government emphasized that the above recommendation relates to the Department of Public Revenues, and that the time limit for its implementation is the first quarter of It has been verified by the quarterly reports of the Ministry of Finance that an independent audit of the information system of the Department of Public Revenues was performed, but that additional resources, required for the improvement of IT system in the Department of Public Revenues, were not provided. According to the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, it has been noted that this recommendation was not implemented and that the time limit set for its implementation has significantly been exceeded. Page 106

107 Recommendation 2 It is recommended to exceed the scope of tax control in the forthcoming period, to legal and natural persons involved in the leasing of real estate to diplomatic and consular authorities and to continue with the control in the part of tax on capital gains at banks and financial institutions. It has been stressed in the Action Plan of the Government that the above recommendation applies to the Department of Public Revenues, and that it should be implemented instantly. It has been verified by the quarterly reports of the Ministry of Finance that the implementation of this recommendation is in progress. According to the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, it has been asserted as follows: the Department of Public Revenues has not started with the control of legal and natural persons involved in the leasing of real estate to diplomatic and consular authorities, so it has been noted that the recommendation was not implemented in this part. The audit has found that the Department of Public Revenues carries out regular control at commercial banks in 2013 and it has resulted in identifying significant corrections in tax liabilities regarding VAT payments, which has justified the recommendations given by the State Audit Institution in the previous period, in respect of conducting inspection oversight of VAT calculation and payment at commercial banks in Montenegro. The State Audit recommends continuous intense inspection control at commercial banks in the future, especially in the part of VAT tax payments, due to incorrect VAT calculation and payment, in order to provide safe and timely inflow of public revenue into the State Treasury. It is noted that in this part, the recommendation was implemented. Given that this recommendation is consolidated, it could be noted that it was partially implemented and its implementation should be continued. Recommendation 3 Consistent application of Article 13 of the Law on Real Estate Turnover Tax is recommended in the collection of real estate turnover tax, whereas the Real Estate Administration notary service submit Decisions on the change of ownership over immovable property to the tax authority in the territory where the immovable property is located. In addition, it is deemed essential that the Department of Public Revenues takes additional measures towards the taxpayers who avoid the legal obligation of reporting the incurred tax liability. The obligations of participants in real estate turnover transactions have been regulated by passing the Law on Real Estate Turnover Tax ( Official Gazette of Montenegro 36/13), and it has been stated that this recommendation was implemented. Recommendation 4 It is recommended to consider the possibility of transferring the real estate transfer tax collection procedure from the jurisdiction of the Department of Public Revenues to the jurisdiction of local self-governments, having in mind that they generated the largest part of the revenue. It is deemed possible to provide data exchange by connecting the municipal server to the cadastre registry server, considering that most of the regional units of the Real Estate Administration are seated in the City Hall, which enables an easy technical feasibility by instalment of the network cable. The exchange of data between the municipality database and cadastral database would complete the municipality database of real estate and allow for the modernization and automatization of the collection of taxes on real estate. Page 107

108 The Action Plan of the Government has underlined that the above recommendation refers to the Ministry of Finance and that it is necessary to do further analysis. The quarterly reports of the Ministry of Finance state that the new Law on Real Estate Turnover Tax ( Official Gazette of Montenegro 36/13) also stipulates that the collection of taxes shall be done by the Department of Public Revenues, and it is not possible to implement this recommendation at the moment, but the Ministry of Finance considers the possibilities for the implementation of recommendations in both the legal and the administrative-technical part. The State Audit Institution accepts the argument of the Ministry of Finance that it is necessary to make amendments to several laws and regulations to create administrative and technical conditions for the implementation of the recommendation. Since the implementation of the above activities requires a longer period of time and the involvement of several government institutions, the fact that it is not possible to implement the recommendation in this reporting period is accepted. Recommendation 5 According to its legal powers, it is recommended to the Ministry of Finance to examine the possibility of consolidation of the income models of the Ministry of Interior Affairs and Police Administration. The audits carried out in the Ministry of Interior Affairs have established that the Central Bank of Montenegro has installed a connector that will allow access to the Ministry of Interior Affairs into the payment system for the execution of interbank transactions by real-time per gross settlement system (RTGS) with the CBM. The Information Technology Service of the Ministry of Interior Affairs - in cooperation with the engaged supplier - has developed a software that will encompass the entire structure of the revenue payment accounts of the Ministry of Internal Affairs. It is expected that after the trial period, the unified income model will become functional during November Based on the foregoing, it has been noted that this recommendation was implemented. 5. Employment of the Civil Servants and State Employees The audit of the Final Budget Accounts for 2011 has found cases of inappropriate or inconsistent application of laws and regulations in respect of the employment of civil servants and state employees, thus continuing with the application of bad practice noted in the previous findings of the SAI and the Conclusions adopted by the Parliament of Montenegro. Recommendation 1 It is recommended to the Government to ensure the consistent application of regulations on employment in the state bodies and to harmonize employment on the basis of temporary service contracts only for performing tasks outside the scope of the regular activities of the employer. Temporary and occasional labour contracts shall be concluded for the jobs which do not require special knowledge and expertise, for the period of up to 120 working days a year, with individuals registered at the Employment Office of Montenegro, i.e. Intermediary Agency. It has been stressed in the Action Plan of the Government that the above recommendation applies to all the budget users, and that it should be implemented instantly. It has been verified by the quarterly reports of the Ministry of Finance that this recommendation is partially implemented. Page 108

109 However, the auditing of the tested sample of budget spending units determined that restrictive employment measures have not been applied consistently. The budget users have circumvented restrictions on employment, they engaged individuals on the basis of temporary and occasional labour contracts and temporary service contracts. More than 400 persons were employed in the state administration during 2012 on the basis of such contracts, as follows: 97 employees in the Real Estate Administration, 89 in the Ministry of the Interior, 71 in the Forest Administration, 45 in the Directorate for Protection of Cultural Property, 32 in the Department of Public Revenues, 24 in the Ministry of Finance, 21 in the Administration for Inspection Affairs, 12 in the Ministry of Economy, 12 in the Ministry of Maritime, 12 in the Ministry of Transport and Maritime Affairs, 12 in the Human Resources Administration, 7 in the Ministry of Culture, 7 in the Games of Chance Administration, 6 in the Ministry of Agriculture and Forestry, 4 in the Water Management, 2 in the Transport Directorate and 1 in the Port Administration. The application of temporary service contract is not regulated by the Labour Law and the Law on Civil Servants and State Employees, whereas the Labour Law (Art. 163) defines the temporary and occasional labour contracts as a special work agreement concluded by the employer for the purpose of performing certain activities that do not require special knowledge and expertise, and, by their nature are such that they do not exceed 120 working days in a calendar year, with a person registered with the Employment Office, i.e. the Intermediary Agency. Based on the foregoing, the employment cannot be based on a temporary service contract, given that it is not in compliance with legal provisions which regulate the issues of employment, and thus it is treated as a misuse of the above regulations. Concluding temporary and occasional labour contracts must be limited to performance of activities which do not require special knowledge and expertise, in the timeline established by the law. Adoption of the Law on Civil Servants and State Employees was carried out in accordance with the Strategy for Administrative Reform in Montenegro, with the aim to provide a numerically reduced, but also professionally more competent and efficient administration. This law regulates the system of employment of civil servants and state employees, promotes the principle of equal accessibility in accordance with the procedures of public advertising and general labour laws. For the purpose of monitoring the implementation of this law, and in order to adhere the objectivity of employment, the law prescribes centralized management of employment procedure in state bodies through the Human Resources Administration. If the employer has the need for engaging persons to perform duties and tasks laid down in the Act on Systematization, it has to be processed by a public announcement, the choice of a candidate and by passing a decision on the fixed term assignment of the employee. Employment on the basis of temporary and occasional labour contracts and temporary service contracts, despite the ban proclaimed, makes the Government measures, adopted with the aim of budget spending restriction, absurd and pointless. Based on the foregoing we note that this recommendation was not implemented, and therefore It is recommended to the Government of Montenegro to apply procedures of employment on the basis of temporary and occasional labour contracts and temporary service contracts in the timelines and cases established by law, as well as to ensure conformity with the determined employment policy. Page 109

110 Recommendation 2 and 3 It is recommended to the Human Resources Administration to provide the input of data and regular updating of the personnel information system, in order to ensure the accurate records necessary for high quality management of human resources. It is recommended to the Ministry of Internal Affairs to intensify supervision over the implementation of the Law on Civil Servants and State Employees. It has been ascertained by the audit conducted at the Ministry of Interior Affairs, that the Department for inspection of the Ministry of Interior Affairs acted upon the request of the Human Resources Administration and carried out the inspection of data input into the personnel information system of the Human Resources Administration for 15 budget users. Due to the extended workload, we note that these recommendations were partially implemented and need to be continuously conducted, with the consequence of calling on accountability for nonperformance Gross Wages and Other Personal Income The audit of the Final Statement of Accounts of the State Budgets for 2011 has asserted that there are cases of inconsistent application of laws and regulations governing the issues of wages and personal income. It has been found that during 2011, the Ministry of Foreign Affairs and European Integration carried out wage calculation and income tax payments, as well as compulsory social insurance contribution, against the gross earnings of employees in the diplomatic-consular representative bodies. The wage calculation at the Police Administration is not fully compliant with the current legislation, since the Police Administration has not yet completed assignment in accordance with the new Regulation on Internal Organization and Systematization, passed in accordance with the Law on Wages of Civil Servants and State Employees and Decision on Increasing Wages of Civil Servants and State Employees for performing particular tasks. Recommendation 1 It is recommended to the Ministry of Foreign Affairs and European Integration to, as soon as possible, execute the revised wage calculation for employees in the DKP for 2011, draw up and submit IOPPD Forms (Report on Calculated and Paid Taxes and Social Insurance Contributions) to the Department of Public Revenues, and execute the alignment with the Department of Public Revenues afterwards, confirming in writing the amount of overpaid social insurance contributions. It is also necessary to include the Ministry of Finance and establish a manner of settling overpaid social insurance contributions with the Department of Public Revenues, with the Ministry as well, in regard to budget planning and records keeping. In the Government Action plan, it has been pointed out that the above recommendation refers to the Ministry of Foreign Affairs and European Integration and the Ministry of Finance, and that it should be implemented instantly. It has been verified by the first quarterly Report of the Ministry of Finance that the Ministry of Foreign Affairs and European Integration changed the wage calculation of the employees of Diplomatic - consular representative bodies for 2011 and submitted the IOPPD Forms to the Department of Public Revenues. Final alignment with the Department of Public Revenues is expected by May 15 th of the current year, due to the alignment of the final balance of accounts for 2012 and a part of The recommendation related to establishing the way of settling overpaid contributions with the Department of Public Revenues was implemented in cooperation with the Ministry of Finance. Page 110

111 The audit performed at the Department of Public Revenues has found that the Ministry of Foreign Affairs and European Integration has not submitted IOPPD Forms since December 2011, with a nominal overpayment of EUR 2,257,394.09, as a result of a failure in submission of the stated forms. Acting upon a request made by the state auditor, the Department of Public Revenues sent out an invitation to the Ministry of Foreign Affairs and European Integration on August 10 th, 2013, in order to align obligations in respect of accrued and paid taxes and contributions. However, this recommendation was not implemented until the completion of the Report on the implementation of Conclusions passed by the Montenegrin Parliament in respect of adoption of the Law on The Final Statement of Accounts of the State Budgets of Montenegro for Recommendation 2 Considering that the Police Administration has become a part of the Ministry of Interior affairs since June 2012, and the new Regulation on internal organization and systematization of posts has been passed, it is necessary to ensure consistent application of regulations when assigning officers in pay grades and determining their coefficients. In the Government Action Plan it has been stressed that the above recommendation refers to the Ministry of Interior Affairs, with the set time limit for its implementation as of December 31 st, The first quarterly Report of the Ministry of Finance has stated as follows: the Ministry of Interior Affairs has confirmed that they will disburse wages under the new Regulation, which is in the course of drafting and expected to be adopted during April 2013, and therefore it has been concluded that this recommendation was implemented. The audit of the Final Statement of Accounts of the State Budgets for 2012 has found that according to the new Regulation on Internal Organization and Systematization of the Ministry of Interior Affairs for 2012, 5301 civil servants have been assigned, whereas 196 employees have not been assigned yet, due to inadequate qualifications. Based on the foregoing, it has been noted that this recommendation was partially implemented and it is necessary to continue with the activities until its full implementation. Recommendation 3 In the forthcoming period, it is necessary to provide a ban on the retroactive effect in respect of disbursement of salaries and other personal income for the laws and regulations in accordance with Article 147 of the Constitution of Montenegro, given that only in exceptional cases certain provisions of the law have a retroactive effect, if required on behalf of the public interest defined in the procedure of passing the law. The audit of the Final Statement of Accounts of the State Budget of Montenegro for 2012 has not determined irregularities outlined in the recommendation, and therefore we noted that this recommendation was implemented Working Groups Based on the audit of the Final Statement of Accounts of the State Budget of Montenegro for 2011, it has been ascertained that the current trend of composing working groups, retroactive application of legislation and discretionary powers are one of the risk indicators that may adversely affect the economy, efficiency and effectiveness of the use of resources, and therefore, the following recommendations have been given: Given that the audit has ascertained a practice of composing working groups according to provisions of secondary legislation acts, whereas, at the same time payments to employees have been suspended, i.e. disbursements based on the variable portion of salaries for outstanding performance and quality of work and on the basis of overtime labour, as Page 111

112 standardized by the Law on Civil Servants and State Employees, it is recommended to the state authorities to apply the principle of rewarding specified by the Law. When composing working groups, spending units should consistently apply Article 55 of the Decree on the State Administration Organization and Operations, as well as the Decision on criteria for determining the remuneration rate for membership in working bodies, teams or other form of labour, which regulate the manner of composing project working groups, teams or other forms of labour. The Act on composition of a project group, team or other form of labour shall specify the carrier, resources, structure of the working group and outline detailed specification of duties per each member, as well as the timelines regarding task completion and publishing the Report on activities. The earnings of employees, in respect of remunerations for membership in working groups and commissions, are considered to be earnings generated on the basis of labour relation, i.e. corresponding to labour relation and if reimbursed by the same employer, the employer shall be legally obliged to calculate and pay income tax of natural persons and mandatory social insurance contributions. It has been underlined in the Action Plan of the Government that the above recommendation applies to all the budget users, and that it should be implemented instantly. The first quarter Report of the Ministry of Finance states: Based on the statement of the budget users, the consistent application of Article 55 of the Decree on the State Administration Organization and Operations, as well as the Decision on Criteria for Determining the Remuneration Rate for Membership in Working Bodies, Teams or Other Form of Labour, which regulate the manner of composition of project groups, teams or other form of labour. The Act on Composition of a Project Group, Team or Other Form of Labour shall specify the carrier, resources, structure of the working group and outline detailed specification of duties per each member, as well as the timelines regarding task completion. In addition, budget users confirmed to calculate and pay the income tax of natural persons and contributions for compulsory social insurance against the earnings of employees, generated on the basis of remunerations for membership in working groups. Based on the foregoing, it can be noted that this recommendation was implemented. However, the audit of the Final Statement of Accounts of the State Budget for 2012 has determined that the Ministry of Finance does not calculate tax, contributions and surtax payable on these payments when it disburses remunerations based on participation in working groups, and it has not complied with the established compensation limits with several working groups. The Administration for Inspection Affairs has duly calculated and paid tax on income of physical persons and surtax on income tax with disbursement of remunerations to civil servants and state employees, but they have not calculated and paid social insurance contributions. The Real Estate Administration has realized payments related to remunerations for the members of the tender commissions and members of the commissions for real estate evaluation, whereas tax and contributions were not calculated. In addition, the audit has ascertained that in cases of engagement on the basis of a temporary service contract and temporary and occasional labour contracts, the Real Estate Administration, Human Resources Administration and the Concession Commission have not paid taxes and contributions. Games of Chance Administration and Directorate for Protection of Cultural Property have paid taxes, but not contributions for compulsory social insurance and surtax in accordance with respective regulations. The audit of the Final Statement of Accounts of the State Budget for 2012 has determined a lesser extent of existing irregularities, related to the composition of working groups (non-payment of taxes and contributions, failure to comply with the set limits in determining the amount of the compensation rate, the lack of or inadequacy of the report on working group activities) which indicates that the noted recommendations Page 112

113 were partially implemented, and it is deemed essential to keep on taking measures in order to establish appropriate oversight Subsidies The audit of the Final Statement of Accounts of the State Budget for 2011 has ascertained the increase in the amount of subsidies in 2011 compared to the previous reporting period, totalling EUR 6,665, During 2011, payments executed against the item - Subsidies included transfers for addressing the problem of redundant employees in AD Zeljezara, AD Radvent and AD Tehnostil, amounting to EUR 16,106, In addition, pursuant to the Government Conclusion, the amount of EUR 1,512, was reallocated to the current reserves, and the payment was made for addressing the issue of redundancies in AD Zeljezara Niksic. It is recommended to the Government to further reconsider the policy of giving subsidies, with a special attention paid to their structure. Providing subsidies and guarantees for borrowings and deferred liabilities to the State in respect of taxes, contributions and social programmes, requires a comprehensive analysis which would help in determining the extent to which the Government would, on the one hand, provide tax benefits to the taxpayers, and on the other hand issue subsidies and guarantees for borrowings to the same taxpayers. It has been emphasized in the Action Plan of the Government that the above recommendations apply to the Ministry of Economy, Ministry of Sustainable Development, Ministry of Agriculture, Ministry of Transport and Ministry of Finance, and that they should be implemented instantly. The first quarterly Report of the Ministry of Finance has stated that the line ministries reviewed the policy of giving subsidies, which was followed by practice of providing subsidies in accordance with applicable regulations. It has also been underlined that When providing subsidies, issuing guarantees for borrowings and deferred liabilities towards the State for taxes, contributions and social programmes, all the aspects, both positive and negative of this type of subsidizing taxpayers should be reconsidered, as well as the possible effects to the State budget. The recommendation requiring a comprehensive analysis of this kind of benefits was fully implemented. It has been identified by the audit of the Final Statement of Accounts of the State Budget for 2012 that the State is still suffering the negative effects reflected to the budget, due to the bad financial situation of entities which were given subsidies and guarantees and thus allowed to defer liabilities towards the State regarding payment of taxes, contributions and social programmes, and we note that these recommendations were only partially implemented and it should be insisted on their implementation in the forthcoming years. 6. Capital Expenditures By auditing the Final Statement of Accounts of the State Budgets for 2011 and carrying out a control of recommendations given in the audit of the Final Statement of Accounts of the State Budgets for 2010, it has been ascertained that a certain number of irregularities in the Capital budget execution has been repeating, and therefore, it has been recommended as follows: It is deemed essential for the Annual Budget Law to provide a more realistic Capital budget planning, transparent description of activities and detailed elaboration of projects per stages, in order to ensure their implementation in the budget fiscal year they have been nominated for. Regarding the projects within the Capital budget which include sub-projects, it is deemed necessary to provide special codes, which would facilitate analytical monitoring and separation of each expense in the Capital budget. Page 113

114 It is deemed essential for the executors of the Capital budget, as well as their competent ministries, not to propose projects for funding from the Capital budget without planning documents, urban and technical conditions and the revised project documentation. It is recommended to the Directorate of Public Works and Transport Directorate to cooperate with the Ministry of Finance in intensifying supervision over the planning and execution of the Capital budget, in order to ensure its execution according to dynamics defined by the Budget spending plan. It is also deemed necessary to provide better reporting to the Ministry of Finance on the level of development in construction of capital facilities and present these data in the Final Statement of Accounts of the State Budgets. The audit of the Final Statement of Accounts of the State Budgets for 2012 has identified the same omissions, but to a lesser extent compared to the previous years, which represents a positive step forward in the execution of the Capital budget. On the basis of the audit conducted at Transportation Directorate and the Directorate of Public Works, it has been noted that the recommendations were partially implemented The Housing Policy Procedures and the manner of addressing the housing needs are governed by Decisions on addressing housing needs of Government officials, i.e. civil servants and state employees. The audit of the Final Statement of Accounts of the State Budgets for 2011 has found that in practice, certain segments of the public sector were not covered by the distribution of resources, i.e. flats, neither in the last, nor in previous years, which indicates of an unequal treatment of employees in the public services. Recommendation 1 Addressing the housing needs should be arranged in such a way that all the employees in the public sector have equal treatment in the exercise of rights in this field, in a manner which will further improve the criteria and procedures, in order to ensure comprehensiveness in the exercise of rights and transparency in the procedure for the award of housing loans, or a residential units. The Action Plan of the Government has emphasized that the above recommendation applies to all the budget users, with the set time limit for implementation on December 31 st, The quarterly Reports of the Ministry of Finance have reported on the prepared Proposal of Decision on addressing housing needs of civil servants and state employees, but that a Bill on amendments to the Law on Housing and Maintenance of Residential Buildings has been adopted meanwhile. We would suggest considering the possibility of postponement of Decision until the adoption of the said Law in the Assembly of Montenegro. Based on the foregoing, it has been noted that this recommendation in the process of implementation, but significantly goes beyond the time limit for its implementation. In addition to a total amount of financial resources, indicated in the Annual Budget Law for addressing the housing needs, it is deemed necessary to transparently emphasize the number of housing units which would be subject to distribution in the coming fiscal year in the Explanation of the Annual Budget Law. Page 114

115 The Action Plan of the Government has emphasized that the above recommendation applies to all the budget users, with the set time limit for implementation on December 31 st, The quarterly Reports of the Ministry of Finance have reported that it is not possible to implement the recommendation, because the Budget Law refers to a financial plan, based on an estimate of receipts and expenditure and therefore it is impossible to include issues, such as, which housing units will be the subject of distribution. The State Audit Institution deems the implementation of this recommendation possible. If the number of housing units to be built is planned, we believe it seems logical to know the actual construction costs. Based on the above we note that this recommendation was not implemented. 7. The Use of Current Reserve Funds The audit on the Final Statement of Accounts of the State Budgets for 2011 has ascertained that the criteria, referred to in Article 2 of the Rulebook on detailed criteria for the use of current and permanent budget reserve, are not sufficiently developed, thus leaving a lot of room for a different interpretation in certain cases, as determined by the audit. It is recommended to the Ministry of Finance to closely specify criteria for the use of current and permanent budget reserve funds, by modifying Article 2 of the Rulebook on detailed criteria for the use of current and permanent budget reserve funds, in order to ensure consistent application of Article 33 of the Budget Law, and to use these funds only in cases of emergency and unforeseen expenses. Based on the finding reported in the audit on the Final Statement of Accounts of the State Budgets for 2012, we note that this recommendation was not implemented. 8. Improper Spending The audit on the Final Statement of Accounts of the State Budgets for 2011 has found that the structure of certain expenditures, recorded at the Ministry of Foreign Affairs and European Integration, the Ministry of Economy, the Ministry of Finance, the Ministry of Health, the Ministry of Science, the Police Administration, the Real Estate Administration, the Agency for Environmental Protection, the Protector of Property and Legal Interests of Montenegro, the Institute for Textbooks and Teaching Aids and the Transport Directorate, does not correspond to factual executed budget spending. Spending units should carry out payments of expenditures that correspond with the purposes outlined in the budget, along with the obligation of the Ministry of Finance to control the payments and thus ensure fiscal discipline and the proper use of funds. The sample-based audit on the Final Statement of Accounts of the State Budgets for 2012 has ascertained improper spending, contrary to the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, with the following spending units: - charged against expenses for material at the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 208,704.82; - charged against business travels expenses in the Transport Directorate, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Forestry, Forest Administration and Water Directorate in the amount of EUR 150,485.12; EUR Page 115

116 - charged against contracted services costs at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, the Concessions Commission, Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 576, charged against capital expenditure in Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amount of EUR 35, charged against expenditure for repayment of securities to residents in the amount of EUR 16,564, for the Transport Directorate and EUR 740, for Telecom. - charged against subsidies provided for redundancies in the amount of EUR 4,564, Based on the above, it is noted that this recommendation was not implemented. 9. Treasury Operations The audit has identified certain irregularities when it comes to cash management and treasury management of spending units, i.e. in certain cases the separation of duties has not been performed, or there have been omissions in justification of travel expenses, different bills, and alike. In order to prevent errors and a possible misuse of the available financial resources, in accordance with Article 9 of the Law on Public Internal Financial Control System in the Public Sector, it is deemed essential to perform segregation of duties, which would prevent one person being, at the same time, responsible for authorizing, execution, recording and control, by amending the Regulation on Internal Organization and Systematization in the spending units. It is recommended to spending units to execute cash payments on the basis of fiscal bills, and to submit special reports on business trips, along with the bills for justifying travel expenses. Pursuant to Article 162 of the Instruction on State Treasury Operations, the spending units are obliged to return the unspent funds to the Treasury Main Account, until the last day of the fiscal year. It is recommended to the Ministry of Finance to cooperate with the Ministry of Interior - Department for safeguard and protection tasks and supervision, and prescribes additional internal procedures in accordance with Art. 84 and 85 of the Instruction on State Treasury Operations, in order to safeguard cash during its physical transfer. The sample-based audit of the Final Statement of Accounts of the State Budgets for 2012, conducted at the budget spending units included in the auditing, has identified still existing omissions in the following: segregation of finance officers duties, keeping the cash journal updated, the efficiency in cash payments, valid documentation of full travel expenses, improper spending, the annual return of advances and the cash count in the treasury. In conclusion, the same omissions have been determined, but to a lesser extent compared to previous years, which represents a positive step forward in the treasury operations. Based on the foregoing, it is noted that these recommendations were partially implemented. Page 116

117 10. Public Procurement The audit of Final Statement of Accounts of the State Budgets for 2011 has ascertained numerous irregularities in the implementation of the Public Procurement Law, which exist and keep on repeating at a larger number of controlled entities. Unrealistic public procurement plans, lack of transparency of the implementation of procedure, the failure in appointing a public procurement officer, sharing the subject of public procurement and incomplete reporting are the major characteristics of the previous and current system of public procurement. It is deemed necessary for all the spending units, particularly those with irregularities determined, to appoint a person in capacity of a Public procurement officer. Public procurement should be conducted by using the appropriate procedure in relation to the nature and estimated value of the subject of public procurement. Sharing a single subject of public procurement should be avoided and accurate recording of required data on awarded public procurement contracts should be provided. With the aim of consistent application of the Public Procurement Law, spending units should undertake activities for enhancing their own public procurement procedure and adopt written guidelines which will further regulate this process, in accordance with Art. 8, 9 and 10 of the Law on Public Internal Financial Control System. The sample-based audit of the Final Statement of Accounts of the State Budgets for 2012 in respect of public procurement procedures, conducted at the budget spending units included in the auditing, has identified still existing omissions in the following: appointing public procurement officer, adopting public procurement plans, compliance with regulations and transparency in the implementation of procedures, the scope and delivery of reports on public procurement, as well as one determined case of the lack of application of the Public Procurement Law. Based on the foregoing, it is noted that these recommendations were partially implemented. 11. Public Property The audit of the Final Statement of Accounts of the State Budgets for 2011 has ascertained that some of the individual budget users have not made the inventory of assets and liabilities at the end of the fiscal year, they have not aligned the bookkeeping records and the factual (inventoried) state of facts, asserted and explained any potential discrepancies, as well as that the Property Administration has not established the Register of state property in accordance with the Law on State Property. Recommendations 1 and 2 As stipulated by Article 17 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro, the Ministry of Finance and Property Administration, in cooperation with the Ministry for Information Society should complete the activities related to the procurement of software for electronic Registry of the state property and enable its functioning. Pursuant to Article 50 of the Law on State Property, state authorities should promptly submit to the Property Administration all the data on movable and immovable state-owned assets, in order to create high-quality databases and enable the input into the electronic Registry of state property. Page 117

118 The Action Plan of the Government has underlined that the first recommendation refers to the Ministry of Finance, the Property Administration and the Ministry for Information Society, with the set time limit for its implementation as of July 1 st, 2013, whereas the second recommendation relates to all the budget users, with the set time limit for its implementation as of the first quarter of In 2013, the State Audit Institution conducted a cross-section audit on disposition of public property which has been integrally published on the website of the Institution. Based on the performed audit, we note that these recommendations were not implemented. Recommendation 3 Given that spending units do not use the capacities of the Property Administration in performing tasks of the public property maintenance, we deem it purposeful to prescribe the obligation of utilization of the Property Administration property within current and investment maintenance of facilities, or obtaining a consent to delegate this task to another entity, if specificity and scope of the subject tasks go beyond professional, HR and financial capacities of this Administration. The audit on the Final Statement of Accounts of the State Budgets for 2012 has ascertained that this recommendation was not implemented. 12. Transactions of Financing The audit of the Final Statement of Accounts of the State Budgets for 2011 has identified a significant increase in the amount of liabilities based on external (foreign) debts in the controlled period, which led to an increase in public debt in 2011, and there is a potential risk of converting state guarantees into the public debt, in case of their repayment. The Ministry of Finance should arrange for the reconciliation of its liabilities to foreign creditors at least once a year and, for the purpose of possible entering into new loan arrangements, the Ministry should make regular analysis of debt sustainability, particularly in respect of new debts, with an emphasis on benchmark interest rates fluctuation. The audit on the Final Statement of Accounts of the State Budgets for 2012 has noted that this recommendation was implemented. Based on performed audit of the Final Statement of Accounts of the State Budgets for 2012, it has been noted that there were payments made in 2012 in respect of guarantees issued, as follows: on behalf of Crnogorska komercijalna Bank, for the beneficiary Jadransko brodogradiliste ad Bijela, in the amount of EUR 1,292,092.45, and on behalf of Deutsche Bank, for the beneficiary Aluminum Plant ad Podgorica in the amount of EUR 23,427, On July 12 th, 2013, the Government paid off the amount of 59,356, to the VTB Bank, on behalf of the Aluminum Plant ad Podgorica, the state guarantees beneficiary. Although it has been confirmed that the amount of issued guarantees was reduced and that the guarantees are being issued for projects of public interest. However, we deem it necessary to insist on the implementation of this recommendation in the forthcoming years, as well. Based on the foregoing, it is noted that this recommendation was partially implemented. Page 118

119 The Government is recommended as follows: - to issue state guarantees primarily for priority projects of interest to the general socio - economic and regional development of the State; - to issue state guarantees in order to support the state economy, to those economic entities whose financial statements and business policy can guarantee the orderly settlement of loan commitments; - state guarantees are not to be issued to those economic entities which will use them for covering current expenses or operating loss; - to develop additional criteria for defining the manner of issuance and collateral when making a decision on the issuance of state guarantees 13. Court Rulings Expenses The audit of the Final Statement of Accounts of the State Budgets for 2011 has ascertained that the Ministry of Finance has not provided the application of Article 13 of the Law on Budget of Montenegro for 2011, which stipulates that the total amount of payments, arising from court rulings, are to be executed against the current budget of a spending unit which caused these expenses, up to the limit of available resources. Given that the amount of payments, arising from disbursements based on court rulings is increasing, it is deemed necessary for the Ministry of Finance to regulate through the system that disbursements based on court rulings are executed and charged against the current budget spending units that caused them. The Ministry of Finance implemented this recommendation in However, the audit of the Final Statement of Accounts of the State Budgets for 2012 has found that the overrun in budget spending has mainly resulted from the expenditures incurred due to enforcement of court rulings. However, the audit has ascertained that the amount of EUR 1.36 million represents the current expenditure (only in this amount the Ministry has reported increase and reduction of liabilities for the execution of expenditures based on enforcement of court rulings). Current expenditures should have been used for this amount of payment, including: transfers to individuals and / or the current budget reserve. 14. Financial Accountability The audit on the Final Statement of Accounts of the State Budgets for 2011 has found that the systemic Budget Law does not contain penalty provisions against the budget users and executives, in case of improper acting in planning, execution, and reporting in the budget procedure. With the aim of ensuring regularity in the application of laws and regulations governing the operations of the state bodies, it is recommended to the Government to consider the possibility of passing regulations which would regulate the financial accountability of the holder of public legal powers, as well as misdemeanour accountability for the budget users and executors. The Government of Montenegro - Ministry of Finance has fulfilled its obligation to prepare the Budget and Fiscal Accountability Bill, and as far as this is concerned, the recommendation was implemented. However, due to the importance of the solutions proposed in this Law, involving the recommendations of the SAI from the previous period, we deem it necessary to speed up the procedure of its adoption. Page 119

120 15. Concluding Remarks Regarding Verification of Implementation of the Montenegrin Parliament Conclusions Adopted Following the Report on Audit of Final Statement of Accounts of the State Budgets for 2011 Based on the audit performed on the Final Statement of Accounts of the State Budgets of Montenegro for 2012, individual audits and control of the recommendations included in the Conclusions of the Parliament of Montenegro, adopted following the Report on Audit of the Final Statement of Accounts of the State Budgets for 2011, the SAI notes that following the adoption of the Action plan, considered and discussed by the Government at its sessions during the two quarter periods, the system of monitoring of implementation of recommendations issued by the SAI has been improved. However, at the same time it should be specified that, out of a total number of recommendations, 7 (seven) were fully implemented, 25 (twenty-five) were partially implemented and 12 (twelve) were not implemented. A total of 2 (two) recommendations have been developing, whereas 1 (one) recommendation could not have been implemented within the reporting period. Page 120

121 PART III EXCERPTS FROM THE FINAL AUDIT REPORTS ON INDIVIDUAL AUDITS PERFORMED IN THE PERIOD OCTOBER OCTOBER 2013 Page 121

122 Page 122

123 EXCERPT FROM THE AUDIT REPORT ON STATE GUARANTEES OF THE GOVERNMENT OF MONTENEGRO ISSUED IN 2010 AND 2011 Type of audit: Audited entity: Cross-section audit and compliance audit Government of Montenegro Ministry of Economy, Ministry of Finance and Commission for State Aid Control Subject of audit: State guarantees of the Government of Montenegro issued in and 2011 Audit duration: Collegium members: 120 auditing days Mr Milan Dabovic, PhD, President of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 123

124 Page 124

125 BASIC ELEMENTS OF AUDIT 1. Legal Basis for Performing Audit The legal basis for conducting the audit on the State guarantees issued by the Government of Montenegro in 2010 and 2011 is contained in the following documents: Constitution of Montenegro, Article 144 of the Constitution ( Official Gazette of Montenegro, 01/07); Law on State Audit Institution, Articles 4 and 7 ( Official Gazette of Montenegro, 28/04, 27/06 and 78/06 and Official Gazette of Montenegro, 17/07); Annual plan on audits of the State Audit Institution for 2011 and 2012; Decision passed by Collegium on conducting the audit on the State guarantees issued by the Government of Montenegro in 2010 and 2011 ; Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, 50/07); International Auditing Standards for Public Sector (ISSAI). 2. Audited Subjects The audited entity is the Government of Montenegro, i.e. Ministry of Economy (the donor of the Government aid - Guarantee) authority responsible for: the transition of the economy; structural adjustment of the economy; initiating, establishing and evaluating programmes of transformation and reporting on assessing value of enterprises, with a methodology of assessment and giving or denying consent to this process; monitoring agreements with advisors for privatization for the purposes of the Privatization Council and tender commissions; monitoring and studying conditions of operational activity and the economic position of entities from the jurisdiction of the Ministry; supervision and implementation of the subject Conclusions of the Government. Ministry of Finance - Authority responsible for: preparation, planning, budgeting and execution of the budget of Montenegro; fiscal impact; supervision of generating revenues and executing budget expenditures; proposing guidelines and medium-term macroeconomic framework for the preparation and planning of the budget; execution, modification and evaluation of the budget with requirements analysis of spending units; managing debt arisen from the guarantees issued and borrowings taken; signing contracts on issued guarantees; administrative supervision; implementation of the Government Decision on indebting and issuing guarantees, the implementation of the underlying Conclusions of the Government, etc. State Aid Control Commission - authority responsible for: controlling compliance of notified state aid (previous control); control of compliance of awarded state aid and the intended use of assistance granted (subsequent control), in accordance with the Law on State Aid Control. 3. Subject, Objective, Scope and Type of Audit The subject of the audit are guarantees issued by the Government of Montenegro in 2010 and 2011, i.e. acts and actions made by the Ministry of Finance, Ministry of Economy and the State Aid Control Commission for granting state aid, for the purpose of issuing government guarantees. Page 125

126 The respective audit has the character of a cross-section and compliance audit (regularity). The audit objective is to examine compliance of the audited entities operations with the applicable laws and subordinate legislation, governing the field of issuing state guarantees. The subject audit encompasses all the guarantees issued in 2010 and 2011, in the amount of over EUR 10 million. Accordingly, the audit has included guarantees of the Government of Montenegro issued to the following beneficiaries of government guarantees: - KAP a.d. - Podgorica; (Aluminum Plant) - Zeljezara a.d. - Niksic; (Montenegrin Steel Mill) - "Railway infrastructure of Montenegro" A.D. - Podgorica; - Railway transport of Montenegro a.d. - Podgorica, and - Pobjeda a.d. - Podgorica. THE ATTITUDE OF AUDITED ENTITIES TOWARDS THE AUDIT PROCEDURE The audited entities have not fully honoured the provisions of Article 10 of the Law on State Audit Institution, which refers to the obligation of audited entities to submit relevant documents for the review and provide information, which made the work of state auditors more difficult, and resulted in exceeding the timelines for the completion of the audit, set out by the Detailed plan of audit, adopted by the Collegium of the SAI. The SAI has addressed to the Ministry of Finance by an official request (Off. letter SAI / 2 dated February 15 th, 2012) to submit the translated copies of the Loan Arrangements and Guarantee Agreements on state guarantees approved thereto for a review. As the same was not responded to by a letter, (the SAI : /12 dated March 12 th, 2012), the Institution sent an urgency reminder for immediate submission of the Loan Arrangements in official language, Guarantee Agreements on state guarantees approved thereto, and other supporting documents, in accordance with Article 10 of the Law on the SAI. The requested documentation was not delivered to the SAI for a review until April 12 th, 2012, and thereafter, the most part of it was handed over to the state auditor. On April 17 th, 2012, the state auditors conducted an interview in official premises of the Commission for State Aid Control, with responsible individuals in the Commission and officials of the Ministry of Finance who provide professional support to the Commission, and it was agreed to make copies of the rest of the required documentation as soon as possible. The SAI was informed during the interview that the basic documents were in the Ministry of Economy, i.e. the following: Sales Agreements, Annexes to the Agreements, Proposal to the Government on granting state aid, Requests Plans on debt restructuring, Reports on the implementation of restructuring programmes, Reports on granted state aid, Opinions on justification for providing guarantees. The stated documentation was requested from the Ministry of Economy by the SAI s Letter ( : /16 dated May 4 th, 2012), but the same was not responded to. Accordingly, the SAI sent an urgent reminder to the Ministry of Economy ( : /18. dated May 18 th, 2012) along with the request for an immediate submission of documents, necessary for the audit of the state guarantees issued for loans granted to beneficiaries Aluminum Plant KAP and Steel Company Niksic. On June, 29 th, 2012, after having an urgency reminder sent along with several verbal requests in the course of audit on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, as well as after the auditors had conducted interviews with responsible officials in the Ministry of Economy when they Page 126

127 handed over all the copies of requests and urgency reminders sent over the period of time, the SAI received most of the requested documents. The following requested documents were not submitted to the SAI until the completion of the audit procedure: a) The Request for granting state aid, made by KAP; b) External and internal expert analysis and assessment of the financial situation of the KAP and Zeljezara Niksic, the capacity of these entities to repay debts, and evaluation of economic sustainability of the submitted Programmes of financial restructuring, on the basis of which the granting of state aid to KAP and Zeljezara had been proposed. Note: During the negotiation, in a letter dated April 15 th, 2013, the Ministry of Finance stated that it had no legal or any other obligation to draw up these types of documents. c) Report of the Ministry of Economy on the implementation of the restructuring programmes of KAP and Zeljezara, the aims accomplished and earmarked use of the state aid. Until the completion of the audit procedure, the state auditors were not provided the insight into the following documents which the Ministry of Finance failed to submit: a) The Request submitted by the KAP and Zeljezara to the Ministry of Finance for the issue of state guarantees for loans, with enclosures; b) The Report of the Ministry of Finance sent to the Government on the purposefulness of issuing state guarantees for loans of KAP, for the guarantees issued in 2009; c) An assessment of the fiscal impact of the Loan Agreements and Guarantees of the loans of KAP and Zeljezara, to the budget, which should have been made according to the Guidelines for Fiscal Impact Assessment to the Budget ("Official Gazette of Montenegro", 87/09); d) An assessment of fiscal risk to the budget, arising from issuing state guarantees to KAP and Zeljezari 9 ; e) The Opinion of the Ministry of Finance following the Request of the Ministry of Economy for granting the state aid to KAP (with guarantees on loans) and Zeljezara, as well as the Assessment of fiscal impact of the stated Request to the state budget. The Commission for State Aid Control duly submitted all the requested documentation, which was in the possession of the Commission, to the SAI. 9 Note: In the negotiation procedure, the Ministry of Finance made a statement by a letter dated April 15th, 2013, that.stated regulations could not be applied in the particular case, and therefore the estimation was not made. Page 127

128 DETERMINED FACTUAL STATE 1. State Guarantees Issued for the KAP-Aluminum Plant Podgorica a.d. - Podgorica On November 16 th, 2009, the Government signed a Settlement Agreement with the CEAC Holdings Limited, En + Group Limited, "Aluminium Plant" ad Podgorica and "Bauxite Mine" AD Niksic (RBN), which made the Sales Agreement of "KAP" from 2005 null and void, and committed to providing 5 state guarantees for KAP, totalling EUR 135,000, Commission for State Aid Control subsequently passed the Decision ( 01-35/1) dated November 24 th, 2009, which assessed the Financial restructuring programme, submitted by KAP to the Ministry of Economy (as state aid donor), compliant with the Law. At its session held on December 12 th, 2009, the Government passed the Conclusion ( /2), according to which the amount of EUR 92,817, of KAP s debt to the State of Montenegro was written-off (out of which EUR 8,000, of unpaid income tax), the amount of EUR 5,000, was allocated for a social programme, a total of EUR 60,000, on the basis of subsidies for electricity, and state guaranties in the amount of up to EUR 135,000, Pursuant to the same Conclusion, the liabilities to the State of Montenegro, in respect of unpaid taxes and contributions, amounting to EUR 8,800,000.00, were deferred. The audit performed on State guaranties of the Government of Montenegro issued in 2010 and 2011, in part related to state guaranties provided to Aluminum Plant a.d. Podgorica 10, has ascertained as follows: 1) The audited subjects have not been sufficiently applying normative provisions which prescribe procedure for granting loan guarantees to KAP; 2) The audited subjects have not presented their own analysis of the financial situation in KAP, the analysis of the economic sustainability of the Programme of financial restructuring of KAP, the lack of credit risk assessment and corresponding study of costs and benefits, as well as the assessment of the possible consequences of issued state guarantees activation, to the state budget. The audited subject deliberated on the stated facts "that it had no legal obligation of drawing up these documents"; 3) The facts and figures presented in the financial statements of KAP, as well as the audit reports of commercial auditors, warned about "accumulated losses, deep indebtedness and obvious uncertainty regarding the repayment of commitments arising from loans taken, on the basis of its regular operations. 4) The Settlement Agreement from 2009 asserted that by committing to provide loan guarantees to KAP, amounting to EUR 135,000, (issued EUR 131,680,000.00) without corresponding counterguarantee in its favour, 11 the Government took a significant risk of being faced with the guarantees activation. 10 Note: The audit covered the Guarantees issued in 2009 (v. pg. 5, 11 and 12 of the Report). 11 CEAC has given all its shares in KAP as collateral in RBN, aggregate nominal value EURi 22,185, (pursuant to Art. 10, Item 2 of thesettlement Agreement from 2009). Page 128

129 2. State Guarantees Issued for Zeljezara Niksic a.d.- Niksic 1) The audit carried out at the audited subjects Ministry of Economy, Ministry of Finance and the Commission for State Aid Control has determined the following: When providing the state guarantees to "Zeljezara Niksic" a.d., the following aspects were not considered in details: economic indicators of business operations of "Zeljezara Niksic" ad, commercial auditor s findings, obvious, accumulated debts (especially towards the State in respect of unpaid taxes and contributions), accumulated losses for the period , (amounting to over EUR 120 million), trends in the global steel market, as well as the fact that the Government of Montenegro had already paid the debts of "Zeljezara Niksic" ad based on given loan guarantees. The State of Montenegro assumed a significant portion of commitments of "Zeljezara Niksic" a.d according to the Guarantee Agreement, signed on July 31 st, 2009, between Blue Bay Multi - Strategy Investments (Luxembourg) and the Ministry of Finance of Montenegro, and subsequently paid EUR 1.62 million, which were converted to equity (shares), (which had not been envisaged by the Guarantee Agreement). In our opinion, the aforementioned circumstance should have been particularly valued in case of this economic entity, when concluding a new loan agreement with the Suisse Bank. 2) The Government has concluded the Guarantee Agreement with Credit Suisse bank on the basis of the Loan Agreement, in the amount of EUR 26.3 million, which this Bank approved to "Zeljezara Niksic" ad. The audit has found that due to accumulated debts to suppliers and employees of "Zeljezara Niksic", the Commercial Court introduced bankruptcy in Zeljezara Niksic a.d. on April 15 th, 2011, whereas the full amount of the state guarantee (principal increased by interest costs and commissions), amounting to EUR 32,922,888.90, had to be repaid from the budget of Montenegro. 3) The Government delegated tasks to the following officials and state authorities (pursuant to its Conclusion dated April 22 nd, 2010): - Minister of Economy, to monitor the implementation of planned activities in "Zeljezara Niksic" and to regularly inform the Government on the progress; - Ministry of Economy and Ministry of Finance, to ensure supervision of the use of credit funds obtained on the basis of the Loan Agreement between the Bank Credit Suisse "Zeljezara Niksic" a.d. The audited entities did not present reports on conducted supervision, which they were obliged to perform pursuant to the Conclusion of the Government, until the audit procedure was completed. 4) State guarantee issued to "Zeljezara Niksic" for the loan granted by the Credit Suisse bank was activated on May 18th, The state repaid the full principal, amounting to EUR 26.3 million and accrued interest in the amount of EUR 6,622,888.90, i.e., a total of EUR 32,922, These amounts were been reported in the bankruptcy estate through the bankruptcy procedure initiated against "Zeljezara Niksic" before the Commercial Court in Podgorica. In our opinion, the given amount of a guarantee issued by the State is not collectible (except for an insignificant portion, compared to the total amount repaid in respect of the guarantee issued), because the entire property of "Zeljezara Niksic" ad was sold to a new buyer from Turkey by price of EUR 15.1 million and the State receivables, arising from the issued guarantee, amounted to Page 129

130 EUR 32,922, (whereby the state was ranged third-priority of a right in a receivable settlement). 3. State Guarantees Issued for Pobjeda a.d. Podgorica In spite of constant calls for repayment of commitments made by the Ministry of Finance, "Pobjeda" ad Podgorica did not regularly pay off its commitments to "Podgoricka Bank Societe Generale Group" ad Podgorica, and therefore the Ministry of Finance repaid an amount of EUR 992, in favour of "Podgoricka Bank Societe Generale Group, on December 26 th, 2011." The Agreement on settlement of mutual relations between the Government of Montenegro - Ministry of Finance and "Pobjeda" ad Podgorica, on the basis of funds disbursed to "Podgoricka Bank Societe Generale Group" ad Podgorica at the amount of EUR 992,274.50, arising from the issued guarantee, was not concluded until the audit procedure was completed. The audit has determined that the Ministry of Finance should have planned appropriations for issued domestic guarantees at the budgetary position item Repayment of guarantees. The Bill on Amendments on the Law on Budget of Montenegro for 2011, except for amendments made for the purpose of technical conformity (in accordance with restructuring of the Government of Montenegro and harmonization of the spending units names with proposed amendments), should have also foreseen the amendments related to repayment of guarantees. The audit has found that there is a risk of introduction of bankruptcy (since "Pobjeda", has not been able to pay off its liabilities to creditors without the support of the majority shareholder, as well as a part of liabilities from business operations in case they do not finalize the sale of the state equity share), i.e. there is a high level of risk that the State of Montenegro will have to repay the liabilities arising from long-term loans granted by "Podgoricka Bank" and "Erste Bank" and guaranteed for by the State. In respect to subsequent control of the use of the granted state aid to beneficiary "Pobjeda" ad, the state auditor was not assured that, after the state aid had been granted to "Pobjeda" ad, the state aid donor, (Ministry of Culture), submitted the Report on the implementation of the restructuring plan once a year, as provided for in Article 30 of the Decree on detailed criteria, purpose and conditions of granting state support and aid. 4. State Guarantees Issued for Railway Transport a.d. Podgorica The Ministry of Transport and Maritime Affairs is a donor of the state aid with the guarantee for the Railway Transport a.d. Podgorica, on behalf of the Government of Montenegro. The Government of Montenegro - Ministry of Finance, issued guarantees in 2010 and 2011 for the beneficiary the Railway Transport of Montenegro a.d. Podgorica, in the total amount of EUR 17,050, As stipulated by Article 48 of the Law on Railways ("Official Gazette of Montenegro", no. 21/04 as of March 31 st, 2004 and "Official Gazette of Montenegro", no. 54/09 as of August 10 th, 2009, 40/11 as of August 8 th, 2011), this economic entity carries out tasks - activity of public interest (transport of passengers and goods in railway transport) and pursuant to Article 49 of the Law, transportation activity in the public interest can be performed by an enterprise that signs an Agreement with competent authority of state administration, which governs the rights, commitments and responsibilities in performing the public interest activity. Page 130

131 Based on the performed audit and the review of the balance sheet and the income statement of the "Railway Transport" ad for 2011, the SAI s point of view is that the state aid beneficiary will not be able to meet commitments arising from granted loans, but we also draw attention to the importance of the public interest that was taken into account when issuing this guarantee. 5. State Guarantees Issued for Railway Infrastructure a.d. Podgorica The Ministry of Transport and Maritime Affairs is a donor of the state aid with the guarantee for the Railway Infrastructure a.d. Podgorica, on behalf of the Government of Montenegro. Government of Montenegro - Ministry of Finance, issued guarantees for the beneficiary Railway Infrastructure of Montenegro a.d. Podgorica in 2010 and 2011 in the total amount of EUR 12,000, Pursuant to Article 1 Paragraph 2 of the Law on Railways ("Official Gazette of Montenegro", no. 21/04 and "Official Gazette of Montenegro", no. 54/09 and 40/11), ( Official Gazette of Montenegro, : 21/04; Official Gazette of Montenegro, : 54/09 and 40/11), the infrastructure, except for the industry sidings, is the asset in general use, state-owned and available for use under equal conditions to all interested operators and enterprises, that perform transportation activity. Pursuant to Article 5 of the stated Law, infrastructure management shall be an activity of general interest, i.e. as stipulated by Article 9 of the same Law, financing of infrastructure construction, maintaining, reconstruction and modernization shall be provided from the budget of Montenegro, foreign and domestic investments, loans and other sources as defined by the Law. Based on performed audit, the SAI has not been able to obtain assurance that the state guarantee beneficiary will be completely capable to meet commitments arising from loans (without further help from the State), but we also draw attention to the importance of the public interest involved in the enterprise's operations. Page 131

132 CONCLUDING REMARKS AND RECOMMENDATIONS On the basis of the audit performed, determined factual state and after deliberating Opinions of the audited subjects: - Ministry of Economy ( : /4) as of April 15 th, 2013; - Ministry of Finance ( : /1) as of April 15 th, 2013 and - Commission for State Aid Control ( : 01-18/1) as of March 20 th, 2013, on the Preliminary Report of the SAI on audit of the State guarantees issued in 2010 and 2011 ( : /2), adopted on February 18 th, 2013 by the Collegium of the SAI, composed of Miroslav Ivanisevic (President of Senate Head of Collegium) and Dragisa Pesic (member of Senate member of Collegium). According to Art. 50 the Rules of Procedure of the State Audit Institution, the Collegium composed of Branislav Radulovic, PhD ( member of Senate - Head of Collegium) and Dragisa Pesic (member of Senate - member of Collegium), at the meeting held on April 29 th, 2013, adopted the following: FINAL REPORT on audit State Guarantees of the Government of Montenegro issued in 2010 and 2011 And on the basis of the conclusions and assessments determined for each beneficiary of the State aid (guarantees) included in this Report - "KAP Aluminum Plant" ad Podgorica (pg. 19), "Zeljezara Niksic" ad Niksic (pg. 32), "Pobjeda" ad Podgorica (pg. 40), "Railway Transport" ad Podgorica (pg. 45) and "Railway Infrastructure" ad Podgorica (pg. 49), and has developed: RECOMMENDATIONS 1. Previous Recommendations of the SAI Related to the Issuance of State Guarantees Having recognized the significance of previously presented recommendations regarding the issuance of the state guarantees, the competent Collegium of the SAI took over the recommendations contained in the SAI s Reports on audit of Final Statement of Accounts of the State Budgets of Montenegro for 2010 and Due to the risk of activating the issued state guarantees (especially those given for KAP) and the risk of converting those into the public debt, the SAI recommended then the following: to intensify precautionary measures in planning and issuing new state guarantees; to include the expected costs on the basis of the guarantee in the analysis of debt sustainability, in accordance with the Strategy for debt management, which has not been the case before; to plan appropriations in the Montenegrin budget at the position guarantees for the repayment of provided guarantees, because of the possibility of their activation; to provide Guarantees only for priority projects, of importance for the general socioeconomic and regional development of the state; Page 132

133 to issue state guarantees, as a mechanism of supporting economy, for those enterprises which regularly pay off their liabilities to the state and whose financial statements and business policy guarantee the orderly settlement of credit commitments; not to give guarantees to enterprises which will use them for current expenditures or for covering operating losses; to provide detailed criteria for defining the means of security (collateral) when making a Decision on the issuance of state guarantees, by amending existing legislation. In addition, according to the opinion of the SAI, it is necessary to: enter into a settlement agreement on mutual relations with the guarantee beneficiary, simultaneously with the conclusion of the guaranty agreement with creditors for the underlying loan, in order to define the legal delimitations; enter into contracts with beneficiaries of guarantees which would define respective collaterals for the issued guarantees and specify that new borrowings and more substantial investments and procurements are possible for the guarantee beneficiary only with the consent of the Government of Montenegro - Ministry of Finance; enter into guaranty agreements, i.e. guaranty to creditors for the underlying loan only after a risk compensation of 0.5% has been paid by the guarantee beneficiary; evaluate the credit and fiscal risk for guarantees issued and outstanding; conduct regular supervision of activities undertaken by beneficiaries of guarantees, in respect of issued guarantees: - by submitting reports on activities undertaken after the issuance of guarantees, with accompanying documentation which verifies the undertaken activities; - by periodical submission of data on the amount of financial resources at the disposal of guarantee beneficiaries; - by regular submission of data on required and repaid debts to creditors and regular submission of financial statements of guarantee beneficiaries. The SAI recommends additional improvement of the following: - procedures to be followed and acted upon in the process of issuing guarantees; - supervisory role after the issuance of a guarantee, to determine time limits and obligatory report forms that beneficiaries will be required to submit to the Ministry of Finance, in order to provide regular availability and disposition of information on the earmarked use of loan funds guaranteed by the issued guarantees and in order to enable for the expected costs, arising from issued guarantees, to be realistically included into the analysis of debt sustainability and the medium-term budget projections. Page 133

134 2. Analysis of Regulations with Proposed Amendments 2.1 During the period , the Law on Budget was amended, the new Law on State Aid Control was passed (amended "Official Gazette of Montenegro", no.: 57/11 as of November 30 th, 2011), and the new Government Decision on the content and method of submitting requests for the issuance of state guarantees for legal entities ("Official Gazette of Montenegro", no.: 74/09). The amendments to the mentioned regulations changed the procedures for granting state aid and issuing state guarantees, but all the necessary procedural aspects which would ensure and improve the process of issuing state guarantees were not processed: The Law on Budget does not precisely define basic criteria based on which the state (the Government) should provide assistance to economic entities through loans and give guarantees, but it has only been defined (Article 38, item 10) that the guarantees and transfer loans shall be given in accordance with the guidelines from the Debt Management Strategy (document that contains projections made within the medium-term budget framework that includes the analysis of debt sustainability, costs analysis and risks which are subject to exogenous jumps). The Law on Budget (Art. 38 Item 9) prescribes the obligation of the Ministry of Finance to keep records and monitor settlement of liabilities in respect of issued guarantees and transfer loans, but neither the Law nor other regulations prescribe the manner of keeping records and the procedure of monitoring which they are obliged to by Law. Prescribe by the Law on Budget that the issuer of guarantees (the competent ministry or local self-government unit) is obliged to draft an expert analysis of the financial position of the company, the ability of paying off debts and evaluation of the economic sustainability and to report to the Government thereof, before issuing guarantees. 2.2 The annual Laws on Budget for 2010, 2011 and 2012 did not foresee appropriations at the position of item Repayment of guarantees, for the repayment of guarantees in case a debtor is unable to return the loan in respect of which the state guarantees were issued. It is deemed necessary to plan appropriations for repayment of commitments arising from issued state guarantees in the Annual Law on Budget (item 462 Repayment of guarantees), and to issue guarantees with a maximum of precautionary measures used in order not to jeopardize the public interest and the stability of the budget. Guarantees shall be issued only after having the credit risk assessed and fiscal impact on the budget evaluated. 2.3 The Law on State Aid Control stipulates that the Commission for State Aid Control shall be appointed by the Government, whereas the Government is responsible for the operations of the Commission. The Commission shall submit a report to the Government and the Assembly. The Commission has limited powers and does not have the necessary autonomy in decision-making. For the appointment of the Commission members, the Law does not prescribe conditions which would have to be met by the members of the Commission before their appointment. Article 13 of the Law contains a provision that "the Commission shall decide by majority of votes of the members present and voting," which allows the Commission to pass a decision with the minority of the total number of members. Page 134

135 Prescribe by the Law on State Aid Control that the issuer of guarantees (the competent ministry or local self-government unit) is obliged to draft an expert analysis of the financial position of the company, the ability of paying off debts and evaluation of the economic sustainability and to report to the Government thereof, before issuing guarantees. The appointment of members of the Commission should be regulated by prescribing more demanding conditions, which will provide the composition of members who have significant experience and knowledge in the field of public finance and commercial law. Article 13 of the Law on State Aid Control should be amended as to ensure that the Commission's decisions shall be taken by majority of vote of the total number of members. The Law on State Aid Control should prescribe that the Commission for State Aid Control shall submit its reports to the State Audit Institution. 2.4 Law on corporate profit tax ("Official Gazette of Montenegro", no.: 65/01 till 14/12) regulates the system and introduces the obligation to pay profit tax. Article 25 stipulates that losses resulting from business relations, excluding those resulting in capital gains and losses, may be transferred forward against profit generated in future accounting periods, but not exceeding five years. Also, Article 38, Paragraph 5 of the Law on corporate profit tax stipulates that the ministry competent for finance shall prescribe a more detailed manner for determining the arm s length prices. By-law in accordance with Art. 38, paragraph 5 of the Law on Corporate Profit Tax has not been passed and it is deemed necessary to pass it as soon as possible. Article 37, Paragraph 6, Item 2 of the Law on Value Added Tax should be amended in such a way that a taxpayer may deduct input VAT only if it is shown on customs declarations, i.e. is paid when importing goods. The above amendments in the Law on Value Added Tax would have a positive impact on the collection of public revenues. 2.5 The Decree on detailed criteria, conditions and manner of granting the State Aid ( Official Gazette of Montenegro, 27/10, 34/11), in the chapter "State aid for rescuing an enterprise" anticipates the possibility of granting state aid "before submitting the restructuring plan of the enterprise"(article 15, Paragraph 2), with the obligation thereof to deliver it within six months to the Commission for State Aid Control. Previous Decree from 2008 (The "Official Gazette of Montenegro", : 13/08) did not predict this possibility, but the state aid beneficiary was obliged to submit to the state aid donor the following: the restructuring plan or programme of forced settlement, i.e. proposal for initiating bankruptcy and a guarantee for repayment of assistance granted, along with the application form (Article 29, Item 5). The SAI deems the provision in Decree from 2008 a better solution as far as public interest is concerned, and therefore recommends amendment to the applicable Decree and enactment the previous one. Therefore, it is necessary to amend the current Decree governing the conditions for granting state aid and prescribe that the beneficiary of the state aid shall submit, along with the request, a restructuring plan or programme of forced settlement, i.e. a proposal for initiating bankruptcy procedure and a guarantee for repayment of the state aid granted. Page 135

136 2.6 By the Decision on the content and method of applying for the issuance of state guarantees for legal entities ("Official Gazette of Montenegro", no. 74/09), the previous Decision from 2004 was revoked, and it envisioned the following: Article 3: The Ministry evaluates the purposefulness of issuing state guarantees in a special report; for the applicants under Article 1 of this Decision, should they not have settled commitments to the Government, a special procedure for the issuance of state guarantees referred to in paragraph 1 of this Article will be defined. Article 5: The Report referred to in Article 3 of this Decision, the Ministry shall submit to the Commission for Debt Policy, the line ministry of the applicant for a state guarantee and inform the Government. On the basis of the audit performed by the SAI, it is recommended to input the previous provisions, related to mandatory assessment of purposefulness of issuing state guarantees in a special report, and the obligation to inform the Government, back into the content of the applicable Decision, by amending it, or to determine these obligations by acts of primary legislation. 3. Analysis of Economic Indicators and Risk Analysis Based on the performed audit, the SAI has obtained reasonable assurance that the state guarantees were issued without a detailed analysis of the financial position and analysis of the economic sustainability of the Financial restructuring programme of the state guarantees user (KAP, Zeljezara and Pobjeda), and without an adequate assessment of the possible consequences of their activation to the state budget. Guarantees were given without a solid counter-guarantee, and the same may be activated, due to bad financial position of the user. The audited entities (Ministry of Economy, Ministry of Finance, Commission for State Aid Control) did not estimate the financial situation of KAP, Zeljezara and Pobjeda with due diligence, and did not respect findings disclosed by commercial auditors. Financial performance indicators suggested that they would not be able to service approved loans properly and regularly from their own resources, as well as that the continuation of their operations was brought into question. On December 31 st, 2008, KAP had accumulated losses of EUR 284,325,000.00, which was much higher than its equity, which amounted to EUR 53,625, and the total liabilities, amounting to EUR 408,415,000.00, and there was a significant risk of activation of guarantees given (without introducing the process of modernization and organization of production with higher stages of processing, which would result in better profit generated, KAP could hardly be recovered by shutting it down and by selling its production and processing capacities). By analyzing the Settlement Agreement from 2009, it has been found that the Government took a significant risk by having provided guarantees for loans of KAP, amounting to EUR 135,000,000.00, without an appropriate counterguarantee 12, in case of their activation. Before entering the Settlement Agreement and providing state guarantees and other assistance in case of KAP, the donor thereof should have assessed the justification of providing state aid with guarantees to KAP and develop a study of costs and benefits from the standpoint of the national economy (with several variations), which would be presented to the Government, and thereafter, based on the results of the study, make a decision on issuing state guarantees. 12 CEAC has given all its shares in KAP as collateral in RBN, aggregate nominal value EURi 22,185, Page 136

137 When considering requests of Zeljezara - Niksic for the issuance of guarantees, it was necessary to review in details the balance sheet and income statement for 2008 and 2009, the reports made by independent auditors on audits of final accounts of Zeljezara for the mentioned years, other economic indicators of performance of Zeljezara, the amount of indebtedness, which totalled at almost EUR 88 million at the end of 2009, the cost of production per ton of steel and concrete steel, as the main steel products of Zeljezara, prices and trends in the global steel market, etc. Starting from established financial position of Zeljezara-Niksic, as well as the fact that on the basis of a guaranty agreement, the State had already taken over a significant portion of commitments of Zeljezara-Niksic in the past, (according to the statement made by the Ministry of Economy, the guaranteed amount of EUR 1.62 million were converted into shares), in our opinion, when this enterprise is in question, special precaution should have been taken when entering the guaranty agreement with Credit Swiss Bank, in order to avoid repayment of the state guarantees (increased by interest costs and commissions) and totalling at EUR 32,922, against the budget of Montenegro. The total loss of "Pobjeda" ad as of December 31 st, 2011 amounted to EUR 21,564, and it exceeded the amount of the share capital and revaluation reserves by EUR 3,215,027. The report of the commercial auditor noted that "The amount of generated loss of the Company exceeded its capital. The company cannot reconcile the loss from its regular resources assets, nor the outstanding liabilities, and that the ability of the Company to continue with its operations primarily depends on the possibility of debt restructuring and establishing an appropriate level of liquidity. The lack of circulating capital can, on the one hand, lead to a reduced volume of operations, and on the other hand, increase the risk of insolvency." Despite reminders on urgency sent by the Ministry of Finance,"Pobjeda" ad Podgorica did not repay its commitments to "Podgoricka Bank Societe Generale Group" ad - Podgorica, and on December 26 th, 2011, the Ministry of Finance repaid the amount of EUR 992, in favour of "Podgoricka Bank Societe Generale Group" ad Podgorica. Since "Pobjeda" ad is not capable to settle its obligations to creditors, in our opinion, based on the conducted audit, there is a high degree of risk that the obligations, arising from long-term loans approved by "Podgoricka Bank Societe Generale Group" and "Erste Bank", which were guaranteed by the issued state guarantees, will be activated and repaid against the funds of the state budget. As far as the collaterals are concerned, on the basis of the subject audit and the analysis of documentation of the state guarantees beneficiaries, the following has been noted: A pledge on securities in their nominal value (in most cases), was given as a collateral for loans with issued guarantees. Given the bad financial position of the state guarantees beneficiary, the market value of the pledged shares (at the time of control) was significantly lower than the nominal (pledged) value of shares. Guarantees were provided without a solid counter-guarantees and may, at any moment, be activated due to bad financial position of the state guarantees' beneficiaries. The SAI indicates that the Debt management Strategy envisages that the amount of a guarantee shall not cover more than 80% of credit obligation and that the guarantee should be based on the market price. Page 137

138 4. Supervisory Role On the basis of the performed audit and the analysis of issuing state guarantees procedure, it has been determined as follows: - The Commission for State Aid Control does not perform substantial control of the data provided by the applicant, i.e. the entity which proposes the state aid; - The State aid donor did not conduct a regular and effective supervision over the implementation of contracted obligations and the cooperation among the competent state authorities in exercising supervisory role was not at the required level. It is deemed necessary to strengthen the capacity of the Commission for State Aid Control in organizational and professional terms, and extend its authority by amending the law, in order to establish an independent state authority that would, (in accordance with its name), carry out substantial control over the issuance of state aid and guarantees. Ministries and other state bodies, within their jurisdiction, should exercise regular and effective supervision in accordance with legal acts, and by-laws and the conclusions of the Government, related to the procedure for the issuance of state guarantees and monitoring the implementation of assumed commitments on this basis of approved loans. Page 138

139 EXCERPT FROM THE AUDIT REPORT ON 2011 ANNUAL FINANCIAL STATEMENTS OF THE PI CENTER FOR VOCATIONAL EDUCATION AND TRAINING Type of audit: Audited entity: Subject of audit: Audit duration: Collegium members: General audit (compliance audit) PI Center for Vocational Education and Training Annual financial statements of the Center for Vocational Education and Training for auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 139

140 Page 140

141 BASIC ELEMENTS OF AUDIT 1. Subject and Scope of Audit The subject of performed audit is the Annual financial statements of the Center for Vocational Education and Training for 2011 and compliance of its financial operations with applicable legal and other regulations. In accordance with Article 4 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Centre is obliged to submit the Annual financial statements to the Ministry of Education and Sports on the following Forms: - Statement on cash flow IV - Statement on outstanding liabilities For unspent deposits on the sub-accounts or transitional accounts, which are recorded in the Treasury General Ledger as an expenditure, the spending unit is required to, in addition to the Annual financial statements, submit also the Statement on the manner of spending funds submitted upon the expiry of a fiscal year on Form 8. The Center is not obliged to draw up the Statement on the manner of spending funds submitted upon the expiry of a fiscal year on Form 8, but considering that it is one of the programmes within the spending units, the state auditor deems it useful to report to the competent ministry, if the Centre disposes of unspent funds at the year-end. The subject audit has included cash flow control, legality of spending budgetary funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage or the scope of examination has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 2. Audit Objective The objective of the audit of the Centre was to express our opinion on reliability and accuracy of the Annual financial statements of the Centre for vocational education for 2011 and compliance of the operations of the audited entity with laws and regulations, as well as evaluation of the internal system of financial management and control. According to the audit objective, the following has been examined: - true and fairness of financial statements; - regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization for intended purposes; - system of internal control. 3. Type of Audit The State Audit Institution has conducted a general audit (compliance audit) within the subject audit, which implies a comprehensive insight into the financial operations of the audited entity as of December 31 st, Page 141

142 4. Activity of the Audited Entity The audited subject is a public institution. The Center was founded on May 14 th, 2003, by the Agreement on Foundation, concluded by the founders, the Government of Montenegro, Montenegrin Chamber of Commerce, the Federation of Independent Trade Unions of Montenegro and the Employment Agency of Montenegro, on the basis of Article 39 of the General Law on Education. The tasks and responsibilities of the Center are defined by Articles 39 and 41 of the Law on General Education, as follows: development, consulting, research and professional activities in the field of vocational education and adults training and education shall be carried out by the Centre for Professional Education (hereinafter: the Center). The Center carries out the following activities and tasks in the area of vocational and adult education: professional tasks of monitoring, analysis and development of the education system; in cooperation with the institution works on improving educational and pedagogical work; performs preparation of professional tasks on the issues decided on by the competent Council and the Ministry; performs professional tasks in preparation of: educational programmes, catalogues and standards of knowledge, occupational standards, norms and standards of teaching aids and equipment; performs researches; performs advisory work in institutions in the field of vocational education and adult education, the institutions affiliated with the pedagogical work and education; prepares educational and pedagogical-methodological standards for textbooks and manuals; prepares professional standards for teachers and educational staff; organizes professional training and development of teachers and training of director; proposes measures for the development and introduction of new teaching technologies and their application; performs an external check of knowledge acquired by pupils' or adults (students), in accordance with the law; monitors experiments; performs other duties in accordance with the law and the Act on Foundation of the Centre. The managing bodies of the Center are the Steering Board and Managing Director. The seat of the Centre is in Podgorica. The Head of the authority is Mr Dusko Rajkovic, managing director. The person responsible for managing accounting and preparing the financial statements is Ms Irena Jankovic. The Card of deposited authorized signatures and the cash are in charge of governance of the person authorized for valid signature with the use of a seal: Mr Dusko Rajkovic. 5. Audit Methods The audit has been planned and performed in accordance with the ISSAI standards, in the manner which provides obtaining reasonable assurance about whether the financial statements are free of material misstatement and whether the whether the business operations of the audited entity is compliant with laws and bylaws and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The selection of audit procedures is based on the auditors' judgment, including the risk assessment. In accordance with the audit practice, materiality is determined at the level of up to 1% of the audited entity s total expenditures. Determination of samples for auditing expenses for employees (gross wages and contributions charged to employer and other personal earnings) was completed by a random sampling method. For selecting samples for expenses examination (expenses for materials and services), the state auditor has chosen non-statistical sampling, where the criteria for choosing a sample of transactions are the value and importance of transactions. When calculating the sample, the state auditor used subjective judgment. It is a pragmatic approach, where one decides according to distinct criteria of audit and the implications to resources. Page 142

143 6. The System of Records The audited entity is not linked to SAP information system (the software of the State Treasury which keeps records on treasury operations), but the Ministry of Education and Sports transfers budgetary allocations by a Payment Request to the entity onto an account with a commercial bank, which the Center uses for further payments. The accounting records of the Centre implies to posting changes on the bank accounts (based on the bank statements) and keeping the books of Received invoices. Based on records of the changes in the bank accounts, the audited entity prepares the Statement of Cash Flows IV. Page 143

144 OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on conducted audit and established facts, as well as after deliberation of the audited entity's Opinion on the Preliminary Report of the State Audit Institution as of January 14 th, 2013, and pursuant to Art. 9. of the Law on State Audit Institution and Art. 50 of the Rules of Procedure of the State Audit Institution, the authorized Collegium, comprising of the following members: Branislav Radulovic, PhD (member of Senate Head of Collegium) and Miroslav Ivanisevic (president of Senate member of Collegium), at its session held on February 11 th, adopted: FINAL REPORT on Audit on 2011 Annual Financial Statements of the PI Center for Vocational Education and Training Activities, transactions and information disclosed in the Financial Statements for 2011 have not been in all material respects in compliance with the applicable regulations and statutory requirements. Materially significant deviations and non-compliance of operations with regulations have been ascertained, especially in application of the Law on Budget, Law on Budget for 2011, Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, Instruction on the State Treasury Operations, the Public Procurement Law and the Law on Public Internal Financial Control System in the Public Sector. Based on the established state of facts, the competent Collegium of the SAI expresses an adverse opinion on the 2011 Annual Financial Statements of the Center and a qualified opinion on the conformity of operations of the audited entity with regulations. DETERMINED IRREGULARITIES AND RECOMMENDATIONS 1. The Center was established in 2003, as a public institution and a legal entity whose founders are the following: the Government of Montenegro, Montenegrin Chamber of Commerce, the Federation of Independent Trade Unions of Montenegro and the Employment Agency of Montenegro. In the course of 2011, the Centre conducted its operations as a unit within the Ministry of Education and Sports, i.e. as one of the Budget Programmes of the competent ministry. The audit has found that, except for the Government (the Ministry of Education and Sports), the founders of the Center did not participate in the financing of the Centre in 2010 and The Act on Foundation of the Centre prescribes entering into special agreements for financing the operations of the same, and the last agreement regarding this issue, was concluded for the period , and was not extended or renewed afterwards. According to the Act on Foundation of the Center, it is deemed necessary for the founders to conclude agreements on financing regularly and in a timely manner and to consistently apply hereto. 2. The Steering Board, as the managing body of the Center, is composed of five members and decisionmaking procedure has been regulated by majority vote rule (consensus), which means that the founders, who do not take part in financing the Center, may take a decision by majority vote over the founder (the Ministry of Education and Sports), the only one who is financing the Center. The Page 144

145 responsibilities of the Board are, inter alia, to make decisions upon the following: the purchase and sales of assets, taking bank loans, the earmarked spending of the surplus of revenue over expenditure, i.e. on covering the operational loss, on statutory changes (with the consent of the founder), which is in accordance with the status of the Centre as an independent legal entity, but not regarding its position as one of the Programmes in the budget of the Ministry of Education and Sports. The Center Steering Board did not adopt the Financial statements of the Center for 2011 within the prescribed period (until March 1 st ), but considered the same on June 1 st, The person responsible for managing accounting and preparing the financial statements of the Centre is, at the same time, the Board member. The Steering Board of the Centre is obliged to timely adopt the financial statements and pass decision on auditing thereof, in order to provide the legality and regularity of the Centre operations. It is deemed necessary to eliminate conflict of interest in the Steering Board, i.e. the person responsible for managing the accounting and preparing the financial statements should not be, at the same time, a member of the Board, which is the managing body in charge of the adoption of those documents. It is recommended to the founders to review the existing status and the method of financing of the Center, because the state of facts established by the audit indicates of an existing risk of repeating irregularities in the future operations of the Center. 3. Based on data from the Treasury General Ledger, it has been found that the code Centre for Professional Education and Training has recorded expenditures in the amount of EUR 477,545.86, out of which the total of EUR 372, was transferred into the account of the Center, as recognized (less by EUR 104, than disclosed in the Treasury records), at the position of General revenues in the cash flows statement IV composed by the Center. The rest of the funds, amounting to EUR 104,982.93, was spent for the payment of taxes and contributions expenses, surtax and the electricity, whereas the funds were not transferred into the Center account, but directly to a single account of taxes and contributions and to the account of EPCG. The expenses for taxes and contributions, surtax and the electricity, totalling EUR 104, (funded from the portion of general revenues that was not allocated to the Center account), were not reported in the cash flows Statement IV, composed by the audited entity. The previously described method of financing the Centre is a result of insufficiently defined position of the Center in the system of public finance. In fact, the Center is a legal entity, a public institution within the spending unit, whereas it is, at the same time, one of the Programmes in the budget of the same spending unit. Because of that, a portion of EUR 372, was transferred to the Centre as a body within the spending unit, while the portion of the funds, amounting to EUR 104, was paid to suppliers on behalf of the expenditure of the Centre, as one of the budget Programmes of the spending units. The described method of financing this state body has resulted in the lack of recording receipts and expenditures in the amount of EUR 104, in the Center s accounting system, and thus in a misstatement in the financial statement. It is deemed necessary for the Ministry, as a spending unit under whose jurisdiction the Center operates (as a Programme), to define the manner for allocation of appropriations for the Centre: by transferring to the account of the Centre or by paying the expenditures of the Centre as one of the Programmes. Page 145

146 It is deemed necessary for the Center, as a body operating within another budget spending unit, to reconcile its records with the records of the Ministry of Education and Sports before compiling its financial statements, and to disclose the revenue and expenditure in the financial statements in accordance with the International accounting standards for the public sector for cash basis of accounting, which requires that the amounts paid on behalf of the reported entity by third parties, shall be disclosed in the cash inflows and outflows statements. 4. The audit has found that the structure of inflows in the cash flows IV Statement was not disclosed properly. The Center reported earmarked revenues amounting to EUR 90,090.00, where it included the donations revenue amounting to EUR 55, and the income in the amount of EUR 34, which did not belong to earmarks, but to resources allocated for projects implemented by the Centre. The audited entity should disclose the income based on donations separately in its financial statements, in a particular position foreseen for this type of revenue. The revenues in the amount of EUR 34, should have been recorded in the position Own revenue. 5. In the cash flows IV Statement, at the position Other personal income, the audited entity reported expenditures in the amount of EUR 16,884.08, which was not an accurate figure, because the audit has ascertained a total of EUR 35, of expenditures paid in respect of other personal income in 2011, which should have been disclosed in the position 412 in the cash flows IV Statement. Other personal income, amounting to EUR 18,862.82, was reported at the position Expenses for materials and services. In its cash flows IV Statement, the Center reported outflows of funds for financing salaries of employees working at Adult education centres, for severance payments and taxes and contributions, totalling EUR 116, at position Expenses for materials and services, which is not in compliance with the Rulebook on drafting, composing and submitting financial statements on the State budget, extra-budgetary funds and local self-governments. The audited entity is obliged to provide conformity of its accounting records with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, and to compile its financial statements in accordance with the Rulebook on drafting, composing and submitting financial statements on the state budget, extra-budgetary funds and local self-governments. 6. The audited entity does not keep records of liabilities on the accounts of Class 2 - Liabilities, and the State auditor expresses a reservation in respect of the Report on outstanding liabilities compiled by the Centre. The Centre should record its liabilities in the Class 2 accounts, because the Instruction for filling Report on outstanding liabilities, which, along with Form 5 makes an integral part of the Rulebook on drafting, composing and submitting financial statements on the state budget, extra-budgetary funds and local self-governments, envisages that the Report on outstanding liabilities shall be entered data recorded in the Class 2 accounts Liabilities. Page 146

147 7. According to the Law on Budget for 2011, the audited entity was approved appropriations through the Centre for Vocational Education of the Ministry of Education and Science. The appropriations are approved by the annual Law on Budget per economic classification and using four-digit code of accounts. The audited entity keeps records of expenditure at the group of accounts using three-digit code level and only descriptive, without the use of prescribed structure codes (account numbers), so it is not possible to examine and verify the compliance of spending of funds with the annual Law on Budget. When planning, recording and paying expenditures, the audited entity is obliged to ensure consistent application of the Law on Budget, Regulation on unique Classification of Accounts for the State Budget, Extra-budgetary Funds and Budgets of Municipalities and other regulations governing the operations of the public sector. 8. The Center is funded as one of the Programmes through the Programme budget of the spending unit the Ministry of Education and Sports. The revenue of the Center is paid to the bank accounts with a commercial bank with no Government account designation, which are not included in the Treasury Consolidated Account, and that these revenues have not been recorded in the Treasury General Ledger, which is not compliant with Article 11, Paragraph 231 and Article 32, Paragraph 132 of the Law on Budget. Should it be considered necessary to open additional bank accounts for the efficient and effective implementation of activities under the Programme Center for Vocational Education and Training be considered necessary, these shall be opened in accordance with the Law on Budget and the Instruction on the State Treasury Operations.. 9. Donations are paid to the Center bank account with a commercial bank, which is not designated as a Government account, which is not in accordance with Item 164 of the Instruction on the State Treasury Operations. Donations should be paid into the Treasury Consolidated Account in accordance with the Instruction on the State Treasury Operations. 10. The audit has found that remunerations for membership in commissions - working groups, disbursed in the amount of EUR 32,654.00, were not treated as personal income, and therefore contributions which should have been calculated and paid as stipulated in the Guidelines on the method of calculation and payment of taxes and contributions and personal earnings from employment, were not paid. The Center paid taxes and surtax on the tax base reduced by 30%, which is not compliant to Article 15 of the Law on Income Tax of Natural Persons, where it says that the taxable income from revenues based on personal earnings shall represent the amount of gross earnings. It is deemed necessary to ensure consistent application of the Law on Income Tax of Natural Persons when personal earnings are calculated and paid. 11. Remunerations for participation in the working groups-commissions, totalling E 20, were disbursed without a Decision on the appointment of a working group-commission members. The State auditors have found that in most cases these remunerations for participation in working groups and commissions were paid to the employees of the Centre for the work which is included in description of their regular work duties. Page 147

148 When composing working groups, the audited entity should consistently act in accordance with Article 69 of the Decree on the State Administration Organization and Manner of Operation, as well as with Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour, which regulate the manner of composing project groups, teams or other forms of labour. The Act on composition of a project group, team or other form of labour shall specify the carrier, resources, structure of the working group and outline detailed specification of duties for each member, as well as the timelines regarding a task completion and publishing the Report on activities. 12. The Report on the awarded public procurement contracts of the audited entity is not complete because it does not contain information on all the procurements. The amount of public procurement contracts awarded without a conducted procedure and which have not been disclosed in the report totalled at EUR 57,780.55, thus representing % of the executed public procurement budget. Public procurements implemented by direct agreement amounted to 48.02%, although the statutory limit accounts for 10% of the total executed public procurement budget. During 2011, the audited entity repeatedly conducted the procurement of office supplies by direct agreement, totalling EUR 11,551.51, which represents sharing of public procurement subject, that is not in compliance with Art. 19 and Art. 77 of the Public Procurement Law. The public procurement officer is obliged to act in accordance with Art. 78 of the Public Procurement Law and keep records of public procurement contracts conducted by direct agreement procedure and disclose on the number, the value and the name of a supplier in the Annual Report submitted to the competent administrative authority. The audited entity is obliged to implement public procurement procedure envisaged by Law with each procurement, and to ensure the application of basic principles. The audited entity should develop and adopt written guidelines, which would define the role of each employee participating in the public procurement procedure and establish control procedures in the public procurement system, in order to provide the application of Law therein. 13. During 2011, the audited entity did not undertake activities aimed at establishing a system of internal financial control and internal audit, i.e. the application of the Law on Public Internal Financial Control System in the Public Sector. The Center did not provide segregation of duties regarding the control of recording business transactions and treasury operations. The Payment Request was being used for withdrawing funds from the Treasury Consolidated Account into the account at a commercial bank, which the Center used to execute payments from, by a payment order. Thus, a Payment Request loses its basic purpose as an instrument of internal control of expenditure, which results in a noncompliance of the audited entity records with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, as well as non-compliance with the Annual Law on Budget. The audit has found that the lack of internal controls, (which include a set of procedures and measures taken to ensure the accuracy and regularity of recording financial transactions and their full conformity with regulations), as well as the absence of supervision, which is conducted by the Ministry of Education and Sports, in accordance with the Decree on the State Administration Organization and Operations has resulted in non-compliance of the financial operations of the Center with the regulations. Page 148

149 The audited entity should undertake activities on establishing the internal financial control system, in accordance with the Law. The Ministry of Education and Sports should carry out the oversight of financial operations of the Centre, in order to ensure a full implementation of regulations governing the operations of budgetary users. 14. The Center does not provide analytical records of assets, as required by IAS for the public sector, the Law on State Property, the Regulation on Unique Classification of Accounts for the Budget, Extrabudgetary Funds and Budgets of Municipalities, Regulations on the Classification of Tangible and Intangible Fixed Assets by Groups and Methods for Determining Depreciation of Budgetary and Extra- Budgetary Funds and Instructions for the State Treasury Operations. The audited entity did not submit data on movable and immovable assets to the Property Administration, pursuant to Art. 50 of the Law on State Property. The Center is obliged to create an analytical fixed assets ledger, in order to record all the fixed assets specified by essential elements (inventory number, the name of the asset, quantity, type, purchase cost, value adjustments and current value). The records made in accordance with applicable regulations should timely be submitted to the competent administrative authority for the property affairs. The scope and the nature of established irregularities and omissions in the audited entity require the following: The audited subject is to report to the State Audit Institution on the actions undertaken in respect of developed and delivered recommendations, within the period of 6 (six) months. To present the contents of the SAI Final Report on Audit to the Ministry of Education and Sports, as responsible for the supervision of the audited entity, and to provide the competent Prosecutor s office the insight into the Final Report on Audit. Page 149

150 Page 150

151 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE PI CENTRE FOR CONTEMPORARY ART Type of audit: Audited entity: Subject of audit: Audit duration: Collegium members: General audit (compliance audit) PI Centre for Contemporary Art 2012 Annual financial statements of PI Centre for Contemporary Art 70 auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Miroslav Ivanisevic, President of Senate member of Collegium Page 151

152 Page 152

153 BASIC ELEMENTS OF AUDIT 1. Subject and Scope of Audit The subject of performed audit is the 2012 Annual financial statements of the Centre for Contemporary Art and compliance of its financial operations with applicable legal and other regulations. In accordance with Article 4 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Centre is obliged to submit Annual financial statements to the Ministry of Culture on the following Forms: - Cash flow Statement - Statement on outstanding liabilities For unspent deposits on the sub-accounts or transitional accounts, which are recorded in the Treasury General Ledger as an expenditure, the spending unit is required to, in addition to the Annual financial statements, submit also the Statement on the manner of spending funds submitted upon the expiry of a fiscal year on Form 8. In addition, for the spent funds of the current budget reserve, the audited entity (spending unit) is obliged to submit the Statement on the spent funds of the current budget reserve on Form 9, along with the Annual financial statements. 2. Audit Objective The objective of the audit of the Centre was to express our opinion on reliability and accuracy of the Annual financial statements of the Centre of Contemporary Arts for 2012 and compliance of the audited entity operations with the laws and regulations, as well as evaluation of the internal system of financial management and control. According to the audit objective, the following has been examined: - true and fairness of financial statements; - regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization for intended purposes; - internal control system. 3. Type of audit The State Audit Institution has conducted a general audit (compliance audit) within the subject audit, which implies a comprehensive insight into the financial operations of the audited entity as of December 31 st Activity of the Audited Entity The Centre for Contemporary Art of Montenegro is a public institution, which performs activities of the public interest for the State of Montenegro in the field of culture. The bodies of the Center are the Steering Board and Managing Director. The Head of this state body is Mr Milenko Damjanovic. The Center for Contemporary Art of Montenegro is situated in Podgorica. The Centar for Contemporary Art of Montenegro is a legal entity and independently participates in legal transactions with the third parties, on its own behalf and for its own account with unlimited liability. PI Centre for Contemporary Arts of Montenegro was registered as a taxpayer by the Decision of the Directorate of Public Revenues of Montenegro, number as of December 11 th, 2002, and it was assigned a VAT identification number, VAT ID The general legal acts of the Centre are: the Statute of the Centre and Regulation on internal organization and systematization of posts and tasks. Page 153

154 The Centre performs its activity in accordance with the Law and Decision on Foundation of the Public Institution the Centre for Contemporary Arts of Montenegro. The regular activity of the Centre includes the following: museum and gallery activities in the field of art, taking measures and actions in collecting, preserving and exhibiting artworks, compilation and enrichment of different collections of domestic and foreign artists, realization and distribution of programmes and events in the field of fine arts, theatre, literature, film, activities in audience animation through seminars, courses, lectures, art dinners, meetings, promotions, etc, organization of study visits, as well as performances by artists from the country and abroad; connecting gallery activities with other segments of the culture (music, theatre, literature, film, video, photography); maintaining and developing of cooperation with cultural institutions and other institutions of a similar type in the country and abroad; marketing activities in the field of culture, copyright and agency services, i.e. advocacy and intermediation between authors and other entities; supporting free artistic initiatives in all the aspects of artistic activity; publishing professional publications, publications within the scope of the Centre and other activities in accordance with the Decision on Foundation of PI Centre for Contemporary Arts of Montenegro. The internal organization, the manner of operation and management, as well as other issues relevant to the work of the Centre, are regulated by the Statute and other general acts of the Centre. 5. Audit Methods The audit has been planned and performed in accordance with the ISSAI standards, in the manner which provides obtaining reasonable assurance about whether the financial statements are free of material misstatement and whether the business operations of the audited entity is compliant with laws and bylaws and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The selection of audit procedures is based on the auditors' judgment, including the risk assessment. In accordance with the audit practice, materiality is determined at the level of up to 1% of the audited entity s total expenditures. Determination of samples for auditing expenses for employees (gross wages and contributions charged to employer and other personal earnings) was completed by a random sampling method. For selecting samples for expenses examination (expenses for materials and services, ongoing maintenance, rental expenses, other expenditures and capital expenditures) the auditors used stratified sampling method, supported by computeraided audit tool, the auditing software IDEA. Various methods have been used in the audit procedure, in relation to the position of financial statements to be examined. Individual transactions testing has been used for auditing expenditures, along with tests of control, examination of records and documents, accounting records control, analytical procedures and physical inspection. For obtaining reasonable assurance about whether the financial statements give true and fair view in relation to the accepted financial reporting framework, the state auditor has decided to apply a method of statistical sampling, Monetary unit sampling (MUS), which allows the calculation of extrapolation errors. Determination of samples for auditing expenses for employees (gross wages and contributions charged to employer and other personal earnings) was completed by a random sampling method. 6. The System of Records Accounting system of the Centre uses modified basis of accounting, which provides accrual based accounting for recognition of assets and liabilities, whereas the revenues and expenditures are posted at the time they incur, i.e. using the principle of cash basis of accounting. All the cash transactions are executed via the bank account at NLB Montenegro Bank. Financial operations of PI Centre for Contemporary Arts of Montenegro is conducted through the business bank account number , opened at NLB Montenegro Bank, where the budget allocations are being transferred, based on submitted Payment Requests. Page 154

155 OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on conducted audit and established state of facts, as well as after deliberation of the audited entity's Opinion ( 330 as of June 5 th, 2013), regarding the Preliminary Report of the SAI ( /7 as of May 15 th, 2013), and pursuant to Article 12 of the Law on State Audit Institution and Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composing of Mr Branislav Radulovic, PhD (member of Senate Head of Collegium) and Mr Dragisa Pesic (Chairman of Senate member of Collegium), at its session held on June 7 th, 2013, adopted the following: FINAL REPORT on Audit on 2012 Annual Financial Statements of PI Centre for Contemporary Arts OPINION Activities, transactions and information disclosed in the Financial Statements for 2012 have not been in all materially significant respects in accordance with the applicable regulations and statutory requirements. Materially significant deviations and non-compliance of operations with regulations have been ascertained, especially in application of the Law on Budget, Law on Budget for 2012, the Instruction on the State Treasury Operations, the Public Procurement Law, Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, the Law on Income Tax of Natural Persons, the Law on Culture, the Law on Public Internal Financial Control System in the Public Sector, Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro and internal Acts of the Centre. The Collegium of the SAI expresses an adverse opinion on the 2012 Annual Financial Statements of the Centre and on conformity of operations of the audited entity with regulations. DETERMINED IRREGULARITIES AND RECOMMENDATIONS 1. According to Article 19 of the Law on Culture, the Steering Board was renamed into the Council as of March 16 th, 2012, without carrying out the appropriate harmonization of the Statute of the Centre with the Law. The audited entity should promptly harmonize the Statute and other acts with the Law on Culture. 2. Director issued the Decision on launching the publication "Art Cetral", on the appointment of the editor-in-chief and the editorial board, although Article 12 of the Statute of the Centre stipulates that the Council (The Steering Board) shall be appoint the editor-in-chief, editorial board members and the Council of publication. During 2012, the director of the Centre issued a Decision on purchasing the art work "The Great General" by the author Uros Toskovic, a painter, in the amount of EUR 2,000.00, which is not in accordance with Article 12 of the Statute of the Centre, which provides that a decision on the purchase of artworks shall be passed by the Steering Board (Council). The purchase of this artwork has not been carried out in accordance with Article 84 of the Law on Culture, which provides that the purchase of works of art shall be done on the basis of a public competition, according to criteria for determining their value prescribed by the Ministry. Page 155

156 Director of the Centre should make decisions only within his competences set out in the Statute. Purchase of artworks should be carried out in accordance with the procedure laid down in Article 84 of the Law on Culture. 3. The appointment of acting Business director of the Centre was exercised without having previously announced a public competitive contest, as defined by Article 24 of the Law on Culture. The appointment of acting Artistic director was exercised without having previously complied with the procedures of public advertising, as prescribed by Article 27 of the culture. It is deemed necessary for the Centre, (in accordance with Article 18, Article 24 and Article 27 of the Law on Culture), to establish the conditions and procedures by its Statute, for the election and dismissal of directors of the institution. The Ministry of Culture should (in accordance with Article 47 of the Law on Culture) propose a business and artistic director of the institution to the Government, after the implemented public contest in accordance with Article 24 and Article 27 of the Law on Culture. 4. The bank accounts of the Centre, opened at a commercial bank and used by the institution for execution of payments, do not have a written approval from Ministry of Finance, are not marked as "Government accounts" and are not included in the Treasury Consolidated Account, which means that they have not been opened in accordance with Article 12 of the Law on Budget, and Items 91 and 92 of the Instruction on State Treasury Operations. Chief Finance Officer of the Centre (Director), shall provide that the payment of expenditures is executed via the Treasury Consolidated Account, or if he considers a separate government bank accounts necessary for the operations of the Centre, he/she shall forward a request in writing to the Ministry, in accordance with paragraph 98 of the Instruction for State Treasury Operations.. 5. The Centre does not execute expenditure payments based on the Payment Request, but the Payment Request is being used for withdrawing funds from the Treasury Consolidated Account into the account opened at a commercial bank, which the Centre uses to execute payments by a Payment order. Thus, a Payment Request loses its basic purpose as an instrument of internal control of expenditure, which results in a non-compliance of the audited entity s records with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, as well as noncompliance with the Annual Law on Budget for Chief Finance Officer of the Centre (Director), shall provide that the payment of expenditures is executed by Payment Request. The Certifying Officer and Approving Officer of the Centre shall certify and approve Payment Requests in accordance with items 43 and 44 of the Instruction for State Treasury Operations. Page 156

157 In accordance with item 47 of the Instructions for State Treasury Operations, the Authorizing Officer should request supporting documentation from the Centre, and thus obtain the insight in whether the control process in the spending organization has been conducted according to these Instructions. 6. In Cash flow IV Statement, at the position gross wages and contributions paid by the employer, the audited entity recognized the expenses relating to severance pay, totalling EUR 23, Expenses for severance pay should have been recorded and disclosed in the Report at the position 412-Other personal income. 7. The Financial plan of the Centre has not been passed in accordance with Article 12 of the Statute of PI Centre for Contemporary Arts of Montenegro, which stipulates that the Council (The Steering Board) shall adopt the Financial plan. The Work programme of the Centre was adopted at the 16 th session of the Centre Council on March 16 th, 2012, which is not in accordance with Article 20 of the Statute, which prescribes the Work programme shall be passed at the end of the year for the following year. Council, as a governing body of the Centre, should carry out its functions in accordance with the Statute and pass the Financial plan of the Centre in a timely manner. 8. In 2012, the Centre executed expenditures in an amount of EUR 40,126.58, or by 7.72% exceeded the amount of expenditures approved by the Law on Budget for The Centre funded expenditures from their own and earmarked revenues in the amount which exceeded the one approved by the Law, which is not in compliance with Article 7 of the Law on Budget for 2012, which prescribed that own and earmarked revenues generated by a spending unit can be used exclusively to finance expenditure of the subject spending unit up to the amount appropriated and planned by the budget. Chief Finance Officer of the Centre (Director), should provide that the earmarked and own revenues of the Centre are paid into the bank accounts opened by the approval of the Minister, and marked as government account, in accordance with Article 32 of the Law on Budget. 9. During 2012, the Centre improperly spent funds totalling EUR 57,197.80, against various accounts (4111, 4139, 4134, 4136, 4137, 4138, 4181 and 4416). As a budget spending unit, the Centre is obliged to execute the budget in accordance with the Annual Law on Budget, i.e. t use the budget funds for the purposes authorized by Law. 10. The audited entity recorded expenses for severance pay in the amount of EUR 23, in the account Net earnings and business trips expenses, amounting to EUR 7, and in the account Contracted services, which is not in accordance with the Regulation on Unique Classification of Accounts for the Budget, Extra-Budgetary Funds and Budgets of Municipalities. The Centre did not pay tax on severance pay, which is not in accordance with Article 5 of the Law on Income Tax of Natural Persons, which does not provide for exemption of payment of taxes on severance pay in case of mutual termination of employment. Page 157

158 The Centre is required to record expenses in accordance with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. The Centre is obliged to calculate and pay taxes on severance pay, in accordance with the Law on Income Tax of Natural Persons. 11. In 2012, the Centre executed cash payments of expenditures through its treasury totalling EUR 255,745.64, out of which EUR 107, related to the payment of fees arising from agency services. Severance pay expenses, other personal earnings, material and supplies expenses, expenses for telephone services, contracted services and expenditures for equipment were paid through the treasury, which is not in accordance with the Instruction on the State Treasury Operations, Item 151, which stipulates that advances, (cash from the treasury), shall relate to small amounts of circulating cash and monetary supplies that are used in order to settle the ongoing financial needs that cannot be effectively carried out through the usual system of payment. The audited should pay in cash only for the expenditures which cannot be paid out through the bank account. 12. By the insight into the individual lists of museum fund of the Centre, which are an integral part of the Inventory report, the audit has found that the inventory-noted condition was reported as a natural disclosure with the name of the artwork, but without the stated value, which is not in accordance with Article 6, Paragraph 2 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. The Decree stipulates that the unique system of records of movable assets referred to in Article 5, (which, among other things, refers to objects of artistic and cultural value), is based on the inventory list, i.e. the identification of these assets, assessing their value by the SAI - Report on the Audit of Annual Financial Statements of the PI CCA for 2012 and other data. The Inventory list compiled by the Commission is not in accordance with Article 11 of the Decree which states that the information on the inventory list of the movable property - objects of artistic and cultural values, are entered in the Form "PS - 2", based on the established actual state of facts, and in monetary disclosures, based on their estimated value. It has been determined that the Centre does not consistently apply Article 9 of the Decree, which states that the data from the records shall be entered in the prescribed Forms ("PS-1", "NS-1"). After examining the Report on the inventory of works of art - with exhibits and books as of December 31 st, 2012, the audit has found that the artistic work of the painter Uros Toskovic "The Great General" is neither listed in the Inventory report in the part with specified artworks which enriched the existing fund in the current year, nor in the inventory lists with artistic works. The painting is not even included in the list of borrowed works - Reverse. Based on subsequently delivered Confirmation by the Ministry of Culture, it has been confirmed that the painting was in the premises of the Ministry. The Centre is obliged to provide consistent application of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State- Owned Assets, especially in the part referring to the obligation of entering data into prescribed forms PS -- 1, NS -- 1 and PS Data on inventory of movable assets referred to in Article 5, Paragraph 2 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets, relating to objects of artistic and cultural value, should contain information based on the established factual state, and in monetary disclosures, based on their estimated value by an authorized assessor, in accordance with Article 11, Paragraph 3. Page 158

159 13. In addition, the same person employed in the Centre simultaneously acts in capacity of Public procurement officer, the Head of the Agency operations Office, appointed person responsible for the establishment, implementation and development of the financial management and control (FMC Manager), and the person who signs the Financial statements, which is not in accordance with the Law on Public Internal Financial Control System. The Article 9, Item 2, of the Law precisely defines to separate the duties which prevents that one person, at the same time, is responsible for authorization, execution, tracking and control. The Head of financial affairs signed a part of the treasury orders, which is not in accordance with the Law on Public Internal Financial Control System. The Centre has not acted in accordance with the Law on Public Internal Financial Control System, and has not established the internal audit, within the timeline, in one of the manners envisaged by the Law. Financial operations of the Centre during 2012 was not in accordance with the regulations, which is the result of underdeveloped internal controls (which include a set of procedures and measures taken to ensure the accuracy and regularity of financial transactions and their full compliance with regulations), as well as the lack of supervision, which the Ministry of Culture was required to undertake, in accordance with Article 35 of the Law on Culture, the SAI - Report on the Audit of Annual Financial Statements of the PI CCA for The audited entity uses the Payment Request for withdrawing funds from the Treasury Consolidated Account into the account at a commercial bank, which the Centre used to execute payments from, by a payment order. Thus, a Payment Request loses its basic purpose as an instrument of internal control of expenditure, which results in a noncompliance of the audited entity records with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, as well as non-compliance with the Annual Law on Budget. The audited entity should undertake activities on establishing and developing internal control and internal audit in accordance with the Law on Public Internal Financial Control System and Instruction for State Treasury Operations, and thus ensure conformity of financial operations of the Centre with the regulations. The Ministry of Culture should supervise the financial operations of the Centre and ensure the full implementation of the regulations governing the operations of the budget users. 14. The Centre did not draw up the Public procurement plan for 2012, which is not in accordance with Article 38 of the Public Procurement Law. After examining the Report on public procurement, it has been found that the Centre executed all the procurements of goods and services by applying only the method of direct agreements. The Centre shared a single subject of public procurement during the year, in provisioning services of the press and thereby avoid the application of the legally prescribed public procurement procedure. In the Report on awarded public procurement contracts, submitted by the audited entity to the competent authority, the following data are missing: in the column: II the place of award, III - data on the type of object (goods, services, works), IV - the subject of public procurement, which resulted in the inability to precisely determine the amount referring to goods, services and works. The audited entity did not use the terminology and expressions defined by a unique public procurement vocabulary (CPV - Common Procurement Vocabulary), in the process of compiling the Report, which is not in accordance with Art. 43 of the Law. The Centre did not submit concluded contracts with selected bidders to the competent authority, which is not in accordance with Art. 118 of the Law. The Report on public procurement is not complete, since the realized public procurements amounting to EUR 3, have not been included. According to the Report for 2012, the agreed - awarded value of public procurement contracts by direct agreements amounted to EUR 69,521.46, i.e. by % higher than the prescribed limit (EUR 6,603.73) or a nominal amount of EUR 62,917.73, which is not in accordance with Art. 30 the Public Procurement Law. Established Page 159

160 mismatches in relation to the Public Procurement Law (Art. 149, Item 4 of the Act), are prescribed as a violation of Procuring Authority, related to sharing of a single subject of public procurement, with the intention of avoiding the application of the legally determined public procurement procedure. The audited entity is obliged to ensure the full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, with the purpose of legitimate use of budget funds, thus making the public procurement procedure transparent and cost-effective. The audited entity should undertake activities that will improve its own system of public procurement, which, among other things, includes the adoption of written procedures and guidelines which will additionally defined tasks and duties of employees in the matters of public procurement, in accordance with Articles 8, 9 and 10 of the Law on Internal Financial Control System. The scope and the nature of established irregularities and omissions in the audited entity require the following: The audited subject is to report to the State Audit Institution on the actions undertaken in respect of developed and delivered recommendations, within the period of 6 (six) months. To present the contents of the SAI Final Report on Audit to the Ministry of Culture, as responsible for the supervision of the audited entity and the Ministry of Finance, as well as the Public Procurement Administration, in the part of irregularities relating to the application of the Public Procurement Law, as a body responsible for carrying out an inspection oversight over the implementation of the Law; To submit the SAI Report, (in accordance with the SAI rule on delivering all the Reports with expressed adverse opinion to the Prosecutor's Office), to the competent Prosecutor's Office, in order to determine the possible existence of the criminal offense. Page 160

161 EXCERPT FROM AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF PI INSTITUTE FOR TEXTBOOKS AND TEACHING AIDS OF MONTENEGRO Type of audit: Audited entity: Subject of audit: Audit duration: Collegium members: General audit (compliance audit) PI Institute for Textbooks and Teaching Aids 2012 Annual financial statements of PI Institute for Textbooks and Teaching Aids 60 auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Milan Dabovic, member of Senate member of Collegium Page 161

162 Page 162

163 BASIC ELEMENTS OF AUDIT 1. Subject and Scope of Audit The subject of performed audit is the 2012 Annual Financial Statement of the Institute for Textbooks and Teaching Aids and compliance of its financial operations with applicable legislation and other regulations. In accordance with Article 4 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Centre is obliged to submit Annual Financial Statements to the Ministry of Education on the following Forms: - Cash Flow Statement IV - Statement on outstanding liabilities The subject audit includes the control of cash flows, lawfulness of spending funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage or the scope of examination has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 2. Audit Objective The objective of the audit of the Institute was to express our opinion on reliability and accuracy of the Annual Financial Statements of the Institute for Textbooks and Teaching Aids for 2012 and compliance of the operations of the audited entity with legislation and other regulations, as well as the evaluation of the internal system of financial management and control. According to the audit objective, the following has been examined: - true and fairness of financial statements; - regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization for intended purposes; - internal control system 3. Type of Audit The State Audit Institution has conducted a general audit (compliance audit) within the subject audit, which implies a comprehensive insight into the financial operations of the audited entity as of December 31 st, Audited Entity Activity and Organization 4.1 Activity of the Institute PI Institute for Textbooks and Teaching Aids was established by the Government Decision : /95 as of August 7 th, 1995, ("Official Gazette of Montenegro", no. 26/95 and "Official Gazette of Montenegro". 26/08) and operates under the name of the Public Institute for Textbooks and Teaching Aids. The Institute is a legal entity and is registered in the Central Registry of the Commercial Court as of July 17 th, 2002, under the registration number /001. Tax Identification number (TIN) of the Institute is: , VAT ID Number: 30/ The Institute is seated in Podgorica, 36, Novaka Miloševa Str. Page 163

164 The Institute performs its operations through a single account number , opened at CKB Bank. In accordance with Regulation on internal organization and systematization of posts in the Institute, the Accounting and financial department consists of the Head of the department, the Adviser for accounting and bookkeeping, a Financial accountant and a Treasurer. Department Activity is defined by Article 5 of the Statute. The activity of the Institute may be the provision of services, manufacturing, sales and other activity which promotes or contributes to the rational and high quality work of the Institute, whereas the Steering Board shall make decision thereof. A decision on other activities of the Institute includes the Revenue plan and the Plan for using the generated resources in accordance with special regulations that govern this field. The Institute also performs its activity through its retail stores (bookstores), which in legal transactions act on behalf of and for the account of the Institute in trading activities. The Institute thereto, performs for the purpose of operational development and implementation of the publishing business as its major activity, for the benefit of better and timely equipped classes, pupils and students with textbooks, teaching materials, supplies and other school needs for learning, as well as for the sports, recreational and educational needs of pre-school children and pupils. Through its business units-bookstores, the Institute provides textbooks, teaching aids and instructional materials, school supplies and other school needs for learning, as well as resources for sports and recreational and educational needs of pre-school children and pupils. 4.2 Internal Organization The Institute is a unique public institution and parts of the Institute have no legal subjectivity. The internal organization of the Institute is based on the following: - A single plan and work program; - A unique business policy; - Unity of management and leadership; - The unique economic and financial system; - Unique publishing and production programmes of textbooks and other teaching aids; - Unity of organizational and technological-information links; - Harmonized methods and measures for the implementation of business policy and operations of the Institute. The internal organization and systematization of posts is regulated by the Regulation on internal organization and systematization of posts of the Institute for Textbooks and Teaching Aids, passed in December posts for 60 executors have been systematized by the Regulation. Organizational units of the Institute are the following: 1. Publishing department - Department of general and vocational education - Department of periodicals and non-textbook teaching aids 2. Department for legal, financial and general affairs - The Legal and General Affairs - Accounting and Financial Service Page 164

165 3. Division placement and turnover - Commercial Service In 1998, the Institute concluded Separate collective bargaining agreement with the Trade union organization of the Institute employees, which governs the rights, obligations and responsibilities of the employees and the employers, on the basis of the General collective agreement and the Branch collective agreement for graphic and publishing activities. On the basis of the Separate collective agreement, the Employer and the Trade union concluded two Agreements on amendment on the Separate collective agreement in 2000 and in The managing bodies of the Institute are: 1) Director and 2) The Steering Board. The Director manages the work the Institute. Director of the Institute shall be appointed and dismissed by the Steering Board of the Institute. The Director shall be appointed for a 5-year term, and thereafter may be reappointed. The mutual rights and obligations between the director and the Institute shall be regulated by the employment contract negotiated with the Steering Board of the Institute. Director of the Institute in the audited period, as well as in period of audit, is Mr Nebojsa Dragovic. The Steering Board is the managing body of the Institute. The Steering Board consists of five members, as follows: the President and the two members, representatives of distinguished scientific and professional workers in the field of education and science, as well as two members of the employees of the Institute. The President and members of the Board are appointed and dismissed by the Government of Montenegro, for a 4-year term. The Institute may, in order to consider certain organizational - professional issues within the scope of their work, compose the Expert Collegium, as an advisory body. The composition of the Expert Collegium is determined according to the Decision of director of the Institute, who also manages its work. The Steering Board of the Institute was appointed according to the Decision of the Government /4 as of November 20 th, 2008, comprising of the following members: President Mr Marko Jokic and members: prof Ljubisa Stankovic, PhD, Ms Vesna Vučurović, Ms Nadja Durkovic and Mr Alexander Hajdukovic. The audit has found that the Steering Board of the Institute has not been complete since December 30 th, 2010, when the session was held and it was noted that the requirements for the dismissal of one Board member were fulfilled, due to appointment to another position. The Institute did not submit a Request to the Government or the Ministry of Education, for the appointment of the fifth member of the Board. The mandate of all the Board members expired on November 20 th, The Institution did not submit any evidence of a request sent to the Ministry of Education and Sports in order to initiate proceedings for the appointment of a new Board member, until the completion of the audit procedure. The Institute was established as a public institution, a legal entity performing its activity in accordance with the Law on Publishing 13. The position and status of the Institute was not define by the General Law on Education 14, or by Decree on the State Administration Organization and Manner of Operation 15, and the Institute carries out its activities as one of the Programmes in the budget of the Ministry of Education and Sports. The Ministry of Education supervises the work of the Institute, in accordance with the Act on Foundation. 13 Off. Gazette of Montenegro No. 30/12 14 Off. Gazette of RoM No. 64/02... Off. Gazette of Montenegro No. 45/11 15 Off. Gazette of Montenegro No. 5/12, 25/12, 61/12 and 20/13 Page 165

166 5. Audit Methods The audit has been planned and performed in accordance with the ISSAI International auditing standards, in the manner which provides obtaining reasonable assurance about whether the financial statements of the audited entity are free of material misstatement and whether the business operations of the audited entity is compliant with laws, bylaws and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The selection of audit procedures is based on the auditors' judgment, including the risk assessment. In accordance with the audit practice, materiality is determined at the level of up to 1% of the audited entity s total expenditures, i.e. by the value of EUR 36, As for the compliance audit, materiality has been determined at the level of EUR 36, In the course of audit, various methods have been used in relation to the position of financial statements to be examined. Individual transactions testing has been used for auditing expenditures, along with tests of control, examination of records and documents, accounting records control, analytical procedures and physical inspection. For obtaining reasonable assurance about whether the financial statements give true and fair view in relation to the accepted financial reporting framework and on conformity of operations with regulations, the state auditor has decided to apply various sampling methods for different areas of audit. Statistical sampling, applying Monetary unit sampling model (MUS-Monetary Unit Sampling), which allows the calculation of extrapolation errors has been used for expenses for material and services, rental expenses and other expenditures. Determination of samples for auditing expenses for employees (gross wages and contributions charged to employer and other personal earnings) was completed by a random sampling method. In the part of transfers and other personal earnings, in accordance with the high risk estimated for this area, the state auditor has opted for non-statistical sampling, where the value and importance of transactions are basic criteria for taking a sample of transactions. The sample included all the transactions recorded in the position of other personal earnings and 80% of the transactions value in position transfers. 6. The System of Records The Institute is a public institution, legal entity registered in the Commercial Court, for carrying out activities publishing of textbooks, whereas at the same time, it is one of the Programmes in the budget of the Ministry of Education. The Institute compiles its financial statement in accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, on Forms 4 and 5 and submits it to the Ministry of Education. The Institute also prepares financial statements on Forms prescribed for economic (commercial) entities, in accordance with the Law on Accounting and Auditing and forwards them to the Department of Public Revenues. The Institute keeps accounting records on an accrual basis, in accordance with the Chart of Accounts for enterprises, as envisaged by the Law on Accounting and Auditing. The Steering Board has not adopted the financial statements for 2012, compiled by the Institute in accordance with the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local governments. Page 166

167 OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on conducted audit and established state of facts, and after deliberation of the audited entity's Opinion ( 1335 as of July 8 th, 2013) regarding the Preliminary Report of the SAI ( /8 as of June 25 th, 2013), and pursuant to Article 12 of the Law on State Audit Institution and Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composing of Mr Branislav Radulovic, PhD (member of Senate Head of Collegium) and Mr Milan Dabovic, PhD (member of Senate member of Collegium), at its session held on July 18 th, 2013, adopted the following: FINAL REPORT on Audit on 2012 Annual Financial Statement of the PI Institute for Textbooks and Teaching Aids OPINION Based on the state of facts established by the audit, the competent Collegium of the SAI have obtained reasonable assurance that the Financial Statements of the Institute for 2012 contains materially significant misstatements and disclosed activities, transactions and information have not been in all material respects in accordance with the applicable regulations, and that the Institute has not been managed with due care, which led to inefficient operations and operational loss amounting to EUR 669, Materiality rate for the audit of financial statements of the PI Institute for Textbooks and Teaching Aids, as well as for the compliance audit, has been determined at the level of 1% of the total expenditure, i.e. EUR 36, The audit has identified material misstatements in the financial statements compiled by the Institute. Three (3) positions in the financial statements - Statement of cash flows IV and Statement on outstanding liabilities, own revenues, earmarked revenues and liabilities have been incorrectly disclosed in materially significant respects. - The Cash flows IV Statement have been reported in the incorrect position of revenues amounting to EUR 2,939,405.00; - The amount of liabilities is incorrectly summarized in the Statement on outstanding liabilities, disclosing the total sum reduced by EUR 177, comparing to the factual state of facts. Materially significant deviations and non-compliance of operations with regulations have been ascertained, especially in application of the applicable regulations (the Public Procurement Law, Law on Public Internal Financial Control System, Labour Law, Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro, etc.) and internal acts (Financial plan, Rulebook on addressing housing needs of the Institute employees). - Irregularities have been identified in relation to the application of the Public Procurement Law, exceeding a total of EUR 850, Disbursements in respect of expenditure for sponsorship, in the amount of EUR 53,096.15, executed only on the basis of requests for sponsorship, without previously adopted decisions; - Disbursements of funds amounting to EUR ,00 against the union organization, executed without previously foreseen by the financial plan, and for the payment of EUR 23,500.00, there has not been even a decision issued; - Disbursement of funds in the amount of EUR 90,000.00, for addressing housing needs of the employees, without the prescribed procedure conducted. Page 167

168 Based on the established facts and analysis made of data on the Institute operations, the State auditor has concluded that the set objectives could have been met by the use of cost-effective methods, and that the Institute conducted its operations without paying enough attention to the application of regulations and acts (Financial Plan, The Public Procurement Law), or to minimizing the costs (frugality), which can affect the economy as one of the principles of successful operations. Based on the foregoing, the competent Collegium of the SAI expresses a qualified opinion on the financial statements of the Institute and an adverse opinion on the conformity of operations with regulations and on the economy of business operations. DETERMINED IRREGULARITIES AND RECOMMENDATIONS 1. The Institute was established as a public institution, a legal entity which carries out its activity in accordance with the Law on publishing and printing industry. The position and status of the Institute is defined neither by the Law on General Education, nor by the Decree on the State Administration Organization and Manner of Operation, and the Institute performs its activity as one of the budgetary Programmes of the Ministry of Education and Sports. According to the State auditor's opinion, this position of the Institute, as one of the Programmes in the budget of the Ministry of Education, is not compliant with the basic features of the Institute as an enterprise engaged in publishing activity, and leads to existence of problems and omissions in operations, which the state auditors have pointed out to in this Report. Due to the lack of a clear and defined position of the Institute, the Draft 16 of 2012 Final Statement of Accounts of the State Budget, own revenues of the Institute, amounting to EUR 2,939,405.00, are recognized in the Report in own revenue and donations of public institutions, in the table - "Analytics of the revenue generated by secondary schools." In the same table, in the column "balance on account as of 31 st December 2013", there is no sum in the position of the Institute, although the balance of account of the Institute as of 31 st December 2013 amounted to EUR 94, It is recommended to the Government of Montenegro (as a Founder) and the Ministry of Education, (which supervises the work of the Institute), to consider, in accordance with the Law on Improvement of the Business Environment 17, the possibility of reorganizing the Institute pursuant to the Company Law 18, and thus enable it to operate as an enterprise (state-owned), which the Institute in respect of its essential features, actually is. 2. The mandate of all the Board members expired on November 20 th, 2012 the Institution did not submit any evidence of a request sent to the Ministry of Education and Sports in order to initiate proceedings for the appointment of a new Board member, until the completion of the audit procedure. The Steering Board did not adopt the Financial Statements for 2012 compiled by the Institute in accordance with the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local governments and submitted it to the Ministry of Education and Sports. The Steering Board of the Institute has adopted the Financial plan which foresees operational loss, without previously having performed the preliminary analysis of the implementation of possible reductions in certain costs, (which will not affect the achievement of business objectives), in order to achieve positive business results. On the basis of the insight into the minutes of the Steering Board meeting, as of April 25 th, 2013, when the Financial Statements for 2012 was adopted, the State auditor has concluded that the Steering Board, in spite of significant exceeding in amounts of various types of expenditures comparing to planned and approved, (expenses for office supplies, sponsorships, 16 Number as of May 31 st, Off. Gazette of Montenegro, broj 40/10 18 Off. Gazette of RoM,No. 06/02... Off. Gazette of Montenegro,No. 40/11 Page 168

169 expenses for the national team, expenditures on equipment and inventories and other personal earnings), as well as the execution of expenditure amounting to EUR 113, (funds for the union organization operations), which was not predicted by the Plan, and the stocks write-offs in the amount of EUR 465, and operational loss totalling at EUR 669,797.23, did not pass conclusions as particular measures and activities that should have been implemented by director as an executive organ, and thus ensure successful operations of the Institute. It is deemed necessary that the Ministry of Education and Sports and the Government of Montenegro take immediate actions for the appointment of a new Steering Board of the Institute. In addition to Financial Statements, drawn up in accordance with the Law on Accounting and Auditing, the Steering Board should adopt the Financial Report drawn up in accordance with the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local governments and submit it to the Ministry of Education and Sports. It is deemed necessary for the Steering Board of the Institute to provide systematical planning and control of the execution and thus ensure performance management. It would be useful to make plans and report periodically (quarterly), in order to provide enough time and space for decision-making during the year. Since the revenue of the Institute can realistically be planned based on the annual Law on Budget, (general revenue) and the revenue generated from sales in the previous period (at the level of EUR 2.9 million), the State auditor has recommended performing a detailed analysis and reduce expenditure to the level that will not affect the process of meeting the set business objective of the Institute. More attention should be paid to analyzing Financial plans and Reports to be adopted by the Steering Board, as the managing body responsible for the operations of the Institute, as these documents should be considered essential for making decisions on the activities to be undertaken, in order to ensure successful operation of the Institute. 3. In the Cash flows IV statement, the Institute has disclosed revenues in the amount of EUR 2,939, Earmarked revenues amounted to EUR 2,913, include customers payments for sold goods and turnovers paid from the Institute retail shops (bookshops), whereas the amount of EUR 26, is recognized as the interest income. Revenues generated from commercial activities of the Institute should be reported in the cash flows IV statement at the position - Own revenues. 4. In its Report on outstanding liabilities, the audited entity disclosed liabilities against gross wages and contributions payable by the employer in the amount of EUR 126, Having examined the General Ledger of the Institute, it has been determined that the credit balance in the group of accounts 45 - Liabilities for wages and fringe benefits as of December 31 st, 2012 amounted to EUR 304,092.81, as it should have been disclosed in the Report on outstanding liabilities.. 5. The Institute paid out the variable portion of the earnings against its own resources, on the basis of the Decision on the manner of employee pay, 1895 as of February 28 th, Decision which serves as the basis for the variable payment refers to the period as of October 1 st, There has been no Act governing the calculation and payment of the variable portion of earnings in the period 1 st January -30 th Page 169

170 September The Decision defines that the variable portion of earnings shall be paid against the own resources if possible. During 2012, the Institute was paying variable portion for the financial year that ended with the loss in the amount of EUR 669, It is deemed necessary to define the criteria for payment of variables and in particular specify precisely the indicators for determining whether there is a possibility for disbursement of variables in a certain accounting period. 6. There are no supporting documents serving as a base for transferring the amount of EUR 23,500.00, for the operational costs of the union organization. Sponsorship expenses were carried out only on the basis of requests for sponsorship, without previously adopted decisions. In certain cases there is not any supporting documentation for the payment (requests, invoices), or the same is inappropriate. The Institute should establish internal procedures which will define the method of payment of expenditure and ensure that the payment is based on the basis of appropriate documentation. 7. During 2012, according to the Decision made by the director, the amount totalling EUR 113, was transferred to the account of trade union organizations of the Institute (EUR 90, on the basis of the above Decision, and EUR 23, without any kind of supporting documentation). The Financial plan for 2012, adopted by the Steering Board pursuant to Article 21 of the Statute of the Institute, did not provide for funding the operational costs of the Union. Director, as an executive body ensuring the legality of work of the Institute and issuing orders of execution of the Financial plan and the Programme of the Institute, should make decisions in accordance with the adopted Financial plan of revenues and expenditures. 8. The procedure prescribed for aid awards in addressing housing needs has not been fully implemented. When awarding grants to employees for addressing housing needs in three cases (decision 2917 as of December 23 rd, and No: 2930 the 2931 as of December 26 th, 2011), during 2012 no procedure of announcing and drawing up lists of candidate was conducted, to serve as the basis which the Commission could refer to when deciding on granting assistance, even though it is prescribed by Articles 38 and 41 of the Rulebook on addressing housing needs of employees in the Institute. When awarding grants for addressing housing needs of employees, the audited entity should ensure conducting of procedures prescribed by the Rulebook on addressing housing needs of employees in the Institute. 9. Advance payments, amounting to EUR 1,103, have been carried out for the printing services, although concluded contracts do not foresee advance as a method of payment. The Contracts define that the contractor party shall issue an invoice for the services provided, signed by an authorized person, whereas advance payments are not envisaged. The Institute has also made advance payments for rental expenses, although it was not provided for by the Contracts. Advance payments were posted to the debit side of the account 433-Suppliers. Initial balances on the debit side of the account Suppliers (prepayment), covered by the tested sample, amounts to EUR 145,909.75, and they are result of advance payments, which are almost the rule in the Institute for the payment of a large portion of the procurement of goods the services, and not only print services, but also the rental payments, equipment etc. Page 170

171 It is recommended to the audited entity to avoid advance payments, which should be used exceptionally, and not as a rule. Institute should allow for the recognition of the amount of advance payments in the accounting books at any time, by posting these (as stipulated by the Rulebook of the Chart of Accounts and the Contents of the accounts in the Chart of Accounts for Companies and Other Legal Entities), to account 150 Advances paid. 10. The Institute ended 2012 with reported operating loss in the amount of EUR 669,794.00, which mostly resulted from the write-off of textbooks, in the amount that burdened the operations in The amount of written off textbooks, at purchase value, totalled at EUR 407, As the stocks is recorded by the sales price (excluding VAT), the value of written-off stocks amounted to EUR 465, The value of the goods that are written off due to obsolescence and inadequacy to the curriculum total EUR 424, Promotion of cooperation between all the parties involved in the preparation of textbooks, aimed at obtaining timely information on changing of educational programmes, that directly results in replacement of textbooks, could lead to a reduction in depreciation of textbooks that burden the Institution. The Ministry of Education should consider the possibility to suggest to the National Council to timely provide clear instructions when replacing a textbook, as those frequent changes represent a major expense for the Institute (State). The possibility of using old textbooks, which the Institute has in stock should be considered in certain situations (especially when the changes made are not large in volume and essential), in order to avoid writing-off of textbooks in large quantities. Based on the insight into the documentation relating to the write-off of textbooks and the Monstat data on the number of pupils per class in elementary and secondary schools, (which ranges from 7.3 to 8.1 thousand of pupils per class at the State level), the State auditor points out that adoption of procedures which would prescribe the method of estimation optimal stocks of textbooks, could have a positive impact to reduction of costs resulting from the write-off of outdated textbooks. 11. During the implementation of negotiated procedure without publication of a contract notice, the Commission for Opening and Evaluation of three members was composed according to the Decision 205/1 as of February 15 th, Pursuant to the Decision on disbursement of remuneration for taking part in the work of Commission, determined amount for the three members and the public procurement officer totalled EUR 2, It has been found that the Institute does not have an internal rulebook which defines the amount of remuneration for membership in working groups. In addition to the lack of this Act, the Institute has not even applied the Decision on criteria for determining the remuneration rate for membership in working body or other form of labour, which in Art. 4, Paragraph 1, Item d, stipulates that a work team may be established a compensation rate for the implementation of public procurement procedures up to EUR 1, The amendments to this Regulation limited the amount of remuneration for participation in working groups for public procurement to the amount of EUR It is deemed necessary for the audited entity to adopt the internal document which will define the criteria for determining the amount of remuneration for the members of the working bodies. 12. According to the data in the Inventory report for 2012, the value of listed equipment amounts to EUR 131,766.62, whereas the written-off value of equipment totals EUR 71, According to the Page 171

172 accounting records, the value of the equipment stands at EUR 149,423.29, whereas the written-off value of equipment totals at EUR 89, The Inventory Commission failed to carry out a detailed list of receivables and liabilities of the Institute as of 31 st December The Institute has not filled recorded assets into the prescribed Forms ("PS-1", "NS-1"), as provided for in Article 9 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. It is deemed necessary for the audited entity to harmonize data from the general ledger with the data disclosed in the Report on Inventory. When performing inventory, the Inventory Commission should also list and confirm the balance of receivables and liabilities of the Institute at the end of the reporting period. The data on recorded assets should be entered into the prescribed Forms, as prescribed in Article 9 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets, and deliver to the Property Administration. 13. In the course of 2012, the audited entity wrote-off textbooks in the total amount of EUR 40, These textbooks were written-off as damaged due to the leaking roof structure in the warehouse in February and December During 2012, which was closed with operating loss for the Institute, this institution executed various types of expenditures (expenses for office supplies, sponsorships, expenses for the national team, expenditures on equipment and inventories and other personal earnings), which significantly exceeded the level planned. The audited entity did not conduct procurement procedure for printing services, (expenditure for printing services makes the most important part of the textbooks cost), in accordance with the Public Procurement Law, thus ensuring the cost-effective use of public resources. In order to increase cost effectiveness, it is recommended to the management of the Institute to ensure the implementation of legislation and internal acts, as well as the principle of frugality in the business operations of the Institute, i.e. undertake actions that will minimize costs to the extent necessary to achieve the set objectives. 14. The Institute has not complied with the Law on Public Internal Financial Control System and has not established the internal audit in the time limit and in the manner prescribed by the Law. The audited entity has not undertaken activities aimed at establishing a system of internal financial control and internal audit, i.e. the application of the Law on Public Internal Financial Control System in the Public Sector. Frequent transfers of journal entries, cancellations, delays in posting, inconsistent application of regulations, all indicate that the Institute has not sufficiently developed the internal control system, which includes a set of procedures the measures, undertaken by management to ensure the accuracy and regularity of financial transactions and their full compliance with the Law. The established irregularities in the operations indicate to the lack of supervision over the legality of operations of the Institute, which is in charge of the Ministry of Education and Sports, as stipulated by Article 5 of the Decision on Foundation. The management of the Institute should ensure the application of the Law on Public Internal Financial Control System and undertake activities for development of the internal control system. It is deemed necessary to draft a set of internal financial and accounting procedures and measures, especially in the parts related to compiling financial plans of revenues and expenditures, payment of expenses, recording and acting upon irregularities and executing public procurements. Page 172

173 It is recommended to the Ministry of Education and Sports to perform supervision of the work of the Institute in accordance with Article 5 of the Decision on Foundation and to undertake specified measures in order to eliminate irregularities in the operation of the Institute. 15. During 2012, the audited entity shared a single subject of public procurement and did not conduct statutory public procurement procedure when taking business premises to lease, when purchasing computer equipment, with the procurement of printing services and supplies for the bookstores (the total value of purchased goods and services exceeds EUR 850,000.00), which Article 149, Paragraph 1, Item 4 of the Public Procurement Law stipulates as a misdemeanour. The Institute submitted to the Public Procurement Directorate an incomplete Report on granted public procurement contracts, which contains only Form A (records on granted public procurement contracts, in this particular case, of contracts concluded on the basis of a negotiated procedure without prior publication of contract notice). The submitted Reports do not contain Form B (records on granted public procurement contracts of small value - shopping method) and the Form C (records on granted public procurement contracts by direct agreement), which is not in accordance with the Regulations on the Records of Public Procurement Procedures, and with Article 117 and 118 of the Public Procurement Law, and which is subject to misdemeanour charges (Article 149, Paragraph 1, Item 12 and 13 of the Law). The audited entity is obliged to ensure the full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, with the purpose of legitimate use of budget funds, thus making the public procurement procedure transparent and cost-effective.. The audited entity should undertake activities for enhancing its own public procurement system, which, inter alia, shall include adopting written procedures and guidelines which will further regulate tasks and duties of the employees engaged in public procurements, in accordance with Art. 8, 9 and 10 of the Law on Public Internal Financial Control System. The competent Collegium of the SAI has determined that the scope and nature of established irregularities and omissions in the audited entity require: The audited entity is to report to the State Audit Institution on the actions undertaken in respect of developed and delivered recommendations, within the period of 6 (six) months. To present the contents of the SAI Final Report on Audit to the Ministry of Education and Sports, as an authority responsible for the supervision of the audited entity, as well as the Public Procurement Administration, in the part of irregularities relating to the application of the Public Procurement Law, as a body responsible for carrying out an inspection oversight of the implementation of the Law. To submit the SAI Report, (in accordance with the SAI rule on delivering all the Reports with expressed adverse opinion to the Prosecutor's Office), to the competent Prosecutor's Office, in order to determine the possible existence of the criminal offense. Page 173

174 Page 174

175 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE PRIVATIZATION AND CAPITAL PROJECTS COUNCIL Type of audit: Audited entity: Subject of audit: Audit duration: Collegium members: General audit (compliance audit) Privatization and Capital Projects Council 2012 Annual financial statements of Privatization and Capital Projects Council 60 auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 175

176 Page 176

177 BASIC ELEMENTS OF AUDIT 1. Subject and Scope of Audit The subject of performed audit is the 2012 Annual financial statement of the Privatization and Capital Projects Council and compliance of its financial operations with applicable legislation and other regulations. In accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments (Official Gazette of Montenegro 32/10), the Council is obliged to submit Annual financial statements to the Ministry of Finance on Forms 3 and 5: - Cash flow III Statement - Statement on outstanding liabilities. For unspent deposits on the sub-accounts or transitional accounts, which are recorded in the Treasury General Ledger as an expenditure, the spending unit is required to, in addition to the Annual financial statements, submit also the Statement on the manner of spending funds submitted upon the expiry of a fiscal year on Form 8. For the spent funds of the current budget reserve, the audited entity (spending unit) is obliged to submit the Statement on the spent funds of the current budget reserve on Form 9. The subject audit includes the cash flows control, lawfulness in spending funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage or the scope of examination has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 2. Audit Objective The objective of the audit of the Council was to express our opinion on reliability and accuracy of the Annual financial statements of the Privatization and Capital Projects Council for 2012 and the compliance of operations of the audited entity with laws and regulations. According to the audit objective, the following has been examined: - true and fairness of financial statements; - regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization for intended purposes; 3. Type of audit The State Audit Institution has conducted a general audit (compliance audit) within the subject audit, which implies a comprehensive insight into the financial operations of the audited entity as of December 31 st, Page 177

178 4. Activity and Organization of the Audited Entity Pursuant to Article 2a of the Law on Privatization 19 the Government established the Privatization and Capital Projects Council in 2009, for the purpose of managing, supervising and ensuring the implementation of the process of privatization, as well as proposing the coordinating activities in the implementation of capital projects in Montenegro. The scope of work, composition and the other issues relevant to the work of the Council have been defined by the Decision on the scope of work and the composition of the Privatization and Capital Projects Council 20. Pursuant to Art. 2 of the above Decision, the Council performs the tasks of management, control, the implementation of privatization and has executive powers stipulated in the Law on Privatization of Economy, proposes and coordinates activities on the implementation of capital projects in Montenegro. In performing its duties, the Council shall act on behalf of and represent the interests of Montenegro in the privatization process and responsible to the Government. The Council has a President, Vice-President, a number of members and a Secretary General appointed by the special decision. The number of members of the Council shall be determined by an act of appointment. The term of office of the President, the Vice- President and the members of the Council is 4 (four) years with the possibility of re-election. Decision on the scope of work and the composition of the Privatization and Capital Projects Council has defined the following: - resources for the Council s operations shall be provided from the Budget of Montenegro and the Privatization State Funds; - for performing tasks under the jurisdiction of the Council, it may have one or more accounts with commercial banks, and the changes in these accounts will be recorded over the State Treasury; - the General Secretariat of the Government shall carry out administrative and technical tasks for the Council; - every 6 (six) months the Council shall submit the Report on the implementation of the privatization plan to the Government. 5. Audit Methods The audit has been planned and performed in accordance with the ISSAI standards, in the manner which provides obtaining reasonable assurance about whether the financial statements are free of material misstatement and whether the business operations of the audited entity is compliant with laws, bylaws and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The selection of audit procedures is based on the auditors' judgment, including the risk assessment. In accordance with the audit practice, materiality is determined at the level of up to 1% of the audited entity s total expenditures, or nominal value of EUR 3, Determination of sample for auditing expenditure was made by a method of non-statistical sampling, where the criteria for choosing a sample of transactions are the value and importance of transactions. When calculating the sample, the state auditor used subjective judgment. It is a pragmatic approach, where one decides according to distinct criteria of audit and the implications to resources. Determination of sample was done separately for each field of auditing. 19 Off. Gazette of RoM, No.23/96, 6/99,59/00,42/04 20 Off. Gazette of Montenegro, No. 83/09 as of December 18 th, 2009, 04/11 Page 178

179 6. The System of Records Accounting system of the Centre uses modified basis of accounting, which provides accrual based accounting for recording of assets and liabilities, whereas the revenues and expenditures are posted at the time they incur, i.e. using the principle of cash basis of accounting. The audited entity keeps records of expenditures by economic classification, in accordance with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. Cash transactions are carried out through the Treasury Consolidated Account. The audited entity is connected to the SAP information system (software of the State Treasury which keeps records of treasury operations) and executes payments of expenditures by a Payment Request Page 179

180 OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on conducted audit and established state of facts, and after deliberation of the audited entity's Opinion ( as of October 3 rd, 2013) regarding the Preliminary Report of the SAI ( /4 as of September 25 th, 2013), and pursuant to Article 12 of the Law on State Audit Institution and Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composing of Mr Branislav Radulovic, PhD (member of Senate Head of Collegium) and Mr Dragisa Pesic (member of Senate member of Collegium), at its session held on October 7 th, 2013, adopted the following: FINAL REPORT on Audit on 2012 Annual Financial Statements of the Privatization and Capital Projects Council OPINION Financial statements of the Privatization and Capital Projects Council for 2012, in all material respects, give a true and fair view of reported receipts and expenditures, except for the incorrectly disclosed expenses for material and services, which affect the financial statement (in materially significant respect), as well as the lack of records of liabilities. Materiality rate for the audit of financial statements of the Council, as well as for the compliance audit, has been determined at the level of 1% of the total expenditure, i.e. EUR 3, The audit has identified material misstatements in the financial statements compiled by the audited entity the Council. Institute. Two positions in the financial statements - Statement of cash flows III, including: Other personal earnings and Expenses for material and services have been incorrectly disclosed in materially significant respect, with a total amount of discrepancy of EUR 12, As for the second part of the financial statement - Report on outstanding liabilities, there is no corresponding records based on which the State auditor could be convinced to what extent the liabilities disclosed in the statement correspond to factual debts of the audited entity. The Council does not keep records of liabilities on the accounts of Class 2 and it is not possible to express an opinion on the accuracy of the Report on outstanding debts. Activities, transactions and information disclosed in the Financial Statements for 2012 have not been in all material respects in compliance with the applicable regulations and statutory requirements. Materially significant deviations and incompliance of operations with regulations have been ascertained, especially in application of the Annual Law on Budget for 2012, Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities and the Public Procurement Law. Based on the established state of facts, in respect of the Annual 2012 Financial Statements of the Council and the conformity of the audited entity operations with regulations, the competent Collegium of the SAI expresses a QUALIFIED OPINION. Page 180

181 DETERMINED IRREGULARITIES AND RECOMMENDATIONS 1. Pursuant to Article 2a of the Law on Privatization of Economy 21, the Government established Privatization and Capital Projects Council (for the management, control and implementation of the process of privatization, as well as for the purpose of proposing and coordinating activities on the implementation of capital projects in Montenegro). In accordance with the Article 26 of the Rules of Procedure of the Government 22, the Council was established as an advisory governmental body, and pursuant to the annual Law on Budget, it has the status of the budget spending unit 23. Decision on the scope of work and composition of the Council prescribes that the General Secretariat of the Government shall carry out administrative and technical tasks on behalf of the Council. It is recommended to the Government to consider the current position of the Council as an advisory governmental body, while it is at the same time also a separate Budget spending unit (possible if the Government establish a single entity that would consolidate several governmental bodies of similar competence). 2. The Decision on the scope of work the composition of the Council (Article 2) provides that the Council "shall submit to the Government a Report on the implementation of the privatization plan every six months." In 2012, the Council did not submit any report to the Government any report on the implementation of the privatization plan. The audited entity should, in accordance with the Decision on the scope of work and composition of the Privatization and Capital Projects Council, submit semi-annual report on the implementation of the privatization plan. 3. In respect of Council members fees and remunerations for participation in the work of the Commission, the audited entity paid expenses totalling EUR 12,166.00, recorded on the account position Contracted services. In the Cash flows III Statement, the audited entity incorrectly disclosed two positions in the financial statements, including Other personal income and Expenses for materials and services, in the same misstated amount of EUR 12, Expenditures for Council members fees and remunerations for participation in the work of the Commission, should be recorded on the positions Other remunerations and recognized in the Cash flows III Statement in position Other personal earnings. 4. The audited entity does not keep records of liabilities in the accounts of Class 2, and the State auditor has not been able to obtain assurance about the state of balance of the outstanding liabilities disclosed in the Report on outstanding liabilities. The audited entity is obliged to record liabilities in the accounts of Class 2 Instructions for Completing Report on Outstanding Liabilities, which together with Form 5 makes an integral part of the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local governments, and provides that the data recorded in the accounts of Class 2 Liabilities, shall be entered in the Report on outstanding liabilities. 21 Off. Gazette of RoM, No. 23/96, 6/99, 59/00 and 42/04 22 Off. Gazette of Montenegro, No. 48/09 23 According to Article 3 of the Law on Budget, spending units are: state bodies, ministries, administrative authorities, state funds local government authorities and local government administration bodies. Page 181

182 5. By examining sample-tested expenditures, the audit has found that the audited entity recorded expenditures (totalling EUR 14,604.00) on positions that are not in accordance with the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, and therefore, these expenses have not been spent for the purposes approved by the Law on Budget for The audit has determined that the reported structure of expenditure of the audited entity does not match the planned budget spending and that executed payments do not correspond with the purposes recognized by the Budget, so it is deemed necessary to increase fiscal discipline in the forthcoming period and use funds for intended purposes. The audited entity is required to use budget resources in accordance with the Annual Law on Budget and to record expenditures as stipulated by the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. 6. The audit has found that in 2012, in addition to resources allocated from the budget position of the Council, the payment of remunerations for Council members was executed against the budget position of the General Secretariat of the Government, in the amount of EUR 32, Remunerations for the Council members, (having in mind that the Privatization Council is a budget spending unit), should be planned and paid out against the budget of this spending unit. 7. The audited entity does not have an internal act which determines the amount of compensation for the engagement of consultants and other professionals to perform tasks for the Council. The audited entity should pass an Act that would regulate the manner, criteria and the amount of compensation rate for the engagement of professional persons for the needs of the Council. 8. According to the records of the Department of Public Revenues (individual analytical account of the taxpayer - Council, on 4 th September 2013), the Council has a total of 525,088.80, based on overpaid taxes and contributions. It is recommended to the Council to harmonize records in cooperation with the Department of Public Revenues, in order to settle mutual commitments with the Department of Public Revenues, in the part referring to the overpayment recorded at the Department of Public Revenues based on paid taxes and contributions. 9. The audit has determined that the audited entity adopted the 2012 Public procurement plan as of September 5 th, 2012 (with eight month delay in relation to the statutory deadline). The audited entity is obliged to draw up the Public procurement plan and submit it to the competent authority within the time limit prescribed by the Law (January 31 st ). Page 182

183 10. The audited entity does not keep records of public procurements awarded by the implementation of a direct agreement on the Form C, as required by Article 2 of the Regulations on the Records of Public Procurement Procedures. The Council submitted to the competent authority an incomplete Report on awarded public procurement contracts, which contains only Form A (records on granted public procurement contracts, in this particular case, the contract was concluded on the basis of the procedure - consultancy services without prior publication of a contract notice), but it did not submit the Form C, which contains records of public procurements awarded by direct agreement, which is not in accordance with Article 118 of the Public Procurement Law and Article 6 of the Regulations on the Records of Public Procurement Procedures. For the stated incompliance with the Public Procurement Law, the Law stipulates the misdemeanour liability (Article 149, Paragraph 1 of the Public Procurement Law). The audited entity is obliged to act in accordance with Article 118 of the Public Procurement Law and Article 6 of the Regulations on the Records of Public Procurement Procedures, and to keep records of public procurement contracts conducted by direct agreement procedure and disclose the number, the value and the name of a supplier in the Annual Report submitted to the competent administrative authority. 11. The audit procedure has determined that the obligation of keeping consolidated records of all the privatization contracts, but the records thereof have been kept in several Governmental institutions. Taking into consideration the role and the importance of the Council's in the management and control of the privatization process, the SAI recommends to the Government to amend the Decision on the scope of work and composition of the Council and stipulate that the Council shall establish and ensure keeping unique records of the privatization contracts. The competent Collegium of the SAI has determined that the scope and nature of established irregularities and omissions in the audited entity require: The audited entity is to report to the State Audit Institution on the actions undertaken in respect of developed and delivered recommendations, within the period of 6 (six) months. Page 183

184 Page 184

185 EXCERPT FROM THE AUDIT REPORT ON MANAGING BUSINESS PREMISES Type of audit: Audited entity: Subject of audit: Audit duration: Collegium members: Compliance audit and economy audit Managing Business Premises Existing system of managing business premises lease 180 auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Milan Dabovic, member of Senate member of Collegium Page 185

186 Page 186

187 BASIC ELEMENTS OF AUDIT 1. The Audited Entities The audited entities are: - Property Administration; - Ministry of Finance. PROPERTY ADMINISTRATION The adoption of the Law on State Property ("Official Gazette of Montenegro" 21/09) and the Decree on the State Administration Organization and Manner of Operations ("Official Gazette of Montenegro" 59/09), has made it necessary to establish the Property Administration, to carry out tasks related to: conducting a unique records of the state property in accordance to international accounting standards; keeping a register of state property; taking care of the intended use of the state property; taking care of the property which by force of law becomes the state property; investment the ongoing maintenance of the buildings of state bodies, representative buildings of the state authorities and Montenegrin diplomatic and consular buildings abroad; submitting requests and monitoring tasks of cadastral registration relating to the plotting, demarcation, exchange, preparation of draft contracts and monitoring their implementation; carrying out collection of lease; providing conditions for the protection of assets; performing other duties in connection to the state property by order of the Government and the Ministry of Finance; harmonization of data from their records with data from the real estate Cadastre; inventory of assets owned by the former social and political organizations and providing their registration in the Cadastre of real estate; taking care of registration of stateowned property in the real estate Cadastre; keeping records of the contracts on acquisition and disposal of state-owned immovable the movable assets and other goods of higher value; submission of reports to the Ministry of Finance in electronic form, within the time limits prescribed by Law; performing additional tasks necessary for the functioning and operations of state bodies, as well as other duties under its jurisdiction. MINISTRY OF FINANCE The Ministry of Finance performs administrative tasks related to: preparing proposals of the current economic policy of Montenegro and monitoring its implementation; preparation, planning, drafting and execution of the budget of Montenegro; fiscal impact; supervision of expected revenues and expenditures of the budget of Montenegro; proposing guidelines and medium-term macroeconomic framework for the preparation, planning and control of the budget; execution, modification and evaluation of the budget with analysis of the requirements of spending units, extra-budgetary funds for the allocation of budget funds and proposing amendments thereto; capital spending of the public sector, the assessment of basic economic proportions and balances; simulation, testing and evaluation of the effects of economic and development measures and institutional changes; bank system; securities; expressing opinions in terms of improving the business environment to the bills and other regulations; execution of payments upon payment requests by spending units; Treasury General Ledger; managing accounting system of Government revenues; preparation of the final statement of accounts of the budget; financial control through accounting system based on planned liabilities; following the execution of expenditure; preparation of regular financial statements for the Government of Montenegro (hereinafter: the Government); management of available funds in the Treasury Consolidated Account; Debt Management arising from securities issued by the state, given guarantees and borrowings; management of domestic the external debt, foreign donations, aid and loans; monitoring financial operations of extra-budgetary funds and local self-government units; preparation of proposals on financial system regulations, the system of games of chance, insurance, accounting, auditing, money laundering and financing of terrorism, anti-corruption; coordination of activities, the realization of cooperation and fulfilment of Page 187

188 obligations towards the World Bank, the International Monetary Fund and other international financial institutions; public revenues (customs duties, taxes, contributions, fees, fees, etc.), which finance public expenditures at the state level and at the local government level; international agreements on avoidance of double taxation; application of international agreements relating to customs policy; system of local government finance; customs and tax policy; development of the system of internal financial control in the public sector in line with the international standards; preparation and implementation of regulations in the field of property-legal relations, state property, survey and real estate cadastre, land expropriation, liens on the assets, and return of indemnification on the basis of confiscated property; decision-making in the second instance administrative procedures in the field of property rights and restitution of the first instance proceedings; taking care of the collection of domestic debt relating to the Government receivables through regular, bankruptcy and court proceedings and activation of lien rights on this ground, the field of public procurement; giving proposals regarding the management and disposal of state property; implementation of the Law on Ratification of the Framework Agreement between the Government of Montenegro and the Commission of the European Communities on the rules for cooperation concerning EC financial assistance to Montenegro in the framework of the implementation of pre-accession assistance (IPA); adoption of system regulations, rules of procedure, procedures of establishing a decentralized management of projects of the European Union in Montenegro; conducting tenders, contracting, approving payments and financial reporting in terms of public procurement in the field of services, supplies, works, grant and twinning, in terms of programmes financed by the European Union in Montenegro; providing the application of EU rules, regulations and procedures relating to procurement in the field of services, works, equipment, and twinning grant, the proper functioning of the reporting system; control of activities within the organization of tender procedures, grants, contracting, financing, approval of payment; state assistance; international financial cooperation in the areas which the Ministry has been founded for; alignment of domestic system regulations under its jurisdiction with the EU acquis; administrative oversight in the areas which the Ministry has been founded for; as well as other duties assigned under its jurisdiction. 2. Type, Subject and Objective of Audit The State Audit Institution (SAI) has performed a thematic audit cross-section audit on managing (rental and lease) business premises. The subject of audit is the existing system of disposal and management of state assets - official buildings and premises, i.e. giving for usage, as well as renting and leasing business premises. The subject of audit involves all the decisions, actions and rules for management, accounting system and development of financial and material resources. o The compliance audit implies verification whether the disposal and management of premises is in accordance with established criteria (rules, regulations, acts, decisions, norms). o The performance audit of disposal and management of premises will be implemented through the audit of the economy. Economy means minimizing the cost of resources used for an activity, having regard to quality i.e. spending economically, whilst maintaining quality. o The audit of economy and efficiency should determine whether the most acceptable and less expensive business premises have been given for use and leased, which will provide meeting the set objectives of the bodies that use them. The audit objective is: assessment of quality of the established institutional and normative framework including a Registry of the State property and appraisal of economy of management (of lease) business premises. Page 188

189 3. The SAI Findings in Previous Audits The audit conducted at the Property Administration (number /12 as of June 26 th, 2011), determined the following omissions and put forward recommendations: the audit procedure related to the effectiveness of recording of state property has found that the application of the Law on State Property is not ensured and that there is no established Registry of the state property, despite the expiration of time limit for its establishment prescribed by law and by-law. The SAI has determined the following: It is deemed necessary for the Ministry of Finance to cooperate with the authority of the state administration, responsible for the Information Society, on developing electronic data processing programme for keeping separate records, registries and a single records of state property as soon as possible, and submit it to the use of the Property Administration. When using its own (temporary) software solutions, until the provision of legally established programme for the state property records, the audited entity should: - provide adequate IT protection of the temporary programme for state property records, which was developed by the Property Administration; - accurately determine input procedures and use of data, as well as persons who may have access to the database, i.e. who may carry out registration procedure and other operations; - complete final modification of its program solution which would have, pursuant to Article 42 of the Law on State Property, in addition to specific records of movable and immovable property, to contain separate records for other goods, except for the things of special purposes; - add, in the part of recording immovable assets, a separate section to the database, relating to the data on immovable assets which have been acquired by joint ventures. The audit has determined that there have not been any control or other procedures conducted with the aim of eliminating any possible lacks, identified in the process of recording and submitting data relating to the state property, due to insufficient staff capacities in the Department for state property records, and the fact that the competent ministries have not developed and delivered software for the records of assets. - The audited entity should establish internal procedures in order to control the legality and regularity of the proceedings of recording state property; - The audited entity should carry out internal controls aimed at eliminating any possible lacks, identified in recording state property and in the process of providing documentation from the competent authorities; - The audited entity should finalize and solve the problem of insufficient staff capacity in the Department for state property records. The audit has found that state bodies and local government units which lease state assets perform its acquisition or sale, do not submit concluded contracts to the Property Administration for the purpose of keeping records, in accordance with Article 61, Paragraph 2 of the Law on Property. - It is deemed necessary for the Ministry of Finance, as the authority responsible for the oversight of the implementation of Law on State Property, to take actions to initiate Page 189

190 misdemeanour proceedings, towards entities that do not submit the data to the Property Administration, pursuant to Art. 61 of the Law. The audit of the 2011 Final Statement of Accounts of the Budget of Montenegro has found that spending units, in the cases determined by audit, inconsistently apply the statutory obligations and that in some cases, despite earlier recommendation of the SAI, keep repeating errors in the application of laws and other legal acts of secondary legislation, with the special attention drawn to the cases of inappropriate or inconsistent application of the provisions of the legislation, including the Law on State Property. Based on foregoing, the SAI has given the following recommendations: The Ministry of Finance and the Property Administration, in cooperation with the Ministry for Information Society, in accordance with Article 17 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro, should complete the activities related to the procurement of software for the electronic registry of state property and enable its putting into use. The State authorities should, in accordance with Article 50 of Law on State Property, promptly submit to the Property Administration data on movable and immovable state-owned property, in order to create high-quality database and their entry in the electronic registry of state assets. CONCLUSIONS, FINDINGS AND RECOMMENDATIONS Based on performed audit and established state of facts, and pursuant to Article 12 of the Law on State Audit Institution and Article 48, Paragraph 5 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composing of Mr Branislav Radulovic, PhD (member of Senate Head of Collegium) and Mr Milan Dabovic, PhD (President of Senate member of Collegium), at its session held on October 15 th, 2013, adopted the following: FINAL REPORT on Audit on Managing Business Premises I. NORMATIVE AND INSTITUTIONAL FRAMEWORK The existing normative and institutional framework envisages that providing the possession and use 24 of official buildings and business premises is conducted through a process in which the Government adopts Decisions on the lease, at the proposal of the Ministry of Finance. It is provided that the technical basis for giving use of is prepared by the Property Administration, based on the standards for the use of office space per employee. The basic prerequisite for successful process and quality decisions are the prescribed records (with all the necessary information) of state-owned immovable assets (real estate). 24 The State auditor covered by audit the management (lease) of state-owned business premises because the economy of taking a lease of business premises primarily has to be based on the assumption that the business premises owned by the state are economically utilized. Page 190

191 The applicable regulations prescribe that the lease of state-owned immovable property, as a rule, shall be performed by a public auction (auction) and by collecting bids (tender), and exclusively by a direct agreement. In the process of the respective audit, the following shortcomings of the existing system of managing state-owned premises have been ascertained: The standard for the use of or taking a lease of office space has not been prescribed (specified by m 2 per employee or some other criterion), which would serve as the base for distribution; 25 There are no by-laws in respect of the management of lease of business premises; the obligation of drafting and developing documents for the state property management has not been prescribed (the Strategy, Management plan and Report on the execution of the Management Plan), which would define the long-term and short-term objectives and guidelines for the management of state property; The Government has not passed a regulation that defines the types of procedures and public procurement, as well as the manner of their implementation for diplomatic and consular missions of Montenegro abroad, military and diplomatic representatives and the Army of Montenegro units in the international forces and peacekeeping missions, as stipulated by Article 2 The Public Procurement Law. II. APPLICATION OF LAWS AND OTHER REGULATIONS The Property Administration has not established the Registry of the state property, which is not in accordance with Article 20 of the Law on State Property. The unique property records kept by the Property Administration is not based on a consistent application of the Regulation on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets, i.e. on the Forms prescribed for submitting data (Form NS-1 for official buildings, business premises, garages, official flats, etc.), and does not provide all the required information, as for example data relating to the area (m 2 ) of business premises at disposal of the state bodies that use them. The procedure of for giving the use of official buildings and business premises that are provided for the use of state organs, which is prescribed by Law on State Property ( Official Gazette of Montenegro", no. 21/09 and 40/11) and the Regulation on Conditions and Use of Official Buildings and Business Premises in the Ownership of the State of Montenegro ("Official Gazette of Montenegro", no. 07/11 and 19/13), is not applied consistently in all the cases. Inspection for the State Property has not been established. State authorities and public services founded by the State of Montenegro, in most cases do not submit to the Property Administration the data from the records of the property on the prescribed forms, which is not in accordance with Article 9 of the Regulation on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. 25 The Property Administration has not passed the standard for the use of business premises per civil servant, but the distribution of office space is managed according to the practice and experience of the countries in the region, which apply the standard of 9m ² per employee. Page 191

192 The Ministry of Finance and the Ministry for Information Society have not prepared a program of electronic data processing for keeping separate records, registries and unique records, which is not in accordance with Article 17 of the Regulation on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. III ECONOMIC EFFICIENCY OF BUSINESS PREMISES MANAGEMENT One of the objectives of the respective audit has been the assessment of performance in managing business premises, (the economy and efficiency audit). First of all, to make the lease of office space for the needs of the state organs economically justified, two basic conditions have to be met: and - that the existing business premises, which is owned by the state, is economically exploited and - the competent authority disposes of accurate data on the potential surplus of business premises in certain state bodies. The audit has determined the following: Due to the inconsistent application of regulations, governing the field recording immovable property owned by the state, the competent authorities do not have (as a unique records) data on the area business premises per employee, which prevents assessment of whether the business premises are exploited economically, i.e. whether some authorities have more or less business premises (compared to prescribed standards), than needed to perform their operations. There is not a unique records of business premises which are given on lease and the data for particular business premises are reported only in the records of the Property Administration or the Ministry of Finance, while some data appear in both records. In the records of the Treasury General Ledger, the revenues generated from the lease of land and buildings are recorded on the same account, and therefore the Bill on 2012 Final Statement of Accounts of the Budget of Montenegro( with explanation) does not clearly and separately discloses the income generated by the lease of business premises. This makes the access and the insight into the complete and accurate information on the revenue generated by the lease of business premises at the annual level, difficult to competent authorities, which is necessary in order to monitor the implementation thereof. Economic efficiency of managing business premises taken on lease by the state bodies can be assessed by answering the following questions: whether the size, location and the equipment of the business premises affect the high price, but are not essential for the successful functioning of the organs that use them and whether the leasing of business premises for the purpose of state authorities is implemented by consistent application of the Public Procurement Law, which is the basic assumption that the business premises have been obtained at the lowest price. Assessment of the extent to which taking business premises on leasing, for the purposes of state organs, is considered reasonable and economic, on a commercial basis, previously also requires an answer to the question about the established criteria to determine area, location and other elements when taking business premises on lease. There are no statutory models and the criteria for taking business premises on lease and thus there is neither prescribed obligation of authority that takes business premises on lease to objectively compare costs and benefits of different solutions (location, equipment of, etc.), nor the obligation to prove the need for a particular size of business space. Page 192

193 A regulation defining types of public procurement procedures and the manner of their implementation for Montenegrin diplomatic and consular missions abroad, for the military and diplomatic representatives and units of the Army of Montenegro in the international forces the peacekeeping missions, has not been passed yet, which means that the application of the basic principles of public procurement have not been provided: the economy and efficiency of the use of public funds and ensuring competition. In certain cases, state bodies and public services founded by the State of Montenegro, when taking business premises to lease, implemented the public procurement procedure in a way (by using criteria and specifications requested by tender documentation) which does not ensure meeting the principle of competition, and therefore provision of business premises at the lowest price. Consequently, with the aim of successful management and disposal of business premises (of the state property in general), the competent Collegium of the SAI put forward the following recommendations: 1. Prescribe the criteria and procedures for taking business premises to lease; 2. Prescribe the standard for the use of business premises per employee; 3. Define by Law the obligation of developing documents for management of the state-owned property (the Strategy, Management plan and Report on the execution of the Management Plan), which would define the long-term and short-term objectives and guidelines for the management of state property; 4. It is recommended to the Government, according to the Article 2 of the Public Procurement Law, to promptly pass the regulation defining types of public procurement procedures and the manner of their implementation for Montenegrin diplomatic and consular missions abroad, for the military and diplomatic representatives and units of the Army of Montenegro in the international forces the peacekeeping missions. 5. It is deemed necessary for the Property Administration to establish unique records of immovable property in a form and with all the information provided as stipulated by the law, as a precondition of implementation an economically efficient process of giving the use of business premises. 6. Unique records of business premises should provide the following data: the number of business premises and total area thereof (in m 2 ) in possession of the State of Montenegro; the level of their utilization per employee; the number of insufficient (and needed) business premises to perform the functions of the state organs. These data are necessary in order to determine the appropriate manner (by adopting the Strategy, the Management plan) for addressing the lack of business premises. Ministry of Finance the Ministry for Information Society should, at the earliest, prepare a program of electronic data processing for keeping separate records, registries and the unique records of the state property. 7. It is deemed necessary for the Ministry of Finance and the Property Administration to provide the unique records of business premises given on lease. 8. It is deemed necessary for the Ministry of Finance to separately disclose the income generated by the lease of land and the revenues generated from the lease of business premises in the Bill Page 193

194 on 2012 Final Statement of Accounts of the Budget of Montenegro, i.e. to keep separate records of the income generated from the lease of business premises in the separate account in the Treasury General Ledger, which would allow monitoring the success in collecting these revenues. 9. Statutory models and criteria for taking business premises on lease should be defined, in order to impose an obligation to the authority that takes business premises on lease, to objectively compare costs and benefits of different solutions, (location, equipment of, etc.), and to prove and justify the need for a particular size of business premises. 10. The SAI recommends to the Government to consider the possibility of putting the Property Administration in charge of conducting the procedures of leasing business premises for all the state bodies. The competent Collegium of the SAI has determined that the scope and type of the respective audited require: in addition to the audited entity, to present the contents of the SAI Final Report on Audit to the following entities: - The Government of Montenegro; - The Ministry of Foreign Affairs and European Integrations - The Ministry for Information Society the audited entities are to report to the State Audit Institution on the actions undertaken in respect of developed and delivered recommendations, within the period of 6 (six) months. Page 194

195 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE SOCIAL COUNCIL Type of audit: Audited entity: General audit The Social Council Subject of audit: Annual financial statement for 2012 Audit duration: Collegium members: 45 auditing days Mr Milan Dabovic, PhD, member of Senate Head of Collegium Mr Branislav Radulovic, PhD, member of Senate member of Collegium Page 195

196 Page 196

197 I. BASIC ELEMENTS OF AUDIT 1. Legal Basis The State Audit Institution of Montenegro, (hereinafter: the Institution), in accordance with Article 4 of the Law on State Audit Institution ( Official Gazette of Montenegro 28/04, 27/06 and 17/07) and Decision on performing the audit passed by the Collegium responsible for the respective audit (SAI number: , as of January 16 th, 2013), performed the Audit of 2012 Annual Financial Statements of the Social Council. The audit has been performed in accordance with the Law on State Audit Institution and the Rules of Procedure of the State Audit Institution. The audit procedures have been conducted in accordance with International Standards on Auditing in the Public Sector (ISSA and EUROSAI). These standards require that the audit is carried out in accordance with ethical requirements and plan and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. 2. Subject and Scope of Audit The subject of performed audit is the Annual Financial Statements of the Social Council for 2012 and compliance of its financial operation with applicable legal and other regulations. In accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Social Council is obliged to submit the Annual Financial Statements to the Ministry of Finance on Forms: Form 3 Cash flow Statement Form 5 Statement on outstanding liabilities Form 8 - Statement on the manner of spending funds submitted upon the expiry of a fiscal year Form 9 - Report on using current budget reserve funds The respective audit includes the cash flows control, lawfulness in spending funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage, or the scope of examination, has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 3. Audit Objective The objective of the audit was to express our opinion on reliability and accuracy of the Annual financial statements of the Social Council for According to the audit objective, the following has been examined: true and fairness of financial statements, which implies regularity of data reported. regularity of operations, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transactions were executed in accordance with the law, other regulations, given authorization and for intended purposes. Page 197

198 4. Type of Audit The State Audit Institution has conducted a general audit (compliance audit) within the respective audit, which implies a comprehensive insight into the financial operations of the audited entity as of 31 st December General Information on the Audited Entity Activity of the Audited Entity The Social Council was founded for the purpose of establishing and developing social dialogue on issues of importance for the realization of economic and social status of employees and employers and their living and work conditions, developing culture of dialogue, encouraging the peaceful resolution of individual and collective labour disputes and other issues arising from the international documents, which relate to the economic and social status of the employees and employers. The Social Council of Montenegro was established by the Law on Social Council ("Official Gazette of Montenegro" 16/07 and 20/11), which regulates the composition, scope, method of operations, financing and other issues of importance to the work of the Social Council. The Social Council of Montenegro is a legal entity and by Decision of it was entered in the register of the Social Councils, which is governed by the state administrative body responsible for labour affairs, the Ministry of Labour and Social Welfare. According to Article 8 of the Law on Social Council, the Social Council passed the Rules of Procedure and other acts which further regulate the scope of work, as well as other issues of importance to his work. Resources for the establishment and operation of the Social Council shall be provided from the Budget of Montenegro. The seat of the Social Council of Montenegro is in Podgorica, 2, Stanka Dragojevica Str. The President of the Social Council in 2012 was Suad Numanovic, PhD Organization and Systematization of Posts Pursuant to Article 13 of the Law on Social Council, at its session of 9 th June 2011, the Government of Montenegro passed a Resolution /3, on the appointment of members of the Social Council of Montenegro. The Council consists of the following: eleven (11) representatives of Government of Montenegro, six (6) representatives of the Confederation of Trade Unions of Montenegro, five (5) representatives of the Union of Free Trade Unions of Montenegro and eleven (11) representatives of the Union of Employers of Montenegro. By the Resolution on appointment /3 as of September 22 nd, 2011, the Government of Montenegro appointed Ms Natasa Vuksanovic in the capacity of the Executive Secretary of the Social Council. A person responsible for the accounting records is Ms Julija Lazovic, an employee of the Ministry of Health. The Social Council has one employee, the Executive Secretary of the Social Council. The Ministry of Labour and Social Welfare is the authority competent for supervising the work of the Social Council. Page 198

199 6. Audit Methods and Materiality Estimation The audit includes auditing methods and techniques, applied with the aim of obtaining audit evidence on the amounts and disclosures in the financial statements. The audit evidence is obtained in various ways and from several sources. We have analyzed the legislative regulation and examined the documentation and information on operations of the Social Council. The selection of procedures is based on the auditors' judgment, including the risk assessment. In accordance with the audit practice, materiality has been estimated at the level of 1% of the actual expenditure of the audited entity, i.e. the assessment of the extent to which misstatements in the financial statements can be tolerated without significantly affecting the truthfulness and fairness thereof. The sample for testing expenditure has been determined in relation to the line of expenditure observed, where the criteria for sampling transaction selection are the value and importance of the transaction. We believe that the evidence obtained is sufficient, appropriate and provide a solid basis for expressing our audit opinion. 7. The System of Records The Social Council uses a cash basis accounting system, in accordance with the regulations governing the accounting operations of the budget users. The Social Council is connected to the SAP information system (the software of the State Treasury which keeps records on treasury operations). The Card of deposited authorized signatures and the approved budgetary allocations are in charge of governance of the persons authorized for valid signature with the use of a seal: Suad Numanovic, PhD, Radosav Kadovic and Julija Lazovic, the employees of the Ministry of Labour and Social Welfare. Page 199

200 II OPINION, DETERMINED STATE OF FACTS AND RECOMMENDATIONS Based on the established state of facts, and after deliberation of the audited entity's Opinion regarding the Preliminary Report on Audit on the Annual Financial Statements for 2012 (letter /6 as of 17 th April 2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composed of Mr Milan Dabovic, PhD (member of Senate Head of Collegium) and Mr Branislav Radulovic, PhD (member of Senate member of Collegium), at its session held on May 16 th, 2013, adopted the Final Report on Audit on 2012 Annual Financial Statements of the Social Council, and passed the following: OPINION WITH PROPOSAL OF RECOMMENDATIONS AND MEASURES The Annual Financial Statement of the Social Council for 2012, does not contain material misstatements and in all material respects, give a true and fair view of reported receipts and expenditures in relation to the accepted financial reporting framework and therefore, the competent Collegium expresses an unqualified opinion. Activities, transactions and information disclosed in the Financial Statements for 2012 have not been in all material respects in compliance with the applicable regulations and statutory requirements. Based on the established state of facts and the audit findings, the Collegium competent for the respective audit expresses a qualified opinion on conformity of operations of the audited entity with regulations, and put forward the following: RECOMMENDATIONS AND MEASURES 1. The Social Council do not have records of liabilities for The audited entity should provide records of liabilities and to draw up a Report on Outstanding Debts (liabilities), in accordance with the Instruction on filling the Report of outstanding debts, which is an integral part of the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local selfgovernments. 2. The Social Council has planned the necessary funds for the following year based on data on executed expenditures in the previous year, and not on the basis of quality analytical estimates of costs required for the implementation of activities, in accordance with the set objectives of the Social Council. The audit could not provide for the assurance that the Financial plan for 2012 was considered and approved by the Presidency of the Social Council. The Social Council should approach carefully to analysing of all the indicators, which would serve as the basis for providing a realistic estimate of the necessary budget funds, and the Presidency of the Social Council should consider and approve the Financial plan for the following year, in accordance with the Statute. Page 200

201 3. When calculating surtax on compensations paid, it has been determined that a single rate of surtax on tax rate, set for the municipality of Podgorica was applied, amounting to 15%, regardless of the place of residence of the Social Council members. When calculating surtax on tax rates, it is deemed necessary to apply surtax rates set by the municipalities where the members of the Social Council reside. 4. By auditing expenses arising from business travels abroad, the State auditor was unable to verify the accuracy of the accrued daily allowances, because the plane tickets, based on which the daily allowances, paid per each business trip should have been calculated, were not attached to the travel orders. As supporting documents along with the documentation on disbursed allowances, the Council attached the invitation letters, as well as transportation bills that justify incurred costs, but Reports on business trips were not accompanied. Within three days upon completed business trip, the civil servant shall be obliged to submit the travel order, along with the invoice of the travel expenses incurred, to the Head of the authority, or person he or she authorizes, including evidence of the amount paid for accommodation and the travel ticket, as well as a Report on business trip, in accordance with Articles 8 and 9 of the Regulation on Allowances and Other Income of Civil Servants and State Employees. 5. The audit has found that the Social Council failed to take actions in order to establish a system of internal financial control and internal audit in Taking into account the number of employees and the amount of approved budgetary allocations, it is recommended to the Social Council to enter into agreement with another spending unit, with the prior consent of the Ministry of Finance, which would carry out internal audit on behalf of the Council, as stipulated by Article 18 of the Law on Public Internal Financial Control System. 6. Social Council does not keep accounting records of assets. The Social Council is required to record the equipment and other movable assets used for the its functioning, in accordance with Article 4, Paragraph 1, and Article 9 of the Regulation on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. 7. The Social Council did not draft a Public procurement plan for the year subject to audit, nor did it submit a Report on conducted public procurement procedures, as stipulated by the Public Procurement Law. The Social Council is obliged, as the legal entity financed from the budget of Montenegro, to prepare the Public procurement plan and the Report on conducted public procurement procedures and to submit it to the competent state authority, pursuant to Articles 38 and 118 of the Public Procurement Law. Page 201

202 Page 202

203 EXCERPT FROM THE AUDIT REPORT ON DONATION FUNDS OF THE KINGDOM OF DENMARK (PROJECT - MONTENEGRO ORGANIC AGRICULTURE DEVELOPMENT PROGRAMME) (ORGANIC AGRICULTURE DEVELOPMENT PROGRAMME - OADP) FOR THE PERIOD FROM 1 ST JANUARY 2012 UNTIL 31 ST MAY 2013 Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: Audit of regularity of payments carried out from the special bank account for the amount of donated funds, as well as the account of the State Treasury in Montenegro. Ministry of Agriculture and Rural Development, the leader of the project Organic Agriculture Development Program in Montenegro The object is financial transactions of funds received from the Danish Government and transactions of the State Treasury of Montenegro, in accordance with the written Statement OADP - Organic Agriculture Development Program MAFWM-DANIDA, from October 10 th, 2012, for the period January 1 st, 2012 to May 31 st, auditing days Mr Milan Dabovic, PhD, President of the Senate Head of Collegium Mr Branislav Radulovic, PhD, member of the Senate member of the Collegium Page 203

204 Page 204

205 State Audit Institution (hereinafter referred to as: Institution), pursuant to Article 4 of the Law on State Audit Institution and Decision of the competent Collegium for the audit from January 15 th, 2013 and in accordance with the letter of the Office of the Denmark Government in Montenegro from October 30 th 2012, has performed the audit of donation funds of the Kingdom of Denmark for financing the Project Organic Agriculture Development Programme in Montenegro for the period from January 1 st to May 31 st The audit has been performed in accordance with the Rules of Procedure of the State Audit Institution and International Auditing Standards for the Public Sector (ISSAI and EUROSAI). Based on determined factual state and deliberation on the opinion of the Ministry of agriculture and rural development ( from July 12 th 2013) on the preliminary audit report of the SAI ( /16 from July 1 st, 2013), the competent Collegium consisted of PhD Milan Dabovic, head of the Collegium member of the Senate and PhD Branislav Radulovic, member of the Collegium - member of the Senate, at its session held on July 23 rd, 2013 has adopted the FINAL AUDIT REPORT ON DONATION FUNDS OF THE KINGDOM OF DENMARK (PROJECT - "ORGANIC AGRICULTURE DEVELOPMENT PROGRAMME IN MONTENEGRO") for the period January 1 st 2012 to May 31 st 2013 and has passed the following: OPINION WITH RECOMMENDATIONS Based on determined factual state, it has been determined that in the period from January 1 st 2012 to May 31 st 2013, related to the Component 2 Component of competitiveness and Results 2.1. Establishment of Investment Grants for Organic Production, there have been no important material irregularities which would indicate significant violation of procedures, except in the part of delays of deadlines prescribed by the Instruction Manual for the Grant Scheme. Based on afore-mentioned irregularities, the competent Collegium of the Institution has given a QUALIFIED OPINION on the audit in question. 1. The audit has determined that the four month deadline wasn t met after approval of the grant funds for realization of the own participation - personal share in six cases or 37.5% of applications chosen by the sample. Deadline for realization of approved funds has been postponed on the base of approvals given by the Commission of Evaluation. The Grant scheme does not predict the possibility to postpone the deadlines or give approvals for postponing the deadlines. 2. The audit has determined that a part of the budget/ investments, after receiving contributions from the grant, has not been completed within the four month time limit in seven cases or 43.75% of the chosen sample. The Grant scheme does not predict the possibility of postponing the deadlines. 3. The audit has determined that one applicant from the chosen sample does not have the documentations on the base of which it can be determined the investment state after receiving the funds from the grant, i.e. the level of investment realization where the time limit for investment completion expired. Based on the Report given by the Ministry of Agriculture and Rural Development on realization of the funds of the Project - Organic Agriculture Development Programme DANIDA for 2010, 2011 and 2012, according to the funds sources and users with established status from May 27 th 2013, it has been determined as follows: Out of the 53 investments in total supported by the programme (paid out funds from donation and from the budget), six investments were not completed on May 27 th 2013 and those include four investments paid out in 2011 and two investments paid out in The Grant scheme predicts that, after receiving the contribution from the grant, the rest part of the budget / investments has to be completed in four month deadline. Page 205

206 The State Audit Institution received the minutes from the Management Board from May 13 th 2013 (OADP- the eighth- the last meeting of the Management Board), by on 20 th June We remind that the minutes were not verified and that it contained the three week deadline for remarks with a statement that if they were not delivered, the minutes would be considered adopted. Regarding delivered minutes, the State Audit Institution has paid attention to the comments regarding three projects in which the grant funds were not spent in accordance with application. Related to the above mentioned, we note: In the reports for 2010 and 2011, the State Audit Institution has stated that there were certain irregularities related to prolongation of the deadlines for realization of the applicants own funds, as well as realization of the funds approved by the Grant scheme (see the Audit report on donation funds of the Kingdom of Denmark for 2011, title- Commission for Evaluation, page 9). The State Audit Institution informed the Management Board on the issue of deadlines exceeding about the use of approved funds from the grant and at the same time, we could not convince, through minutes of the Management Board, that certain attention was paid to this issue until the last meeting of the Management Board on May 13 th On the session held on May 13 th 2013, the Management Board has reconsidered the problems about grant applications that were not used according to the Grant scheme so that closing of the project was brought into question by the Government of Denmark. Respecting the circumstances that the State Audit Institution had drawn attention on deadlines prolongation regarding the use of funds and that the members of the Management Board had been acquainted with these issues in accordance with the Article 2 of the Memorandum of Understanding on implementation of Organic Agriculture Development Programme (OADP) between the Government of the Kingdom of Denmark and the Government of Montenegro, we propose that the Management Board holds another session dedicated to this issue and proposes a concrete conclusion in accordance with positive legislature of Montenegro, Memorandum of Understanding between the Government of the Kingdom of Denmark and the Government of Montenegro on implementation of Organic Agriculture Development Programme (OADP) and Grant Scheme Manual. Page 206

207 I. INTRODUCTION Office of the Kingdom of Denmark in Montenegro, authorized for financing the Organic Agriculture Development Programme OADP in Montenegro, has sent a letter to the State Audit Institution : from October 30 th 2012 requiring from the Institution to perform an audit of donation funds for organic agriculture development in Montenegro in conclusion with the date of March 31 st However, in accordance with the note of the Embassy of Denmark 06/3-1270/2 from May 18 th 2012 in which they inform the Ministry of Agriculture and Rural Development that the Danish part fully agrees with the proposal for prolongation of the Bilateral agreement on Organic Agriculture Development Programme until May 2013, the time period covered by the audit is from January 1 st 2012 until May 31 st Legal Basis for Audit Legal basis for performing the audit on donation funds of the Kingdom of Denmark, approved for financing the Project Organic Agriculture Development Programme in Montenegro is contained in: the Law on State Audit Institution ("Official Gazette of the Republic of Montenegro'', 28/04, 27/06, 78/06,17/07, 73/10 and 40/11), the Annual Plan of Audits for 2013, adopted by the Senate of the State Audit Institution (SAI: from December 24 th 2012), and Decision on Performing the Audit of Donation Funds for the Organic Agriculture Development Programme (OADP) according to the Project of the Kingdom of Denmark (SAI from January 15 th 2013). The audit procedure has been performed in accordance with the Rules of Procedure of the State Audit Institution ( 'Official Gazette of the Republic of Montenegro'', 50/07), and the International Auditing Standards for the Public Sector (ISSAI/EUROSAI). The audit procedure has above all followed the standards that require audit planning and performing of audit in a way which shall provide a reasonable reassurance for expressing an opinion. 2. Type and Objective of Audit The Institution has performed regularity audit (compliance audit) of payments executed for the time period from 1 st January 2012 until 31 st May 2013 from the special open bank account for donation funds as well as from the account of the State Treasury in Montenegro. The Leader of the project is the Ministry of Agriculture and Rural Development (hereinafter referred to as: The Ministry). The aim of the audit is to express an independent opinion on whether the financial state is accurate and objective and whether the activities were performed in accordance with the programme documentation and the Grant Manual (Organic Agriculture Development Programme in Montenegro: External Audit-Project task). The State Audit Institution has performed the control of the funds received from the Ministry of Finance of Denmark, transfer of funds from the special bank account to the State Treasury and payment of funds from Danish and the state budget. Such an aim of the audit requires verification of the funds received from the Ministry of Foreign Affairs of the Kingdom of Denmark on the bank account of Montenegrin Commercial Bank AD Podgorica, Account , which have been paid to users through the State Treasury, as well as verification of expenses paid from the state budget, i.e. paid by the Ministry in the time period from 1 st January 2012 until 31 st May Page 207

208 3. Subject to Audit and the Scope of Audit The subject to audit includes financial transactions of funds received from the Danish Government and transactions of the State Treasury of Montenegro, in accordance with the Organic Agriculture Development Programme and the Manual for Grant Scheme from December The scope of audit covers all expenditures / payments executed from the funds of the grant in the year of 2012 and Organic Agriculture Development Programme in Montenegro The Government of Denmark has allocated 15 million of DKK for the organic agriculture development in Montenegro for the period January December 2011 within its Neighbourhood Programme. Danish aid is realized through a development programme called Organic Agriculture Development Programme (OADP). The Programme aims to support the development of organic agriculture and consumption of organic products at the local market through the sector of tourism as well as the export of organic products. Budget of the Project amounts to EUR 2,250, out of which the amount of EUR 2,000, has been allocated by the Government of Denmark, while the Ministry of Agriculture and Rural Development has participated with EUR 250, The activities on the realization of the Organic Agriculture Development Programme started on June 2 nd, The project Office was established, national consultant and Programme assistant were employed and the members of the Management Board were appointed. The Programme has been managed by Permanent Senior Expert for organic agriculture, appointed by the Ministry of Foreign Affairs of Denmark, and the Project Office is located at the Institute of Biotechnology. Permanent Senior Advisor is responsible for Programme management and its implementation. Management Board and the Ministry of Agriculture and Rural Development of Montenegro are responsible for the realization of the Programme. Memorandum of Understanding has been signed between the Government of the Kingdom of Denmark and the Government of Montenegro on the implementation of the Organic Agriculture Development Programme (OADP), which prescribes the conditions for all programme activities as well as for international staff and their families, i.e. those who do not have Montenegrin citizenship. Notes important for performing the audit, among others, and which are prescribed by the Memorandum of Understanding are the following: Interests accrued on the programme funds have to be paid out to Denmark. Montenegro must guarantee that the grant of Denmark is not used for payment of any import duties, allowances, national or other public duties on import of any part of the equipment, material, tools, services, vehicles and spare parts purchased for activities agreed within the scope of the OADP. All equipment, material, tools, services, vehicles and spare parts financed by the grant of Denmark will be value-added tax free by Montenegro for the activities agreed within the scope of the OADP. An Instruction Manual for the Grant Scheme was drafted, and made available to all who meet the criteria and who oblige to be certified organic producers. The investment arrangements are focused on crop production, processing and distribution, especially on the value chain of fruits and vegetables. The scheme is not intended for the purchase of inputs such as seeds and fertilizers, or for marketing promotion. Page 208

209 The accounting records are kept on a cash basis and accounting documents are presented in euro currency. The procurement of assets and equipment made by the user, and which should be complied with the guidelines for procurement from the Instruction Manual for Grants, is not the subject to our audit. The audit has been planned and prepared in order to detect possible irregularities and examine the adequacy of the implementation of the rules of conduct determined by the Programme. Considering the above mentioned, CHECKLIST has been made for checking the compliance of procedures for obtaining a grant with the Grant Manual. II. DETERMINED FACTUAL STATE Organic Agriculture Development Programme in Montenegro includes two separate procedures of financial management. The first procedure refers to the funds for the grants under component 2- Component of competitiveness (results 2.1- Establishing a program of investment grants for organic production and 2.2- Establishing a program of grants for the Biotechnology Institute 26 ), which is realized through the appropriate national system in Montenegro. The second procedure refers to financing other Programme activities and it is implemented through the appropriate account, managed by the Senior Expert. Account of the Programme, managed by the Senior Expert, was opened as a non-residential account on June 23 rd, 2009 at Montenegrin Commercial Bank, and intended for financing the results from the component 1-Component of institutional development and results and the component 2 - Component of competitiveness ( Placement and promotion of organic products). Transactions recorded at the above mentioned account were not the subject of checking in the audit procedure performed by the State Audit Institution. The fiscal year of the programme follows the fiscal year of the Budget in Montenegro, i.e. January - December. Budget of Programme Grants and planning cycle follow the cycle of planning the Budget of Montenegro. In the programme documents, time period for the support to the Programme has been planned from June 2009 until June The Ministry of Agriculture and Rural Development has sent a letter 320/ /11 from January 16 th 2012 to the Ministry of Foreign Affairs and European Integrations requiring prolongation of duration of the Project Organic Agriculture Development Programme, which needs to be passed to the Ministry of Foreign Affairs of the Kingdom of Denmark. The Ministry of Foreign Affairs and European Integrations - General Directorate for Bilateral Affairs, in the letter from May 18 th 2012, has delivered the note of the Embassy of Denmark in which they inform that the Danish part agrees with proposal for prolongation of Bilateral programme on Organic Agriculture Development Programme until the end of May The programme started with grant support, investments in the organic production, processing and distribution in April 2010 and it was opened for applications until March Within the afore-mentioned time period, 53 investments were supported, which total value amounts to EUR 904,276.59, out of which donation funds of the Government of Denmark amounts to EUR 678, or 75% and paid out funds from the state budget in amount of EUR 226,069.17, or 25% as it can be seen from the following chart: 26 Component 2/ Result 2.2. Forming of programme grants for Biotechnology Institute-was not the subject to audit Page 209

210 In EUR Year Number of Kingdom of Denmark users Donation State Budget User Own Participation Total , , , , , , , , , , , , Total , , , ,721, User own participation of grant funds amounted to EUR 817, or 50% of approved investment. Based on the Report given by the Ministry of Agriculture and Rural Development on realization of the funds of the Project - Organic Agriculture Development Programme DANIDA for 2010, 2011 and 2012, according to the funds sources and users with established status from May 27 th 2013, it has been determined as follows: Out of the 53 investments in total supported by the programme (paid out funds from donation and from the budget), six investments were not completed on May 27 th 2013 and those include four investments paid out in 2011 and two investments paid out in The Grant scheme predicts that, after receiving the contribution from the grant, the rest part of the budget / investments has to be completed in four month deadline. The State Audit Institution received the minutes from the Management Board from May 13 th 2013 (OADP- the eighth- the last meeting of the Management Board), by on 20 th June We remind that the minutes were not verified and that it contained the three week deadline for remarks with a statement that if they were not delivered, the minutes would be considered adopted. Regarding delivered minutes, the State Audit Institution has paid attention to the comments regarding three projects in which the grant funds were not spent in accordance with application. Related to the above mentioned, we note: In the reports for 2010 and 2011, the State Audit Institution has stated that there were certain irregularities related to prolongation of the deadlines for realization of the applicants own funds, as well as realization of the funds approved by the Grant scheme (see the Audit report on donation funds of the Kingdom of Denmark for 2011, title- Commission for Evaluation, page 9). The State Audit Institution informed the Management Board on the issue of deadlines exceeding about the use of approved funds from the grant and at the same time, we could not convince, through minutes of the Management Board, that certain attention was paid to this issue until the last meeting of the Management Board on May 13 th On the session held on May 13 th 2013, the Management Board has reconsidered the problems about grant applications that were not used according to the Grant scheme so that closing of the project was brought into question by the Government of Denmark. Respecting the circumstances that the State Audit Institution had drawn attention on deadlines prolongation regarding the use of funds and that the members of the Management Board had been acquainted with these issues in accordance with the Article 2 of the Memorandum of Understanding on implementation of Organic Agriculture Development Programme (OADP) between the Government of the Kingdom of Denmark and the Government of Montenegro, we propose that the Management Board holds another session dedicated to this issue and proposes a concrete conclusion in accordance with positive legislature of Montenegro, Memorandum of Understanding between the Government of the Kingdom of Denmark and the Government of Montenegro on implementation of Organic Agriculture Development Programme (OADP) and Grant Scheme Manual. Page 210

211 1. Budget Planning and Execution In accordance with the Instruction on the Work of the State Treasury, and based on the Request of the Ministry of Agriculture and Rural Development of Montenegro (in that period it was the Ministry of Agriculture, forestry and water management), 320/ /7 from February 10 th, 2010, the Ministry of Finance opened a bank account number: , at Montenegrin Commercial Bank a.d. Podgorica, entitled Organic Agriculture Development Programme (OADP). The funds at the account are handled by the Ministry, while the Ministry of Finance is responsible for the transfer of funds to the end user. Planned funds from donations of the Government of the Kingdom of Denmark, intended for realisation of the Organic Agriculture Development Programme, were included in the state budget for 2012 within the framework of Agrobudget, in amount of EUR 425, in the budget lines for expenditures Expenditures for contracted services. In the budget line for expenditures 4171 Subventions for production and service providing, the Ministry has planned expenditures based on its own participation at realisation of the Organic Agriculture Development Programme in amount of EUR 143,000.00, so that total planned funds for these purposes were EUR 568, After getting an insight into the commercial account at the bank, it has been determined that cash balance demand deposits on January 1 st 2012 were EUR 30, Debit turnover of the account, i.e. flow of the funds were 280, EUR. Credit turnover of the account, i.e. outflow of the funds was EUR 310,512.95, so that cash balance - demand deposits on May 16 th 2013 was EUR 1, as it can be seen in the following chart: In EUR Number Description Debit Credit 1 Balance on 01/01/ , Grant funds inflow (01/01/ /05/2013) 280, Grant funds outflow 309, Bank commissions Balance on 16/05/2013 1, Total 311, , Flow of the funds at the bank account, based on donations from the Government of Denmark, were realised: In amount of EUR ,00 on January 13 th 2012 In amount of EUR 99, on May 23 rd 2012 In amount of EUR 30, on October 10 th 2012 There were no flow or outflow of funds at the commercial account of the bank in Payments of funds from the account to the end user were executed on a request for payment delivered by the Ministry, which is EUR 309, in total, as the expenditures on behalf commission for bank service are expressed in amount of EUR Page 211

212 2. Project Management The audit has included the work of the Management Board as a managing body of the Programme, as well as the work of the Advisory Service, the Commission for Evaluation and the Department for Organic Agriculture. The audit has also included financial service at the Ministry, where budget planning and payment processing are performed by the Ministry of Finance, as well as accounting records. 2.1 Management Board of the Program - comprises of the representatives of the partners responsible for Organic Agriculture Development Programme, according to the programme documentation. Based on the letter of the Ministry of Agriculture and Rural Development 320/ /5 from November 23 rd 2012, appointment of new President of the Management Board was verified at the VII session of the Management Board. The Management Board was carrying out its tasks and decisions were made by consensus, which is in accordance with the programme document and other legal acts related to the Programme. 2.2 Advisory Service - Through the interview method and review of the Application Register (according to chosen sample) in audit procedure, it has been determined that the Advisory Service performed its tasks in accordance with the Grant Scheme, as follows: informed the target group about the possibilities for receiving donations, pre-conditions for application and evaluated the justification of investment requests (comment on the application form). The Advisory Service carried out continuous communication with all parties during the project cycle in accordance with the Grant Scheme (when the funds of personal financing were invested, but before executed payments of contributions from the grants and when the project was completed). 2.3 Commission for Evaluation - carried out processing of applications in terms of accepting or rejecting the requests for grant funds in accordance with the Grant Scheme, with aim to make decision on awarding the grant. Reviewing the Register of Applications, according to chosen sample, it has been determined that there was an irregularity in the work of the Commission for Evaluation regarding not meeting the deadline for realization of own participation (four months after grant approval). Deadline for realization of own participation personal share of funds, was postponed to 37.5 % of applications among chosen sample, based on approval given by the Commission for Evaluation. The Grant scheme does not predict the possibility to postpone the deadlines or give approvals for postponing the deadlines. 2.4 Ministry of Agriculture and Rural Development Since 2005, there has been an Unit for organic agriculture and legislative infrastructure for organic agriculture within the organizational structure of the Ministry of Agriculture and Rural Development Organic Agriculture Department is an implementing body within the Ministry of Agriculture and Rural Development which coordinates the work of all parties in Organic Agriculture Development Programme, in accordance with the programme documentation. Reviewing the Register of Applications, kept by the Organic Agriculture Department, it has been determined that on May 23 rd 2013, one application included in the sample, was not completed, i.e. there is no document based on which it can be determined that the investment was completed according to determined procedure in accordance with the Grant Scheme. The Grant Scheme predicts that, after receiving contributions from grant, the rest part of the budget/ investments has to be completed within four month deadline. There is a Report on realization of the second part of investment 320/ /13 from April 29 th 2012 within the Page 212

213 Register of Applications and it stated that the exact amount of designed spent funds cannot be determined due to incomplete documentation Financial Service of the Ministry of Agriculture and Rural Development performed financial operations on the basis of orders received from the Department for Organic Agriculture. Having reviewed the Register of Applications, it has been determined that the Financial service, in one case from the chosen sample, did not submit a request for payment from the state budget funds to the Ministry of Finance as well as a request for payment from donation funds, which is not in accordance with the Grant Scheme. It has been determined by the control that the Ministry timely updated specimen signatures in cases when it came to the changes of responsible persons for authorization and approval of requests for payments and acted according to recommendation of the Institution given in the Audit Report for On the basis of specimen signature card, given to insight to the state auditors, financial funds approved by the budget were disposed by the following individuals: From 20 th April 2011 to 2 nd July 2012 Tarzan Milosevic Authorising officer Vukica Perovic Authorising officer Djurdjica Lakic Officer for verification In the time period from 2 nd July 2012 Tarzan Milosevic Authorising officer Vukica Perovic- Authorising officer Djurdjica Lakic Officer for verification Rados Sucur approves Rosanda Vojinovic - verifies The following chart contains the overview according to sources of realised funds on the project Organic Agriculture Development Programme in Montenegro from January 1 st 2012 and in the year of 2013 (until the end of the project): In EUR Kingdom of Denmark Grant Budget of Montenegro User Own Funds Total Funds Funds 312, , , , In the afore-mentioned chart, realized funds from donation of the Government of Denmark were expressed in amount of 312, EUR, while as the outflow on the currency account at the commercial bank on the basis of funds (grant) payments was expressed in amount of EUR 30, The difference in the amount of EUR 3, refers to the funds that were mostly withdrawn by the Ministry of Finance in 2011 and paid out in 2012, which is explained in detail in the Audit Report on donation funds of the Kingdom of Denmark for Donation funds, planned in 2012, are included in the annual budget on the position Expenditure for contracted services in amount of EUR 425, and paid from the same position in amount of EUR 312, The funds from the state budget, intended for co-financing of the Organic Agriculture Development Programme, were planned for the position Subventions for production and providing service in amount of EUR 143, and paid out from the same account in amount of EUR 104,279.74, which is in accordance with planned funds. We remind that recommendation of the Institution from the Report Page 213

214 for 2010 and 2011 was respected, regarding planning of expenditure and execution of budget according to economic classification. 2.5 The Ministry of Finance In accordance with the Grant Scheme, the Ministry of Finance properly carried out transfer of the funds from the currency account opened at Montenegrin Commercial Bank a.d. Podgorica, : , which has been opened for monitoring donation funds of the Kingdom of Denmark, to the Capital account of the Treasury and to the end user. No irregularities have been determined by the audit. 2.6 Applications As previously stated, the audit has paid special attention to the following: Examine compliance of procedures for obtaining a grant with the Grant Manual, i.e. examine if procedures and criteria prescribed by the Instruction Manual for the Grant Scheme from December 2009 were followed and met regarding the approval of the grants to the users, Verification of the documentations for payments. In reported period (2012 and 2013), there were 37 applicants for receiving funds on the Organic Agriculture Development Programme in Montenegro. The Commission for Evaluation approved 21 applications and rejected 16 applications which did not meet the prescribed conditions. Out of approved 21 applications, 3 individuals gave up from the funds. In the time period that was the subject to the audit, the funds for 25 approved applications were paid out, 18 of which were approved in 2012 and 7 in the previous time period. By the method of random sample, the audit controlled sixteen applications that were paid out to the users in It was determined that controlled applications were approved in accordance with the procedure predicted by the Grant Scheme and other documents made with the aim of realization of the Project Organic Agriculture Development Programme in Montenegro. It has been also determined that the grant funds users, who were paid out the funds according to approved applications, respected the prescribed procedure. We consider that we should specify some minor irregularities referring to the following: 1. The audit has determined that the four month deadline was not met after approval of the grant funds for realisation of own participation - personal share in six cases or 37.5% applications chosen by the sample. Deadline for realisation of approved funds has been prolonged on the basis of approvals given by the Commission for Evaluation. The Grant Scheme does not predict the possibility to prolong the deadlines or give approvals for prolongation of the deadlines. 2. The audit has determined that a part of the budget /investments, after receiving contributions from the grant, was not completed within a four month period in seven cases or 43.75% of the chosen sample. The Grant scheme does not predict the possibility to prolong the deadlines. 3. After having reviewed the Register of Applications, it has been determined that in one case from the chosen sample, the Financial Service submitted a request to the Ministry of Finance for payment from the state budget funds, as well as the request for payment from donation funds in the deadline longer than the deadline predicted by the Grant Scheme (two week deadline). 4. The audit has determined that for one applicant from the chosen sample there was no documentation on the base of which state of investments after receiving funds from the grant can be determined, i.e. the level of investment realisation where the deadline for investment completion expired. In the Report given by the Ministry of Agriculture and Rural Development, on realisation of the funds of the Organic Agriculture Development Programme DANIDA for 2010, 2011 and 2012, according to fund sources and users with established status from May 27 th 2013, status of this applicant is UNCOMPLETED, i.e. the Application was not completed by the procedure in accordance to the Grant Scheme. Page 214

215 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE AGENCY FOR THE PEACEFUL SETTLEMENT OF LABOUR DISPUTES Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: General audit Agency for the Peaceful Settlement of Labour Disputes 2012 Annual financial statements 45 auditing days Mr Milan Dabovic, PhD, member of Senate Head of Collegium Mr Branislav Radulovic, PhD, member of Senate member of Collegium Page 215

216 Page 216

217 I. INTRODUCTION 1. Legal Basis According to Article 4 of the Law on State Audit Institution ( Official Gazette of Montenegro 28/04, 27/06 and 17/07) and Decision passed by the Collegium of the SAI as of 18 th February, 2013, the State Audit Institution of Montenegro performed the Audit of 2012 Annual Financial Statements of the Agency for the Peaceful Settlement of Labour Disputes (hereinafter: the Agency, or the audited entity) The audit has been performed in accordance with the Law on State Audit Institution, the Rules of Procedure of the State Audit Institution and the International Standards on Auditing in the Public Sector (ISSA). These standards require that the audit is carried out in accordance with ethical requirements and plan and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. 2. Subject and Scope of Audit The subject of performed audit is the Annual Financial Statement of the Agency for 2012 and compliance of its financial operations with applicable legal and other regulations. In accordance with Article 4 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extrabudgetary Funds and Local Governments, the Agency is obliged to submit Annual Financial Statements to the Ministry of Finance, on Forms as follows: Form 3 Cash flow Statement Form 5 Statement on outstanding liabilities Form 8 - Statement on the manner of spending funds submitted upon the expiry of a fiscal year Form 9 - Report on using current budget reserve funds The respective audit includes the cash flows control, lawfulness in spending funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage or the scope of audit has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 3. Audit Objective The objective of the audit of the Agency was to express our opinion on reliability and accuracy of the Annual financial statements of the Agency for Peaceful Settlement of Labour Disputes for 2012 and compliance of the operations of the audited entity with laws and regulations, as well as evaluation of the internal system of financial management and control. According to the audit objective, the following has been examined: true and fairness of financial statements; regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization and for intended purposes; system of internal control. Page 217

218 4. Type of Audit The State Audit Institution has conducted a general audit (compliance audit) within the respective audit, which implies a comprehensive insight into the financial operations of the audited entity as of December 31 st, General Information on the Audited Entity 5.1. Activity of the Audited Entity The Agency for the peaceful settlement of labour disputes was established as a separate organisation pursuant to Article 10 of the Law on Peaceful Settlement of Labour Disputes, with the status of a legal entity. As stipulated by Article 10 of the Law, the Government of Montenegro founded the Agency. Pursuant to Article 12 of the Law on Peaceful Settlement of Labour Disputes, the Government of Montenegro adopted the Decision on Foundation of the Agency for peaceful settlement of labour disputes. The Law on Peaceful Settlement of Labour Disputes regulates the manner and procedure of peaceful settlement of labour disputes (collective and individual), selection, rights and obligations of mediators and arbitrator and other issues of importance to the peaceful settlement of labour disputes. Pursuant to Article 10 of the Law on Peaceful Settlement of Labour Disputes and the Decision on Establishment of the Agency for peaceful settlement of labour disputes, the Steering Board passed the Statute of the Agency for the peaceful settlement of labour dispute. The Agency is registered in the Central Registry of the Commercial Court, under the registration number /001, on 10 th February 2010, in accordance with the provisions of the Law on Commercial Companies, as "other forms of performing an economic activity." It is seated in Podgorica, 29, Novaka Miloseva Str. Managing bodies of the Agency are: the Steering Board and Director. 5.2 Organization and Systematization of Posts Pursuant to Article 12 of the Law on Peaceful Settlement of Labour Disputes, Article 6 of the Decision on Establishment of the Agency for the peaceful settlement of labour disputes and Article 21 of the Statute of the Agency, at the suggestion of the Director, the Steering Board of the Agency passed Regulations on internal organization and systematization of posts in the Agency for the peaceful settlement of labour disputes, number 1-54 as of 9 th April The Regulation was obtained a consent by the Ministry of Labour and Social Welfare, internal act as of July 1 st, 2010, along with the approval given to the Director of the Agency, to fill in five posts in order to enable the commence of operations of the Agency, because of the insufficient funds in the budget for 2010 to fill posts according to adopted systematization plan. In accordance with the Regulations, the jobs in the Agency shall be carried out without internal units being established. The Regulations has determined seven (7) posts, with ten (10) employees, including the Director of the Agency. Each work post has a description given, necessary conditions and number of employees. As stipulated by Article 49 of the Law on Peaceful Settlement of Labour Disputes and Article 29 of the Statute of the Agency, the Agency shall be financed from the budget of Montenegro and other source of finance, (donations, grants etc.). The Article 31 of the Statute defines that the Agency shall have a bank account. Page 218

219 The Card of deposited authorized signatures and the approved budgetary allocations are in charge of governance of the persons authorized for valid signature with the use of a seal: Ms Zdenka Burzan and Ms Rada Rupcic. 6. Audit Methods The audit has been planned and performed in accordance with the ISSAI standards, in the manner which provides obtaining reasonable assurance about whether the financial statements are free of material misstatement and whether the business operations of the audited entity is compliant with statutory requirements and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The audit has been performed based on sample-testing, by using analytical procedures and interviews to verify the amounts and disclosures in the financial statements. Determination of risk and materiality has been done by using Methodological guidelines of the State Audit Institution, whereas sampling has been carried out by application of the audit program IDEA. According to the drafted Record of determining risk and materiality, /04 as of 03/29/2013, there was an inherent risk determined (Ri) at the level of 43.91% (medium risk) and risk of control (Rk) at the level of 38.60% (medium risk), i.e. the audit risk was estimated at the level of 0.43%. Materiality, i.e. estimation of the extent for tolerating misstatements in the financial statements, and that it does not significantly affect the truthfulness and objectivity thereof, was estimated to be at 1.64% or EUR 5, The sample determined at 74.70% covered the expenditure of the audited entity. We believe that the evidence obtained is sufficient, appropriate and provide a valid basis for our audit opinion. 7. The System of Records The Agency uses a cash basis accounting system, in accordance with the regulations governing the accounting operations of the budget users. The Agency is connected to the SAP information system (the software of the State Treasury which keeps records on treasury operations). The Agency concluded a contract on bookkeeping services provided with DOO "Nestor", 1-42 of 21 st January 2012, stipulating the rights, obligations and responsibilities of the Parties, related to the processing of business documents and business records of the Client (the Agency) by doo "Nestor", in accordance with the applicable regulations. doo "Nestor" is obliged to keep the books in time and in the manner envisaged by the Law on Accounting, based on the documentation submitted. Under the business records shall be: Drafting a treasury reports Records of fixed assets Records of public procurement plan for the 2012th year. In addition to bookkeeping services, the service provider DOO "Nestor" is required to provide expert advice from the scope of the work of the Agency, file documents in accordance with accounting standards and provides consumables for carrying out the above tasks. DOO "Nestor", as provider of services and the Agency, as a service user, agreed the cost of services in the amount of EUR per month, VAT not included, for the contracted services. State auditors have examined the books of accounts maintained by doo "Nestor" as the service provider for the Agency as a client of the services, and found that doo "Nestor" keeps records of treasury book (daily cash), with the attached bookkeeping documentation, keep records of fixed assets, which contains data on fixed-assets. doo "Nestor" keeps records of documents based on which the Payment Requests were made. Page 219

220 II OPINION, DETERMINED FACTUAL STATE OF FACTS AND RECOMMENDATIONS Based on the established state of facts, and after deliberation of the audited entity's Opinion regarding the Preliminary Report on Audit of 2012 Annual Financial Statements (letter /1 as of July 24 th, 2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composing of Mr Milan Dabovic, PhD (member of Senate Head of Collegium) and Mr Branislav Radulovic, PhD (member of Senate member of Collegium), at its session held on 30 th July 2013, adopted the Final Audit Report on 2012 Annual Financial Statements of Agency for the peaceful settlement of labour disputes, and passed the following: OPINION WITH PROPOSED RECOMMENDATIONS AND MEASURES The 2012 Annual Financial Statements of the Agency for peaceful settlement of labour disputes, does not contain material misstatements and transactions of finance in 2012 have been disclosed in accordance with the annual Law on Budget, recorded in the Treasury General Ledger and outflows have been registered at the Treasury Consolidated Account. However, the activities and records of transactions by earmarks, as reported in the Financial statements for 2012, are not, in all material respects, in accordance with the applicable regulations and therefore the Collegium, responsible for relevant audit, expresses a qualified opinion. According to the facts established by the audit and in order to eliminate determined irregularities, we are proposing recommendations and measures, as follows: 1. The audit has determined that the Agency do not have orderly kept records of liabilities, and therefore the State auditor could be convinced of the accuracy of information disclosed in the Report on outstanding liabilities. Outstanding liabilities for other current expenditure, amounting to EUR 55,710.53, include debts arising from fees for arbitrators and mediators, in the amount of EUR 53, The audit has found that for the amount of EUR 53,974.40, which is recognized as outstanding debt in Form 5 - Report on outstanding liabilities, decisions on reimbursements to arbitrators were not passed in 2012, but in Therefore, this amount cannot be reported as an outstanding debt in The audited entity should provide records of outstanding liabilities in accordance with the Regulations on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities and draw up a Report on outstanding liabilities, in accordance with the Instruction on filling the Report of outstanding debts. When drafting the Form 5 - Report on outstanding liabilities, commitments for arbitrators and mediators should be reported on the basis of relevant legislation (recommendations, decisions), which will conclude the dispute and on the basis of which an arbitrator or a mediator shall be entitled to an award, in accordance with Article 3 of the Rulebook on the amount of remuneration and fees costs of mediators and arbitrators for the peaceful settlement of labour disputes. Page 220

221 2. The Agency has calculated compensations by applying coefficient of for recalculating net compensations into the gross amount, instead of using the coefficient of , which is not in accordance with the Regulation on recalculation of net earnings into gross wages. The amount of misstatement, resulting from the misstated coefficient applied for recalculation of net fee into the gross one is related to a surplus in calculated and paid tax and contribution, in the amount of EUR For calculation of gross remuneration, it is deemed necessary to apply the coefficient of recalculation of net amount into gross, which is derived based on the tax rate and the contribution for PIO Fund, which are applied to the base value for calculation. 3. The inspection has found that when purchasing toner, the invoiced price per share does not correspond to the price specified in the Offer PO-287-0/12, as of 9 th April 2012, based on which the public procurement contract was awarded. The above misstatement indicates to an inadequately established system of internal control. When purchasing goods and services, in accordance with Articles 41 and 42 of the Instruction for State Treasury Operations, it is deemed necessary to undertake control of invoiced prices and match them with the prices offered in the public procurement procedure. 4. The audit of expenditure has shown that the expenditures, amounting to EUR 39, have not been spent as earmarked, which is not in compliance with the Law on Budget for 2012, i.e. i. Expenses for office supplies in the amount of EUR 2, ii. Energy costs in the amount of EUR 1, iii. Expenditures for contracted services in the amount of EUR 35, The specified expenses should have been recorded as stipulated by Article 9 of the Regulation on Unique Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. 5. Expenses related to business trips to Belgrade were calculated without an Invitation letter for the business trip, and therefore it cannot be determine whether the daily allowance was calculated in accordance with the Regulation on Allowances and Other Income of Civil Servants and State Employees. In addition, travel orders were usually not accompanied with reports on business trips, which is not in compliance with the said Regulation. The civil servant shall be obliged to submit a Report on a business trip to the Head of the authority, (or a person authorized by him/her), within seven days upon the completion of the business trip, as stipulated by the Article 20 of the Regulation on Allowances and Other Income of Civil Servants and State Employees. 6. The Agency has not established the internal audit in a manner to entrust the task of performing internal audit to another spending unit, with the prior consent of the Ministry of Finance, pursuant to Article 18 of Law on Public Internal Financial Control System. Page 221

222 The Agency has not passed internal rules and guidelines on the use of mobile phones, business gifts, the use of official vehicles and private vehicles for official purposes, which would define eligibility and the amount of costs for the use of mobile phones, the right to representation costs and usage of official vehicles, i.e. private vehicles for official purposes. The Agency has not created records of the proceedings of the peaceful settlement of labour disputes, according to Article 48 of the Law on Peaceful Settlement of Labour Disputes, which would, in addition to other data, contain the information on the subject of dispute, the date of initiating the dispute and the date and manner of conclusion of the dispute. The Agency is obliged to commence keeping records on proceedings of the peaceful settlement of labour disputes in accordance with Article 48 of the Law on Peaceful Settlement of Labour Disputes. The Agency is obliged to undertake certain activities in order to establish an adequate financial management and control, in accordance with the Law on Public Internal Financial Control System and the applicable by-laws. 7. The audit has identified minor irregularities in the records of assets, outlined in the Report, pg. 23 and 24, which are not compliant with the provisions of the Law on Property, and for the purpose of consistent application of Law and by-laws, we are hereby putting forward the following recommendations: Records of assets, in accordance with Article 48 of the Law on State Property, should be kept on the basis of the inventory list of assets as of 31 st December, for the year which they are inventoried for. The inventory lists must be entered a stated cash value based on book value for each fixed asset, in accordance with Article 11 of the Regulations on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro. The Report on inventory of assets should be made on the basis of inventory lists of the Inventory Commission, in accordance with Article 13 of the Regulations on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State- Owned Assets. Tangible assets should be classified in respect to depreciation rates prescribed by Article 4 of the Regulations on the Classification of Tangible and Intangible Fixed Assets by Groups and Methods for Determining Depreciation of Budgetary and Extra-Budgetary Users. Instructions on the Manner of Use and Fuel Consumption of Vehicles, i.e. official vehicles owned by the Agency, must be submitted to the Ministry of Finance in accordance with Article 5, Paragraph 3 of the Decree on Conditions and Manner of Use State-Owned Vehicles. 8. The audit has concluded incompliance with certain provisions of the Law on Public Procurement of Goods and Services. The audited entity is obliged to ensure the full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, with Page 222

223 the purpose of legitimate use of budget funds, transparent and cost-effective. thus making the public procurement procedure In respect of irregularities determined in the course of audit, outlined in the Report, pg. 24 and 25, we are giving the following recommendations: Pursuant to Article 44 of the Public Procurement Law, the ordering party is obliged to abide by the conditions and manner of public procurement, according to established values set forth in the Plan of public procurement. Article 105, Paragraph 1, Item 3 of the Public Procurement Law defines that the procurement procedure can be suspended only if the purchase will not be repeated during the budget year. The Agency is obliged to keep records of all the conducted public procurement procedures and report on procurements in the appropriate Forms in accordance with Articles 117 and 118 of the Public Procurement Law. If the estimated value of public procurement falls in the third threshold (over EUR 25,000.00), it is deemed necessary to carry out the procurement procedure in accordance with Article 20, Items 1-7 of the Public Procurement Law. Page 223

224 Page 224

225 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE MINISTRY OF HEALTH Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: General audit Ministry of Health 2012 Annual financial statement 120 auditing days Mr Milan Dabovic, PhD, President of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 225

226 Page 226

227 I. INTRODUCTION 1. Legal Basis According to Article 4 of the Law on State Audit Institution ( Official Gazette of Montenegro 28/04, 27/06 and 17/07) and Decision passed by the Collegium of the SAI as of 16 th January 2013, the State Audit Institution of Montenegro (hereinafter: the Institution), performed the Audit of 2012 Annual Financial Report of the Ministry of Health (hereinafter: the Ministry). The audit has been performed in accordance with the Law on State Audit Institution, the Rules of Procedure of the State Audit Institution and the Instructions on the Work Methodology of the State Audit Institution. The audit procedures have been conducted in accordance with International Standards on Auditing in the Public Sector (ISSA). These standards require that the audit is carried out in accordance with ethical requirements and plan, and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. 2. Subject and Scope of Audit The subject of performed audit is the Annual Financial Statement of the Ministry for 2012 and compliance of its financial operation with applicable legislation and other regulations. In accordance with Article 4 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Ministry is obliged to submit the Annual Financial Statements to the Ministry of Finance on the following Forms: Form 3 Cash flow Statement Form 5 Statement on outstanding liabilities Form 8 Statement on the manner of spending funds submitted upon the expiry of a fiscal year Form 9 - Report on using current budget reserve funds The respective audit includes the cash flows control, lawfulness in spending funds, the accuracy of reported data and the level of their disclosure, as well as the functioning of the internal control system. The coverage or the scope of audit has been set out depending on determined level of the audit materiality (significance) and identified audit risk. 3. Audit Objective The objective of audit was to express our opinion on reliability and accuracy of the Annual financial statements of the Ministry of Health for 2012 and compliance of the operations of the audited entity with laws and regulations, as well as evaluation of the internal system of financial management and control. According to the audit objective, the following has been examined: true and fairness of financial statements; regularity of operation, i.e. financial transactions and decisions in respect of receipts and expenditures, in order to determine whether the reported transaction was executed in accordance with the law, other regulations, given authorization and for the intended purposes; system of internal control. Page 227

228 4. Type of Audit The State Audit Institution has conducted a general audit (compliance and financial audit) within the respective audit, which implies a comprehensive insight into the financial operations of the audited entity as of 31 st December General Information on the Audited Entity The audited entity, the Ministry of Health, is the authority of the state administration, seated in Podgorica, 46, Rimski Trg. The Head of the authority is the Minister, during the audit, Assoc.Prof. Miodrag Radunovic, PhD. General information about the audited entity include the activity of the audited entity, organization and systematization of posts. 5.1 Activity of the Audited Entity In accordance with the Law on State Administration, the minister shall represent the Ministry, operate and administer its work. For his/her work, for the work of the ministry, as well as for the conditions in the state administration in the field of health, the minister is responsible to the Parliament of Montenegro and to the Prime Minister. The Ministry has a Secretary. The Secretary of the Ministry coordinates the work of the organizational units within the ministry, provides the exercise of relations and cooperation with the administrative bodies in the administrative areas which it is established for and other bodies and reports to the Minister and the Government. Deputy Ministers manage and organize work in the sectors. For his/her work, the Deputy Minister is responsible to the Minister. The Ministry of Health performs tasks of the state administration in accordance with the Law on State Administration and Regulations on State Administration Organization and Manner of Operations. In accordance with the Regulation on the organization and operations of the State Administration Ministry of Health shall carry out administrative tasks related to: drafting and managing policy in the field of health protection; health insurance and provision of health protection from public revenues; establishing and organizing medical institutions and laying down requirements regarding space, human resources and equipment of medical institutions; professional training and specialisation of medical staff and medical associates; sanitary safety of imported food-stuffs and things of common use; protection of citizens against contagious diseases; national policy in the field of production and trade of medications and medical supplies protection of citizens against tobacco products; issuing approvals for the transfer of toxins over the state border and within domestic traffic; field of poison production and trade of poison; field of production and trade of narcotics and precursors coordination and monitoring of realisation of inter-sectoral activities in the field of narcotics; management of medical waste and biologically dangerous materials; proposing, negotiating, concluding and implementing agreements and other international treaties, affairs related to international cooperation and European integrations; cooperation with international and non-governmental organisations; administrative procedure; first instance misdemeanour procedure; administrative supervision in the field for the purpose of which this Ministry has been established, as well as other affairs falling within its competence. 5.2 Organization and Systematization of Posts The internal organization and systematization of the Ministry of Health is governed by the Regulation on Internal Organization and Systematization of Posts. In 2012, the applicable Regulation on Internal Organization and Systematization was as of 21 st July 2011, the Rulebook on Amendments to the Regulation on Internal Organization and Systematization, / as of 20 th February 2012 and the Regulation on Internal Organization and Systematization as of 19 th September The Rulebook establishes organizational units and their scope of work, name, conditions and job description and Page 228

229 number of employees. Carrying out tasks beyond the organizational units is provided through a Secretary of the Ministry and Advisers of the Minister. The organizational units of the Ministry, established by Regulation on Internal Organization and Systematization and / , include five sectors, two departments, service, the Cabinet and regional units. The number of employees is 110 civil servants and state employs, including the minister and managing officials. Pursuant to Article 60 of the Regulation on Organization and Manner of Operation of State Administration, a new Regulation on Internal Organization and Systematization of Posts of the Ministry of Health, as of 19 th September 2012 was determined, which excluded the regional units of health and sanitary inspections from the internal organization of the Ministry, because these were taken over by the Administration for Inspection Affairs. By the Agreement on takingover of officers employed as health and sanitary inspectors, their employment at the Ministry is terminated as of 31 st May Regulation on Internal Organization and Systematization of Posts of the Ministry of Health as of 19 th September 2012, 67 posts for civil servants and state employees were systematized (categorized), by organizational units, as follows: 1. Cabinet 2. Sector of Health Protection 3. Sector for Health Management 4. Sector for Economics in Healthcare 5. Sector for Quality Control and Improvement 6. Sector for Bioethics and Pharmaceuticals and Transplantation Programmes 7. Department for Drugs 8. Department for European Integration and International Cooperation 9. General affairs Office and Finance The audit has found that the organizational structure of the Ministry corresponds to the structure defined by the Regulation on Internal Organization and Systematization of Posts. On 1 st January 2012, the Ministry employed a number of 87 persons, whereas on 31 st December 2012 the total number of employees amounted to 48. The audit procedure included the control of personnel records and employment. Pursuant to Article 10 of the Regulation on Internal Organization and Systematization of Posts, the Service for General affairs and Finance administers personnel records and other records in the field of labour, as well as activities related to the implementation of the recruitment process. By examining personnel files of the employees of the Ministry, the audit has found that the procedure in respect of employment is being conducted in compliance with the Law on Civil Servants and State Employees. 6. Audit Methods The audit has been planned and performed in accordance with the ISSAI standards, in the manner which provides obtaining reasonable assurance about whether the financial statements are free of material misstatement and whether the operations of the audited entity is compliant with statutory requirements and other regulations. The audit involves performing audit methods and techniques in order to obtain audit evidence supporting the amounts and disclosures in the financial statements. The audit has been performed based on sample-testing, by using analytical procedures and interviews to verify the amounts and disclosures in the financial statements. Determination of risk and materiality has been done by using Methodological guidelines of the State Audit Institution, whereas sampling has been carried out by application of the audit program IDEA. Page 229

230 According to the drafted Record of determining risk and materiality, /3 as of 13 th February 2013, there was an inherent risk determined (Ri) at the level of 25,82% (medium risk) and risk of control (Rk) at the level of 29.00% (medium risk), i.e. the audit risk was estimated at the level of 0.34%. Materiality, i.e. estimation of the extent for tolerating misstatements in the financial statements, and that it does not significantly affect the truthfulness and objectivity thereof, was estimated to be at 1.77% or EUR 22, The sample determined at 70.16% covered the expenditure of the audited entity. We believe that the evidence obtained is sufficient, appropriate and provide a valid basis for our audit opinion. 7. The System of Records The basic regulations governing the accounting operations of the budget users is the Law on Budget with the bylaws. There is no document that would particularly elaborate accounting policies in the Ministry (system of information, control, evaluation and reporting), and the system of accounting records of the Ministry uses a cash basis accounting, in accordance with the regulations governing the accounting operations of the budget users. The Ministry is connected to the SAP information system (the software of the State Treasury which keeps records on treasury operations). Ministry carries out cash transactions via the Treasury Consolidated Account, using the SAP (software Treasury). The persons authorized for disposal of funds at the account , according to Specimen signatures issued by the Ministry of Finance - State Treasury, are: Miodrag Radunovic, the Head of the authority, Zoran Kostic, the Secretary of the Ministry, Nebojsa Todorovic, Assistant Minister in the capacity of Authorizing officer, with a single mode of signature, Jela Raonic - IV state employee and Julija Lazovic state employee IV. The person authorized for cash withdrawals for the Ministry, as determined by a document as of 10 th February 2012 is Lazovic Julija. Cash transactions on the basis of raising the advance were executed via a single treasury. In the Law on Budget for 2012 and the Law on Amendments to the Law on the Budget for 2012, the Ministry, according to the organizational classification, is recorded under the code 41301, for the Programme "Administration" and "Development, economical sustainability and health care quality improvement" Page 230

231 II. OPINION, DETERMINED FACTUAL STATE AND RECOMMENDATIONS Based on the established state of facts, and after deliberation of the audited entity's Opinion regarding the Preliminary Report on Audit of 2012 Annual Financial Statements (letter /22-9 as of 9 th September 2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composed of Mr Milan Dabovic, PhD (President of Senate Head of Collegium) and Mr Branislav Radulovic, PhD (member of Senate member of Collegium), at its session held on 23 rd September 2013, adopted the Final Audit Report on 2012 Annual Financial Statements of the Ministry of Health, and passed the following. OPINION WITH PROPOSAL OF RECOMMENDATIONS AND MEASURES According to state of facts established by the audit, the competent Collegium decided to express qualified opinion, for the following reasons: 1. The audit has found that the Ministry of Health has not fully approached budget planning by analysing factual needs, in accordance with the structure of expenditure and defined purposes. The Ministry has planned budget allocations through two Programmes, but did not determine the programme indicators as a mechanism of tracking results in meeting the programme objectives. The Request for budget allocations does not present identified programme tasks, which define particular and measurable standards and actions, which the spending unit is obliged to execute during the fiscal year, in order to meet the set goal of the programme. It is deemed necessary for the Ministry of Health to adopt the budget plan based on factual activities, cost analysis and realistic projections of needs and to draft a Request for budget allocations in accordance with the Instructions for the Preparation of Budgets of Spending Units, which is made by the Ministry of Finance, pursuant to Article 21 of the Law on Budget. 2. In the Statement of cash flows, the column Plan for 2012, the Ministry reported the funds in the amount of EUR 1,298,450.17, which is, in respect to the current budget (in accordance with the Law on Budget for 2012, the Law on Amendments to the Law on Budget for 2012 and executed redirection of funds), increased by EUR 46, The disclosed difference, amounting to EUR 46,723.82, appeared as a result of inconsistent application of the Law on Amendments to the Law on Budget for 2012, and thus the Ministry increased its resources by 3.95% in relation to the amount approved by the Law, and exceeded the approved amount of allocations by 1.96%. Therefore, the Ministry did not comply with Article 11 of the Law on Budget, which provides that no expenditure shall be paid out of the Treasury Consolidated Account, unless it is approved by the Law on the State Budget. It is recommended to the Ministry of Health to provide a consistent application of regulations which have an impact on the use of funds approved by law. Page 231

232 3. In one particular case, the Ministry reallocated funds in the amount which exceeded the limit defined by law. The allocation reduced funds in the amount of EUR 28, against the account Contracted services (Programme - Development, economic sustainability and health care quality improvement), and thus exceeded the legally defined amount by EUR 6, or by 13.15%. According to Article 35 of the Law on Budget, spending units, with the approval of Ministry of Finance, may reallocate funds among individual programmes and expenditures in the amount of 10% of the funds determined by Law on State Budget for programmes and expenses whose amount decreases. The Ministry is required to comply with the limits defined by Article 35 of the Law on Budget when reallocating. 4. The Ministry has opened accounts at commercial banks. The audit has confirmed that certain accounts have not been opened in accordance with Article 12 of the Law on Budget, which stipulates that the Ministry of Finance issued an order to open government bank accounts. Therefore, the requirements for carrying out financial transactions (revenue collection and payment of expenses) have not been provided in accordance with the provisions of the Law on Budget and applicable laws. Cash transactions executed and reported by the accounts opened with commercial banks, have not been recorded in the accounting records of the Ministry, as stipulated by Article 1 and Article 6 of the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, which governs the economic classification of accounts for budget users applying cash-based or modified cash-based accounting system. It is recommended to the Ministry to undertake the procedure of closing bank accounts that were not opened in accordance with the applicable regulations. It is recommended to the Ministry to consistently follow provisions of the Law on Budget and bylaws in the procedure of opening bank accounts. It is recommended to the Ministry to establish keeping records of cash transactions, carried at open bank accounts, pursuant to Article 1 and Article 6 of the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. 5. The Report on outstanding liabilities, submitted by the audited entity, has not disclosed outstanding liabilities at the end of the reporting period. The Ministry does not have accounting records of the accounts of Class 2. Thus, the provisions of the Rulebook on drafting, composing and submitting financial reports on the State Budget, extra-budgetary funds and local governments, which stipulate that the figures recorded in the accounts of Class 2 - Liabilities (categories 21, 22, 23, 24, 25, 26 and 27), shall be entered in the Report on outstanding debts of Class 2. were not complied with. The Ministry should provide records of liabilities in the accounts of Class 2 pursuant to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, and prepare a Report on outstanding debts in accordance with the Instructions on Filling Reports on Outstanding Liabilities. Page 232

233 6. The execution of the Ministry of Health budget has shown certain irregularities referring to the following: a) Inappropriate spending of funds in the amount of EUR 33,295.48, which is not in accordance with the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. Inappropriate spending, based on tested sample, refers to the following expenditures: expenditure in the amount of EUR has been recorded as other remunerations, and it is related to the separate life allowances, expenditures in the amount of EUR 31, recorded in the group of accounts 413, whereas related to the expenditure as outlined in the table on page 30 of the Report, expenditure in the amount of EUR 1, EUR has been recorded as ongoing maintenance, whereas related to expenses for purchase of equipment. b) The audit of the tested sample has found that the liabilities paid in the amount of EUR 16, does not refer to the reporting period, but the debt-creditor relationship created in the previous period. c) Payment of expenses for other remunerations has been executed based on decisions made by the Government of Montenegro and the decision passed by the Minister of Health on composing a working team, which determined the composition and mission of the work team, as well as the obligation of submitting the Report on activities to the Government of Montenegro and the Minister of Health, but did not define a time limit for the completion of the task. The Report on the activities that working team should have developed and which presents the basis for the payment of remunerations, was not enclosed in the documentation provided to justify the expenditure and certified and approved by authorized persons, which indicates to an inadequately established system of internal controls. d) The audit has determined that the Finance officer keeps the treasury book (journal) by chronological order following the payment of cash, but does not record the payment of cash by the type of expenditure (Eco code), which is not in accordance with Paragraph 157b of the Instruction for the State Treasury Operations. e) The audit has examined whether the received invoices are in compliance with the contracts concluded with suppliers, preceded by public procurement procedure and the accepted bid, and two cases have been found where it has not been possible to confirm compliance with the terms of the contract regarding price, due to the manner of issuing invoices by the supplier, without specifying the elements of the calculation for the reported commitments arising from services rendered. In accordance with the established irregularities, it is deemed necessary for the Ministry of Health to plan budgetary spending more precisely, in order to avoid improper spending and allocations by the lines of expenditure above the approved limit. The Ministry of Health must take care of the fiscal discipline and not allow transactions without valid supporting documentation. 7. By the inspection of business documents related to engagement of persons based on temporary service contracts, it has been determined that four persons were hired on the basis of such contracts in 2012, for the duties and tasks whose posts were systematized (categorized) by the Regulation on Page 233

234 Systematization of Posts. This way of engagement for performing tasks determined by the Regulations is incompliant with the procedures prescribed by Articles 16 to 30a of the Law on Civil Servants and State Employees. calculated liabilities for taxes and contributions on the basis of paid compensation Calculation of expenses in respect of taxes and contributions were not attached with Payment Requests for net contractual compensation. Therefore, it is impossible to reliably determine compliance with the applicable laws governing this area (Law on Income Tax of Natural Persons and Law on Contributions for Mandatory Social Insurance). Engagements based on temporary service contracts for carrying out tasks and duties included in the regular jurisdiction of the Ministry, envisaged by the Regulation on Internal Organization and Systematization of Posts, is not compliant with the provisions of the Law on Civil Servants and State Employees. 8. The Ministry has started activities on the establishment and development of the system of financial management and control, in accordance with the provisions of the Law on Public Internal Financial Control System. However, activities on the establishment and implementation of the system of internal financial controls, including the adoption of the plan and methodology, internal rules and procedures for defined operational processes have not been carried out in a manner regulated by the Law on Public Internal Financial Control System and the Rulebook on the Manner and Procedure of Establishment and Implementation of Financial Management and Control, both in the planning process and in the management of funds. It has been ascertained that the audited entity did not comply with the Instruction for the State Treasury Operations, Section III EXPENDITURE CONTROL, as it has not submitted supporting documents, confirming an obtained verification in writing that the service has been performed or goods or equipment delivered in accordance with an approved Purchase Order, along with the certified and approved Payment Requests. It is recommended to the Ministry to establish a system of internal financial controls at all levels and in all processes, in accordance with the Law on Public Internal Financial Control System. 9. The public procurements show a deviation in the application of legislation in the area of annual reporting. According to a Report on awarded public procurement contracts in 2012, the Ministry has conducted 339 procurement procedures of small value through direct agreements, totalling EUR 121, The annual value of small value procurements, executed through direct agreements, is not in accordance with Article 30, Paragraph 2 of the Public Procurement Law. The Ministry is obliged to ensure the full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, with the purpose of legitimate use of budget funds, thus making the public procurement procedure transparent and cost-effective. The Ministry should undertake activities aimed at enhancing the system of public procurement, which, among other things, includes the adoption of written procedures and guidelines which will additionally defined tasks and duties of employees in the matters of public procurement, in accordance with Articles 8, 9 and 10 of the Law on Internal Financial Control System. Page 234

235 COMPILATION AUDIT REPORT ON ANNUAL FINANCIAL STATEMENTS OF POLITICAL PARTIES FOR 2011 Audit type: Audited entity: Financial audit Parliamentary political parties Subject of audit: Annual financial statement for 2011 Audit duration: Collegium members: 120 auditing days Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 235

236 Page 236

237 GENERAL PART 1. Legal Basis The legal basis for conducting the audits is contained in: Law on State Audit Institution ( Official Gazette of Montenegro, 28/04, 27/06 and 78/06 and Official Gazette of Montenegro, 15/07); Law on Financing Political Parties (Official Gazette of Montenegro 49/08, 49/10, 40/11, 42/11, 60/11, 01/12); Annual Plan on audits of the State Audit Institution for 2012 ( dated ); Decision passed by the Collegium sector IV responsible for carrying out this audit ( , dated 30 th January 2012.) The financial audit was conducted in accordance with: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, 50/07); International Accounting Standards and Auditing Standards for Public Sector Instructions on the Work Methodology of the State Audit Institution; 2. Subject of Audit The subject of the audit are the Annual Financial Statements and conformity of operations with the legislation for 2011, of the following parliamentary political Parties: Democratic Party of Socialists of Montenegro (DPS CG); Social democratic Party of Montenegro (SDP CG); Croatian Civic Initiative (HGI); Bosniak Party (BS); Socialist People s Party of Montenegro (SNP CG); New Serbian Democracy (NOVA); Movement for Changes (PzP); Albanian Alternative (AA); Democratic League in Montenegro (DSCG); Democratic Union of Albanians (DUA); New Democratic Power (FORCA); Albanian Coalition Perspektiva (composed of: NGO Perspective Ana e Malit and NGO Civic Initiatives Tuzi). In addition to the audit of the annual financial statements of 11 parliamentary parties, the subject of this audit has been the annual financial statements of the Albanian coalition "Perspective", which consists of two non-governmental organizations, as follows: Perspective Ana e Malit and Civic Initiatives, which won one mandate in the elections in 2009 and therefore became entitled to funding from the Budget of Montenegro, pursuant to the Law on Financing Political Parties, Article 5. Page 237

238 3. Audit Objective According to the audit objective, the following has been examined: true and fairness of financial statements, application of laws and other regulations related to organisation and financial and accounting operation, regularity in generating revenues, regularity of expenditures execution, i.e. verification whether the funds were used exclusively for meeting objectives set forth by the programme and the Statute of the political party, regularity of the execution of other transactions. 4. Type of Audit The State Audit Institution has conducted a financial audit. Financial audit implies a comprehensive insight into the annual financial statements of parliamentary political parties for 2011 and their conformity with the legislation framework. 5. Subject of Audit Pursuant to the Law on Political Parties, a political parties is an organization of freely and voluntarily united citizens, in order to achieve political goals by democratic and peaceful means. The Law on Political Parties governs the conditions and the manner of: the establishment, organization, registration, associating and termination of work of political parties (hereinafter referred to as: the Party). The party acquires the status of a legal entity and starts to work on the day of registration in the Register of political parties. A Party can be established by at least 200 citizens with the right to vote in Montenegro, who voluntarily sign a declaration on the establishment of the party (hereinafter referred to as: the Declaration). Holders of judicial and prosecutorial functions, protectors of human rights and freedoms, professional members of the police and the army cannot be founders of the party. Parties are founded during the Founding session, by enacting a Decision on the Establishment of a Party, the Statute, the Programme and by the election of a person authorized to represent the party. The Law on Financing Political Parties governs the manner of generating and providing financial resources for operations and electoral campaign of the political parties, and the manner of controlling financing and financial operations of political parties, in order to achieve the legality and transparency of their business. Resources for the regular operations and electoral campaigns can be provided from public and private sources, in accordance with the Law on Financing Political Parties. The party entitled to budget funds is a political party, coalition or a group of citizens who participate in the elections and win at least one deputy or municipal deputy mandate. For financing regular operations and covering the costs of a political campaign, a political party i.e. parliamentary party and a submitter of an election list can raise funds from private sources, in accordance with the Law. Pursuant to Article 23 of the Law, political parties shall submit the completed final statements of accounts to the State Audit Institution, at the latest on March 31 st, of the current year for the previous year. The State Audit Institution is obliged to carry out the audit of the final statement of accounts of political parties, prepare a report on audit and publish it on its website within seven days of the adoption of the final report on audit. Page 238

239 This audit has included the political parties which had deputy mandates in the Parliament of Montenegro in 2011, (hereinafter: the Parliamentary party), as follows: Democratic Party of Socialists of Montenegro (DPS CG); Social democratic Party of Montenegro (SDP CG); Croatian Civic Initiative (HGI); Bosnian Party (BS); Socialist People s Party of Montenegro (SNP CG); New Serbian Democracy (NOVA); Movement for Changes (PzP); Albanian Alternative (AA); Democratic League in Montenegro (DSCG); Democratic Union of Albanians (DUA); New Democratic Power (FORCA); In addition to the audit of the annual financial statements of parliamentary parties, the audit has included the annual financial statements of the NGO Perspective Ana e Malit and NGO Civic Initiatives, which have been allocated funds from the budget of Montenegro based on mandates won. 6. Audit Methodology The audit was performed by combining the methods of in-office documentary audit and field audit. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, property, liabilities, resources, assets, etc.). According to the detailed plan for conducting the audit on annual financial statements, materiality rate was determined in the range of 0.5% and 2.0% in accordance with the established methodology of the SAI. The overall expenditures served as the basis for determining the materiality threshold. Materiality is determined separately, for each parliamentary party. Inspection of certain costs at larger parties, which provide electronic recording of financial transactions, was made on the basis of the sample obtained by sampling-program application, that supports the amounts and disclosures in the financial statements. Based on the obtained sample, more than 80% of the total expenditure was tested. Revenues generated on all the grounds, expenditures for salaries and other remunerations, cash in the accounts at commercial banks and in the treasury and assets (property) have been fully audited. 7. Planned Areas of Audit According to the detailed plan for conducting the audit on annual financial statements of political parties, the planned segments have been audited as follows: the scope of work and internal organization, the system of internal control, planning and accounting operations, financial statements, revenues, expenditures, property (assets), liabilities and own sources with all the parties that were the audited entities of this audit. Page 239

240 8. Financing the Work of Political Parties Budget resources allocated for financing regular work of the parliamentary parties in the Assembly of Montenegro, account for 0.5% of the total budget plan, reduced by the Capital budget resources and the budget of the state funds. Budget resources allocated for financing regular work of the parliamentary parties in the Municipal Assemblies account for 1% to 3% of the total budget resources, reduced by the Capital budget funds - planned current budget for the year which the budget of the municipality has been prepared for. Revenues Pursuant to the Law on Financing Political Parties, the budget of Montenegro appropriated and executed EUR 3,158, for the regular work of political parties in 2011, out of which the amount of EUR 3,081, was appropriated for the work of political parties, the amount of EUR 76, was appropriated for Albanian Coalition - Perspective, which has one mandate won in the Parliament of Montenegro, whereas the local self-government budgets allocated EUR 884, In addition to the outlined resources, the amount of EUR ,62 was allocated from the budget of Parliament of Montenegro, for the work of deputy clubs. In their accounting books, parties also reported income from private sources, amounting to EUR 209, and other income in the amount of EUR 251,975.00, and therefore, it can be concluded that the audited entities disclosed a total revenue in 2011, amounting to EUR 4,750, The following table outlines an overview of revenue generated in 2011 by type and by the audited entity: Political Party State Budget Revenues Municipal Budgets Revenues Private Sources Revenues Other Revenues Total Revenues In EUR Share % 1 Democratic Party of Socialist (DPS) 1,270, , , ,797, % 2 Social Democratic Party of Montenegro (SDP) 380, , , , , % 3 Croatian Civic Initiative (HGI) 76, , , % 4 Bosniak Party (BS) 168, , , % 5 Socialist People's Party of Montenegro (SNP) 622, , , , , % 6 New Serbian Democracy (NSD/NOVA) 347, , , , % 7 Movement for Changes (PzP) 234, , , % 8 Albanian Alternative (AA) 6, , , % 9 Democratic League in Montenegro (DSCG) 76, , , , % 10 Democratic Union of Albanians (DUA) 76, , , % 11 New Democratic Power (FORCA) 76, , , % 12 NGO "Perspective Ana e Malit" 76, , % 13 Civic Initiative 11, , , % TOTAL 3,405, , , , ,750, % Page 240

241 The graphic view of share in total revenues generated in 2011 per each party. According to the tabular overview and graphical representation, it is noted that the largest share in the aggregate generated revenue belongs to the Democratic Party of Socialists (37,83% share), the Socialist People's Party (18,00% share), the Social democratic Party (11,37% share), the New Serbian Democracy (10,90% share), etc. Expenditures The audited entities realized total expenditures in the amount of EUR 4,219, in 2011, structured as follows: procurement of assets, amounting to EUR 331,048.00, wages and other remunerations, amounting to EUR 2,049,086.50, amortization costs in the amount of EUR 52,104.00, other operating expenses, amounting to EUR 1,747, and financial expenses in the amount of EUR 39, The following table outlines an overview of expenditures executed in 2011 by type and by the audited entity: Political Party Democratic Party of Socialist (DPS) Social Democratic Party of Montenegro (SDP) Croatian Civic Initiative (HGI) Bosniak Party (BS) Socialist People's Party of Montenegro (SNP) New Serbian Democracy (NSD/NOVA) Movement for Changes (PzP) Albanian Alternative (AA) Democratic League in Montenegro (DSCG) Democratic Union of Albanians (DUA) New Democratic Power (FORCA) NGO Perspective Ana e Malit NGO Civic Initiative Material Expenses Wages, contributions and other personal earnings Depreciation Costs and Reserves Other Operational Expenses Financial Expenses Total Expenses In EUR Share % 229, , , ,692, % 264, , , , % , , , % 2, , , , % 78, , , , , % 109, , , , , % 111, , , , , % 23, , , % 4, , , , % 8, , , , % 4, , , , % 1, , , , , % 31, , % TOTAL 331, ,049, , ,747, , ,219, % Page 241

242 Graphic view of share in total expenditures executed in 2011 per each party. According to the tabular overview and graphical representation, it is noted that the largest share in the total expenditure belongs to the Democratic Party of Socialists (40.11% share), the Socialist People's Party (19.20% share), the Social democratic Party (12.80% share), the New Serbian Democracy (8.05% share), etc. II. EVALUATIONS, CONCLUSIONS AND RECOMMENDATIONS Based on the established state of facts and analysis of Opinions delivered by the audited entities regarding the Preliminary Report of the SAI, and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composed of Mr Branislav Radulovic, PhD (member of Senate) and Mr Dragisa Pesic (member of Senate), at its session held on 15 th November 2012, adopted the following: FINAL REPORT on the Audit of 2011 Annual Financial Statements of the Parliamentary Political Parties with the following evaluations, conclusions and r e c o m m e n d a t i o n s : The respective audit performed by the State Audit Institution has included the audit of the annual financial statements of 11 (eleven) political parties, and 2 (two) non-government organizations, representing the Albanian Coalition Perspective, all of which have been financed from the Budget of Montenegro. The Final Audit Report, Chapter II, presents the established state of facts individually, by each audited entity, as well as the recommendations given in order to eliminate the established irregularities and omissions in the operations of the audited entities. The Collegium competent for carrying out this audit have prepared a set of recommendation related to improving the legal framework that regulates the operations of political parties, as well as improving the work of all audited entities. Page 242

243 1. The audit has found that political parties do not keep their business books in a uniform manner, as they use different accounting principles for recording revenues, expenditures, assets and liabilities gradients by different accounting principles. In order to provide uniformity of accounting records, it is deemed necessary for the Ministry of Finance to pass an act by the end of the fiscal year, and thus regulate the manner of keeping books of political parties and establish the principles for recognizing their revenues, expenses, assets, liabilities and sources of finance. 2. The audit has found that the State is financing the lease of business premises used as the headquarters of four political parties (SNP, NEW, PfP and Bosniak party) through the Property Administration, and that the state-owned property has been given, free of charge, at disposal of two parties (DPS and SDP) for their activities. It is necessary to identify all aspects of financing of political parties by the Law on Financing Political Parties, and to regulate the issue of providing premises for the activities of political parties in a uniform manner, both, at the state and the local level, by the competent authority. 3. The audit has found that the majority of political parties have not fully and satisfactorily established an effective system of internal controls. It is deemed necessary for the audited entities to use an effective system of internal controls in order to ensure the lawful, cost-effective and successful management of financial resources and other assets, and raise the level of awareness and responsibility of persons involved in the disposal of financial and other assets. 4. The audit has found that all the audited political parties used to make cash payments (withdrawals from the treasury) of substantial sums, based on business gifts expenses, wages and remunerations, fuel, telephone bills and ongoing maintenance of equipment, etc. It has also been determined that certain parties (DPS CG, BS, CG SNP, NOVA, DUA, DS CG, and FORCA) justified a portion of these expenses paid out from the treasury, and referring to: business gifts expenses, fuel, fuel, telephone bills and ongoing maintenance of equipment, by using unreliable financial documents (non-fiscal receipts). It is deemed necessary for the audited entities to reduce cash payments from the treasury and to justify expenses on the basis of valid financial documents. 5. The audit has determined that the revenues, collected from the local governments, in addition to the main account of the party, are also being paid in the bank accounts of the municipal Boards. In order to improve fiscal discipline and achieve efficient management of financial resources, it is deemed necessary to transfer the aggregate generated revenue of the audited entities to their single, main account. Page 243

244 6. The audit has found that a number of parties (SNP CG and NOVA) have credited natural persons, and that the parties have been credited through members borrowings. It has also been concluded that certain parties are using funds for financing regular activities of parliamentary parties for covering election campaign costs. It is deemed necessary to precisely regulate the issue of borrowings which certain parties use as a form of crediting, by the Law on Financing Political Parties. 7. The audit has found that more than 90% of the total revenues generated by the audited parties comes from the Budget of Montenegro and local self-government budgets. The State Audit Institution deems it necessary to consider the possibility that the parties funded from the budget (parliamentary parties), should be subject to the Public Procurement Law. 8. In addition to budget appropriations for the regular work of political parties in the amount of EUR 3,158, in 2011, the audit has found that the parties were also approved the funds from the budget of the Assembly of Montenegro, in order to finance gross wages of the employees in the deputy clubs of the parties, amounting to EUR 247, It has also been determined that the two parties (NOVA and Bosniak party) have not fully complied with the purpose of financing gross wages of employees in the deputy clubs, since they have not calculated taxes and contributions in accordance with the prescribed tax base. The Assembly of Montenegro should carry out the transfer of funds for financing the work of deputy clubs on the bank accounts of parties, in a way which would prevent overruns if legally established limit of 0.5% of the current budget, defined by the Law on Financing Political Parties. Therefore, the financing of employees in deputy clubs should be done against the funds approved for regular financing of political parties, or the Assembly can assume the commitment of disbursing wages directly to the employees in the deputy clubs. Page 244

245 COMPILATION OF THE AUDIT ON REPORTS ON THE ORIGIN, AMOUNT AND STRUCTURE OF THE FUNDS RAISED AND SPENT ON ELECTION CAMPAIGNS OF SUBMITTERS OF ELECTION LISTS FOR 2012 Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: Financial audit Submitters of election lists on national and local level Reports on the origin, amount and structure of the funds raised and spent on election campaign of submitters of election lists for auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Mr Dragisa Pesic, member of Senate member of Collegium Page 245

246 Page 246

247 I. GENERAL PART 1. Legal Basis The legal basis for conducting the audits is contained in: Law on State Audit Institution ( Official Gazette of Montenegro 28/04, 27/06 and 78/06 and Official Gazette of Montenegro 15/07, 73/10 40/11); Law on Financing Political Parties ( Official Gazette of Montenegro, 49/08, 49/10, 40/11, 42/11, 60/11, 01/12); Annual Plan on Audits of the State Audit Institution for 2012 ( dated 9 th January 2012) and Amendments to the Annual Plan ( / 4 dated 1 st November 2012); Decision passed by Collegium IV responsible for carrying out this audit ( , dated 23 rd November 2012). 2. Subject of Audit The subject of audit is: Reports on the origin, amount and structure of the funds raised and spent on election campaign for the national and local elections of the following submitters of election lists: Coalition European Montenegro - Milo Djukanovic; Democratic Front - Miodrag Lekic; SNP - A word and a deed; Positive Montenegro - Darko Pajovic; Bosniak parties - Rafet Husovic; Croatian Civic Initiative - resolutely; Democratic Union of Albanians; Serbian National Alliance - Dr. Ranko Kadic Coalition "Together"; The Albanian Coalition - the Democratic Alliance in Montenegro; FORCA for Unity; The Albanian Youth Alliance; A Coalition of Serbian Unity. In addition to the audit of the said reports, the audit of the Report of Liberal party and Social democratic party of Montenegro have also been performed, as these two parties participated independently in the local elections in Kotor. 3. Audit Objective The audit objectives were to verify the following: whether the Reports on origin, amount and structure of the funds raised and spent on election campaign were compiled and submitted in accordance with statutory requirements; whether the Reports provide true, fair and accurate disclosure of revenues and expenditures; regularity in generating revenues and executing expenditures; whether the Reports are based on valid documentation. Page 247

248 4. Audited Entities The audited entities are submitters of confirmed and declared electoral lists that participated in national and local elections, held on 14 th October The President of Montenegro announced the elections (Decision as of 31 st July 2012, "Official Gazette of Montenegro" 42/12) for the election of deputies to the Parliament of Montenegro (Decision , and as of 31 st July 2012), and for the election of municipal Assembly delegates for the municipality of Kotor, Niksic and Budva, with dates of election as of 14 th October Pursuant to Article 25 of the Law on Financing Political Parties, submitters of electoral lists are obliged to submit a Report on origin, amount and structure of the funds raised and spent on election campaign to the State Audit Institution within 30 days, with supporting documents, and the SAI is required to perform an audit of the submitted reports. 5. Audit Metodology The respective audit was an in-office, documentary audit. The audit has examined the submitted Reports on origin, amount and structure of the funds raised and spent on election campaign and other supporting documentation of the submitters of the electoral lists at the national and local level. 6. Finansing of Election Campaigns Budget funds for financing the costs of the election campaign referred to in Article 9 of the Law, shall be provided in the year in which regular elections are held, in the amount of 0.25% of the current budget planned for the year which the budget is adopted for (current budget for 2012 amounted to EUR 596,035,556.53). Pursuant to Article 10 of the Law on Financing Political Parties, funds from the budget of Montenegro, in the amount of 20% are paid in equal instalments to the submitters of electoral lists, totalling EUR 298, (EUR 22, x 13 confirmed electoral lists at the national level). Funds in the amount of 80% were paid to submitters of electoral lists in proportion to the number of mandates won, in the amount of EUR 1,192, Raised Funds The audit has found that the submitters of electoral lists for the election of deputies to the Parliament of Montenegro and the election of municipal assembly delegates in the Municipal Assembly of Kotor, Niksic and Budva, for the elections held on 14 th October 2012 raised funds totalling EUR 1,726,559.48, out of which the funds generated from public funds amounted to EUR 1,518,623.23, i.e % of the aggregate amount, from private funds, amounting EUR 207,938.25, i.e % of the aggregate amount. The funds raised from public sources, included the funds from the budget of Montenegro, in the amount of EUR 1,490, and the budget of municipalities, in the amount of EUR 28, Pursuant to Article 10, Paragraph 2 of the Law on Financing Political Parties, submitters of electoral lists raised from the budget of Montenegro the aggregate amount of EUR 298, (20%) of related resources, and on the basis of mandates won, the sum of EUR 1,192, (80% of resources). Page 248

249 The submitters of electoral lists raised funds from the budget of local self-governments in the amount of EUR 17, (20% of related resources) and on the basis of mandates won, the sum of 11, The funds raised from private sources, amounting to EUR 207,938.25, are related to the donations of legal entities in the amount of EUR 1,100.25, i.e. 0.06% of the total revenue, and donations made by natural persons, in the amount of EUR 206,836.00, i.e % of the total revenue. Tabular overview of the funds raised by submitters of confirmed electoral lists In EUR Political Party State Budget Revenues State Budget Revenues (mandates won) Municipal Budget Revenues Municipal Budget Revenues (mandates won) Revenues from Legal Entities Donations Revenues from Natural Persons Donations Total Revenues Share % Total per Submitters of Electoral Lists Share per Submitters of Electoral Lists Coalition European Montenegro Milo Djukanovic 22, , , , % European Budva - local elections 1, , % European Kotor - local elections , , % European Budva-local elections , , % 2 Social Democratic Party of Montenegro (SDP CG) - local elections Kotor 2, , , % 3 Croatian Civic Initiative (HGI) - national level 22, , , % 3.1 Croatian Civic Initiative (HGI) - local elections Kotor % 4 5 Positive Montenegro 22, , , , , , % Bosniak Party (BS) - national level 22, , , % 6 Socialist People's Party of Montenegro (SNP CG) - national level 22, , , , % SNP - local elections Budva 1, , % SNP - local elections Kotor , , % SNP - local elections Niksic , , % 7 Democratic Front - national and local level (NK, KOTOR and BUDVA) 22, , , , % 8 Albanian coalition (DS in CG, DP, AA) - national level 22, , , % Coalition Forca for Unity - national level 22, , , % Democratic Union of Albanians (DUA) 22, , % Albanian Youth Alliance - national level 22, , % Coalition of Serbian Unity - national level 22, , % Serbian Unity for Niksic - local elections % 13 Coalition Serbian National Alliance - dr Ranko Kadic - national level 22, , , % 13.1 Coalition Serbian National Alliance - local election Kotor % 13.2 Coalition Serbian National Alliance - local election Niksic % 14 Coalition Together (communists and pensioners) - national level 22, , % 14.1 Coalition Together (communists and pensioners) - local level Niksic % 15 Liberal Party - local elections Kotor , , % 16 Workers Movement of Niksic Z. Z. Bulajic - local elections Niksic % TOTAL 298, ,192, , , , ,726, % 793, % 12, % 38, % 134, % 67, % 162, % 320, % 37, % 37, % 22, % 22, % 23, % 26, % 23, % 2, % % 1,726, % % 17.26% 69.04% 0.99% 0.00% 0.06% 11.98% % % Page 249

250 Graphic presentation of the structure of aggregate raised funds for financing election campaigns is given below. The aggregate funds raised for financing the election campaigns in the amount of EUR 1,726,559.48, presented in the given tabular and graphic overview, refer to the following submitters of election lists: Coalition European Montenegro - Milo Djukanovic, in the amount of EUR 793, or (45.94% of the total funds), the Democratic Front - Miodrag Lekic, in the amount of EUR 320, or (18.54%), SNP of Montenegro - A word and a deed, in the amount of EUR 162, or (9.43%), Positive of Montenegro, in the amount of EUR 134, or (7.82%), Bosniak party - Rafet Husovic, in the amount of EUR 67, or (3.88%), Croatian Civic Initiative, in the amount of EUR 38, or (2.24%), Albanian Coalition (DS CG, DP and AA), in the amount of EUR 37, or (2.18%), Coalition for Unity FORCA, in the amount of EUR 37, or (2.18%), Coalition of Serbian National Alliance - Dr. Ranko Kadic, in the amount of EUR 26, or (1.51%), Coalition of Serbian Unity, in the amount of EUR 23, or (1.36%), Coalition Together, in the amount of EUR 23, or (1.36%), Democratic Union of Albanians, in the amount of EUR 22, or (1.33% ), Albanian Youth Alliance, in the amount of EUR 22, or (1.33%), Social democratic Party of Montenegro - Kotor local elections, in the amount of EUR 12, or (0.71%), Liberal Party - the local elections of Kotor in the amount of EUR 2, or (0.14%) and the Workers' Movement Niksic - ZZ Bulajic, in the amount of EUR or (0.05%). 8. Loans and Borrowings A number of submitters of election lists used funds from loans for financing election campaigns, totalling EUR 652,000.00, as follows: Coalition European Montenegro - Milo Djukanovic (EUR 400,000.00), Positive of Montenegro - Darko Pajovic (EUR 80,000.00), the Democratic Front - Miodrag Lekic (EUR 72,000.00) and Bosniak party - Rafet Husovic (EUR 100,000.00). After having examined the submitted documentation, the audit has found that the Coalition European Montenegro - Milo Djukanovic fully settled its commitments under the loan in the amount of EUR 400,000.00, from the funds obtained from the Budget of Montenegro, on the basis of mandates won, and that Democratic Front settled a portion of the commitment under the loan in the amount of EUR 12,281.00, whereas the Bosniak party - Rafet Husovic and Positive of Montenegro - Darko Pajovic did not repay their commitments under the loan agreements concluded, by the time of the delivery of the SAI Report. Page 250

251 It has also been ascertained that, for the purpose of financing election campaigns, the submitters of election lists were taking borrowings from coalition partners, and they also used own funds, in the amount of EUR 148,623.81, as follows: Coalition of European Montenegro - Milo Djukanovic (EUR 53,800.00), SNP - (EUR 38,125.00), Democratic Front - Miodrag Lekic (EUR 37,400.00), Social democratic Party of Montenegro (EUR 1,448.81), Croatian Civic Initiative (EUR 5,000.00), Democratic Union of Albanians (EUR 8,050.00) and Coalition of Serbian National Alliance (EUR 4,800.00). The audit has found that the submitters of electoral lists returned the borrowings after having received funds from the budget of Montenegro and the budget of local governments, on the basis of mandates won. 9. Spent Funds The audit has determined that the submitters of election lists recognized expenditures for financing election campaigns in the aggregate amount of EUR 2,112,771.93, referring to: the costs of pre-election meetings, in the amount of EUR 236, (11.21%), the cost of TV commercials and promotional material, in the amount of EUR 515, (24.39%), advertising costs EUR 222, (10.51%), printing and publishing costs, in the amount of EUR 74, (3.54%), the cost of media presentation in the amount of EUR 427, (20.22%), the costs of public opinion polls, in the amount of EUR 32, (1.54%), the cost for engagement of authorized representatives, in the amount of EUR 162, (7.71%), overheads and general administration expenses, in the amount of EUR 99, (4.70%), transportation costs, in the amount of EUR 112, (5.34%) and other expenses of the campaign, in the amount of EUR 229, (10.84%). Tabular overview of the funds spent for financing election campaign of the electoral lists submitters Overheads Pre- Commercia Costs for Costs of and Election ls and Costs of Engagement Advertising Publication Public General Transportat Other Total Political Party Conventio Promotiona Media of Authorized Share % Expenses Expenses Opinion Administrat ion Costs Expenses Expenses n l Material Presentation Representativ Pools ive Expenses Expenses es Expenses 1 Coalition European Montenegro Milo Djukanovic 99, , , , , , , , , , % Total Expenses In EUR Share % 1.1 European Budva - local elections 2, , % 1.2 European Kotor - local elections 2, , % 800, % 1.3 European Budva-local elections 4, , % Social Democratic Party of Montenegro (SDP CG) - local 2 1, , % , , , % elections Kotor 3 Croatian Civic Initiative (HGI) - national level 7, , , , , , , , % 21, % 3.1 Croatian Civic Initiative (HGI) - local elections Kotor % 4 Positive Montenegro 19, , , , , , , , , , % 236, % 5 Bosniak Party (BS) - national level 45, , , , , , % 167, % 8, Socialist People's Party of Montenegro (SNP CG) - national 6 1, , , , , , , , % level 6.1 SNP - local elections Budva , % 6.2 SNP - local elections Kotor , % , % 6.3 SNP - local elections Niksic , , % Democratic Front - national and local level (NK, KOTOR and 7 11, , , , , % 40, , , , , , % BUDVA) 8 Albanian coalition (DS in CG, DP, AA) - national level 2, , , , , , , % 44, % 9 Coalition Forca for Unity - national level 27, , , , , , % 59, % , Democratic Union of Albanians (DUA) 5, , , , , , , % 39, % 6, , Albanian Youth Alliance - national level 4, , , , % 12, % 12 Coalition of Serbian Unity - national level 2, , , , , , , , % 12.1 Serbian Unity for Niksic - local elections % Coalition Serbian National Alliance - dr Ranko Kadic - national 13 5, , , , , % level 13.1 Coalition Serbian National Alliance - local election Kotor , , % 23, % 36, % 13.2 Coalition Serbian National Alliance - local election Niksic , , , % Coalition Together (communists and pensioners) - national 14 8, , % , , level 23, % Coalition Together (communists and pensioners) - local level % Niksic 15 Liberal Party - local elections Kotor , % 2, % 16 Workers Movement of Niksic Z. Z. Bulajic - local elections % % Niksic 2,112, ,112,771.9 TOTAL 236, , , , , , , % % 222, , , % 11.21% 24.39% 10.51% 3.54% 20.22% 1.54% 7.71% 4.70% 5.34% 10.84% % Page 251

252 below. Graphic presentation of the structure of total expenditure of financing election campaigns is given The aggregate funds spent for financing election campaigns, amounting to EUR 2,112,771.93, presented in the given tabular and graphic presentation, refer to the following submitters of electoral lists: Coalition European Montenegro - Milo Djukanovic EUR 800, (37.87% of total funds), Democratic front - Miodrag Lekic EUR 486, (23.01%), SNP of Montenegro - A word and a deed EUR 146, (6.93%), Positive of Montenegro EUR 236, (11.19%), Bosniak party - Rafet Husovic EUR 167, (7.91%), Croatian Civic Initiative EUR 21, (1.00%), the Albanian Coalition (DS CG, DP and AA) EUR 44, (2.09%), the Coalition for Unity FORCA EUR 59, (2.80%), the Coalition of Serbian National Alliance - Dr. Ranko Kadic EUR 36, (1.75%), the Coalition of Serbian Unity EUR 23, (1.11%), the Coalition Together EUR 23, (1.11 %), Democratic Union of Albanians EUR 39, (1.88%), Albanian Youth Alliance EUR 12, (0.60%), the Social democratic Party of Montenegro - Kotor local elections EUR 12, (0.58%), the Liberal Party - local elections Kotor EUR 2, (0.12%) and the Workers' Movement Niksic - ZZ Bulajic EUR (0.04%). Within the above expenditures, the cash costs amounting to EUR 406, (19% of the total costs) were paid to the following submitters of electoral lists: Coalition European Montenegro - Milo Djukanovic, the amount of EUR 100,530.00, Bosniak party - Rafet Husovic, EUR 86,988.37, Democratic Front - Miodrag Lekic, EUR 63,909.18, SNP of Montenegro A word and a deed, EUR 25,885.00, Coalition Together - EUR 21,998.00, Coalition of Serbian Unity - EUR 20,037.00, Coalition for Unity FORCA - EUR 14,990.92, Democratic Union of Albanians - EUR 14,090.00, Croatian Civic Initiative - EUR 9,853.00, the Albanian Coalition (DS CG, DP and AA) - EUR 9,811.12, Coalition Serbian National Alliance - Dr. Ranko Kadic - EUR 9, and the Liberal Party - the local elections Kotor, EUR 1, Page 252

253 The audit procedure has shown that an amount of EUR 79,673.77, i.e % of paid cash expenses was not justified by appropriate documentation, or the payment should have been made through bank accounts, at the submitters of the following election lists: Bosniak party - Rafet Husovic - EUR 25,317.00, Coalition Together - EUR 16,858.57, Coalition Serbian National Alliance - Dr. Ranko Kadic - EUR 9,450.00, Coalition Serbian Unity - EUR 9,784.00, Albanian Coalition (DS CG, DP and AA) - EUR 7,896.12, Coalition for Unity FORCA - EUR , Croatian Civic Initiative - EUR 5,000.00, Democratic Union of Albanians - EUR 3,706.00, and Liberal Party - local elections Kotor, Unsettled Debts The audit has found that the submitters of election lists recognized outstanding liabilities arising from financing of election campaigns, totalling at EUR 191,892.36, as follows: Coalition European Montenegro - Milo Djukanovic (EUR 2,925.00), Positive of Montenegro - Darko Pajovic (EUR 22,872.07), Democratic Front - Miodrag Lekic (EUR 122,927.42), Albanian Coalition Democratic Alliance in Montenegro (EUR 6,487.32), Coalition for Unity Forca (EUR 21,446.37), Democratic Union of Albanians (EUR 8,838.67) and Coalition of Serbian Unity (EUR ). In addition to the said liabilities, it has also been found that submitters of election lists have unsettled liabilities arising from loans and interests, totalling at EUR 254,605.48, as follows: Bosniak party - Rafet Husovic, in the amount of EUR 112, (principle EUR 100, and interest EUR 12,209.48), Democratic Front - Miodrag Lekic (EUR 60,182.00) and Positive Montenegro - Darko Pajovic, in the amount of EUR 82, (EUR 80, of principle and EUR 2, loan interest), and therefore the aggregate amount of outstanding liabilities of the submitters of electoral lists stands at EUR 446, Surplus in a Special Account for Election Campaign The audit has determined that some submitters of electoral lists reported a surplus of funds in the special account, i.e. unspent funds on the basis of the electoral campaign in the amount of EUR 46,668.70, as follows: Croatian Civic Initiative (EUR 17,145.46), SNP - A word and a deed (EUR 19,349.67) and Albanian Youth Alliance (EUR 10,173.57). Since the submitter of the electoral list Albanian Youth Alliance, as a representative of a group of citizens, does not have the status of a legal entity, dealing with the said surplus of funds in a separate account remains an open question. Page 253

254 II. FINAL EVALUATIONS AND RECOMMENDATIONS Based on the established state of facts and deliberations of the audited entities' Opinions regarding the SAI Preliminary Reports, and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the competent Collegium, composed of Mr Branislav Radulovic, PhD (Head of Collegium - member of Senate) and Mr Dragisa Pesic (member of Collegium - member of Senate), at its session held on 25 th March 2013, adopted the following: COMPILATION FINAL REPORT with recommendations Based on the established state of facts at the audited entities, the competent Collegium of the SAI have developed the following recommendations, related to enhancing the legal framework that regulates the financing of election campaigns and improving the quality of reporting of submitters of electoral lists: 1. The audit has found that the submitters of electoral lists made cash payments for a significant amount of costs and that some submitters have not justified a portion thereof on the basis of the valid financial documents. It has also been found that the submitters of electoral lists made cash payments of fees on behalf of authorized representatives, as well as other remunerations for the fieldwork of their activists, without calculating tax liabilities based on these payments. The State Audit Institution recommends to submitters of electoral lists to execute payments arising from the election campaign costs from the special bank account (opened for the election campaign), and to justify expenses by appropriate supporting documentation, as well as to make the calculation and payment of tax liabilities when disbursing remunerations of different kinds. 2. The audit has found that the submitters of electoral lists, on the basis of mandates won, were not paid funds from the budget of local self-governments (Budva and Niksic), pursuant to Article 10, Paragraph 4 of the Law on Financing Political Parties, within legally prescribed time limit of 7 days from the date of report submission to the SAI. Pursuant to the Law on Financing Political Parties (Article 10, Paragraph 4), local selfgovernment units are obliged to comply with the prescribed time limit and to transfer funds to submitters of electoral lists, as otherwise they are subject to penal provisions (misdemeanour) as stipulated by Article 37, Item 5 of the Law. 3. The Law on Financing Political Parties (Article 25) sets forth the time limit within which the submitters of electoral lists are obliged to deliver their preliminary reports on origin, amount and structure of the funds raised and spent on election campaign to the SAI. The audit has found that the submitted reports do not contain the amount of funds collected on the basis of actual election results, as well as data on the use thereof, because the provisions of Article 11 of the Law stipulate that the Ministry, or local self-government authority shall transfer this part of funds the submitters of electoral lists after having been informed on the submission of reports by the State Audit Institution. Page 254

255 The SAI recommends the amendments to the Law on Financing Political Parties which shall amend the Article 25 and shall specify time limit for submission of the Final report on origin, amount and structure of the funds raised and spent on election campaign, with the aggregate amount of raised and spent funds recognized. 4. The audit has determined that submitters of the electoral lists used funds from loans and borrowings, totalling EUR 800,623.81, for financing the election campaigns. The SAI recommends that in the process of amendments to the Law, the issue of financing election campaigns from loans and borrowings shall be addressed, because the applicable Law does not standardize these issues. Also, it is deemed necessary to establish the limit of the extent, to which the submitters of electoral lists are allowed to be indebted this way, and set the timeline and the source of funds which the return shall be made from. 5. The audit has found that submitters of electoral lists reported outstanding liabilities in a total amount of EUR 446,497.84, as follows: on the basis of costs of financing the election campaign, in the amount of EUR 191,892.36, and based on unsettled loans and interests, amounting to EUR 254, The SAI recommends that the amendments to the Law should prescribe restriction (limit), to which the submitters of electoral lists shall be allowed to be indebted for financing electoral campaign, corresponding to the limit contained in Article 13 (Paragraph 1) of the applicable Law, given that the audited entities spent more funds during the election campaign, than raised for financing it. 6. The audit has found that some submitters of election lists reported a surplus of funds in the special account, i.e. unspent funds on the basis of the electoral campaign, amounting to EUR 46, Since one of the submitters, as a representative of the group of citizens, does not have a status of a legal entity, dealing with the said surplus of funds in a special account remains an open question. SAI recommends the amendments to the Law, which would amend the Article 14 and specify that political parties are obliged to transfer the surplus funds from the special account to the account for regular operations, within a defined time limit and which would regulate the status of the submitters of electoral lists which are not legal entities (coalitions and citizens' groups), in terms of misdemeanour liability, unsettled debts, surplus funds...). Page 255

256 Page 256

257 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE AGENCY FOR PERSONAL DATA PROTECTION AND FREE ACCESS TO INFORMATION Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: Financial audit Agency for personal data protection and free access to information 2012 Annual financial statement 30 auditing days Mr Branislav Radulovic, PhD, member of Senate Head of Collegium Milan Dabovic, PhD, member of Senate member of Collegium Page 257

258 Page 258

259 I. GENERAL PART 1. Legal Basis The legal basis for conducting the financial audit of the Agency for the Protection of Personal Data and Free Access to Information (hereinafter: the Agency) for 2012, is contained in: Constitution of Montenegro, Article 144 ( Official Gazette of Montenegro 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of Montenegro, 28/04, 27/06 and 78/06, 17/07); Annual Plan on Audits of the State Audit Institution for 2013 ( dated ); Decision passed by the competent Collegium ( , dated ) The financial audit was conducted in accordance with: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, 50/07); Guidelines for Planning and Performing Financial Audit and Compliance Audit of the State Audit Institution; International Auditing Standards for the Public Sector (INTOSAI); 2. Subject and Scope of Audit The subject of performed audit is the Annual Financial Statement and conformity of operations with laws and subordinate legislation of the Agency for the Protection of Personal Data. In accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments (Official Gazette of Montenegro 32/10 and 14/11), the Agency is obliged to submit the following Annual Financial Statements by March 31 st of current year to the Ministry of Finance: Statement on cash flows III Statement on outstanding liabilities V. In addition to the mentioned statements, the Agency is also obliged to submit: Statement on the manner of spending funds submitted upon the expiry of a fiscal year (Form 8), Report on using current budget reserve funds (Form 9), 3. Audit Objective The objective of the audit is to express our opinion on reliability and accuracy of the Annual financial statements of Agency for Protection of Personal data and on regularity (compliance) of transactions reported. The first objective is to express opinion on reliability and accuracy of the financial statements, which implies the regularity of the data reported therein. Page 259

260 The second objective is the regularity of operation, i.e. examination of financial transactions and decisions in respect to receipts and expenditures, in order to determine whether the reported transaction were executed in accordance with the law, other regulations, given authorizations and for the intended purposes. In addition to the report on audit, an opinion has been given on the functioning of the system of internal controls, records-keeping, proper handling and disposal of the state assets and the application of the Public Procurement Law. 4. Type of audit The State Audit Institution has conducted a financial audit of the Agency for Protection of Personal Data for 2012, which implies a comprehensive insight into the Annual financial Statements and conformity of operations with the legislation framework. 5. General Information on the Audited Entity The Agency for the protection of personal data and free access to information was established in accordance with the provisions of the Law on Protection of Personal Data ("Official Gazette of Montenegro" 79/08, 70/09 and 44/12). The Agency is independent in the exercise of activities from its scope. The Founder of the Agency is the State of Montenegro. The Agency is an independent body, with the status of a legal entity, that performs the tasks of the supervisory authority in the exercise of the right to protection of personal data and the free access to information. The Agency is seated in Podgorica, 2 Kralja Nikole Str. Director of the Agency is Mr Bojan Obrenovic. The Agency for the protection of personal data carries out tasks of a supervisory authority, defined by the Law on Protection of Personal Data. The Agency is an autonomous and independent body in the exercise of activities from its scope. The Agency is a legal entity. The competence of the Agency is to ensure the protection of personal data and access to information in accordance with the Law, the principles and standards contained in the ratified international treaties on human rights and fundamental freedoms and the generally accepted rules of the International Law. The Agency is organized in accordance with the rights, duties and responsibilities established by the Law, Regulation on Internal Organization and Systematization of Posts and the Statute. The organizational units of the Agency, in accordance with provisions of the Rulebook, are the following: Section for Supervision, Section for Register and IT, Section for Complaints and Case Handling and Technical Services. The name and scope of certain internal organizational units, responsibility in relation to their management and operation, shall be determined by the Act on Internal Organization and Systematization of Posts. The Agency regulates other issues related to the internal organization and scope by special acts, when it deems necessary. The bodies of the Agency are: the Council of the Agency and the Director. Page 260

261 6. Financial Resources for Agency Operations The funds for the work of the Agency are defined by the Financial Plan of the Agency. The Council of the Agency defines the Financial plan each year, on the proposal of the Director of the Agency. Pursuant to Article 63 of the Law on Personal Data Protection, funding for the Agency shall be provided from the Budget of Montenegro and other sources in accordance with the Law. The resources of the Agency cover the obligations of the Agency for Supervision over the implementation of the Law, the acquisition of fixed assets, salaries of employees of the Agency and other expenses in accordance with the law and other regulations. 7. Audit Methods, Audit Risk and Estimation of Materiality The audit was planned and performed in accordance with INTOSAI and EUROSAI standards in a manner which provides obtaining reasonable assurance about whether the financial statements of the Ministry are free of material misstatement and whether the business operations of the audited entity is compliant with laws and bylaws and other regulations. In the process of planning the audit, the determined inherent risk amounted to (Ri) 33.91%, risk of control (Rk) at the level of 38.40%, risk disclosure (Ro) as assessed by the Chief Officer was found at 6.00%, and therefore the relative risk (RR) was derived by the formula Rr = R x Rk x Ro and amounts to 0.78%, which ensures that the audit will detect misstatements and irregularities with the certainty of 94%. The sample covered 90.16% of the total expenditure of the audited entity. The determination of risk was carried out according to the Methodological guidelines of The State Audit Institution, and sampling was carried out using the audit program IDEA. 8. Accounting Records The audit has determined that the Agency provides the following accounting records: records of revenues and expenditures and records of treasury operations. The Agency uses a cash-based accounting system for recording revenues and expenditures. The audit procedure has determined that the position of the accountant is not filled according to the Regulation on internal organization and systematization of posts, but the person employed on the basis of a temporary service contract carries out accounting tasks for the Agency. According to the statement given by the Director, the Agency repeatedly addressed the Ministry of Finance to obtain a consent to employ a person at the systematized post for the purpose of performing accounting tasks, but the Ministry did not give its consent. Page 261

262 II. OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on conducted audit, established state of facts, as well as after deliberation of the audited entity's Opinion ( 1595/13 as of June 6 th, 2013) on the Preliminary Report of the State Audit Institution ( /11 as of May 23 rd, 2013), and pursuant to Art 50 of the Rules of Procedure of the State Audit Institution, the authorized Collegium, comprising of the following members: Mr Branislav Radulovic, PhD (Head of Collegium - member of Senate) and Mr Milan Dabovic, PhD (member of Collegium President of Senate), at its session held on 12 th June 2013, adopted the following: FINAL REPORT on Audit of 2012 Annual Financial Statements of Agency for Personal Data Protection and Free Access to Information O P I N I O N Annual financial statement of the Agency for Personal Data Protection for 2012 does not contain material misstatements and in all material respects, give a true and fair view of reported receipts and expenditures in relation to the accepted financial reporting framework and therefore, the competent Collegium expresses an unqualified opinion on the accuracy of the Annual Financial Statements of the audited entity. Because of the deviations determined in the application of the Public Procurement Law, the Labour Law, the Law on Public Internal Financial Control System, as well as the identified deficiencies in recording assets, the competent Collegium expresses a qualified opinion on the conformity of operations of the audited entity with statutory and other regulations. RECOMMENDATIONS AND MEASURES 1. The audit has found that the Agency has not established an internal audit as stipulated by Article 18 of the Law on Public Internal Financial Control System. It is deemed necessary for the Agency to establish an internal audit as stipulated by Article 18 of the Law on Public Internal Financial Control System 2. The audit has determined that during 2012, certain duties and tasks under the Agency's jurisdiction, which are systematized (categorized) by the Regulations (Advisor for cooperation with the managers, accountant, the cleaning woman) were performed by persons employed under the Temporary service Contracts. The Agency should fill the systematized posts in accordance with the provisions of the Labour Law, by establishing labour relationships with the executors on the basis employment service contracts. 3. The audit has found that the Agency does not provide accounting records of fixed assets (fixed assets), but as a source of data it uses the inventory lists with presented data on the fixed assets of both, existing, as well as procured during the fiscal year. The Agency should provide recording equipment and other movable property in accordance with Art. 4 and Art. 9 of the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets. Page 262

263 4. Audit has identified the following irregularities in the implementation of The Public Procurement Law: The audited entity has not submitted the Public procurement plan and the Report on completed public procurement procedures for 2012 to the competent authority within the prescribed period; In 2012, the audited entity conducted the procurement of goods, services and works in the amount of EUR 51, by direct agreement, and accounts for more than 10% of the executed budget for public procurements of the Agency for 2011, which, according to the submitted Report for 2011, amounted to EUR 44, Article 30 of the Public Procurement Law stipulates that the total annual value of public procurement of a contracting authority conducted by direct agreement may not 10% of its total annual executed public procurement budget in the previous year, provided that the budget of that contracting authority does not exceed EUR 200,000; In 2012, the audited entity conducted direct agreement with 2 (two) suppliers, for the purchase of mobile providing services in the amount of EUR 9, and the procurement of services from a travel agent, amounting to EUR 11,997.16, and pursuant to thresholds referred to in Article 21 of the Law, in the cases of above mentioned procurements, the shopping method should have been implemented. When conducting an open public procurement procedure, two members of the Commission for opening and evaluation of tenders have not made a Conflict of interest Declaration, which is contrary to the provisions of Article 16 of the Law; In the Minutes of the public opening of bids (number 02/ /12), the Commission has noted that a copy of offer of one bidder was not tied with one red tape (continuous line) in a unit and wax sealed, and the insight into the said offer confirmed that a copy and the original were tied with a continuous line and wax sealed, and therefore the quote from the Minutes of the opening that refers to the validity of the bid, according to the provisions of Article 76 of the Law, is not correct; The Minutes of the public opening of bids (number 02/ /12), in conducting the proceeding via shopping method, it has been noted to have received three (3) bids, although the examination of submitted offers confirmed that five (5) offers were duly delivered. For the purpose of consistent application of the Public Procurement Law, the Agency should undertake activities to improve public procurement system, in a manner to: Prepare and submit the Public procurement plan and the Report on public procurements to the competent authority within the period prescribed by the Law (Article 38 and 118); Conduct the procurement of services by procedures prescribed by Law (Article 20 and 21); Carry out procurement of goods, works and services through direct negotiations in accordance with the provisions of Article 30 of the Law; Nabavku roba, radova i usluga primjenom neposredne pogodbe vrsiti u skladu sa odredbama clana 30 Zakona; Make the Record of the public opening of bids in accordance with the provisions of Article 98, and make the Record of the examination, evaluation and assessment of the bid in accordance with the provisions of Article 103 of the Law. Page 263

264 Page 264

265 EXCERPT FROM THE AUDIT REPORT ON 2012 ANNUAL FINANCIAL STATEMENTS OF THE MINISTRY FOR HUMAN AND MINORITY RIGHTS Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: Financial audit Ministry for Human and Minority Rights 2012 Annual financial statement 30 auditing days Mr Dragisa Pesic, member of Senate Head of Collegium Mr Milan Dabovic, PhD, President of Senate member of Collegium Page 265

266 Page 266

267 I. GENERAL PART 1. Legal Basis The legal basis for conducting the audit of the Annual Financial Statement of the Ministry for Human and Minority Rights (hereinafter: the Ministry) is contained in: Law on State Audit Institution, Article 4 ( Official Gazette of Montenegro, 28/04, 27/06 and 78/06; and Official Gazette of Montenegro 17/07); Annual Plan on Audits of the State Audit Institution for 2013, adopted by the Senate of the SAI ( dated 24 th December 2012); Decision passed by the competent Collegium ( , dated 04 th April 2013.) The audit of Annual Financial Statement of the subject of the audit was carried out in accordance with: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, 50/07); International Standards of Supreme Audit Institutions for public sector (INTOSAI); Methodological Instructions for determining the sample in the audit procedure of the SAI ( as of 1 st December 2009). 2. Subject of Audit The subject of performed audit is Annual Financial Statement of the Ministry for Human and Minority Rights for In accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments, the Ministry for Human and Minority Rights is obliged to submit the following Annual Financial Statements to the Ministry of Finance: Statement on cash flows III, Statement on outstanding liabilities. In addition to the financial statements, the Ministry is obliged to submit the following: Report on using current budget reserve funds (Form 9), Statement on the manner of spending funds submitted upon the expiry of a fiscal year (Form 8). 3. Audit Objective The objective of the audit is to express our opinion on reliability and accuracy of the Annual Financial Statement of the Ministry for Human and Minority Rights for The first objective is to express opinion on reliability and accuracy of the financial statements, which implies the regularity of the data reported therein. The second objective is the regularity of operation, i.e. examination of financial transactions and decisions in respect to receipts and expenditures, in order to determine whether the reported transaction were executed in accordance with the law, other regulations, given authorizations and for the intended purposes. Page 267

268 In the respective audit report, the State auditor is also giving opinion on the functioning of the internal control system, records-keeping, proper handling and disposal of the state property and the application of the Public Procurement Law. 4. Type of Audit The State Audit Institution will conduct a financial audit, which implies an audit of the Annual Financial Statements for 2012 and an audit of the conformity of operations of the Ministry with the legislation. 5. General Information on the Audited Entity The Ministry of Human and Minority Rights was founded in 1998, and it was called the Ministry for the Protection of Rights of National and Ethnic Groups. The Regulation on the Organization and Manner of Operation of the Public Administration ( Official Gazette of Montenegro 05/12 as of 23 rd January 2012 defines that the Ministry of Human and Minority Rights shall perform administrative affairs related to: monitoring realisation and protection of rights of members of national and other ethnic minority groups in the part related to their national, ethnic, cultural, linguistic and religious identity; improvement of interrelations between national and other ethnic minority groups; further improvement of inter-ethnic tolerance in Montenegro, as well as establishing and maintaining undisturbed contacts between members of national and other ethnic minority groups with the citizens and institutions outside of Montenegro with whom they share national and ethnic background, cultural and historic heritage and religious convictions; field of human rights in respect of issues outside the scope of other ministry, field of gender equality; affairs in relation to improvement of status of Roma, Ashkali and Egyptian population and their integration in all aspects of social life, as well as other affairs falling within its competence. By the Regulation on Amendments to the Decree on Organization and Manner of Operation of the State Administration ( Official Gazette of Montenegro 25/12 as of 11 th May 2012), part of the competence relating to the protection of human rights and freedoms and protection from discrimination was transferred to the Ministry of Justice, and the name was changed to the Ministry of Minority Rights. By the Decree on Organization and Manner of Operation of the State Administration ( Official Gazette of Montenegro 05/12,... 61/12 as of 7 th December 2012), the human rights sector was returned to the competence of the Ministry, and the name was changed to Ministry of Human and Minority Rights. In addition to the tasks and duties defined by the Decree on Organization and Manner of Operation of Public Administration, the Law on Minority Rights and Freedoms ("Official Gazette of Montenegro" 31/ /07 and "Official Gazette of Montenegro" no. 02/11 and 08/11) has established the competence of the Ministry of Human and Minority Rights, to develop rules and guidelines for the election of members of the Council of Minorities and other Minority National Communities and to supervise the lawfulness of the Council of Minorities and other Minority National Communities. The same Law also establishes the obligation of Council to pass the budget, the statute and Rules of Procedure, and at least once a year before March 31 st of the current year, submit to the Ministry and the competent working body of the Parliament of Montenegro the Report on Work and Financial Operations. Page 268

269 The internal organization and systematization of the Ministry for Human and Minority Rights, the organizational units, their scope of work, working posts and other issues are regulated by the Regulation on Internal Organization and Systematization of Posts. The Rulebook has also established the organizational units of the Ministry, as follows: the Sector for the Promotion and Protection of Human Rights and Freedoms; the Sector for the Promotion and Protection of the Rights of Minorities and Other Minority Communities; Department for Relations with Religious Communities; Department for Gender Equality Issues; Department for the promotion and protection of the RAE population; the Office of the Minister and the Department for General Affairs and Finance. The work of the Ministry is managed by the Minister, while the Secretary organizes, coordinates and controls the work of the internal organizational units. The Secretary of the Ministry also takes care of the cooperation with other agencies, and performs other duties assigned to him by the Minister. Few officials at the position of Minister governed the Ministry during 2012, as follows: in the period from January to June Dusko Markovic, from June to mid-july under the authorization of the Minister Orhan Sahmanovic, and until the election of the present minister, Mr Suad Numanović, PhD, the duty was performed by Hamdi Hasani. 6. Audit Methods audit. The audit has been carried out by combining methods of in-office (documentary) audit and the field The audit was planned and performed in accordance with INTOSAI and EUROSAI standards in a manner which provides obtaining reasonable assurance about whether the financial statements of the Ministry are free of material misstatement and whether the business operations of the audited entity is compliant with statutory and other regulations. The determination of risk was carried out according to the Methodological guidelines of the State Audit Institution, and sampling was performed by using the audit program IDEA. The audit risk (Rr) of 0.56 was determined for the respectable audit, and expenditures have been tested by a sample of 90%, which ensures that the audit detected misstatements and irregularities with the certainty of 90%. 7. Accounting Records The audit has found that the Ministry provides the following accounting records: records of revenues and expenditures, property records and records of treasury operations. The audited entity uses a cash-based accounting system for recording revenues and expenditures. Page 269

270 II. OPINION, DETERMINED IRREGULARITIES AND RECOMMENDATIONS Based on the established state of facts and deliberation of the audited entity's Opinion Ministry of Human and Minority Rights ( 1589/13 as of June 20 th, 2013) on the Report of the State Audit Institution ( /8 as of June 7 th, 2013), and pursuant to Art 50 of the Rules of Procedure of the State Audit Institution, the authorized Collegium, comprising of the following members: Mr Dragisa Pesic (Head of Collegium) and Mr Milan Dabovic, PhD (member of Collegium), at its session held on June 25 th, 2013, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Ministry for Human and Minority Rights O P I N I O N Annual financial statement of the Ministry for Human and Minority Rights for 2012 does not contain material misstatements and in all material respects, give a true and fair view of reported receipts and expenditures in relation to the accepted financial reporting framework. Because of the deviations determined by the audit in the application of the Public Procurement Law, Law on Public Internal Financial Control System, Law on Minority Rights and Freedoms, Law on Civil Servants and State Employees, Law on Contributions for Compulsory Social Insurance, Instruction for State Treasury Operations, the competent Collegium expresses a qualified opinion. RECOMMENDATIONS AND MEASURES 1. The audit has found that the Ministry has not established internal control in the part of financial - accounting matters as appropriate, because it has not provided the principle of segregation of duties within the activities of preparation of the financial plan and annual statements, recording financial transactions, treasury procedures, inspection of financial documentation and tasks and duties of a public procurement officer, all carried out by one person, which is not in accordance with the provisions of Article 9 of the Law on Public Internal Financial Control System. It has also determined that the Ministry did not establish an internal audit in 2012, as prescribed by Article 18 of the Law on Public Internal Financial Control System. Along with the Opinion on the Preliminary Report, the Ministry delivered an evidence to the SAI on the concluded Agreement with the Ministry of Labour and Social Welfare in 2013,( /13), on the assignment of activities of internal audit, pursuant to Article 18 of the Law on Public Internal Financial Control System of Montenegro. The Ministry of Finance gave its consent thereto. It is deemed necessary for the Ministry for Human and Minority Rights to establish a full oversight and control of the financial - accounting affairs and make the necessary segregation of duties within these jobs, especially treasury tasks and the tasks of filing and controlling documentation. Page 270

271 2. The audit has found that the funds raised from the position of expenditures for official travel expenses were used for payments not related to official travel, but to: the costs of vouchers, business gifts and representation expenses, the costs of organizing cocktails on the occasion of religious holidays and payment of financial assistance to employees. The Instruction on State Treasury Operation ("Official Gazette of Montenegro", 80/ /12 as of 27 th March 2012, Item 157d) stipulates that after the spending cash from the treasury, the Finance officer shall justify the prepayment by economic classification of the spent funds. Cash payments are recorded in the general ledger of spending units by economic classification. It is deemed necessary for the Ministry for Human and Minority Rights to consistently apply Instruction for State Treasury Operations, and after the outflow from the treasury, carries out justification of advance expenses by the economic classification of resources spent. 3. The audit has found that the Ministry calculated and paid tax and surtax for the remunerations disbursed to employees, for participation in the working groups and commissions. Pursuant to the provisions of Article 3a of the Law on Contributions for Compulsory Social Insurance, the Ministry should have calculated and paid contributions thereto. It is necessary that the Ministry for Human and Minority Rights fully apply the provisions of the Law on Contributions for Compulsory Social Insurance ("Official Gazette of Montenegro", no 13/ /12) when makes payments of remunerations to employees. 4. The audit has found that during 2012, the Ministry employed three persons for the period January - February and two persons for the period March May, on the basis of employment contracts. This way of employment in the state administration bodies is not in accordance with the provisions of the Law on civil servants and state employees. It is deemed necessary for the Ministry for Human and Minority Rights consistently apply the provisions of the Law on Civil Servants and State Employees (Article of the Act) and the Law on Earnings of Civil Servants and State Employees in procedures of employment. 5. The audit has found that the Ministry transferred EUR 300, in 2012 for financing operations of six National Councils, i.e. the amount of EUR 50, per council. The transfer of funds was performed on a monthly basis, in the amount of EUR 4, In 2012, the Ministry for Human and Minority Rights did not supervise the work of the Council in the part of control of the use of funds received. Along with the Opinion on the Preliminary Report, the Ministry submitted an internal rule from 2013, on the manner and form of reporting on spending funds by National Council. Page 271

272 It is deemed necessary for the Ministry for Human and Minority Rights, in accordance with the provisions of Article 33 of the Law on Minority Rights and Freedoms, to establish control over the lawfulness of the Council operations and ensure the control of spending funds allocated to National Councils. 6. The audit of conducted public procurements of the Ministry in 2012 has found the following irregularities: Ministry used a shopping method in procuring services from a travel agent in the amount of EUR 62,302.16, which, according to threshold class and type of proceedings under Article 20 and 21 of the Public Procurement Law, should have been conducted under an open public procurement procedure. In the mentioned procedure, the Ministry did not adhere to the conditions and manner of procurement procedure prescribed by Law, and divided the unique subject of procurement during the fiscal year, which is not in accordance with the provisions of Article 44 of the Law; During 2012, the Ministry conducted direct agreement procedures and procured goods and services in an amount exceeding 10% of the executed budget for public procurements for 2011, which is not in accordance with the provisions of Article 30 of the Public Procurement Law; During 2012, the Ministry purchased goods and services in the amount which exceeded the planned one, which is not in accordance with the provisions of Article 37 of the Law; In its Report on conducted public procurement procedures, the Ministry did not recognize a total value of procured goods and services. In the Report, the recognized value of purchased goods and services amounts to 52,119.42, and the audit has determined the execution of public procurement at a total of 174, In order to consistently comply with the Public Procurement Law, the Ministry for Human and Minority Rights should: Conducts public procurement only if they fulfill the conditions laid down in Article 37 of the Law; Conduct procurement of services in accordance with provisions of Article 20, 21 and 44 of the Law; Apply direct agreement in the public procurement procedure in accordance with the provisions of Article 30 of the Law; Recognize in the Report a total amount of public procurements conducted for goods, services and works. Page 272

273 EXCERPTS FROM THE INDIVIDUAL AUDIT REPORTS ON 2012 ANNUAL FINANCIAL STATEMENTS OF POLITICAL PARTIES Audit type: Audited entity: Subject of audit: Audit duration: Collegium members: Financial Audit Parliamentary political parties: Social Democratic Party, Socialist People's Party, New Serbian Democracy, Democratic Party of Socialists, Positive Montenegro, Movement for Changes, New Democratic Forces (FORCA), NGO Perspective "Ana e Malit", Bosniak Party, NGO "Civic Initiative", Croatian Civic Initiative, Democratic League in Montenegro and Democratic Union of Albanians 2012 Annual financial statements of political parties 200 audit days Mr. Dragisa Pesic, member of Senate - Head of Collegium Mr. Branislav Radulovic, member of Senate - member of Collegium Page 273

274 Page 274

275 I. GENERAL DATA 1. Legal Basis The following legal documents were used as the legal basis for conducting the audit of the annual financial statements and business operations of political parties: Law on State Audit Institution ( Official Gazette of Montenegro 28/04, 27/06 and 78/06 and Official Gazette of Montenegro 15/07, 73/10 40/11); Law on Financing Political Parties ( Official Gazette of Montenegro, 49/08, 49/10, 40/11, 42/11, 60/11, 01/12); Annual Audit Plan of the State Audit Institution for 2012 ( as of December 24 th, 2012); Decision passed by Collegium IV responsible for carrying out these audits ( as of 17 th, 2013) Audit procedures are carried out in accordance with: International Accounting Standards for public sector (INTOSAI); Instruction on Work Methodology of the State Audit Institution; Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro 50/07). 2. Subject of Audit The subject of performed audits is the Annual financial statements of political parties and compliance of their business operations with legal regulations. 3. Objective of Audit The objective of audit has been to verify the following: true and fairness of financial statements, enforcement of laws and other regulations related to the organization and financial and accounting operations, regularity in generating revenues, regularity of expenditures execution, i.e. verification whether the funds were used exclusively for the achievement of objectives set forth by the Programme and the Statute of the political party, regularity of the execution of other transactions Page 275

276 II BASIC INFORMATION ON THE PARTIES 1. SOCIAL DEMOCRATIC PARTY OF MONTENEGRO The Social Democratic Party of Montenegro (hereinafter: SDP) is an independent democratic political organization of free and equal members, acting in accordance with the Statute and program principles of SDP, as well as the principles of organization and operation of the Party of European Socialists and the Socialist International, whose member SDP is. The SDP is a legal entity and it operates as a single legal entity on the territory of Montenegro. The seat of the SDP is in Podgorica. The formal legal establishment of the Social democratic Party of Montenegro begun during the 1990s, along with the foundation of the parties that will later unite and constitute the SDP of Montenegro. Parties which the SDP was constituted of, had participated in the first elections in SFRY and Republic of Montenegro that introduced the system of multiparty elections, in December 1990, and it was a bearer of anti-war policy and reformation movement under the name of Yugoslavian Reformation Union for Montenegro, and was at that time, in its core, without a doubt, the only organized attempt of democratic transition of SFRY into a modern European and democratic state of all the citizens and the republics which it was constituted of. The governing bodies of the Social democratic Party are the following: the Congress, the Main Board, the President, the Presidency, the Vice President, the Secretary, The Statutory Commission, and the Supervisory Board. The Congress is the highest authority of the Party. The Congress shall be held at least once every four years. Responsibilities of the Congress are the following: it shall adopt the Programme and the Statute of the SDP, appoint the members of the Main Board, elect the President of the Party and the President and members of the Statutory Commission and the Supervisory Board, consider and adopt reports on the work of the party between the Congress, establish strategic commitments of Party s politics and decide on other matters defined by the Statute. The Main Board is the highest decision-making authority between the two Congresses. Main Board consists of members elected by the Congress (45 members) and members ex officio: President, Vice President, Secretary, MPs, cabinet members, heads of special forms of organization at the national level, President of Committee of the Capital, as well as the Presidents of municipality boards and Chairmen of local community Boards and regional Boards. The President of Party shall represent and act on behalf of the Party, provide a unique and a full functioning of the SDP, shall be responsible for the implementation of established party politics, shall convene and by rule chair the sessions of the Main Board and the Presidency of the SDP, shall propose a list of candidates for deputies and members of the Government. The President shall be directly responsible to the Congress, and to the Main Board between the two Congresses. The Presidency is the executive and political authority of the Party. The Presidency of the Party is composed of members ex officio and elected members. The members ex officio are: the President of Party, the Vice President and the Secretary. Upon the proposal of the President of the Party, the Main Board shall make decision on the number of members of the Presidency, elect and appoint them. The Secretariat is the professional-operative and executive body, responsible for the implementation of the attitudes and politics of the bodies of the SDP, and shall comprise of the secretaries in charge of certain fields, who are employed in the Administrative service and Deputies Club. The Statutory Commission shall interpret the Statute and evaluate compliance of decisions with the Statute and other acts of the Party's bodies. The Commission has a chairman and four members. The Supervisory Board shall control the financial operations of the Party, inform the Congress on its orders, and once a year, between the two consecutive Congresses, it shall inform the Main Board. The Supervisory Board has a Chairman and two members. Business Manager is responsible for Party s material and financial operations. Business Manager shall report directly to the Secretary, the Presidency and the President of the Party. In cooperation with the Secretary, Business Manager shall prepare the Annual financial plan and submit it to the Presidency, while the reports on material financial operations shall be submitted to the Supervisory Board and the Presidency of the Party. Page 276

277 The Party is funded from the State budget of Montenegro, the budget of the Capital, municipal budgets, membership fees and other resources in accordance with the Law and the Statute. Following the Proposal of the Presidency, the Main Board shall pass the budget of the Party. Following the Proposal of the Board President, the Board of the Capital city, the Municipal board and Regional board shall pass Revenue and expenditure plan for real estate management Audit Methodology The audit was performed by combining the methods of documentary (in-office) audit and field audit. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.25% against the overall expenditures, in accordance with the established methodology of the SAI Revenues In 2012, the Party generated total operating revenue of EUR 537, The generated revenue includes allocations from the budget of Montenegro, amounting EUR 311, and from municipal budgets, in the amount of EUR 144,047.00, resources for financing Deputies cubs in the amount of EUR 39,337.91, membership fees income in the amount of EUR 30,314.00, other revenues in the amount of EUR 11, and financial income totalling EUR The comparative overview of operating revenues generated in 2011 and 2012 is shown in the following table: Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 380, % 311, % 2 Municipal budget revenues 83, % 144, % 3 Funds for financing Deputies Clubs % 39, % 4 Membership fees 4, % 30, % 5 Other revenues 25, % 11, % 6 Financial revenues % % 7 Revenues from previous year 15, % % 8 Revenues from state property adjustments 30, % % TOTAL 540, % 537, % The graphic presentation given below presents operating revenues generated and listed by its structure and share in the total revenue: Page 277

278 1.3. Expenditures Operating expenses incurred in 2012 totalled EUR 515, and those include the following: material and miscellaneous items costs, amounting EUR 35,068.00, fuel and energy costs, in the amount of EUR 42,640.45, gross wages and contributions payable by the employer, totalling EUR 162,074.00, business travel expenses, amounting to EUR 41,352.00, landline and mobile phones expenses, in the amount of EUR 64,644.68, rental expenses in the amount of EUR 44,514.00, marketing services expenses, amounting to EUR 1,287.40, other operating expenses in the amount of EUR 2,571.57, depreciation costs, totalling EUR 16,225.01, the costs of other services in the amount of EUR 44,196.35, representation costs, amounting to EUR 30,151.37, payment operations commissions, amounting to EUR 1,469.15, membership fees to Chambers and cooperative associations in the amount of EUR 12,794.32, taxes and contributions expenses totalling EUR 5,956.58, etc. The comparative overview of operating expenses in 2011 and 2012 is presented as follows: Item Type of Expenditure 2011 (in EUR) Share % 2012 (in EUR) Share % 512 Costs of material and other miscellaneous 15, % 35, % 513 Cost of fuel and energy 32, % 42, % 520 Gross wages expenses 138, % 144, % 521 Contributions payable by the employer 17, % 17, % 522 Temporary service contracts remuneration % % 529 Business travel expenses 108, % 41, % 531 Landline and mobile phone expenses 43, % 64, % 532 Non-productive services expenses 10, % 10, % 533 Rental costs 46, % 44, % 535 Marketing services expenses 3, % 1, % 539 Other operating expenses 6, % 2, % 540 Depreciation costs 18, % 16, % 550 Other services expenses 30, % 44, % 551 Representation costs 21, % 30, % 553 Payment system commissions 1, % 1, % 554 Membership fees to Chambers and cooperative associations 12, % 12, % 555 Taxes and contributions expenses 3, % 5, % 559 Fixed assets value adjustments 30, % % TOTAL 540, % 515, % The graphic display given below specifies operating expenses, presented by their structure and participation in the total expenditures: Based on data presented in the tabular overview and graphic display of expenditures, it has been concluded that the largest share of the total expenditures accounts for gross wages participating by 28%, telephone expenses with a share of 12%, rental costs by 8.63%, fuel and electricity consumption costs by 8.27%, expenses arising from other services by 8.57% etc. Page 278

279 1.4. Implementation of 2011 Recommendations The audit of the Annual financial statements of the Social democratic Party for 2011 performed by the State Audit Institution identified a certain number of irregularities and made recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party implemented the SAI s recommendation referring to reduction of cash payments from the treasury by disbursing net wages into the bank accounts of employees. It has also been determinate that the Party undertook some activities in the late 2012, aimed at the implementation of recommendations in respect to the provision of records on receivables from municipalities, by sending a Request to all the municipalities, ( XI-310 dated as of December 24 th, 2012) for reconciliation of mutual commitments and claims, and following the said Request, all the municipalities, except Budva, Tivat, Mojkovac, Pluzine and Andrijevica, sent a written document notifying the party of their commitments to the Party, with the balance of accounts on December 31 st, Based on received information a tabular overview of receivables from municipalities was made, but they were not recorded in the business books. As for the recommendations relating to the total revenue generated and recognized in the income statement, the Party did not report total revenues generated in 2012, but a portion of the revenue, amounting EUR 21,260.00, was recognized as deferred income, so the revenue and expenditures were reported equal. Failure in recognizing financial result (profit) does not affect payment of taxes, given that a political party, according to the Law on Corporate Profit Tax (Law on Tax on Profit of Legal Entities), (Article 6), is not subject to income tax. The Party needs to record the total amount of realized revenues, expenditures and financial results in the financial report (income statement), regardless of its status of a non-profit organization EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( XI/129 from 09/02/2013) to the Preliminary report of the SAI ( /32 from 03/08/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the Collegium composed of Mr. Dragisa Pesic, the head of the Collegium - member of the Senate and Mr. Branislav Radulovic, PhD, the member of the Collegium - member of the Senate passed THE FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Social Democratic Party of Montenegro O P I N I O N The Audit has found that there are no material misstatements or significant discrepancies in officially presented Annual financial statements of the Social Democratic Party for Financial transactions are supported by appropriate documentation based on which financial statements have been prepared, business operations have been complied with the legislation, and therefore, the competent Collegium expresses an unqualified opinion on the annual financial statement. Page 279

280 2. SOCIALIST PEOPLE'S PARTY The Socialist People's Party (hereinafter: SNP) is registered in the Register of Political Parties Decision of the Ministry of Justice ( as of February 18 th,1998), in line with the Law on Association (''Official Gazette Montenegro", 23/90, 13/91 and 30/92). The bodies of the Party at the national level are: the Congress, the President, the Main Board, the Executive Committe of the Main Board, the Statutory Committee and the Supervisory Board. The Congress is the highest organ of the Party. Elected representatives of municipal organizations, organizations of the Capital, and members of the Main Board are members of the Congress. The Congress adopted the Statute of the Party and the Program of the Party, and adopts reports in the period between two consecutive Congress meetings. The President of the Party represents the Party, and its interests at home and abroad. Vice President of the Party, on the proposal of the President of the party, is being elected by the Main Board. The Main Board is the body of political leadership and responsible for realization of the policy of the Party. The Executive Committee of the Main Board takes care of the affairs of political management of the Party for the purpose of its organized and continuous action. Statutory Commission is an independent body Party. Statutory Commission has a Chairman and six members, elected by the Congress. The Supervisory Board controls and supervisory authority of the Party. The Supervisory Board has a Chairman and four members elected by the Congress. The Supervisory Board supervises the financial and material operations and manages the assets of the Party. The Main Board of the Party, within the time limits specified by Law, considers and adopts the Financial plan and Final statement of accounts. The Main Board elects a Director at the proposal of the President of the Party. The Director manages the assets of the Party, and ensures its protection, care of the material financial operations of the party, prepares the Annual financial plan and Financial report of the Party, is responsible for providing funds to finance party s activities and manages the expert service of the Party, and shall report to the Main Board and the President of the Party. The Party is funded from the State budget of Montenegrin, budgets of local governments, donations, gifts and other sources in accordance with the Law Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.25% of the total expenditures in accordance with established methodology SAI Accounting Records The Party, as a non-profit organization for 2012, was obliged under Article 23 of the Law on Financing Political Parties ("Official Gazette of Montenegro", 49/08, 49/10, 40/11, 60/11, 01/12), to keep accounting records of income and expenditure by origin, level and structure of income and expenditure, in accordance with regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other subsidiary books (financial journals). A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. Page 280

281 The audit has found that the Party kept the following business books in 2012: general journal, general ledger, subsidiary books (cash journal). The general ledger provides the following records: permanent records and current assets, liabilities, sources of funds, income and expenses. The party kept its records of income and expenditure in 2012 on cash-based accounting system Revenues According to figures presented in the general ledger, the Party recognized total income for regular operations in the amount of EUR 883,026.04, as follows: Revenues from the state budget amounting EUR 544,882.56, municipal budgets, in the amount of EUR 298,028.61, other income in the amount of EUR 39, and the financial revenues of EUR The audit has found that the Party in 2012 generated total revenues of EUR 855,672.77, which is by EUR 27, less, than the revenues recognized in the business books of the Party. The difference was found in the revenues generated from local government budgets, in the amount of EUR 6, and other income in the amount of EUR 20, These differences incurred because the audited entity recognized as revenues payments which referred to transfers of funds from the election bank accounts to account for regular operations and transfers from municipal bank accounts to the bank account of the Main Board, although these transfers do not have the character of income. The overview of revenues for 2011 and 2012 is presented in the table below. Type of Revenue 2011 (in EUR) 2012 (in EUR) Recorded Share % Recorded in GL Share % Determined by Audit Share % 1 State budget revenues 622, % 311, % 544, % 2 Municipal budget revenues 197, % 144, % 291, % 3 Other incomes 34, % 39, % 18, % 4 Financial revenues 30, % % TOTAL 855, % 525, % 855, % The graphic display given below presents revenue generated in 2012 (as determined by the audit) Expenditures According to figures presented in the general ledger, operating expenses incurred in 2012 totalled EUR 949,904.00, as follows: expenditures for the acquisition of assets in the amount of EUR 14,353.00, expenses for wages and fringe benefits and other personal income in the amount of EUR 528,337.00, other operating expenditures in the amount of EUR 402,674.00, financial expenses in the amount of EUR 2, and expenses in the amount of EUR 1, Page 281

282 The table presents an overview of expenditures for 2011 and Item Description 2011 (in EUR) Share % 2012 (in EUR) Share % 512 Costs of material 15, % 23, % 513 Cost of fuel and energy 60, % 100, % 514 Water consumption expenses 2, % 3, % 520 Gross wages and earnings related benefits 244, % 280, % 521 Costs of taxes and contributions charged to employer 98, % 29, % 524 Temporary contract service remunerations % 26, % 529 Other personal expenses and remunerations 135, % 192, % 531 Transport services expenses 33, % 35, % 532 Maintenance services costs 48, % 32, % 533 Rental costs 22, % 42, % 535 Marketing and advertising expenses 37, % 5, % 536 Research expenses 9, % 10, % 550 Costs of non-production services 3, % 20, % 551 Representation costs 25, % 23, % 552 Insurance premiums 2, % % 553 Payment system commissions 4, % 2, % 555 Other expenses 42, % 103, % 556 Costs of remuneration charged to employer 6, % 3, % 557 The Official Gazette and Publications costs 1, % 1, % 559 Court and administrative fees 10, % 7, % 562 Interest Costs 5, % 2, % 592 Expenses from previous period % 1, % TOTAL 810, % 949, % Graphic presentation of factual expenditure for 2012 (based on general ledger data). According to the tabular overview, the incurred expenditure refers to the following: costs of material in the amount of EUR 23,164.10, fuel and energy costs in the amount of EUR 100,569.13, expenses for wages and fringe benefits, in the amount of EUR 280,687.10, maintenance costs, in the amount of EUR 32,031.44, rental costs in the amount of EUR 42,236.93, transport services expenses in the amount of EUR 35,687.20, costs of production services in the amount of EUR 20,938.34, other costs in the amount of EUR 103,957.51, expenses in the amount of EUR 23,872.14, the cost of insurance in the amount of EUR , the payment system costs in the amount of EUR 2,643.30, legal and administrative fees expenses in the amount of EUR 7,501.47, costs of interests in the amount of EUR 2,559.98, etc.. Based on presented structure of expenditures, it has been concluded that the largest share of the total expenditures accounts for gross wages, contributions charged to employer, remunerations by contracts and other remunerations, accounting for 56%, then fuel and energy costs with 10.60%, other costs participating by 10.94%, rental costs by 4.45%, equipment maintenance costs by 3.37% and so. Page 282

283 2.5. Implementation of 2011 Recommendations The audit of the Annual financial statements of the Socialist People's Party for 2011 (SNP), performed by the State Audit Institution, identified a certain number of irregularities and made recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party undertook a number of activities aimed at the implementation of recommendations, in the late 2012 it adopted the Financial plan for 2013, provided that the payment of income from municipalities was transferred to the bank account of the Main Board of the Party, it entered the estimated assets into the cadastral Registry and ensured recording of receivables from municipalities. It has also been determined that cash payments were mostly executed and justified based on valid documentation, except for a part of costs of Municipal board, amounting to EUR 17,319.92, which was justified by non-fiscal bills. The audited subject reduced cash payments of costs in the late 2012 and in 2013 (net wages, fuel, phones, rental costs). Regarding the implementation of the recommendation relating to keeping business books, it has been determined that in 2012, the audited entity did not record and classify costs in the appropriate accounts and did not provide a chronological records of Municipal boards costs. It has also been found that Municipal boards did not provide keeping treasury books (journals), except for the three Municipal boards (Pluzine, Andrejevica and Rozaje). In December 2012, Main Board of the Party undertook certain activities on the implementation of this recommendation, it imposed an obligation to the Municipal board to submit monthly reports on expenditure of funds and the transfer of funds to municipal boards directly depended on the submission of the said Report and accompanying documentation, which ensured more efficient financial control of the Municipal board. Regarding the implementation of the recommendation relating to taxation of remunerations, it has been determined that the Party carried out activities on the implementation of this recommendation in case of remunerations paid to the Main Board members, while the Municipal Boards continued with payments of remunerations without accrued and paid tax. Page 283

284 2.6. EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( as of 08/14/2013) at the Preliminary report of the SAI ( /24 as of 19/07/2013), pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, the Collegium comprised of Mr Dragisa Pesic, Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD, member of Collegium - member of Senate, adopted the following THE FINAL REPORT on Audit of 2012 Annual Financial Statements of the Socialist People's Party of Montenegro O P I N IO N WITH RECOMMENDATIONS AND MEASURES The audit has determined that there are no material misstatements or significant deviations in official Financial statements of the Socialist People's Party in 2012, but it has found certain irregularities and omissions in the recording of financial transactions, documenting part of the costs, calculation and payment of tax in application of the legislation, and the audited entity did not fully implement recommendations made in the audit report for 2011, and therefore the said Collegium, responsible for the respective audit, expresses a qualified opinion. On the basis of determined state of facts, the following irregularities and omissions, with the impact to expressing qualified opinion, have been noted: 1. Pursuant to the provisions of Article 23 of the Labour Law, the Party has not defined the level of coefficients for payrolls by the Agreement on employment. It is deemed necessary for the Party to define the coefficient for payrolls by the Agreement on employment or by an internal act, in order to consistently comply with the provisions of the Labour Law and the General Collective Agreement. 2. Party has not conducted chronological recording of operational changes, especially those related to Municipal boards, and has not properly classified and recorded a part of the costs into the corresponding items, as stipulated by the Rules on Chart of Accounts applicable in Party should provide in its business books a proper classification of income and costs, keeping records thereof in the accounts prescribed under the Rules on Chart of Accounts, as well as to ensure chronological recording of all the incurred changes. 3. Party has not made an inventory list of assets and liabilities for 2012 as prescribed by the Rulebook on Terms and Method of Inventory and Matching Booked Balance and Factual Situation ("Off. Gazette" 34/09). It is deemed necessary at the end of each fiscal year to carry out regular annual inventory of fixed and current assets, as well as a list of liabilities as of December 31 st. After the harmonization of the inventory-specified state of facts with booked balance, it is deemed necessary to prepare a consolidated Report on the list of total assets and liabilities of the Party. Page 284

285 4. In the late 2012 and during 2013, the Party undertook a number of activities on the implementation of recommendations from 2011, in respect of reduction of cash paid expenses, the payment of revenue to the main account of the Party, the establishment of effective control of financial operations of Municipal boards, provision of receivables from municipalities, but, it has also been identified the party has not fully implemented the recommendation related to justification of cost paid in cash, because the cash paid portion of costs from Municipal boards treasuries, in the amount of EUR 17,319.92, based on representation expenses paid in 2012, was justified by inappropriate documentation, as well as the recommendation concerning the calculation and payment of taxes on remunerations, as a part of these remunerations, amounting to EUR 34, (remuneration for members of the Municipal boards, compensations based on temporary service agreements and remunerations on the basis of the increased workload), were paid without calculation and payment of tax liabilities. The Party has continued with the implementation of recommendations of the SAI in Page 285

286 3. NEW SERBIAN DEMOCRACY The New Serbian Democracy (hereinafter referred to as NOVA) is a political party in Montenegro, which brings together members of the Serbian people. The Party was established in 1998 as a Serbian People's Party, and later by transforming former Serbian list, the New Serbian democracy was established. In accordance with the Law on Political Parties ('' Official Gazette,'' 021/04-16), the bodies of the Serbian People s Party and People s Socialist Party decided to unite into the New Serbian Democracy, a party with the new legal entity, which takes over all rights and obligations of the parties who carried out the process of uniting. NOVA is seated in Podgorica. New Serbian Democracy passed the Statute which defines the objectives, the symbols and headquarters, the rights and obligations of members, organizational structure, acquisition and disposal of assets, passes party s acts and termination of work. Managing bodies and working bodies of NOVA are: Assembly, Main Board, the President, the Presidency, Executive Board, Deputy club, Political Council, and six Boards. New Serbian Democracy is financed from the budget of Montenegro, the budgets of local governments, donations, sponsorships and grants and other sources, in accordance with the Law. The Executive Board of the Party disposes of and decides on the use of financial resources with the consent of the President of the Party. 3.1 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, inspection of documentation, verification of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.5% of the total expenditures in accordance with established methodology SAI. 3.2 Accounting Records The Party, as a non-profit organization for 2012, was obliged under Article 23 of the Law on Financing Political Parties ("Official Gazette of Montenegro", 49/08, 49/10, 40/11, 60/11, 01/12), to keep accounting records of income and expenditure by origin, level and structure of income and expenditure, in accordance with regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: general journal, general ledger and subsidiary books. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that the Party kept the following business books in 2012: general journal, general ledger, financial journals (cash journal). The general ledger provides the following records: permanent records and current assets, liabilities, sources of funds, income and expenses. The Party used cash-based accounting system for keeping its records of income and expenditure in Page 286

287 3.3 Revenues The Party planned total revenue for regular operations for 2012 in the amount of EUR 474,300.00, as follows: revenue generated from the state budget in the amount of EUR 340, and revenues from local government budgets in the amount of EUR 134,300.00, and according to the data in the general ledger, the total generated revenues amounted to EUR 477, Generated revenues include: revenue from the budget of Montenegro, on the basis of won mandates, in the amount of EUR 313,644.78, the income for financing Deputy clubs in the amount of EUR 40,886.59, revenue generated from local government budgets, amounting to EUR 112,375.06, income from donations in the amount of EUR , the revenues generated from the municipalities based on elections in the amount of EUR 8, and other income in the amount of 2.000,00 EUR. The audit has found that in 20112, the Party generated total revenues of EUR 467,704.56, which is by EUR 10, less, than the revenue recognized in the business books of the Party. The difference was found in the revenues generated from local government budgets, in the amount of EUR 6, and other income in the amount of EUR 20, This difference is related to the reported amounts of revenue generated from financing election campaigns in the amount of EUR 8, and the transfer of funds from the Municipal boards on the account of the Main Board, in the amount of EUR 2, which is not to be recognized as revenue. The following table provides an overview of revenue for regular operations in 2011 and Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 308, % 313, % 2 Revenues from the Parliament of Montenegro 38, % 40, % 3 Municipal budgets revenues 89, % 112, % 4 Other revenues 81, % % TOTAL 517, % 467, % The graphic presentation of revenues generated for regular operations by structure and share thereof in the total revenue 3.4 Expenditure According to the Financial plan, the Party planned operating expenses in 2012 in the amount of EUR 440,000.00, and according to the data in the general ledger, the incurred expenses amounted to EUR 452, Page 287

288 The following table provides an overview of operating expenses in 2011 and 2012 Item Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % Net wages and contributions 10, % 14, % Material expenses of engaging volunteers 16, % 64, % Business travel expenses 81, % 76, % Equipment and vehicle maintenance costs 10, % 7, % Electricity, transport, marketing, telephone and rental expenses 24, % 50, % Depreciation costs 2, % 6, % Representation, commissions and insurance costs 30, % 11, % Costs of service rendered 28, % 53, % Expenses against assumed commitments 25, % 8, % Expenses for Municipal boards 108, % 152, % Other expenses % 7, % TOTAL 339, % 452, % The graphic presentation of operating expenses in 2012 by their structure and share in total expenditure: According to the tabular overview, the executed expenditures refer to the following: the expenses for wages and fringe benefits, expenses of engaging volunteers, travel expenses, equipment and vehicles maintenance costs, telephone costs, electricity, marketing, rental expenses, depreciation costs, representation, commissions and insurance costs, costs of services rendered, the expenses against assumed commitments, expenses for Municipal boards, and other expenses. Based on presented structure of expenditures, the largest share of the total expenditures accounts for expenses for Municipal boards with 33.72% of participation, the costs of business trips with a share of 16.82%, compensation costs for volunteers with a share of 14.24%, the cost of services rendered, with a share of 11.89%, overheads, marketing costs participating with 11.16%, and so on. 3.5 Implementation of 2011 Recommendations The audit of the Annual financial statements of New Serbian Democracy for 2011, performed by the State Audit Institution, identified a number of irregularities and made recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party undertook a certain number of activities aimed at the implementation of recommendation related to the establishment of an efficient system of internal control, in the following way: the Party adopted 2012 Financial plan and the Regulation on Material-Financial Operations and ensured that most of the municipalities revenue was paid into the central account, but it did not define by the Statute an obligation to adopt the Financial plan. Page 288

289 Regarding the recommendation related to the provision of analytical records of fixed assets, the Party provided records of assets in the form of tabular overviews, but did not provide recording thereof in its books (analytics of fixed assets). Recommendation on reduction of cash payments from the treasury was not implemented, since in 2012, the Party paid cash expenses based on various grounds, from the Main Board treasury, Municipal boards treasuries and the treasury of a Group of citizens MK in a total amount EUR 300, (66.52% of the total expenditure), as follows: from the Main Board treasury, in the amount of EUR 151,723.75, which makes 56.71% of the Main Board total expenses, from Municipal boards treasuries the amount of EUR 141,222.20, which accounts for 81.95% of the total Municipal boards expenses and from the treasury of the Group of citizens - Milan Knezevic, the amount of EUR , which makes 63.70% of the total expenses of the Group. Recommendation in relation to the calculation and disbursement of daily allowances for business trips abroad was fully implemented, as in 2012, the Party calculated and paid these expenses in accordance with applicable regulations. As for the recommendations relating to the obligation of the Party to calculate and pay tax liabilities when executing payments of any kind of remunerations, it has been found that in 2012, the Party partially implemented this recommendation, because tax liabilities arising from compensations paid to volunteers and persons engaged on temporary service contract were accrued, but not paid. 3.6 EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 291/13 as of 03/09/2013) on preliminary audit report of the SAI ( /35 as of 07/08/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution, Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the New Serbian Democracy of Montenegro O P I N I O N WITH THE PROPOSAL OF RECOMMENDATIONS The audit has ascertained that there are no material misstatements or significant deviations in officially presented 2012 Financial Statements of the New Serbian Democracy, but certain irregularities and omissions have been determined in the recording of financial transactions, providing accounting records, documenting a part of the expenses, in calculation and payment of taxes and, therefore the Collegium competent for the respective audit expresses a qualified opinion. Page 289

290 On the basis of determined state of facts, the following irregularities and omissions, with the impact to expressing qualified opinion, have been noted: 1. In 2012, the Party did not provide analytical records in its business books (fixed assets, liabilities and receivables). It is deemed necessary for the Party to ensure keeping subsidiary ledgers (fixed assets, payables and receivables) in its business books. 2. Party has not made an inventory list of assets and liabilities for 2012 as prescribed by the Rulebook on Terms and Method of Inventory and Matching Booked Balance and Factual Situation ("Off. Gazette" 34/09). It is deemed necessary at the end of each fiscal year to carry out regular annual inventory of fixed and current assets, as well as a list of liabilities as of December 31 st. After the harmonization of the inventory-specified state of facts with booked balance, it is deemed necessary to prepare a consolidated Report on the inventory and do the matching of booked balance with the factual one, pursuant to Rulebook on Terms and Method of Inventory and Matching Booked Balance and Factual Situation. 3. After examining the contracts on voluntary work, the audit has found that the same did not specify the amount of costs to be reimbursed to volunteers, but it defined that the Party would settle all the material costs (transport, phone etc..) arising from voluntary work, as well as pay contributions for volunteers. It has also been determined that the costs of volunteering were not documented, except for takeover of cash, which was documented by a signed receipt. It is deemed necessary for the Party to organize voluntary labour in accordance with the provisions of the Law on Volunteer Labour, to pay the expenses on the basis of voluntary labour on bank accounts of volunteers, based on the valid documentation. 4. The Party did not implement recommendation related to reduction of cash paid expenses, because in 2012, the Party paid cash expenses from the Main Board treasury in the amount of EUR 151,723.75, from Municipal boards treasuries, the amount of EUR 141, and from the treasury of the Group of citizens - Milan Knezevic, the amount of EUR , which makes 66.52% of the total expenditure for regular operations of the Party. The Party partially implemented the recommendation on justification of cash expenses, because in 2012, a part of cash expenses paid from the treasuries of the municipal boards, amounting to EUR 24,807.95, for expenses arose from electoral meetings, office supplies, representation and telephone costs and alike was justified on the basis of incomplete documentation. It has also been concluded that in 2012, the Party did not fully implement the recommendation relating to calculation and payment of taxes on rent paid to natural persons and calculation of taxes and contributions on gross wages paid to persons engaged in NOVA Deputies club. In 2013, the Party completed calculation of the above mentioned taxes and submitted it to the SAI, along with its Opinion on preliminary audit report, but did not settle tax liabilities in this respect. Page 290

291 4. DEMOCRATIC PARTY OF SOCIALISTS OF MONTENEGRO Democratic Party of Socialists of Montenegro (hereinafter: DPS), was founded in the eleventh Congress of the League of Communists of Montenegro, held on June 22 nd, 1991, by Decision ( ) on changing the name of the Communist Party. Under the name of "Democratic Party of Socialists of Montenegro" it entered the register of political organization in the Ministry of Justice of the Republic of Montenegro on July 1 st, The seat of the DPS CG is in Podgorica, bb, Jovana Tomasevica Str. The Party has its bodies at the municipal, city and the national levels. The bodies of the Party at the national level are: the Congress, the Main Board, the President of the Democratic Party, the Presidency, the Executive Board, the Statutory Commission and the Supervisory Board. The Congress is the highest organ of the Party and its decisions are mandatory for members and organs of the Party. The Congress establishes the policy of the Party, assesses the work of the elected bodies, passes the Program and the Statute of the Party and resolves other issues in accordance with the Rules of Procedure. The Congress elects: the Main Board, Party s President, Vice-President, the Statutory Commission and the Supervisory Board. The Main Board is the highest authority of the political management and implementation of policy of the Party between the two Congresses. Main Board establishes the draft Program and the Statute of the Party and other documents which are discussed in the Congress. The President of the Party ensures a unified and integrated functioning of the Party and represents its interests in its relations with the government authorities and other Parties. Vice President of the Party acts on behalf of the President in matters within its jurisdiction he/she is authorized for. The Presidency of the Party conducts political management of the Party for its organized and continuous participation in public life. The Statutory Commission has five members who are appointed and dismissed by the Congress. Statutory Commission interprets the Statute and other acts of the Party, determines on compliance of the acts with jurisdiction of the bodies and submits to the Main Board a proposal for decision on appeal, upon a decision on dismissal. The Supervisory Board is a controlling and supervisory authority of the Party. The Supervisory Board consists of three members elected by the Congress. The Supervisory Board controls the revenues and expenditures of the Party and administers the property management, for the assets owned or disposed of by the Party. The Supervisory Board submits an annual report on internal control of financial operations to the Presidency of the Party. The Supervisory Board adopts the Rules of Procedure. The Executive Board performs the duties of practical realization and implementation of the Party s policy. The Party member is obligated to pay the membership fee, and a decision on its amount or the amount of the part of the benefits exercised on the basis of the mandates of the Party, is passed by the Main Board, upon a proposal of the Presidency of the Party. 4.1 The Party is funded in accordance with the Law on Financing Political Parties. The Presidency of the Party adopts a Financial plan no later than December 31 st, of the current year, for the following year, upon a proposal of the Director of the Party. The party has its Directorate - for professional and administrative affairs. 4.2 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.00% of the total expenditures in accordance with established methodology of the SAI. Page 291

292 4.3 Accounting Records The Party, as a non-profit organization for 2012, was obliged under Article 23 of the Law on Financing Political Parties ("Official Gazette of Montenegro", 49/08, 49/10, 40/11, 60/11, 01/12), to keep accounting records of income and expenditure by origin, level and structure of income and expenditure, in accordance with regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that the in 2012, the Party provided the following business books: general journal, general ledger, subsidiary records (cash journal, records of assets, liabilities and receivables). The Party kept its accounting records on accrual basis, noting that revenues from the budget of Montenegro, the membership fees income and the income from donations are recorded at the time of payment. 4.4 Revenues Provisions of Law on Financing Political Parties ("Official Gazette of Montenegro", No. 49/08, 49/10, 40/11, 60/11, 1/12) regulate the method of generating revenue for political parties, stipulating that political parties may generate its revenue from public and private sources. Pursuant to the Law, the Democratic Party of Socialists, generated total revenue for regular operations in the amount of EUR 2,063, in Generated revenue includes allocations from the budget of Montenegro, in the amount of EUR 1,063,708.00, revenue from the budget of Montenegrin Assembly generated for the operations of Deputies clubs in the amount of EUR 86,527.00, from municipal budgets, amounting to EUR 682,977.00, membership fees income, in the amount of EUR 202,835.00, other revenues totalling EUR 23, and financial income in the amount of EUR 3, The following Table shows planned and actual revenue for 2011 and 2012 Type of revenue Plan 2012 (in EUR) Actual 2012 Actual 2011 Share % (in EUR) (in EUR) 1 State budget revenues 1,091,582 1,063, % 1,202,963 2 Revenues for Deputy club's remuneration 86, % 67,554 3 Municipal budget revenues 285, , % 326,576 4 Membership fees 150, , % 99,993 6 Other revenues 245,793 23, % 26,788 7 Financial revenues - interest revenues 3, % 4,701 TOTAL 1,773,180 2,063, % 1,723,874 The following graphic presents revenue for regular operations in 2012 Page 292

293 4.5 Expenditures According to the Financial plan for 2012, the Party planned expenditures in a total amount of EUR 1,773, Expenditures are planned at the following items: material costs in the amount of EUR 205,302.00, waged and other personal benefits in the amount of EUR 1,006,180.00, production services in the amount of EUR 235, and non-material costs in the amount of EUR 326, Given that the classification of planned expenditures is not in compliance with the expenditure recognized in the ledger, it was not possible to give a comparative overview of the planned and factual expenditure. Operating expenditure incurred in 2012 totalled EUR 2,056,051.00, referring to: the purchase of assets in the amount of EUR 374,388.00, wages, fringe benefits and other personal income in the amount of EUR 1,219, and other business expenditures in the amount of EUR 462, The following Table presents an overview of expenditures in 2011 and 2012 Item Type of expense 2012 (in EUR) Share % 2011 (in EUR) Share % 500 Purchases of merchandises 165, % 0.00% 512 Overheads and office supplies 43, % 132, % 513 Cost of fuel and energy 139, % 95, % 514 Utilities expenses 1, % 1, % 515 Other material costs 5, % 0.00% 520 Gross wages and earnings related benefits 844, % 735, % 521 Costs of taxes and contributions charged to employer 103, % 89, % 524 Temporary service contract expenses 90, % 74, % 529 Other personal expenses remunerations 181, % 160, % 531 Landline and mobile phone expenses 183, % 134, % 532 Maintenance costs 58, % 39, % 533 Rental costs 28, % 14, % 535 Advertising costs 4, % 53, % 536 Costs of researching activities 40, % 0.00% 537 Costs of printing material 31, % 20, % 539 Costs of other services 6, % 5, % 540 Depreciation costs % 0.00% 550 Costs of non-production services 25, % 26, % 551 Representation costs 31, % 38, % 553 Payment system commissions 7, % 4, % 554 Membership fees expenses 10, % 10, % 557 The Official Gazette and Publications costs 32, % 19, % 559 Administrative fees % 1, % 579 Expenses from previous period 18, % 33, % TOTAL 2,056, % 1,692, % The graphic presentation of operating expenses in 2012 Page 293

294 According to the tabular overview, executed expenses relate to the following: purchase of assets in the amount of EUR 165,936.84, expenses for materials and goods in the amount of EUR 43,921.24, fuel and energy costs, amounting to EUR 139,363.20, costs of gross wages and contributions charged to employer and expenses arising from temporary and provisional labour contracts, in the amount of EUR 1,038,303.00, daily allowances for business travel in the amount of EUR 181,228.00, transportation costs in the amount of EUR 183,384.12, vehicle maintenance costs in the amount of EUR 58,916.00, rental expenses in the amount of EUR 28,931.14, costs of research in the amount of EUR 40,151.79, representation expenses in the amount of EUR 31,735.64, costs of fees amounting to EUR 10,889.61, expenses for professional literature and publications in the amount of EUR 32,180.03, costs from the previous period in the amount of EUR 18,025.24, printing services costs in the amount of EUR 31,000.97, lawyer fees costs and other services in the amount of EUR 25, and other expenses in the amount of EUR 26, The largest share in the total amount of expenditure accounts for expenses for wages and contributions charged to employer participating with 47%, the costs of fuel, energy and vehicles maintenance with 15.90%, and the cost of material with 7.74%. 4.6 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of Democratic Party of Socialists, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party undertook a number of activities aimed at the implementation of recommendation, such as: it complied internal regulations (Regulation on Wages and Remunerations) with the legislation, ensured that most of the municipalities revenue is paid into the central account - except in individual cases, provided the recording of receivables from municipalities. It has also been determined that cash expenses were justified based on valid documentation, and that the Party reduced cash payment of expenses based on the costs of fuel, telephone and investment maintenance. 4.7 EVALUATION OF DETERMINED FACTS OPINION Based on the conducted audit, determined facts and considering the audited entity Audit ( as of 25/07/2013) on Preliminary report of the SAI ( /27 as of 19/07/2013), and pursuant to Article 50, of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on the Audit of the 2012 Annual Financial Statements of Democratic Party of Socialists of Montenegro OPINION The audit has ascertained that there are no material misstatements or significant deviations in officially presented 2012 Financial Statements of the Democratic Party of Socialists. Financial transactions are supported by appropriate documentation, based on which financial statements have been prepared and the business operations of the Party is complied with the legal regulations, and therefore the competent Collegium expresses an unqualified opinion on the Annual financial statements. Page 294

295 5. POSITIVE MONTENEGRO Political party Positive Montenegro (hereinafter: PCG), is an independent democratic party of free and responsible members who act in order to achieve Program s objectives and principles of the Party. The Party entered the Register of Political Parties by Decision of the Ministry of Interior Affairs ( / /1 as of June 14 th, 2012). The President Darko Pajovic represents and acts on behalf of the Party. The Party is seated in Podgorica. The bodies of the Party are the following: the Congress, the Main Board, the President, the Presidency, the General Secretariat, the Statutory Commission, the Supervisory Board, the Court of Honour and Political Council. In addition to these bodies, and for the purpose of political activity, the Party shall appoint elect Vice Presidents, a Political Director and a Manager of the Party. The Congress is the highest programme, statutory and electoral authority of the Party. For its operation and activities, the Party is funded through membership fees, donations, property income, from the budget, legacies and other sources in accordance with the Law. The amount of fee shall be determined by the Presidency of the Party. 5.1 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2.00% of the total expenditures in accordance with established methodology of the SAI. 5.2 Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that in 2012, the Party provided the following business books: general journal, general ledger and subsidiary records. The Party's accounting records are based on a modified cash-basis as follows: assets and liabilities are recorded on accrual basis, whereas records of revenues and expenses are kept on a cash basis. Page 295

296 5.3 Revenues The Party reported a total revenue for regular operations in the amount of EUR 77, in Generated revenue refers to revenue from the state budget, amounting EUR 42,298.61, the budget of municipalities in the amount of EUR 4,440.92, other income in the amount of EUR 30, and the financial revenues of EUR The following Table provides an overview of revenues for regular operations of the Party in 2012 Type of Revenue 2012 (in EUR) Share % 1 State budget revenues 42, % 2 Municipal budget revenues 4, % 3 Other revenues 30, % 4 Financial revenues % TOTAL 77, % The graphic presentation of revenues generated for regular operations by their structure and share in the total revenue 5.4 Expenditures Operating expenses incurred in 2012 totalled EUR 55, and it refers to: material costs in the amount of EUR , the costs of energy and utilities in the amount of EUR 1,132.42, gross wages and employer's contributions and fringe benefits in the amount of EUR 10,901.74, telephone and transportation costs in the amount of EUR 6,865.25, rental expenses in the amount of EUR 2,233.60, marketing costs in the amount of EUR 21,734.40, maintenance costs in the amount of EUR 3,058.92, depreciation costs in the amount of EUR , the expenses of conventions and other services, amounting to EUR 5,074.61, other expenses in the amount of EUR , the payment system commissions in the amount of EUR and the expenses for assistance and sponsorships in the amount of EUR 2, Tabular overview of operating expenses in 2012 Type of expense Amount (in EUR) Share % 1 Other material expenses - office supplies % 2 Energy and utilities costs 1, % 3 Gross wages and earnings related benefits 10, % 4 Other personal expenses remunerations - telephone and transportation 6, % 5 Rental costs 2, % 6 Advertising costs 21, % 7 Maintenance costs 3, % 8 Depreciation costs % 9 Costs of non-production services - conventions 5, % 10 Representation costs % 11 Payment system commissions % 12 Other non-production costs - financial aid and sponsorship 2, % TOTAL 55, % Page 296

297 The graphic presentation of operating expenses in 2012 by their structure and share in the total expenditure 5.5 Implementation of recommendations As Positive Montenegro entered the Register of Political Parties upon Decision of the Ministry of Interior Affairs ( / /1) on June 14 th, 2012, this Report does not contain a section on the implementation of recommendations from EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audit entity s Opinion ( /2013 as of 14/08/2013) on Preliminary report of the SAI ( /41 as of 09/08/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Positive Montenegro OPINION The 2012 Annual financial statements of the Positive Montenegro do not contain material misstatements and in all material respects, give a true and fair view of reported receipts and expenditures in relation to the accepted financial reporting framework. Financial transactions are supported by appropriate documentation, based on which financial statements have been prepared and the business operations of the Party is complied with the legal regulations, and therefore the competent Collegium expresses an unqualified opinion on the Annual financial statements. Page 297

298 6. MOVEMENT FOR CHANGES Movement for Changes (PZP hereafter) was established as a political party (organization) on June 13 th, The Party entered the Register of Political Parties on August 8 th, 2006 by Decision /06. The abbreviated name of the political party (organization) is PzP. The Movement for Change is seated in Podgorica. The Movement for Changes is an independent political party (organization) of free and responsible members, which stands for: a rich and legitimate State of Montenegro, based on moral and spiritual values, status of Montenegro as an ecological oasis of Europe, termination of sales of the State property, new politicians, with new ideas and a clear vision, enhancing competitiveness, the introduction of new technology, the entry into the European Union, the better status and position of all society groups, especially pensioners and people with disabilities, as the most vulnerable groups in need of general help and support. The bodies of the Movement for Changes are: the Assembly, the Main Board, the Presidency, the President, Vice-Presidents, the Supervisory Board, the Court of Honour and Director. Members of all bodies are elected for a four-year term. The Assembly is the highest programmatic, statutory and electoral body of the Party. The President represents the Party. For its operation and activities, the Party is funded through membership fees, donations, property income, from the budget, legacies and other sources in accordance with the Law. The Main Board adopts financial plan on the proposal of the Presidency of the Party. The Presidency of the Party decides on the allocation of financial resources and their distribution to organizational units of the Party. The President of the Party and the Director under the authority of the President shall have orders for the use of financial resources of the Party. The Supervisory Board of the Party supervises the collection and disposition of funds. 6.6 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, evaluation and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.5% of the total expenditures in accordance with established methodology of the SAI. 6.2 Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. Page 298

299 The audit has found that in 2012, the Party kept the following books: journal, general ledger and subsidiary cash ledger. The Party based its accounting records on an accrual basis, and kept its business books in accordance with the Chart of Accounts for enterprises. The general ledger included records of assets (fixed and current), capital, liabilities, income and expenses. The treasury operations went through the treasury and the records were kept in the cash journal. The inventory book includes records of assets by ordinal number, the type of the fixed-asset items, but without a recognized purchase, written-off and current value. 6.3 Revenues The Law on Financing Political Parties prescribes the method of generating revenue. According to its business books, the Party generated aggregate operating revenue in the amount of EUR 310, in Generated revenue includes the resources from the State budget, amounting to EUR 231,308.46, out of which the sum of EUR 26, relates to revenues based on financing Deputies clubs, then from local government budgets in the amount of EUR 77,546.31, revenue generated from donations amounted to EUR , other income in the amount of EUR and the financial revenues of EUR The following Table shows a comparative overview of operating revenues of the Party generated in 2011 and Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 191, % 204, % 2 Revenues for remuneration Deputy Club's fee 24, % 26, % 3 Municipal budget revenues 114, % 77, % 4 Donations % % 5 Other revenues % % 6 Financial revenues % % TOTAL 330, % 310, % The graphic presentation of operating revenues by their structure and share in the total revenue. 6.4 Expenditures The operating expenses of the Party incurred in 2012 totalled EUR 318,760.41, whereas in 2011 they reached the amount of EUR 206, Page 299

300 The following Table shows a comparative overview of operating expenses in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Other material costs % 2, % 2 Fuel and energy costs 7, % 4, % 3 Net wages 7, % 8, % 4 Taxes on wages and fees % 1, % 5 Contributions costs 3, % 4, % 6 Surtax costs % % 7 Author's fees and other remunerations expenses 99, % 203, % 8 Representation costs 5, % 10, % 9 Depreciation costs 30, % 29, % 10 Telephone and vehicle registration and insurance costs, transportation costs 6, % 13, % 11 Maintenance costs 1, % % 12 Rental costs 5, % 3, % 13 Advertising costs 1, % 11, % 14 Non-production services, intellectual services and printing costs 6, % 4, % 15 Payment system commissions 1, % 1, % 16 Utilities % 1, % 17 Costs of interest 19, % 2, % 18 Scholarship and other non-material expenses 6, % 1, % 19 Road fees (tax expenses) % % 20 Expenses from previous period % 14, % 21 Other expenses 1, % % TOTAL 206, % 318, % The following Graph shows operating expenses in 2012 by their structure and share in the total expenditure.. According to the presented tabular overview, the total expenses include: costs of material, fuel and energy, gross wages and contributions charged to employer, authors fees and other compensations, landline and mobile telephones costs, rental expenses, depreciation costs, representation expenses, promotion and advertising expenses, accounting, auditing and printing services, payment system commissions, school fees, utility costs and costs of interest on loans. The largest share in total expenditure belongs to authors fees and other compensations and they account for 63.80% of the total operating expenditures of the Party. Page 300

301 6.5 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of the Movement for Changes, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party undertook a number of activities aimed at the implementation of the SAI recommendations relating to the calculation of tax liabilities payable to compensations, in a way that it calculated taxes on paid compensations, but it has been found that the Party did not settle all liabilities in this respect as of December 31 st, The Party implemented the recommendation relating to the performance of regular annual inventory and the provision of records of fixed assets in its books, in a way that it made the inventory list of assets and liabilities as of December 31 st.. The Party also provided the records of assets in excel files by type, quantity, location, purchase price, written-off and current value. Regarding the recommendation in respect of reduction of cash payments from the treasury on the basis of authors fees and other compensations, the audit has determined that the Party did not implement this recommendation, because in 2012 there was a total of EUR 179, cash outflow from the treasury, which is by 87% increased compared to The Party did not implement the recommendation on passing general and special acts and adoption of the Financial plan. 6.6 EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( as of 14/08/2013) on Preliminary report of the SAI (No /24 as of 19/07/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Movement for Changes O P I N I O N WITH THE PROPOSAL OF RECOMMENDATIONS The audit has ascertained that there are no material misstatements or significant deviations in officially presented 2012 Financial Statements of the Movement for Changes, but certain irregularities and omissions have been determined in the recording of treasury operations and calculations, payments of tax liabilities in respect of compensations and lease agreement. The Party did not implement a significant number of recommendations given by the SAI in the audit report for 2011 and therefore, the competent Collegium, responsible for the respective audit, expresses a qualified opinion. Page 301

302 On the basis of determined state of facts, the following irregularities and omissions, with the impact to expressing qualified opinion, have been noted: 1. The Party carried out cash payment of compensations on the basis of authors fees and temporary service contracts from the treasury, in a total amount of EUR 151,020.00, according to concluded contracts, with the receipts on takeover of cash attached thereto. The contracts defined monthly payment of fee, in the agreed amounts and during the period of validity of the contract. The said receipts do not include the number of the contract against which the payment was made, the date of cash payment, as well as personal data (personal ID number) of a person who received the cash. By inspection of the treasury documentation (cash journal), it has been determined that all the cash payments were recorded as of December 31 st, 2012, indicating that chronological recording of payments from the treasury in this respect was not executed. It is deemed necessary to arrange for the chronological records of cash payments from the treasury and to transfer disbursements in respect of author s fees and compensations on temporary service contracts into the bank accounts of individuals engaged. It is also deemed necessary for the Party to clearly distinguish tasks and jobs compensated under the terms of author s fees and those compensated under the terms of temporary service contracted jobs. 2. Party did not pay taxes payable on author s fees and lease agreement, amounting to EUR 21,263.99, which is not in accordance with the provisions of the Law on Income Tax of Natural Persons. The Party is obliged to calculate, withhold and pay tax liabilities on author s fees and lease contracts, as stipulated by the Law on Income Tax of Natural Persons. 3. The Party did not implement the recommendation given in 2011, in respect of reduction of cash payments from the treasury on the basis of authors fees and other compensations, because in 2012 there was a total of EUR 179, cash outflow from the treasury in this respect, which is increased by 87% compared to The Party did not implement the recommendation on passing general and special acts and adoption of the Financial plan. Page 302

303 7. NEW DEMOCRATIC FORCE (FORCA) New Democratic Force (hereinafter - FORCA) is a political organization established with the aim to fight for spreading democratic principles, decentralization of power and the realization of the ideals of free individual and free society, the exercise of national equality, the protection of private property rights, the rule of law, free markets and social justice in Montenegro. New Democratic Force - FORCA was founded on October 22 nd, The Party entered the Register of political parties by Decision of the Ministry of Justice, No /05 as of November 9 th, New Democratic Force is seated in Ulcinj. The bodies of the Party are the Assembly, Main Board and the Presidency. The Assembly is the supreme organ of the Party. The Assembly consists of elected representatives of the organization Committees (municipal and local). The Assembly member is elected for a four-year term. The Main Board establishes the method of election. The Main Board is the body which determines the policy of the Party in accordance with the decisions of the Assembly, between the two Assembly sessions. The Main Board is responsible for the realization of the Programme and political attitudes of the Party, as well as for the implementation of the decisions passed by the Assembly. The President of the Party represents and acts on behalf of the Party in the country and abroad. The Presidency of the Party is the executive political authority of the Party. Within its jurisdiction, the Presidency, among other things, disposes of the financial means, informs the Main Board on the manner of spending, organizes the Secretariat of the Party and other respective services in performing professional, administrative and financial affairs of the Party. The Party is organized at the local level as well, through the Municipal and Local committees, it also has a Supervisory and Statutory Board, and, if necessary, a Professional Board. The Supervisory Board controls the income and expenditure of the Party. Statutory Committee prepares proposals for amendments to the Statute, interprets the Statute and compliance of the general acts of the Party. According to the Law on Financing Political Parties, the Party is funded from the public and private sources. Public resources include allocations from the budget of Montenegro and local government budgets. The candidate of the Party carrying out the duties and functions in the state bodies and local authorities, is obliged to allocate a part of his/her salary for funding the Party, according to the decision of the Main Board of the Party. Private sources, in terms of Law on Financing Political Parties, are membership fees, gifts, income from activities, income from property, legacies, etc. The member of the Party may provide financial assistance to the Party in the form of donations and other forms of assistance in accordance with the Law on Financing Political Parties. 7.1 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2.00% of the total expenditures in accordance with established methodology of the SAI. 7.3 Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the Page 303

304 regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that the Party was keeping business books in 2012 according to the Law on Accounting and Auditing ("Official Gazette of RoM" 69/05 and "Official Gazette of Montenegro", 80/08 and 32/11) and Rules on the Chart of Accounts and the Content of the Account in the Chart of Accounts for Enterprises and other Legal Entities ("Official Gazette of Montenegro", 5/11). The audit has found that in 2012, the Party kept records in the following business books: a general ledger, subsidiary records of liabilities and cash journal. 7.4 Revenues Provisions of Law on Financing Political Parties ("Official Gazette of Montenegro",. 49/08, 49/10, 40/11, 60/11, 1/12) regulate the method of generating revenue for political parties, stipulating that political parties may generate its revenue from public and private sources. Pursuant to the Law, public resources shall be the allocations from the budget of Montenegro and from local governments budgets and private sources, in terms of this Law are membership fees, income from activities, property, legacies and gifts The Party generated total operational revenue in the amount of EUR 89, in Actual revenue refers to allocations from the budget of Montenegro, in the amount of EUR 88,359.00, other revenues of EUR The following Table shows a comparative overview of income for 2011 and Type of Revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 76, % 88, % 2 Municipal budget revenues 16, % 0.00% 3 Financial revenues % % TOTAL 92, % 89, % 7.5 Expenditures The operating expenses of the Party incurred in 2012 totalled EUR 96, The reported expenses refer to the costs of stationery (office supplies) and other materials in the amount of EUR , fuel and energy costs in the amount of EUR 1,062.07, gross wages in the amount of EUR 12,385.16, daily allowances for business travel in the amount of EUR 32,808.00, the costs of telephone services in the amount of EUR 2,570.41, rental expenses in the amount of EUR 9,900.00, promotional and advertising expenses in the amount of EUR 9,391.85, costs of other services and scholarships in the amount of EUR 8,957.70, depreciation costs in the amount of EUR 1,898.26, expenses for representation in the amount of EUR 8,191.58, commissions costs in the amount of EUR , expenses for other contributions and surtax in the amount of EUR and the costs of grants and other non-material expenses in the amount of EUR 2, Page 304

305 The following Table shows a comparative overview of expenditures in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Costs of stationery (office supplies) and other material 3, % 7, % 2 Fuel and energy costs 1, % 1, % 3 Gross wages 4, % 12, % 4 Daily allowances for business travel 19, % 32, % 5 Costs of telephone services 1, % 2, % 6 Rental costs 9, % 9, % 7 Promotional and advertising expenses 9, % 9, % 8 Costs of other services 0.00% 8, % 9 Depreciation costs 0.00% 1, % 10 Representation costs 4, % 8, % 11 Commissions costs % % 12 Expenses for other contributions and surtax 0.00% % 13 Costs of grants and other non-material expenses 1, % 2, % TOTAL 56, % 96, % The following Graph shows operating expenses in 2012 by their structure and share in the total expenditure. Based on presented tabular and graphic overviews, it can be concluded that the largest share of the total expenditures accounts for daily allowances for business trips 33.85%, followed by the gross salary costs with 12.78%, the costs of renting business premises 10.21%, promotional and advertising expenses 9.69%, other expenditures 9.24%, the expenses for representation 8.45%, the costs of material 7.40% etc. 7.6 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of New Democratic power (FORCA), performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations on their elimination. The audit of the Annual financial statements for 2012 has determined that the Party undertook the activities aimed at the implementation of a part of recommendations given by the SAI, in a way that it adopted Financial plan for 2012, conducted inventory of fixed assets, liabilities and cash on hand. Pursuant to the Rulebook on Terms and Method of Inventory and Matching Booked Balance and Factual State ("Off. Gazette" 34/09), the Party did not undertake the inventory of deposits in current accounts and the receivables accounts. Page 305

306 The Party did not implement our recommendation on reduction of cash payments, because the amount of cash paid expenses in 2012 totalled at EUR 41, It has also been found that the Party partially implemented our recommendation related to the provision of analytical records of fixed assets and receivables from Municipalities, as they provided recording assets in the ledger, but no analytical records thereof, as well as records of receivables from Municipalities. 7.7 EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 63/13 of 25/09/2013) on the Preliminary report of the SAI ( /62 as of 09/17/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the New Democratic Force (FORCA) O P I N I O N The Audit has found that there are no material misstatements or significant discrepancies in officially presented Annual financial statements of the New Democratic Forces (Force) for Financial transactions are supported by appropriate documentation based on which financial statements have been prepared, and therefore, the competent Collegium expresses an unqualified opinion on the annual financial statement. Notwithstanding the unqualified opinion given, the Collegium draws attention to the Party that it is required to fully implement the recommendations made in the 2011 SAI Audit Report, as well as to eliminate all deficiencies and omissions stated in this Report, which are not of a material significance as to have an impact to the expression of a different opinion. Page 306

307 8. NGO PERSPECTIVE "ANA E MALIT" NGO Perspective "Ana e Malit" Ulcinj was established in accordance with the provisions of the Law on Non-Government Organizations ("Off. Gazette of RoM. 27/99, 09/02, 30/02'' and Off. Gazette of Montenegro'' 11/07), and according to the Decision of the Ministry of Interior and Public Administration of Montenegro ( / /2 as of August 17 th, 2009) it entered the Register of non-government organizations in Montenegro. The bodies of the audited entity are the Assembly, the Steering Board and the President. Pursuant to the provisions of the Statute the activities of NGOs include: the field of human and cultural relations of people and children towards folk customs and traditions, organizing lectures on traditions and customs, culture and performing arts, exhibitions, events, and charitable activities. The main goal of the said activities is developing human idea of respect for tradition, including youth education, maintenance and expansion of contacts with organizations of the same principles at home and abroad, cooperation with institutions and organizations that may be used for objectives and tasks of the audit client. Publishing, with the aim of educating children and people, as well as the preservation of traditions and nice customs, organization of conferences and issuing publications; cherishing tradition and similar; organizing IT courses and foreign language courses. Perspective was founded as a group of citizens with the name'' New Alliance - Ana e Malit'', represented by Amir Hollaj, and in accordance with applicable legislation in 2009, this group entered into a political agreement with another group of citizens, 'Civic Initiative'' from Tuzi, represented by Vaselj Sinistaj, for the electoral coalition for parliamentary elections, called Albanian Coalition - Perspective''. After the parliamentary elections in March 2009, the Coalition won one deputy mandate and became entitled to the funds from the State budget. According to the Agreement, the members of the coalition shred the funds allocated from the budget in proportion 50:50. Pursuant to the Agreement No. 90/12 as of September 3 rd, 2012, i.e. the Annex of the Agreement as of September 19 th, 2012, concluded by the New Democratic Force (Forca), the ''Civic Initiative'' and the NGO Perspective, based on winning parliamentary mandate, NGO Perspective "Ana e Malit'' was entitled to 12.50% of the funds allocated from the State budget for the aforementioned coalition, on the basis of the won mandate. The audited entity passed a new Statute on July 29 th, 2012, governing: membership issues, internal organization, financing, decision-making, management and control bodies and alike. This Statute annulled the Statute from The bodies of the audited entity are the Assembly and the person authorized for representation. The Assembly is the supreme managing body. It adopts the Statute, elects and dismisses the legal representative and other bodies of the Association, adopts the Work plan for the coming year and Annual financial statements. The Assembly consists of all the members of non-government organization. The Assembly may be regular or extraordinary. The Assembly convenes once a year. The person authorized to represent the Association is elected by the Assembly of the Association and shall report to the Assembly, and is authorized to enter into contracts and take other legal actions on behalf of the Association. The said person is responsible for the legality of operations, he/she submits proposal of the Annual financial statement, and performs other tasks in accordance with the Law and the Statute. The person authorized to represent and for the legality of operation of the audited entity is Amir Holaj. The Constitution stipulates that NGOs are financed and acquired the property through: membership fees, donations, gifts or providing an appropriate economic activity, in accordance with the Law. Page 307

308 8.1 Audit methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.0% of the total expenditures in accordance with established methodology of the SAI. 8.2 Accounting records NGO Perspective, as a non-profit organization in 2012, kept business records in accordance with applicable regulations and based its accounting system on the accrual basis. NGO provided the following business records: nominal ledger, records of revenues, expenditures, liabilities and claims, as well as electronic records of treasury operations. A professional accountant, engaged on the basis of the contractual relationship, was keeping records on behalf of the audited entity. 8.3 Revenues NGO Perspective "Ana e Malit" Ulcinj generated revenue in aggregate amount of EUR 71,940.00, in 2012, whereas it amounted to EUR 76, in According to the business books, the recognized revenue of the audited entity in 2012 amounted to EUR 71, The audit has found that the generated revenue included the state budget revenue amounting to EUR 71,309.54, the coalition partner (Force) revenue, pursuant to the Agreement (No. 90/12 as of September 3 rd, 2012.), amounting to EUR 1, and the income from positive interest in the amount of EUR 63.30, totalling at EUR 72, According to the figures presented, it is noted that the audited entity recognized aggregate revenue in its business books in the amount less by EUR , and the difference refers to the unrecorded revenue per balance statement No. 104, as of December 31 st, The audit has determined that in 2012, the NGO Perspective was allocated funds from the budget of Montenegro in the amount of EUR 71,309.54, on the basis of a mandate won by "the Albanian Coalition - Perspective", consisting of "New Alliance - Ana e Malit'' represented by Amir Hollaj and citizens' group ''Civic Initiative'' Tuzi, represented by Vaselj Sinistaj. According to the coalition Agreement from 2009, the audited entity transferred funds in the amount of 28, to the ''Civic Initiative'' Tuzi, and the revenues of NGO Perspective for 2012 amounted to EUR 44, The following table provides a comparative overview of the revenue for 2011 and Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 76, % 71, % 2 Revenues from interests % % TOTAL 76, % 71, % Page 308

309 8.4 Expenditures According to the business books, in 2012 the audited entity recognized aggregate expenditures in the amount of EUR 66, relating to: the cost of office supplies and miscellaneous items in the amount of EUR 1,825.31, fuel and energy costs in the amount of EUR 2,085.94, daily allowances and business travel in the amount of EUR 11,666.59, the costs of telephone services in the amount of EUR , expenses for maintenance of fixed assets in the amount of EUR 1,276.39, rental expenses in the amount of EUR 2,884.78, advertising expenses in the amount of EUR , depreciation costs in the amount of EUR 1,754.07, costs of intellectual services and daily newspapers in the amount of EUR 2,205.36, expenses for representation in the amount of 5, EUR, commissions costs in the amount of EUR , expenses for humanitarian aid, sponsorship and transfer of funds on the basis of an agreement, to the Citizens' Initiative-Tuzi, in the amount of EUR 35, Comparative table of expenditures incurred in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Other material cost s- office supplies 1, % 1, % 2 Fuel and energy costs % 2, % 3 Business travel expenses and other remunerations 15, % 11, % 4 Postal expenses 1, % % 5 Maintenance costs % 1, % 6 Rental costs 4, % 2, % 7 Advertising costs % % 8 Depreciation costs 1, % 1, % 9 Intellectual services and daily press costs 5, % 2, % 10 Representation costs 5, % 5, % 11 Payment system commissions % % 12 Financial aid, sponsorships and transfer to CIT 42, % 35, % TOTAL 78, % 66, % The following Graph shows operating expenses in 2012 by their structure and share in the total expenditure. According to the presented expenditures structure, humanitarian aid, sponsorship and transfer of agreed funds to the Civic Initiative Tuzi are noted to have the largest share in total costs, accounting for 54% of total costs, representation costs come next, with 9%, then the costs of office premises lease with 4% etc. Page 309

310 8.5 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of the NGO Perspective "Ana e Malit, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations for elimination thereof, relating to: Establishing an effective system of internal control - adoption of a Financial plan The calculation and payment of taxes on compensation paid to individuals. The audit of the Annual financial statements for 2012 has determined that the Party undertook a number of activities aimed at the implementation of the SAI recommendations, relating to the establishment of effective internal control system by adopting a Financial plan for 2012 and defined by its Statute that an Authorized person shall be responsible for lawful operations of the audited entity. The audited entity did not implement the recommendation on calculation and payment of taxes, because in 2012 it paid out remunerations without accrued and paid tax liabilities. 8.6 EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 01-10/13 of 02/10/2013) on the Preliminary report of the SAI ( /67 as of 24/09/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on the Audit of the 2012 Annual Financial Statements of the NGO "Perspective - Ana e Malit" O P I N I O N The Audit has found that there are no material misstatements or significant discrepancies in officially presented Annual financial statements of the NGO "Perspective - Ana e Malit for Financial transactions are supported by appropriate documentation based on which financial statements have been prepared, and therefore, the competent Collegium expresses an unqualified opinion on the annual financial statement. Notwithstanding the unqualified opinion given, the Collegium draws attention to the Party that it is required to fully implement the recommendations made in the 2011 SAI Audit Report, as well as to eliminate all deficiencies and omissions stated in this Report, which are not of a material significance as to have an impact to the expression of a different opinion. Page 310

311 9. BOSNIAK PARTY Bosniak Party (hereafter: BS in CG) was established and registered on March 24 th, 2006, and entered the register of political parties of the Ministry of Justice of the Republic of Montenegro (Decision No /06). Bosniak Party is a democratic political organization - the party, whose principles, objectives and organization are established by the Programme and the Statute. The Party is seated in Rozaje. The Party is organized on the territorial principle and operates in Montenegrin territory in accordance with the relevant regulations and abroad. The Party is a legal entity. The objectives of the Party are determined by the Programme of the Party, and they include equality of all the citizens and people and other minority and ethnic groups in Montenegro; democratization of social and political life and the functioning of the rule of law; promotion and protection of human rights and freedoms and consistent application of special minority rights and freedoms and direct application of international rights in this area, when otherwise regulated by national regulations; new administrative - territorial organization of the State, regionalization, the establishment of new municipalities, particularly establishment of the Municipality of Petnjica and Gusinje; decentralization of authority in accordance with the European Charter of Local Government. Authorities of the BS in CG are the Congress, the Main Board, the President, the Presidency, the Supervisory Board and the Statutory Commission. The highest organ of the Party is the Congress, and its decisions are binding for all the members and Party organs. The competences of the Congress include: adoption of the Programme of the Party and other political acts, adoption of the Statute of the Party, examination and evaluation of Party s activities between the two congressional sessions, election of the Main Board, the Supervisory Board, the President and the Statutory Commission. The Main Board Party is the highest body of political management and the implementation of Party s policy between the two sessions. of the Congress. The competences of the Main Board, among other things, include: decision on the budget and adoption of a Report of the Party s budget execution, defines the Proposal on the Programme and the Statute of the Party. This body determines a Proposal on performance of the Party, decides on the amount of membership fee and performs other tasks. The President of the Party manages and represents the Party. The Presidency is the executive political body. The Presidency, upon a proposal made by the general Secretary, determines the systematization of posts in professional services of the Party, takes care and disposes of assets in accordance with the Constitution and other laws, monitors the implementation of the Financial plan and adopts the Rules of the material - financial operations and other general acts of the Party which he is authorized to. The Supervisory Board supervises the Party s material and financial operations as a whole and of all its organizations and branches. The Supervisory Board may appoint expert teams for different areas of its work. The Supervisory Board submits a Report on the financial operations of the Main Board once a year. Administrative, legal, material-technical and financial affairs, as well as other professional activities in the Party are conducted by the Administrative service of the Party. The work of the service is managed by the General Secretary, who performs his tasks in the Party on a professional basis. The Party generated revenues from membership fees, on the basis of economic activity, organizing various events, donations and by other lawful means. Article 93 of the Statute provides that the financial operation of the Party shall be conducted through the treasury and bank accounts. Receipt and disbursement of funds may be made only on the basis of appropriate documentation. Page 311

312 9.1 Audit methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 1.5% of the total expenditures in accordance with established methodology of the SAI. 9.2 Accounting Records The Party, as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. According to the statement given by the person authorized for carrying out the tasks of accounting records, in 2012 the Party s business books were kept in accordance with the legal requirements for budget users and accounting records were based on a cash basis. The Party recorded revenues, expenditures and cash operations in its business books. 9.3 Revenues According to the Law on Financing Political Parties, the Party generated total revenue of EUR 202, in 2012, whereas its revenue in 2011 amounted to EUR 189, The actual revenue refers to allocations from the State budget, amounting to EUR 139,386.07, resources from the budget of the Parliament of Montenegro for financing the operation of Deputies clubs, in the amount of EUR 27,448.97, revenue from the municipal budgets, amounting to EUR 28,863.53, contributions of individuals in the amount of EUR 2,817.41, membership fees in the amount of EUR 2, and other income in the amount of EUR 1, The following table provides a comparative overview of the revenue for 2011 and Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 142, % 139, % 2 Revenues from the Parliament of Montenegro 26, % 27, % 3 Municipal budget revenues 21, % 28, % 4 Donations by natural persons % 2, % 5 Membership fees % 2, % 6 Other revenues % 1, % TOTAL 189, % 202, % Page 312

313 The following Graph shows operating revenues generated in 2012 by their structure and share in the total revenue. According to the presented tabular overview and graphic display, the largest share of revenues comes from the State budget of Montenegro (69%), municipal revenues (14.27%), revenues from the budget of the Parliament of Montenegro for financing Deputies club (13.57%), and so on. 9.4 Expenditures In 2012, the incurred expenditure of the Party totalled at EUR 208, The actual expenses include: fuel and energy costs in the amount of EUR 5,682.48, the expenses of taxes and contributions on wages and earnings-related benefits, amounting to EUR 15,384.64, other personal expenses in the amount of EUR 15,670.83, equipment maintenance costs in the amount of EUR 3,654.15, rental expenses, amounting to EUR 3,651.00, advertising costs in the amount of EUR 2,252.55, the costs of office supplies in the amount of EUR 3,100.65, printing costs, amounting to EUR 1,263.00, representation expenses in the amount of EUR 9,455.43, the insurance and payment system commissions, amounting to EUR , other non-material expenses in the amount of EUR 124,353.87, expenses for interests in the amount of EUR 7, and overheads costs and other expenses in the amount of EUR 16, The following table provides a comparative overview of expenditures in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Fuel and energy costs % 5, % 2 Taxes and contributions on wages and related earnings 16, % 15, % 3 Other personal expenses remunerations 58, % 15, % 4 Maintenance costs 5, % 3, % 5 Rental costs 5, % 3, % 6 Advertising costs 0.00% 2, % 7 Other material costs - office supplies and equipment 1, % 3, % 8 Printing costs % 1, % 9 Representation costs 2, % 9, % 10 Payment system and insurance costs % % 11 Other non-material costs 53, % 124, % 12 Costs of interest 36, % 7, % 13 Overhead and other costs % 16, % TOTAL 179, % 208, % Page 313

314 The following Graph shows operating expenses by their structure and share in the total expenditure. According to the graphic presentation, other non-material expenses have the largest share in the aggregate expenses, participating with (59.58%), overhead costs and other expenses with (7.90%), other personal expenses (7.51%), taxes and contributions with (7.37%) and alike. 9.5 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of the Bosniak Party, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations for elimination thereof, relating to: establishing an effective system of internal controls - particularly regarding material and financial operations of the Municipal boards, provision of analytical records of assets and records of receivables from the local governments, reduction of cash payments from the treasury and justification of expenses based on the corresponding documentation, calculation and payment of taxes on remunerations paid. The audit of the Annual financial statements for 2012 has determined that the Party did not implement the recommendations given in the SAI Report for 2011, since the audit has ascertained the same irregularities as those found in the previous year. Page 314

315 9.6 EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 14/3013 as of 08/10/2013) on the Preliminary report of the SAI ( of /70, as of 01/10/2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Bosniak Party O P I N I O N Based on the performed audit, the competent Collegium of the SAI obtained a reasonable assurance that the financial statements of the Bosniak Party for 2012 contain materially significant misstatements in the part related to documenting incurred expenses (under Point 1 and 2 of stated irregularities), and therefore activities, transactions and information presented in the financial statements of the Party were not, in all material respects, in accordance with applicable regulations and IAS. Accordingly, the competent Collegium expresses a qualified opinion on the Annual financial statements and an adverse opinion on the conformity of operations of the audited entity with regulations. The audit has identified the following irregularities and omissions that affected the expression of the above opinion: Municipal boards (Plav, Berane, Pljevlja and Bijelo Polje) did not justify the use of funds transferred by the Main Board in a total amount of EUR 19,411.00, which is considered materially significant, given the materiality determined by the audit (1.50% - EUR 3,130.67). The Party has not properly justified expenses in the amount of EUR 37,113.66, as it was based on incomplete and inappropriate documentation (non-fiscal bills, the lack of a contract on lease or a labour contract, etc.), whereas the amount of EUR 19,759.36, included in these expenses, refers to expenses made by Municipal boards (MB Rozaje, MB Bijelo Polje, MB Podgorica and MB Bar). The party has not established an effective system of internal controls - particularly regarding material and financial operations of the Municipal boards. It is deemed necessary for the Party to establish a control over the material and financial operations of Municipal boards, by imposing an obligation to the boards and by defining the time limit for fulfilling the obligation on submission of valid and complete documentation for justification of the spent funds. It is also deemed necessary to provide records of Municipal boards expenses classified by type of expenditure. Page 315

316 The Party disbursed a sum of EUR 14, on the basis of fees paid to the "Media team" in respect to their engagement in the Municipal boards, as well as for and commissions for lease paid to individuals, without the corresponding taxes calculated and paid (the tax liability amounted to EUR 1,130.00). It is deemed necessary that the Party calculate and pay tax liabilities arising from disbursements of any kind of fees, commissions and remunerations, in accordance with the Law on Personal Income Tax. The Party did not pay the contractual commitments with the legal entities in the amount of EUR 9, from its bank account, but in cash, from the treasury. It is deemed necessary for the Party to pay the liabilities arising from contractual relationships with the legal entities by bank transfers, without the use of cash payments, on the basis of invoices issued by suppliers, as well as to make the cash payments on the basis of valid documentation. The Party did not implement the recommendations given in the SAI Report on audit of the 2011 Annual financial report. Page 316

317 10. NGO "CIVIC INITIATIVE" The NGO Civic Initiative entered in the Register of the Ministry of Justice according to the Decision /05, as a non-governmental organization. Pursuant to the Decision of the Ministry of Interior Affairs and Public Administration, /05-1 as of February 19 th, 2007, it was registered in the Register of nongovernmental associations, under the register number According to the said Decision, Mr Sinistaj P. Vaselj shall present and act on behalf of the Civic Initiative. The NGO Civic Initiative is seated in Tuzi. The Statute of the NGO Civic Initiative defined objectives, internal organization, the way of decisionmaking, accountability, funding, etc. According to the Statute of the audited entity, the main objective of the Association is the exercise of basic civil and human rights. The Statute established the bodies of the Association, as follows: the Assembly, the Steering Board and the Executive Director. The Assembly shall adopt the Statute, elect the President and Vice-President of the Assembly, elect the members of the Steering Board (hereinafter the Board). The Steering Board is the managing body of the Association and consists of thirteen (13) members elected by the Assembly of the Association. The mandate of the Steering Board shall be three (3) years, and a Board member have unlimited number of terms. The Steering Board shall elect the President and Vice President out of its members. The Board shall pass the general acts of the Association, except for the Statute, elect and dismiss director, make decisions that are not under the responsibility of the Assembly, implement the policies of Association and other activities. The members of the Board shall be responsible for their work to the Assembly of the Association. The Executive Director shall be appointed by the Decision of the Board and is authorized to conduct operations, represent the Association take care of the conformity of the Association s operations, execute the decisions of the Board, decide on the employment of workers and performs other duties as defined by the Statute of the Association. The group of citizens Civic Initiative' Tuzi, represented by Vaselj Sinistaj and the New Alliance - Ana e Malit' represented by Amir Holaj, concluded a Political agreement and agreed to participate on the parliamentary elections in March 2009 under the name of 'The Albanian Coalition - Perspective'. Pursuant to the Agreement, a mandate shall be equally shared between the signatories to the Agreement, (50:50), as well as the funds which, according to the Law on Financing Political Parties were paid to this Coalition. Pursuant to the Agreement 90/12 as of September 3 rd, 2012, i.e. the Annex to the Agreement signed on September 19 th, 2012, drafted by the New Democratic Power (Forca), the Civic Initiative and NGO Perspective, the coalition members shared the funds generated on the basis of winning the parliamentary mandate as follows: 50% to the Forca, 37.50% to the NGO Civic Initiative and 12.50% to the NGO Perspective Accounting Records Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other subsidiary records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that the Party was keeping business books in 2012 pursuant to the Law on Accounting and Auditing ("Official Gazette of RoM" 69/05 and "Official Gazette of Montenegro", 80/08 and 32/11), the Rules on the Chart of Accounts and the Content of the Accounts in the Chart of Accounts for Enterprises and other Legal Entities ("Official Gazette of Montenegro", 5/11) and the IAS. In 2012, the audited entity was keeping the following books: journal, general ledger and subsidiary records on cash operations. Recording of financial transactions in the general ledger and cash journal was done manually. Page 317

318 10.2 Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the insight into documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2.0% of the total expenditures in accordance with established methodology of the SAI Revenues The audited entity generated a total revenue of EUR 61, in It included: revenue according to the Coalition Agreement with the NGO Perspective in the amount of EUR 28, and the revenue from the New Democratic Force (Forca) in the amount of EUR 5,633.33, Municipal budget revenues amounting to EUR 11,231.14, revenue from the Ministry of Agriculture in the amount of EUR 10,125.00, funds for Deputies club operation, amounting to EUR 5,718.75, interests in the amount EUR and the income generated from writing-off of liabilities from previous year in the amount of EUR The following Table provides a comparative overview of revenues in 2011 and Description 2011 (in EUR) Share % 2012 (in EUR) Share % 1 NGO "Perspective" 38, % 28, % 2 Municipal budget revenues 11, % 11, % 3 Ministry of Agriculture - refund % 10, % 4 Parliament of Montenegro revenues % 5, % 5 New Democratic Force "FORCA" % 5, % 6 Interests revenues % % 7 Revenues from liabilities written-off from previous years % % TOTAL 49, % 61, % The following Graph shows operating revenues by their structure and share in the total revenue. According to the tabular overview, the largest share in the total revenue belongs to the funds generated by the Coalition Agreement with the NGOs Perspective, in the percentage of 46%, Municipal budgets revenues with 18% share, revenues from the Ministry of Agriculture with 17% share, revenues from the Parliament with 10% share and so on. Page 318

319 10.4 Expenditures The Civic Initiative s total expenditure incurred in 2012 amounted to EUR 73,531.41, whereas in 2011 it recorded EUR 31, of expenditure, which means that the expenses incurred in 2012 were increased by 130% in comparison to the previous year. The increase in costs compared to the previous year is evident in the costs of running water, the fees for temporary service contracts, the expenses for financial aid and scholarships, the fuel and energy costs, costs of services and the renting and advertising expenses. The following Table provides a comparative overview of the expenditures in 2011 and Description 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Other material costs - office supplies and daily press 1, % 1, % 2 Temporary contract services remunerations % 5, % 3 Fuel and energy costs 1, % 8, % 4 Scholarship and financial aid expenses 8, % 11, % 5 Business travel expenses % 1, % 6 Postal and telephone expenses 1, % % 7 Rental and advertising expenses 3, % 7, % 8 Utilities 8, % 20, % 9 Maintenance costs % 1, % 10 Other services costs % 9, % 11 Representation costs 3, % 4, % 12 Payment system commissions % % 13 Other material expenses - fixed assets % % 14 Other expenses - road reconstruction % % 15 Other expenses 1, % % TOTAL 31, % 73, % The following Graph shows operating expenses by their structure and share in the total expenditure. The above expenses related to the expenses for office supplies and daily press, fees for temporary service contracts, fuel and energy costs, the expenses for financial aid and scholarships, the transportation costs incurred on business trips, telephone and postal services costs, renting and advertising expenses, maintenance expenses, costs of services, representation expenses, payment system commissions, the costs of acquisition of fixed assets and other expenses. Page 319

320 10.5 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of the NGO Civic Initiative, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations for elimination thereof, relating to: recognizing non-current-assets in the Balance sheet, providing records of fixed-assets and conducting regular annual inventory of assets and liabilities. The audit of the Annual financial statements for 2012 has determined that the Party did not implement the recommendations related to recording non-current assets (fixed assets) in the Balance sheet and providing records of fixed assets in the general ledger and the subsidiary analytical records. The audited entity partially implemented the recommendation given on the inventory of assets and liabilities, because it did not carry out the inventory as specified by the Rulebook on Terms and Method of Inventory and Matching Booked Balance and Factual Situation ("Off. Gazette" 34/09) EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 27/2013 as of 07/10/2013) on the Preliminary report of the SAI ( of /69, as of September 24 th, 2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the NGO Civic Initiative O P I N I O N The audit has determined that there are no material misstatements or significant deviations in official Financial statements of the NGO Civic Initiative for 2012, but certain irregularities and omissions in the part of calculation and payment of taxes, documenting expenditures and recording of fixed assets, influenced the competent Collegium responsible for respective audit to express a qualified opinion. The audit has identified the following irregularities and omissions that affected the expression of the above opinion: 1. Commissions paid under a lease contract, the fees for the pre-election activities and reimbursements paid on temporary service contracts in the amount of 12,350.00, were executed without calculation and payment of tax liabilities. The audited entity should calculate and pay tax liabilities pursuant to the Law on Income Tax of Natural Persons when disbursing any kind of remuneration. Page 320

321 2. The cash payment from the treasury based on reimbursement of costs for provision of running water to residents of Malesia, amounting to EUR 20, was justified as follows: the sum of EUR 17, was justified only by receipts confirming takeover of cash, a sum of EUR 1, was paid in accordance with the Decision 01/12-sl, whereas the amount of EUR was not documented. The payment of costs (promotional election activities) in the amount of EUR 3, was also a cash payment which was not properly documented. The Party should disburse expenses on the basis of valid and complete documentation. 3. The audited entity did not provide records of non-current assets (fixed assets) in its business books and did not conduct a chronological record of treasury transactions. The audited entity should make an estimate of fixed assets and record them in the general ledger at the estimated values, as well as to provide analytical records thereof. It is also deemed necessary that the audited entity carry out chronological recording of financial transactions in the cash journal. Page 321

322 11. CROATIAN CIVIC INITIATIVE Political party Croatian Civic Initiative Tivat was established at the Founding Assembly of the party Croatian Civic Initiative held on 24 th May The party was registered on April 7 th, 2004 in the Register of political parties on the basis of the Decision of the Ministry of Justice of the Republic of Montenegro. The main program objective of the Party the Croatian Civic Initiative is the achievement of common interests of free and voluntary associated citizens through political and other activities, with the aim of exercising and representing collective and individual rights of Croats and other nations in Montenegro. The Party was organized at the municipal and national level, the highest body of the party is the Assembly, which consists of all the candidates of the Party from the last municipal election, the overall composition of the current Central Board, as well as the newly elected representatives of all the municipal organizations. The Central Board is the highest policy and program authority of the Party between the two Assembly sessions and the members of the Central Board are the President of the Party, the Chairman of the Central Board, the Vice-President of the Party and 17 members nominated by the President of the Party. Party is represented by the President of the Party. The Presidency of the Party is composed of the President of the Party, Vice Presidents and 6-8 members from the Central Board, elected at the proposal of the President. The scope of activities of the Presidency is, among other things, control of the fairness of material and financial operations of the Party. The party is a legal entity. The Party is seated in Tivat, at bb, Luke Tomanovica Street. Responsible Person of the Party is Marija Vucinovic, the President of the Party. Except for the Statute, the Party passed the Regulations on the work of Presidency of HGI, Rules of Procedure on the Work of Assembly, and the Rules of Procedure on the work of the Central Board. The Party adopted a Decision on the use of their own car for business purposes, as well as on the amount of financial aid, sponsorships, scholarships and similar, which may be approved by the President of the Party. The Party is financed from the following sources: membership fees and other donations of the members, financial support, gifts, legacies and other voluntary donations, by their own activities, from the budget and by the income generated from their own assets, managed by the Central Board of the Party. The Statute provides that the Party s funds shall be used only for financing activities of the Party and the Party disposes thereof. Orders for disposition of funds shall be signed by the President of the Party or a person authorized by the President Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the review of documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2.0% of the total expenditures in accordance with established methodology of the SAI. Page 322

323 11.2 Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. The audit has found that the Party was keeping business books in 2012 pursuant to the Law on Accounting and Auditing ("Official Gazette of RoM" 69/05 and "Official Gazette of Montenegro", 80/08 and 32/11), the Rules on the Chart of Accounts and the Contents of the Accounts in the Chart of Accounts for Enterprises and Other Legal Entities ("Official Gazette of Montenegro", 5/11). The audited entity was keeping the following books: general ledger and subsidiary records on cash operations and liabilities Revenues In 2012, the Party generated a total of operating revenue in the amount of EUR 96, It included the following: allocations from the State budget of Montenegro, amounting to EUR 82,412.51, allocations from the municipal budgets in the amount of EUR 14,137.64, income from membership fees in the amount of 40,00 EUR and interests income in the amount of EUR The following table provides a comparative overview of revenues generated in 2011 and Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 76, % 82, % 2 municipal budget revenues 8, % 14, % 3 Membership fees % % 4 Financial revenues % % TOTAL 85, % 96, % The following Graph shows operating revenues by their structure and share in the total revenue. According to the tabular overview and the presented Graph, it has been noted that the revenue from the State budget accounts for the largest share of 85% of a total revenue generated in 2012, along with revenues from the municipal budgets with a share of 15%. Page 323

324 11.4 Expenditures In 2012, the Party recorded in its business books a total operating expenditure of EUR 90,464.75, and it refers to: the costs of office supplies and miscellaneous, in the amount of EUR 1,258.60, net wages and taxes payable on wages, in the amount of EUR 6,905.34, the costs of author s fees and temporary service contracts, amounting to EUR 22,619.33, business travel expenses in the amount of EUR 15,199.00, overheads costs, amounting to EUR 2,600.00, the costs of telephones and postal services in the amount of EUR 3,091.48, rental expenses in the amount of EUR , advertising, promotional and costs of trade shows and fairs, in the amount of EUR 14,505.60, depreciation costs, amounting to EUR , the costs of other non-production services in the amount of EUR 5,136.61, representation expenses in the amount of EUR 1,641.49, the costs of financial support and sponsorships in the amount of EUR 15, and other expenses in the amount of EUR The following Table provides a comparative overview of the expenditures incurred in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Costs of other material % 1, % 2 Net wages and taxes payable on wages 6, % 6, % 3 Author's fees and temporary contract services remunerations 2, % 22, % 4 Business travel expenses 51, % 15, % 5 Overhead % 2, % 6 Postal and telephone expenses 3, % 3, % 7 Rental costs 2, % % 8 Advertising costs 2, % 14, % 9 Depreciation costs % % 10 Costs of non-production services 1, % 5, % 11 Representation costs 1, % 1, % 12 Financial aid and sponsorship 3, % 15, % 13 Other expenses % % TOTAL 78, % 90, % The following Graph shows operating expenses in 2012 by their structure and share in the total expenditure. Based on the given tabular overview, it can be noted that the costs of author s fees and temporary service contracts have the largest share, 25% in the total expenses, the expenses for financial support and sponsorships participate with 17.33%, business travel expenses with 16.80%, advertising expenses with 16.03% and so on. Page 324

325 11.5 Implementation of 2011 Recommendations The audit of the 2011 Annual financial statements of the Croatian Civic Initiative, performed by the State Audit Institution, identified a certain number of irregularities and gave recommendations for elimination thereof, relating to: establishment of an effective system of internal control, by passing all the internal general acts, providing keeping analytical records of fixed-assets and receivables from local governments, as well as conducting regular annual inventory of assets and liabilities, reduction of cash payments from the treasury on the basis of daily allowances for business trips, remunerations to party s officials and activists, financial support and sponsorships, as well as justification of expenses by appropriate documentation reconciliation of mutual commitments with the Municipality of Tivat arising from a lease contract on business premises, and recording the liabilities thereof in their business books. Audit of the Annual financial report for 2012 has determined that the Party implemented the recommendations relating to the adoption of the by-laws of the Party and on performing annual list of assets and liabilities. The Party did not implement the recommendation relating to the reduction in cash payments, because in 2012, they paid a total of EUR 54, from the treasury, which is by 8% increased in relation to the expenses paid in the previous year. The recommendation related to providing analytical records of fixed assets and receivables from local governments, as well as the recommendation related to the reconciliation of mutual commitments with the Municipality of Tivat, arising from the leasing of business premises were not implemented EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 114 as of 18/10/2013) on the Preliminary report of the SAI ( of /81 as of October 11 th, 2013), and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Croatian Civic Initiative O P I N I O N The audit has determined that there are no material misstatements or significant deviations in official Financial statements of the Croatian Civic Initiative for 2012, but established irregularities and omissions in the part related to calculation and payment of taxes, documenting expenditures and the provision of statutory records, influenced the competent Collegium responsible for respective audit to express a qualified opinion. Page 325

326 On the basis of determined facts, the following irregularities and omissions that affected the expression of the above opinion have been identified: 1. Disbursement of fees in the amount of 13,400.00, on the basis of performing activities of the Party and fees for providing intellectual services, was carried out without calculation and payment of tax liabilities. The audited entity should calculate and pay tax liabilities pursuant to the Law on Income Tax of Natural Persons when disbursing any kind of remuneration. 2. The cash payments of expenses from the treasury amounted to EUR 54, (60% of total costs) and they were justified by travel orders and decisions of the Presidency and the Central Board of the Party. A part of these expenses, in the amount of EUR 24,254.00, related to: website maintenance, law services, maintenance of business premises, advertising and promotional expenses and travel expenses, was justified by incomplete documentation (the lack of invoices, contracts, etc.). In order to reduce cash payments, it is deemed necessary for the Party to pay the remunerations activists and officials, as well as payments of financial support and sponsorships, by bank transfers, into the bank accounts of individuals, and to justify the cash paid expenses by valid and complete documentation. 3. Within its business records, the Party did not provide statutory subsidiary records (analytical records of fixed assets, receivables from local governments and cash journal) and did not pass a Financial plan for 2012, as stipulated by the Statute. In order to establish an effective system of internal controls, it is deemed necessary for the Party, pursuant to Article 26 and 33 of the Statute, to adopt a Financial plan by the end of the current year for the next year, as well as to provide keeping all the statutory accounting records (analytical records of fixed assets, records of receivables from the local governments, etc.). 4. The Party did not implement the recommendation on reduction of cash payments from the treasury, since in the current year they paid expenses in the amount of 8% higher than the cash paid expenses in the previous year. In addition, the Party did not implement the recommendation relating to the provision of statutory analytical records and reconciliation of mutual obligations with the Municipality of Tivat. Page 326

327 12. DEMOCRATIC LEAGUE IN MONTENEGRO Democratic League in Montenegro, (hereinafter: DS in CG), was established on September 9 th, 1990, and registered in the Register of Political Organizations in the Ministry of Justice of Montenegro. DS in CG, as an independent political Party of people gathered on the basis of free will, shall seek to develop and protect the national interests of the Albanians, democracy, individual freedoms and rights and economic prosperity. The Party is organized on a territorial principle at home and abroad. The Bodies of DS in CG are: the Assembly, the Presidency, the Steering Board and the President. The Assembly is the highest authority of the DS in CG. The Presidency is elected by the Assembly, in accordance with the Programme, the Statute and the decision of the Assembly, it governs the operations of the Party in the period between the two Assembly sessions. The President of the Party represents the Party. The Steering Board elect the Presidency of DS in CG among its members. The Steering Board consists of: the President, the Vice-Presidents, the Secretary, one member from each branch and the Presidents of the partner organizations. The Party is financed from the public and private funding sources in accordance with the Law. The public funds are the funds from the State budget and funds from Municipal budgets. Funding from private sources includes the funds from membership fees, gifts, donations, income from commercial activities, etc. The DS in CG, in accordance with the applicable legislation and in order to generate funds for the functioning of the Party, may establish a company. The DS in CG has a bank account used for all financial transactions. A person appointed by the President conducts the financial management of the Party. The President of the Party is responsible for managing the financial resources of the Party. The use of funds is provided on the basis of the Annual plan of receipts and expenditure, which is proposed by the management of the Party, and adopted by the Steering Board of the DS in CG Audit Methodology The audit was performed by combining the methods of documentary and field audits. After analytical procedures, assessment and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the review of the documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2.0% of the total expenditures in accordance with established methodology of the SAI Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. Page 327

328 The audit has found that in 2012, the Party kept records in the following books: journal, general ledger and subsidiary ledgers (records of treasury operations, liabilities and receivables, except for records of receivables of local governments and records of fixed assets). The audit has determined that the Party was keeping its books in 2012 under the Rules of the Unified Classification of Accounts for Budget Users. The Party based its accounting records of revenues and expenditure on the cash-based accounting principle, i.e. these were recorded at the moment of payment Revenues According to its business books, the Party recognized a total generated operational revenue for 2012 in the amount of EUR 86, Recorded revenue includes the revenue from the State budget of Montenegro in the amount of EUR 77,138.90, revenues from municipal budgets in the amount of EUR 9, and interests income in the amount of EUR The following Table provides a comparative overview of the reported revenue of the Party in 2011 and 2012 by type. Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 76, % 77, % 2 Municipal budget revenues 18, % 9, % 3 Financial revenues 2, % % TOTAL 96, % 86, % The graphic presentation of operating revenue in Based on the given tabular overview and the graphic presentation, it has been concluded in the State budget revenues participate with the largest share of 88.88% in the total revenue, followed by municipal budget revenues with 11:03% Expenditures In 2012, the Party recorded a total operating expenditure in the amount of EUR 97, The audit has found that the said relate to: the cost of stationery and other materials in the amount of EUR 8,683.68, fuel costs in the amount of EUR 4,152.00, gross wages and other earnings-related benefit in the amount of EUR 13,835.87, business travel expenses in the amount of EUR 2,827.32, the costs of telephone services in the amount of EUR 1,314.10, maintenance of fixed assets in the amount of EUR 1,922.58, rental expenses in the amount of EUR 7,200.00, the expenses of branches and coalition partners, the transfer of funds in the amount of EUR 32,214.00, the costs of party s activities in the amount of EUR , depreciation and amortization costs in the amount of EUR , accounting and auditing costs in the amount of EUR 3,744.00, Page 328

329 representation expenses in the amount of EUR 14,641.20, the payment system commissions, in the amount of EUR , the expenses for employers contributions, amounting to EUR 1,899.21, other non-material expenses in the amount of EUR 1,075.24, the acquisition of equipment and miscellaneous items in the amount of EUR 1, and costs based on value adjustments in the amount of EUR The following Table provides an overview of incurred expenditures in 2011 and Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % 1 Expenses for office supplies and other material 2, % 8, % 2 Fuel costs 3, % 4, % 3 Gross wages and earnings related benefits and other remunerations 8, % 13, % 4 Business travel expenses 11, % 2, % 5 Postal services costs 5, % 1, % 6 Maintenance costs % 1, % 7 Rental costs 3, % 7, % 8 Branch offices and transfers costs 26, % 32, % 9 Operational expenses % % 10 Depreciation costs % % 11 Bookkeeping and auditing expenses 1, % 3, % 12 Representation costs 4, % 14, % 13 Payment system commissions % % 14 Costs of taxes and contributions on salaries charged to employer % 1, % 15 Other non-material costs 2, % 1, % 16 Material and miscellaneous items costs % 1, % 17 Adjustments costs 1, % % 18 Advertising and promotion costs 10, % % TOTAL 82, % 97, % The graphic presentation of operating expenditures in Given the tabular and graphic overview, it has been noted that the expenses of branches and transfers of funds account for the largest share in total expenses with 33.07%, followed by the representation expenses with 15.03%, and gross wages and other earnings-related benefits with 14.20% and so on. Page 329

330 12.5 Implementation of 2011 Recommendations The Report on audit of the Annual financial statements Democratic League in Montenegro for 2011, performed by the State Audit Institution, identified a number of irregularities and made recommendations for the elimination thereof, and those related to the following: establishing a more efficient system of internal control, by defining and regulating the manner of conducting internal control of financial and material operations by the Statute of the Party. providing keeping analytical records of assets and records of receivables of the local governments. reduction of cash payments from the treasury and justification of expenses based on valid documentation. The audit of the Annual financial report for 2012 has determined that the Party implemented the recommendations relating to justification of expenses on the basis of valid documentation The Party did not implement the recommendation regarding the reduction of cash payments, because in 2012, they executed cash payments for expenses at the same rate as in the previous year. The recommendation related to providing analytical records of fixed assets and receivables from local governments was not implemented EVALUATION OF DETERMINED FACTS OPINION Based on performed audit, determined factual state and deliberation of audited entity s Opinion ( 12/13 as of 21/10/2013) on the Preliminary report of the SAI number /78, as of October 11 th, 2013, and pursuant to Article 50 of the Rules of Procedure of the State Audit Institution the competent Collegium comprised of Mr Dragisa Pesic Head of Collegium - member of Senate and Mr Branislav Radulovic, PhD - member of Collegium - member of Senate, adopted the following: FINAL REPORT on Audit of the 2012 Annual Financial Statements of the Democratic League in Montenegro O PI N I O N The Audit has found that there are no material misstatements or significant discrepancies in officially presented Annual financial statements of the Democratic League in Montenegro for Financial transactions are supported by appropriate documentation based on which financial statements have been prepared, and therefore, the competent Collegium expresses an unqualified opinion on the Annual financial statements. Notwithstanding the positive opinion given, the Collegium draws attention to the Party that it is required to fully implement the recommendations made in the 2011 SAI Audit Report, as well as to eliminate all deficiencies and omissions stated in this Report, which are not of a material significance as to have an impact to the expression of a different opinion. Page 330

331 13. DEMOCRATIC UNION OF ALBANIANS Democratic Union of Albanians (DUA) was founded on November 21 st, 1993, as an independent political organization, volunteer-organized, which operates in the political, economic, social and cultural life of Albanians in Montenegro. The objectives of the Party are committed by political platform and are directed towards achieving collective and individual rights of Albanians in the territory of Montenegro. The Party is seated in Ulcinj. The bodies of the Party are: the Assembly, the Main Board and the Presidency. The Assembly is the Party's highest statutory and elective authority which is held every four years. The Assembly determines and approves the main guidelines and programme policies of the Party. The President of the Party represents the Party and he is also the Chairman of the Main Board and the Presidency. The President of the Party has right to sign the documents of the Party and perform other duties. The President of the Party is elected by the Assembly of the party for a four-year term, renewable once. The Main Board of the Party implements Party s policy in accordance with the Programme of the Party. The Main Board proposes policy of the Party, the Programme of the Party, the Statute and its amendments, defines the representatives for the authorities of the Party and approves the budget of the Party. The Party has a youth organization called the Youth Forum DUA and the Women's Forum DUA, which organize their activities in accordance with the political programme of DUA and their special Statute. The Party is funded from the municipal and the State budget, membership fees, through commercial activities and donations. The financial manager is elected by a special decision of the Main Board. Responsibilities of a financial manager are the following to: perform financial operations of the Party, monitor collection of membership fees, record other material resources, propose the budget of the Party. The financial manager is accountable to the Main Board of the Party for his/her work Accounting Records The Party as a non-profit organization is obligated, pursuant to Article 23 of the Law on Financing of Political Parties, ("Off. Gazette", 49/08, 49/10, 40/11, 60/11, 01/12) to keep accounting records of revenues and expenditures by origin, amount and structure of revenues and expenditures, in accordance with the regulations of the Ministry. Pursuant to the Law on Accounting and Auditing, a Party with the status of a legal entity is obliged to keep business books according to the system of double-entry bookkeeping. Business records include: journal, general ledger and other supporting financial records. A legal entity is required to record all business transactions and keep records in its business books. Accounting records must be based on valid accounting documents. In 2012, the Party was keeping the following business books: general ledger and subsidiary records, cash journal and payables journal, but did not provide analytical records of fixed assets, as well as records of receivables from the local governments Audit Methodology The audit was performed by combining the methods of in-office documentary audit and field audit. After analytical procedures, evaluation and analysis of collected documents had been completed, detailed auditing techniques and methods were defined and their application was performed (e.g.: drawing up questionnaires, conducting conversations and interviews, the review of documentation, inspection of business books and accounting documents that serve as evidence of created business events, verification of mathematical accuracy of financial transactions related to the recorded revenues and expenditures, etc.). Materiality is determined by applying the rate of 2% against the overall expenditures, in accordance with the established methodology of the SAI. Page 331

332 13.3 Revenues In 2012, the Party generated a total operating revenue of EUR 84, The generated revenue includes allocations from the State budget of Montenegro, amounting to EUR 71, and from municipal budgets, in the amount of EUR 12, and financial income from interests totalling EUR The following Table provides a comparative overview of the reported revenue of the Party in 2011 and 2012, by type of revenues. Type of revenue 2011 (in EUR) Share % 2012 (in EUR) Share % 1 State budget revenues 76, % 71, % 2 Municipal budget revenues 15, % 12, % 3 Other revenues % % TOTAL 91, % 84, % The following Graph shows operating revenues generated in 2012 by their structure and share in the total revenue: According to the tabular and graphic presentation, it is noted that the largest share of total revenue accounts for the revenue generated from the State budget of Montenegro (85%), followed by revenues from municipal budgets, with a share of (15%) Expenditures In 2012, the Party recorded an aggregate incurred operating expenditure in the amount of EUR 79,883.00, and it includes the following: material expenses, in the amount of EUR , fuel and energy costs, in the amount of EUR 5,757.53, financial support and sponsorships, in the amount of EUR 28,413.35, business travel expenses, in the amount of EUR 10,103.50, postal services costs in the amount of EUR 2,639.50, costs of equipment maintenance, in the amount of EUR , rental expenses for the business premises, in the amount of 1.800,00 EUR, advertising expenses in the amount of EUR 3,343.57, depreciation costs, in the amount of EUR 2,825.00, intellectual services expenses, in the amount of EUR 4,779.85, representation expenses in the amount of EUR 17,081.08, the insurance premiums in the amount of EUR 1,211.92, payment system commissions, in the amount of EUR and other non-material costs in the amount of EUR Page 332

333 Following Table provides a comparative overview of expenditures in 2011 and Item Type of expense 2011 (in EUR) Share % 2012 (in EUR) Share % Material and miscellaneous items costs % % Fuel and energy costs 8, % 5, % Remuneration to natural persons - social benefits 16, % 28, % Other personal expenses remunerations (travel expenses) 16, % 10, % Postal and telephone expenses 2, % 2, % Maintenance costs 1, % % Rental costs 1, % 1, % Advertising costs 15, % 3, % Depreciation costs 2, % 2, % Costs of non-production services (intellectual service) 5, % 4, % Representation costs 5, % 17, % Insurance premiums 3, % 1, % Payment system commissions % % Other non-material costs 9, % % TOTAL 90, % 79, % The following Graph shows operating expenses by their structure and share in the total expenditure: Given the data presented in the tabular overview and graphic display of expenditures, it has been concluded that the largest share of the total expenditures accounts for costs of remuneration to individuals (36%), representation costs (21%), accommodation allowances (13%) etc. Page 333