EXCERPT FROM THE AUDIT REPORT ON THE CENTRAL BANK OF MONTENEGRO

Transcription

1 EXCERPT FROM THE AUDIT REPORT ON THE CENTRAL BANK OF MONTENEGRO Type of audit: Audited entity: Subject of audit: Audit duration: Auditing Board members: Financial audit Central Bank of Montenegro 2013 Annual Financial Statement of the Central Bank of Montenegro 120 auditing days Mr. Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr. Dragiša Pešić, member of the Senate member of the Auditing Board

2 2

3 I BASIC ELEMENTS OF AUDIT 1. Legal basis for performing audit Legal basis for performing audit of the Annual Financial Statement of the Central Bank of Montenegro (hereinafter Auditee or CBM) is contained in the following documents: Constitution of Montenegro, Article 144 (OGM 01/07 and 38/13); Law on State Audit Institution, Article 4 (OGRM 28/04, 27/06, 78/06 and OGM 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan, passed by the Senate on 27 December 2013, (no ); Audit Conducting Decision passed by SAI Auditing Board composing of Branislav Radulović, PhD, (Head of the Auditing Board) and Mr Dragiša Pešić (member of the Auditing Board) dated 16 January 2014, number The audit of the auditee has been conducted in accordance with: The Rules of Procedure of the State Audit Institution (OGRM 50/07) and International Standards for Supreme Audit Institutions ISSAI 100 (Basic auditing principles of public sector). 2. Subject and scope of audit The State Audit Institution (SAI) has conducted financial audit of CBM operations. The subject of the audit is the Annual Financial Statement of the CBM for The CBM prepares financial statements in accordance with International Accounting Standards and International Financial Reporting Standards. The financial statements are produced according to the principle of historical cost in the form of: Statement on financial positions /balance sheet/; Statement on overall result /income statement/; Cash flow statement; Statement of changes in equity and Notes. 1 Financial audit implies expressing of an opinion if financial statements inform about the financial structure and financial position in a true and fair way. The criteria based on which it is assessed if the financial statements are true and fair are relevant accounting principles, international accounting standards, international financial reporting standards and adopted accounting policies of the CBM. The subject audit has included the control of cash flow, legality of spending of funds, accuracy of stated data and degree of their disclosure. The coverage, i.e. the scope of verification is determined depending on the found level of materiality (significance) and identified audit risk. The audit has assessed the established system of financial management and control. 1 Financial statements of the CBM 2013 are provided in the annex 3

4 3. Audit type and objective In line with the Annual Audit Plan 2014, the State Audit Institution conducted financial audit for the purpose of viewing the auditee s financial management. The objective of the audit of the CBM was to express an opinion regarding the reliability and accuracy of the Annual Financial Statement of CBM for In view of the objective of the audit the following has been undertaken: - examination if financial statements are true and fair; - examination of activities, information, transactions and decisions related to assets, receipts and expenditures, for the purpose of identifying if the presented transactions have been made in accordance with the delegated authorisations and the current regulatory framework. 4. Audit methods The audit was planned and conducted in accordance with the basic principles of the International Organization of Supreme Audit Institutions (ISSAI), in the way that enables the SAI to obtain reasonable assurance if the financial statement of the auditee includes materially significant misstatements. The audit includes the application of audit methods and techniques for the purpose of obtaining audit evidence of amounts and information disclosed in financial statements. The selection of procedures is based on auditor s judgment, including risk assessment. Sampling for audit has been carried out by the method of statistical and non statistical sampling, whereas the criteria for transaction sampling are the value and materiality of the transactions. It is a pragmatic approach where decisions are made based on clear audit criteria and implications on resources. Sampling has been carried out for each audit area individually. 5. Auditee data The Central Bank of Montenegro was established in 2000 according to the Law on Central Bank 2 adopted by the Parliament of Montenegro in November The new Law on CBM 3 was adopted by the Parliament of Montenegro in July The CBM is a legal entity with rights, obligations and responsibilities envisaged by the Law and the By Laws of the CBM. The seat of the CBM is in Podgorica, addressed at Bulevar Svetog Petra Cetinjskog broj 6. The Constitution of MNE (Article 143) specifies that the CBM is autonomous and it is responsible for monetary and financial stability and functioning of the banking system. The CBM operates as an independent legal entity with no obligation to be registered with the Central Register of Business Subjects, it independently acquires, manages, uses and disposes of the state assets aimed at performing of functions stipulated by the Law on the Central Bank. The assets of the value exceeding 150,000,000, are disposed of at proposal of the CBM but subject to the decision by the Parliament of Montenegro. The CBM is independent in achieving objectives and carrying out functions stipulated by the Law. The Governor of the CBM is Mr Milojica Dakić, MSc. The person responsible for keeping accounting and producing financial statements is Valentina Ivanović, PhD, Director of the Directorate for Finance, Accounting and Controlling. The persons authorised to withdraw cash from the CBM Vault for cash related needs in the Directorate for Finance, Accounting and Controlling are: Anđa 2 OGM 52/00, 53/00, 47/01 and 4/05 3 OGM 40/10 and 46/10 4

5 Vidaković, associate cashier and Svetlana Golubović, Head of the Section for Finance in the Directorate for Finance, Accounting and Controlling. Based on the specimen signature card, the funds on the account are disposed of by the persons authorised with valid signatures if accompanied by use of the seal: Milojica Dakić, Governor; Nikola Fabris, Vice governor for financial stability and payment operations; Velibor Milošević, Vice governor for bank supervision; Valentina Ivanović, Director of the Directorate for Finance and Controlling; Svetlana Golubović, Head of the Section for Finance in the Directorate for Finance and Andrija Jovović, Director of the Department for Domestic Payment Operations. The Decision 4 by the Governor of the CBM authorises the following persons to sign payment orders for disbursements from accounts held abroad and the settlement account: Idriz Ćetković, Director of the Department for Finance and Banking Operations; Valentina Ivanović, Director of the Directorate for Finance, Accounting and Controlling; Tatjana Radusinović, Director of the Directorate for International Reserve Management in the Department for Finance and Banking Operations and Igor Perišić, special advisor in the Department for Finance and Banking Operations. General act on internal organisation of operations of the CBM, passed by the Governor, in details regulates the organisational structure of the CBM, titles and scope of work of individual organisational units. The CBM activities are carried out in organisational units established as departments, directorates, sections, national centres and divisions. A Money Museum is organised in the Central Bank, as a museum within its structure. The CBM passed the Rulebook on Job Systematisation number /1 dated 14 January 2011, in accordance with the Law and By Laws of the CBM. The Systematisation Act has been subject to ten amendments since its adoption. In 2013 there were six amendments to the Rulebook. The latest amendments were on 31 December According to the Rulebook on Job Systematisation systematised are 388 (three hundred eighty eight) posts. As of 31 December 2013, the CBM had 334 employees. 6. Monetary policy The Law on CBM envisages the basic monetary policy instruments of the CBM: Open market operations; Lending operations; Last resort creditor and Mandatory reserve. In 2013 the first three instruments were not used. Mandatory reserve The basic monetary policy instrument of the CBM is the mandatory reserve. The Central Bank requires the banks to hold mandatory reserve in the account of the Central Bank (in the country and/or abroad) and/or in the form of Treasury bills issued by Montenegro. Due to the specifics of the Montenegrin economy, the CBM uses the mandatory reserve instrument primarily to affect the liquidity of the banking system, i.e. indirectly to affect the stability and credibility of the banking system. The CBM also uses this instrument to affect the level of lending activities of banks, indirectly to affect the further process of money multiplication (money supply) in economy. In addition, the changes in the mandatory reserve instrument can affect the term structure of deposits. 4 number /1 dated 1 February

6 The base for calculation of the mandatory reserve includes the demand deposits and term deposits. The rate for mandatory reserve calculation is 9.5% on the portion of the base consisting of demand deposits and deposits with the maturity up to one year, i.e. 365 days and 8.5% on the portion of the base consisting of deposits with maturity over one year. Banks may hold the mandatory reserve in the account of the mandatory reserve in Montenegro and/or in the accounts of the CBM held abroad. Banks are allowed to hold up to 30% of the mandatory reserve in the form of Treasury bills of Montenegro with maturity up to 182 days and up to 13% in the form of Treasury bills of Montenegro with maturity up to 91 days. A bank that fails to allocate mandatory reserve in the stipulated amount and timeframes, is to pay interest to the CBM at annual interest rate of 12%, on the amount of the difference between the prescribed and allocated mandatory reserve. A bank may use up to 50% of mandatory reserve for daily liquidity maintenance: if it pays back the funds on the same day, it does not pay interest, and if it does not pay back on the same day, it pays interest at annual interest rate of 12%. The mandatory reserve instrument has been changed several times since the establishment of the CBM. The amount of the mandatory reserve and conditions for use of mandatory reserve for liquidity purposes are specified in the Decision on Mandatory Reserve of Banks Held with the Central Bank of Montenegro 5. As of the end of 2013, allocated mandatory reserve amounted to mill. which is by 9.8 mill. or 5.2% higher in relation to the end of International reserve management The Central Bank holds and manages international reserves of Montenegro in the way that is consistent to the monetary policy and ensures smooth fulfilment of Montenegro s international obligations. The Central Bank manages international reserves in line with the Law and the Decision on International Reserve Management. International reserves include the following: 1) gold held by the Central Bank or a third party on behalf of the CBM, including credit balances in accounts for gold; 2) bank notes and coins in freely convertible foreign currencies held by the CBM or a third party on behalf of the CBM; 3) credit balances and international deposits payable in freely convertible foreign currency, at demand or within short term, in accounts of the CBM with foreign central banks, international financial institutions or foreign banks whose short term liabilities are rated by two internationally recognised credit rating agencies with one of the three highest ratings; 4) marketable debt securities expressed in freely convertible foreign currencies, issued by the Government, a foreign central bank or an international financial institution; 5) highly liquid and marketable debt securities expressed in convertible foreign currencies, in accordance with the decision by the Council of the Central Bank; 6) receivables in respect of purchase, sale or repo of securities; 7) special drawing rights and reserve position held in the accounts of the Central Bank with the International Monetary Fund. The Central Bank may: open accounts abroad with foreign central banks, international financial institutions and foreign banks whose short term liabilities are rated by two internationally recognised credit rating agencies with one of the three highest ratings; buy and sell foreign securities in the primary and secondary market in accordance with the law; 5 OGM 35/11, 22/12, 61/12 and 57/13. 6

7 enter into agreements on payments and settlements with foreign clearing institutions and enter into agreements in its own name and on its own behalf or on behalf of Montenegro. According to the Law on the CBM and in conjunction with Article 7 of the Decision on International Reserve Management, the CBM Council passed the Guidelines on International Reserve Management, which determine the investment strategy, specific forms of investments, parameters for international reserve management. The Governor established the Investment Committee, as an expert advisory body to develop investment strategy for international reserve management in line with the Guidelines. In 2013, the Guidelines were twice innovated (5 April 2013 and 9 December 2013), at proposal by the Council, due to the conditions in the market and drop of revenues. International reserves of Montenegro as of 31 December 2013 amounted to 393,343, Total( I+II ) ,39 Montenegro funds with IMF amount in SDR in EUR 1. Reserve position , ,00 2. General and special allocation funds , ,63 3. Accrued interest , ,79 Distribution of general reserves portion of extra profit from sale of gold , ,73 III Total Securities available for sale Securities held to maturity IV Total , , , ,98 Comparative review of the balance of international reserves of Montenegro as of 31 December 2011/2012/2013 Breakdown Balance Balance Balance Change 31.dec dec dec / / /2012 Regular accounts , , , % 32,17% 35,87% Deposits , , , % 91,35% 43,58% SDR , , , % 5,40% 3,85% Securities available for sale , , , % 32.31% 13.23% Securities held to maturity , , % Total , , ,52 In 2013 the mandatory reserve funds of banks held with the CBM were a stable source of international reserves. In the reporting period the banks allocated and maintained mandatory reserve in the stipulated amount and did not take the benefit of using 50% for maintenance of daily liquidity, and all the banks used the option to allocate up to 35% in the form of Treasury bills issued by Montenegro. At the end of the reporting period the total allocated reserve of banks held with the CBM amounted to: 196,898,000.00, of which 76.1% in the accounts with the CBM, and 23.9% in the form of Treasury bills. The commitment in reserve management is to have a portion of funds available for execution of the obligations of the Government of Montenegro at any time. Daily liquidity was maintained at the level of million euros. The balance of these funds at the end of the year amounted to 45.3 million euros, and they included demand deposits with central and foreign commercial banks (excluding demand deposits with central banks in foreign currency). According to the guidelines (from March 2012) for international reserve management, the liquid portfolio is divided into disponible and liquid portfolios. Disponible portfolio implies placing of funds with maturity up to 14 days, while liquid portfolio implies maturity from 14 days to one year. A significant portion of the disponible portfolio is placed with central banks from ECB Tier 1 investment placing in overnight 7

8 deposits. The rate in this respect was calculated according to EONIA 10bp, but not less than zero. In addition to overnight placements, a portion of liquid portfolio is placed in short term deposits with central and commercial banks with maturity of 14, 32 and 92 days. Dollar portfolio is placed with the Federal Bank of New York. At the end of the reporting period the total market value of the investment portfolio (securities) available for sale amounted to 101,768, (including accumulated interest). According to the valid Guidelines it was allowed to invest in securities of OECD/EMU countries with minimum rating of AA by S&P or Aa3 by Moody's. This portfolio includes German government securities whose nominal value is 27,900, or 28.47%, Dutch government securities amounting to 31,800, or 32.45%, Finnish government securities in the amount of 8,600, or 8.77%, French government securities amounting to 28,900, or 29.5% and Austrian government securities in the amount of 800, or %. An investment portfolio created in 2012 includes securities held to maturity. Issuers of securities in which investments were made are federal states of Germany: Berlin, Bayern, Baden Wurttemberg, Hessen, as well as German agency KfW and French agency CADES. Securities held to maturity have the value of 17,024, (purchase price with coupon rate). Montenegro became a member of the IMF in January 2007, and CBM is authorised to perform the role of a fiscal agent and depositary in IMF. Membership quote of Montenegro amounts to SDR 25.7 mill. The amount of international reserve funds in CBM accounts held abroad is determined by the balance of deposited funds of the Ministry of Finance, the Deposit Protection Fund, the amount of allocated mandatory reserve and capital of the CBM in financial form. The foreign exchange reserve structure does not include deposit funds in gold, because on 27 July 2009, at request 6 by the Ministry of Finance, the entire amount of gold (FOZ 38,477,690), placed in the CBM account with HSBC Bank USA, N.A. London Branch was ordered to be transferred in favour of the account of the Ministry of Finance held with Credit Suisse Bank, Zurich. Reporting on the balance and changes in international reserves is carried out daily in the form of a review by parameters. The Investment Committee monitors the implementation of strategic Guidelines for international reserve management based on the reports by: the Department for Financial and Banking Operations, the Section for Risk Management, the Directorate for International Reserve Management and such reports include the Report on Risk Exposure and Investment Portfolio Performance for Trade and Liquid Portfolio and Report on International Reserve Management. The benchmark for investment portfolio available for sale during the validity period of the Guidelines adopted in February 2012 was Merrill Lynch EMU securities, AAA rating, with maturity from one to three years. The benchmark during the validity period of the Guidelines adopted in April 2013 was Merrill Lynch Germany, France, the Netherlands, Austria, Luxembourg and Finnish government securities, with maturity from 0 to 3 years. The CBM is obliged, in accordance with the Law, to invest funds in marketable securities. According to the parameters from the Guidelines for international reserve management it is allowed to invest in the securities of the OECD/EMU countries with minimum rating AA according to S&P or Aa3 according to Moody' s with maturity from one to three and from zero to three years. 6 Request no /1 dated 27 July

9 In 2013, funds were placed in securities available for sale, in the amount of 45,500,000.00, and amount of 2,000, was placed in short term French bond, which matured on 19 December, so it is no longer included in the portfolio. Average period of maturity of securities is from one to three years and from zero to three years, which is in accordance with the Guidelines. The funds are placed in the securities of OECD/EMU countries, in the balance sheet currency, which is in accordance with the current Guidelines. Tabular presentation of bought securities available for sale in 2013 Status ISIN Maturity Purchase/sale Nominal value Bought securities rating date 1 S&P Moody's Buy NL Jul Feb ,00 NR Aaa Buy NL Apr Feb ,00 no rating Aaa Buy FR Sep Feb ,00 no rating Aa1 Buy FR Jul Feb ,00 no rating Aa1 Buy FR Oct Feb ,00 NR Aa1 Buy DE Oct Feb ,00 NR Aaa Buy FR Nov Apr ,00 no rating Aa1u Buy FR Feb Apr ,00 no rating Aa1u Buy FR Oct Jul ,00 NR Aa1u Buy FR Feb Jul ,00 no rating Aa1u Buy FI Apr Jul ,00 AAA Aaa Buy FR Apr Jul ,00 NR Aa1u Buy FR Jan 15 9 Oct ,00 NR Aa1u Buy NL Apr 15 9 Oct ,00 no rating Aaau Buy FI Apr 16 9 Oct ,00 AAA Aaa Buy FR Jul 16 9 Oct ,00 no rating Aa1u Buy AT0000A011T9 15 Sep 16 9 Oct ,00 AA+ Aaa Buy FR Dec 13 9 Nov ,00 The data in the Table related to the rating of bought securities are the data from the documents submitted at the time of purchase, which has been presented to the state auditor. Financial funds held to maturity with the balance of 16,589, as of 31 December 2013 are the debt securities issued by German federal districts and agency securities. The presented amount is amortised value in Investing in the portfolio held to maturity in the reporting period has been performed based on the List of approved issuers of securities for investing in the portfolio held to maturity 7 adopted by the Investment Committee and in accordance with the valid Guidelines. Tabular presentation of securities available for sale and securities held to maturity Status ISIN Maturity Purchase/sale date Nominal value Am value in 2013 Purchase price Coupon rate Buy DE Jul May 12 1,500, ,559, ,620, Buy DE000A0EY7Z3 14 Sep May 12 2,000, ,092, ,139, Buy DE Jan May 12 1,000, ,057, ,072, Buy DE Jan May 12 1,000, ,027, ,043, Buy DE000A0Z1Q56 30 May May 12 1,300, ,369, ,392, Buy DE000A1H3YR4 8 Sep May 12 2,000, ,115, ,149, Buy DE Apr May 12 1,000, ,034, ,064, Buy DE000AXYS72 13 Feb May , , , Buy DE000A1MATD5 18 Jan Jun 12 3,500, ,590, ,587, Buy XS Mar Jum 13 2,000, ,226, ,209, Total 15,000, ,589, ,804, IC no.12/3 dated 30 April

10 8. Bank supervision Pursuant to Article 14 of the Law on Central Bank of Montenegro, the Central Bank conducts supervision of banks and micro credit financial institutions. In 2013, as stated in the Annual Performance Report of the CBM, the CBM conducted 12 regular and two extraordinary examinations, the total of 10 banks in the system. The subject of the examination were the following banks: Atlas Banka JSC Podgorica; Crnogorska Komercijalna Banka JSC Podgorica, member of OTP group; Erste Banka JSC Podgorica; First Financial Bank JSC Podgorica; Hypo Alpe Adria JSC Podgorica; Invest Banka Montenegro JSC Podgorica; Komercijalna Banka JSC Budva; NLB Montenegrobanka JSC Podgorica; Prva Banka Crne Gore Osnovana Godine JSC Podgorica and Societe Generale Montenegro JSC Podgorica. 9. Operations for Montenegro The CBM submits the Performance Report to the Parliament of MNE for consideration minimum once a year by the 30 April of the current year for the previous one. The Central Bank also publishes reports on stability of financial system and issues of stability of prices and submits them to the Parliament and the Government for information purposes, by 30 June of the current year for the previous one. As deposits the CBM accepts monetary funds of state authorities and organisations, pays interest on deposited funds at the rates prevailing in the market in Montenegro, also opens accounts for such parties and performs payment operations in respect of such accounts and charges fees for performed operations. The CBM also performs operations related to securities issued by Montenegro, including operations of registration of such securities, pays out principal, interest and other costs related to such securities and performs other related operations, under the conditions contracted with the ministry responsible for finance affairs. Pursuant to the Law on the CBM, the CBM entered into an agreement 8 with the Ministry of Finance regarding performance of banking operations and services related to implementation of decisions on state debt. According to the Agreement, the CBM performs banking operations that imply the following activities: 1) open and maintain state and banking accounts; 2) perform fiscal agency operations; 3) provide reports, statements and notifications based on records kept on the operations it performs; 4) carry out all operational functions in respect of donations and loans that foreign governments and international institutions or organisations approve to the Government of Montenegro; 5) perform other banking services in accordance with the provisions of the Law on the CBM. The CBM is paid fees for banking operations and covering costs incurred by provision of services related to implementation of decisions on state debt. The CBM is to provide to the Minister of Finance notifications and statements on transactions made, every day no later than 2 p.m. for the previous day. The fee for coverage of costs incurred in respect of services for implementation of decisions on state debt is determined as a flat annual amount and may not be less than 0.33% of the nominal value of 8 Agreement: number 1593 dated 25 September

11 issued and registered securities. The Ministry of Finance pays to the CBM accrued fees for banking operations and coverage of costs incurred by provision of services related to implementation of state debt decisions. The CBM pays interest on deposits of state authorities and organisations and idle funds from the sale of Treasury bills. As deposits the CBM accepts monetary funds of state authorities and organisations and pays interest on deposited funds at the rates prevailing in the market in Montenegro. The CBM is to pay interest on idle funds from the sale of Treasury bills (a separate bank account is opened), interest is calculated daily, and paid monthly. The CBM must not, directly or indirectly, approve loans to the Government, other state authorities and organisations, local self government units, or parties whose founder or majority owner is the state or a local self government unit. The Central Bank may approve loans to banks whose founder or majority owner is the state, under the conditions envisaged by the law. The Central Bank must not buy securities issued by the Government in the primary market. 10. Accounting system The CBM keeps business books, on accrual basis, in accordance with the professional regulatory framework, Accounting policies 9 and Accounting Rulebook 10. Accounting operations of the Central Bank are carried out in the organisational unit Directorate for Finance, Accounting and Controlling as well as in other organisational units of the CBM which develop, accept and control accounting documents and submit them for recording (application software or in other way) or keep ancillary books. Records on the balance and changes of the assets, liabilities, capital, revenues, expenditures and offbalance positions are kept in business books (General ledger, journal and ancillary books) which are maintained in electronic form, and if required, they can be presented on the computer and printed. The business books are maintained through the Main Banking System (MBS) which is one of the three key application systems of the CBM, i.e. through its sub systems that are integrated, which implies connection and automated exchange of data. The General Ledger is uniform on the level of the Central Bank and makes the basis for producing financial statements. The Central Bank prepares financial statements in accordance with the International Accounting Standards and International Financial Reporting Standards. Annual Financial Statement, including the opinion by an independent external auditor, is adopted by the Central Bank by 30 April of the current for the previous year and submitted to the Parliament of Montenegro for information purposes. The system of internal accounting controls is established through the control of granting and updating authorisations for work in business books and control of entry of data in ancillary books which implies the control of regularity of entered data, review of chronology of entries and appropriate keeping and using of data. Application software controls (logical and computing) disable sending of data from ancillary books to the General Ledger prior to the completion of the controls, and there are also controls in the application software incorporated in generation of orders. 9 no /2 dated 16 May 2011 and no /1 dated 23 April no /1 dated 16 May

12 Testing of the recorded orders generated in 2013 allowed the state auditor to obtain assurance that the system of internal accounting controls, which is based on procedures and processes set by the CBM management, ensures orderly operations and timely compiling of reliable financial information. 11. Information system The information system of the Central Bank of Montenegro is of great importance for its operations. Business processes are supported by the application systems that are regularly upgraded. In the current information system architecture of the Central Bank of Montenegro there are three key application systems: the Main Banking System (MBS), Inter bank payment operations system (IBPOS) and Enforced collection system (ECS). The CBM develops the main banking system and enforced collection system on its own using its own resources, within the Directorate for development of application systems and quality assurance. Inter bank payment operations system is composed of the Payment operations system for interbank transfers at real time gross settlement basis (RTGS) and the Payment operations system for inter bank transfers at deferred net settlement basis (DNS). This is the key application system of the Central Bank through which 35.94% of the total annual income was generated in Although the Central Bank is not the owner of the source code, the guarantee for stable functioning of the system is the maintenance agreement. Multi year use of IBPOS application has demonstrated its reliability. The system of enforced collection is an automated way of exchanging electronic messages between the Section for Enforced Collection and banks, which blocks all the accounts of debtors and by operation of law makes payments of the liabilities specified as the base for enforced collection in favour of creditors. 3.88% of the total annual income of the Central Bank was generated through this application system in In 2012, the Central Bank took over the source application code from the deliverer, so the maintenance of application system is organised in the IT Department. The main banking system serving for support to a large number of business processes in the Central Bank consists of a range (33) of application sub systems. It is featured by functional integration which implies connection and automated exchange of data between sub systems. One of the key sub systems is the Credit Register register of credit debt of individual parties towards banks, financial institutions and Investment Development Fund maintained by the Central Bank of Montenegro. This sub system, with the client consent, allows the bank to verify its clients. This application system is developed by the Central Bank of Montenegro on its own, by its own resources, within the Directorate for Development of Application Systems and Quality Assurance, in the Information Technology Department. 3.61% of the total annual income of the Central Bank was generated through this system in Within the Directorate for IT infrastructure and operations and security carried out are operations related to systemic support to the information system of the Central Bank including development and maintenance of the overall IT infrastructure, as well as systemic support to users with regard to maintenance of personal computers and peripherals. Significant investments are made in the IT system, which results in a stable IT system and required activities are undertaken so the system would be protected and stable in functioning. IT infrastructure has been significantly improved by the project of Information System Consolidation which has ensured continuous and reliable operation of the entire information system and prevented any operation interruptions to the maximum extent possible. Introduction of optical connections between the central and reserve locations primarily improved the function of the back up location in ensuring continuity of operations. 12

13 Risks, contingent and emergency situations are prevented, and procedures set a course of actions which in case of interruption or cancellation of the information system would enable the work process to continue in the shortest period possible. Security of the information system of the Central Bank is on high level. The information security policy clearly envisages all the actions and situations related to security of information and information system of the Central Bank. Also, the system of digital certificates is significant from the aspect of secure logging in, crypting and digital signature. Internal audit of the information system includes the assessment of the internal control system established for the purpose of ensuring availability of information system, information confidentiality, data integrity, efficient and economic use of the information system. 12. Internal audit system Internal audit activities are carried out in the Internal Audit Department in accordance with the Rulebook on Internal Audit 11. Internal audit is carried out based on the annual plan adopted by the Council, at proposal by the chief internal auditor, and with prior opinion by the Governor and Audit Committee. The Chief Internal Auditor submits periodical (semi annual) and annual reports on internal audit performance to the Council of the Central Bank, the Governor and the Audit Committee. During the reporting period, the internal audit conducted the total of 12 audits. These audits included previously considered risk assessment related to a work process or an organisational part based on which the verification of adequacy and evaluation of the internal control system and assessment of compliance to and observance of laws and regulations in the work, disposing of resources and reporting were completed. 13. Capital The capital of the CBM consists of the core capital and reserves. The amount of the core capital in the amount of 50,000, is set by the Law on the CBM for the purpose of creating appropriate material assumptions for exercise of stipulated CBM functions. The core capital of the Central Bank is under state ownership. The core capital of the CBM cannot be transferred, pledged or encumbered in any way. The core capital of the CBM may increase by the amount set by the CBM Council. The core capital of the CBM is increased by the funds from general reserves. If the funds of general reserves are not sufficient to provide the set amount of the core capital increase, the shortage may be provided from the budget of Montenegro. The following table shows the trend of the core capital of the CBM for the period : Core capital in 000 Year Amount 33,842 35,003 39,648 40,000 In 2010, when the Law on the CBM was adopted, the capital of the CBM amounted to 33,842, The core capital of the CBM should have been increased by the funds from the general reserves. Given that the funds from the general reserves were not sufficient to provide the amount of core capital shortage, the funds should have been provided from the budget of 11 no /1 dated 20 June 2011 and /2 dated 29 January

14 Montenegro, which was not done. In April 2011, the Protocol 12 was entered into and signed with the Ministry of Finance, where it was agreed that a portion of the profit of the CBM which according to the provisions of Article 69 of the Law on CBM would have been the revenue of the Budget of Montenegro should be redirected to the core capital of the CBM, until the legally stipulated minimum has been reached. The annual performance report of the CBM for 2011 specifies that the core capital after the recording of the Decision on Profit Distribution for 2010 in the books of the CBM and application of the provisions of the Protocol on the method of providing the CBM core capital shortage, amounts to 35,003, The core capital shortage is 14,997, In 2012, the core capital is by 13.27% higher in relation to 2011 and amounts to 39,648, According to the Decision by the CBM Council on distribution of the CBM profit for 2011 and pursuant to the signed Protocol with the Ministry of Finance, a portion of the profit for distribution that made the revenue of the Budget of Montenegro ( 2.6 mill.) was redirected to the core capital. A portion of funds from general reserve ( 2.28 mill.) was also redirected to the capital. On 22 January 2013, the CBM signed with the Ministry of Finance a Protocol on temporary cancellation of the Protocol on the method of providing the CBM core capital shortage, so accordingly it was decided that relevant portion of the CBM profit for 2012 and 2013 should not be redirected to the core capital of the CBM, but to be paid into the budget of Montenegro, all for the purpose of public finance stabilisation, as was stated in the notes to the financial statements for The CBM Council passed the Decision 13 on distribution of CBM profit for 2012, according to which the net profit of the CBM for 2012 was established in the amount of 761,280.08, and profit for distribution for 2012 in the amount of 971, The Decision envisages that the profit for distribution in the amount of 485,750.24, or 50% of the profit, should be directed to the general reserves of the CBM, and the remaining 485, make the revenues of the budget of Montenegro. The decision of the CBM Council envisages the increase of core capital of the CBM from general reserves by 351, The core capital of the CMB as of 31 December 2013 amounted to 40,000,000.00, which is not in accordance with Article 12 of the Law on CBM, which envisages that the core capital of the CBM amounts to 50,000, The core capital shortage as of 31 December 2013 was 10,000, so, according to Article 12 and Article 90 paragraph 2 of the Law on the CBM it is necessary to provide the capital shortage from the Budget of Montenegro. General reserves as of 31 December 2013 amounted to 634, while the balance of special reserves was 263, Revaluation reserves for real estate, plants and equipment as of 31 December 2013 amounted to 19,481,821.63, revaluation reserves for securities had negative value in the amount of ( 2,263,426.50) so revaluation reserves presented as of 31 December 2013 amounted to 17,218, Revaluation reserve for used fixed assets amounted to 19,424, In 2013 revaluation reserves were abolished for fixed assets in the amount of 204, Non distributed gain from the current year amounts to 207, and makes realised revaluation reserves for real estate, plants, equipment and library fund. Net profit amounts to 484, and it is established as the difference between revenues and expenditures, in accordance with International Financial Reporting Standards. 12 Protocol on the method of providing the shortage core capital funds of the CBM, number /1 dated 8 April no / dated 5 April

15 The total capital of the CBM as of 31 December 2013 amounts to 58,808, which is by 1,322, less in relation to the balance of the total capital as of 31 December 2012 which amounted to 60,130, The reduction of the total capital was mostly caused by the application of fair value of securities available for sale in the amount of ( 1,320,905.00). Total capital in 000 Year Amount 47,230 60,683 60,130 58, Result of the period Net profit or loss of the CBM is established for each financial year in accordance with the International Financial Reporting Standards. The profit for distribution is determined in the following way: - by taking away the net profit from the total amount of unrealised revaluation gains and distribution of equivalent amount to accounts of unrealised revaluation reserves and - by taking away from the account of unrealised revaluation reserves and adding to the profit for distribution the amount of each unrealised gain that was taken away from the net profit from one or several previous years and which was realised during the current year. Unrealised revaluation losses will be transferred to the account of unrealised revaluation reserves until their balance has equalled zero, then such losses will be covered from the current year profit, and thereafter in the way specified in Article 70 of the Law. The profit established in accordance with Article 68 paragraph 2 of the Law is distributed to general reserves in the amount of 50% of generated profit, until the level of general reserves has reached 10% of the total financial liabilities of the Central Bank. A portion of the profit can be distributed to special reserves in the amount determined by the Council, in accordance with this Law, where the amount of the profit may be maximum 10% of the established profit (according to Article 68). The remaining amount of the profit makes the revenue of the Budget of Montenegro. The profit may not be distributed from non distributed or current profit, unless such distribution is carried out in accordance with Article 68 of the Law. The following table and graphic show the net gain trend for the period : Net gain in 000 Year Amount 540 1,036 4, Reduction of the profit is mostly the consequence of the loss in respect of financial funds available for sale that is in 2013 generated in the amount of 1,222, The Auditee specifies in its report that the loss in respect of financial funds available for sale i.e. reduction of the profit was caused by unfavourable trends in the international financial market in 2012 and 2013, and that in 2013 the revenue generated in respect of financial funds available for sale amounted to 1,413, (as the difference between revenues from coupons 2,635, and net loss in respect of sale of securities was 1,222,111.00). Net profit of the CBM for 2013 in the amount of 484, is established as the difference between revenues and expenditures, in accordance to the International Financial Reporting Standards. 15

16 Pursuant to Article 68 of the Law on the CBM, the profit for distribution is determined in the way that unrealised revaluation gains are taken away from net profit, and added are unrealised revaluation gains that were taken away from net profit in previous years, which have been realised in the current year. The profit for distribution in the amount of 688, is determined in the way that the presented profit ( 484,622.33) was reduced by the amount of exchange differences for IMF funds ( 3,325.83) and increased by non distributed profit that is increased by unrealised revaluation gains ( ,64) which were taken away from net profit in previous years and which have been realised in the current year as a result of transferred reserves as long as the funds are used. The amount of transferred reserve is the difference between the amortisation based on revaluation book keeping value of funds and amortisation based on purchase value of funds. Distribution of profit is carried out according to the Decision 14 on distribution of CBM profit for The profit is distributed: - to general reserves 50% in the amount of 344,371.07; - as the revenue of the Budget of Montenegro 50% in the amount of 344, The Protocol 15 on the Temporary Cancellation of Application on the Method of Providing the CBM Core Capital Shortage has been cancelled in terms of redirecting a portion of the CBM profit for 2012 and 2013 to the core capital but it is to be redirected to the Budget of Montenegro for the purpose of public finance stabilisation. This Protocol has rescinded the Protocol 16 on the Method of Providing the CBM Core Capital Shortage where the Ministry of Finance and the Governor of the CBM have agreed, due to the amount of the core capital shortage, which should have been provided from the Budget of Montenegro, that a portion of the CBM profit, which according to the provisions of Article 69 of the Law on the CBM would make the revenue of the Budget of Montenegro on annul basis, should be redirected to the core capital of the CBM. II OPINION AND RECOMMENDATIONS Based on conducted audit and established state of facts, as well as after deliberation of the auditee s statements included in the auditee s Opinion regarding the Preliminary Audit Report of the SAI, based on Article 12 of the Law on State Audit Institution and pursuant to Art. 50 of the Rules of Procedure of the State Audit Institution, the competent Auditing Board of the SAI, composing of Mr Branislav Radulović, PhD (member of Senate Head of Auditing Board) and Mr Dragiša Pešić (member of the Senate member of the Auditing Board), at its session held on 20 October 2014, adopted the following: FINAL AUDIT REPORT on the Annual Financial Statement 2013 of the Central Bank of Montenegro OPINION Financial statements of the Central Bank for 2013 provide, by all material aspects, a true and fair presentation of the financial position as of the day and the year ending on 31 December 2013 and operating results for the year ending on this day, in accordance with the accepted financial reporting framework, and therefore the competent SAI Auditing Board is expressing an unqualified opinion regarding the financial statement of the Central Bank of Montenegro for Decision, no /55 2 dated 27 March Protocol, no /2 dated 22 January Protocol, no /1 dated 8 April

17 RECOMMENDATIONS 1. The core capital of the CBM as of 31 December 2013 amounted to 40,000,000.00, which is not in compliance with Article 12 of the Law on CBM, which envisages that the core capital of the CBM should amount to 50,000, The core capital shortage as of 31 December 2013 is 10,000, and therefore it is necessary that the Government of Montenegro, pursuant to Article 12 and Article 90 paragraph 2 of the Law on CBM, provides the capital shortage from the Budget of Montenegro. 2. Inventory of securities has not been carried out fully in line with Article 16 of the Rulebook of CBM Inventory. The inventory list does not include all the required data: name of the issuer, issue date, fair value of the available for sale securities or securities held to maturity. The Auditee should ensure, when the inventory of securities is taken, the inventory lists to include all the data in accordance with Article 16 of the Rulebook on Inventory. 3. In the Balance Sheet, within the item Receivables, the Auditee has presented the amount of 123 thousand relating to receivables in respect of rights to non recorded flats. The Report on the Inventory of Receivables and Liabilities of the CBM with the balance as of 31 December 2013 that the Auditee submitted to the State Audit Institution does not include the inventory of receivables in respect of rights to non registered flats. As regards the receivables in respect of rights to non registered flats, the state auditors were presented the documents based on which they could not obtain assurance regarding the recorded amount of receivables. The Auditee is recommended to ensure that the receivables in respect of rights to non registered flats are included in the inventory, i.e. if they meet the criteria for recognition under IAS 16 Real estate, plants and equipment they should be presented within the relevant item, after they have been subject to valuation. 4. In the Report on inventory of receivables and liabilities of the CBM as of 31 December 2013 that the Auditee provided to the State Audit Institution, for receivables in respect of issue and execution of enforced collection orders (account ,945.79) and calculation of interest on enforcement orders (account ,610.58), the following information is not included: name and place of the debtor, amount of the receivables and due date, although it is envisaged in Article 19 of the Rulebook on Inventory of the CBM, so the state auditor could not identify if the published amount includes receivables not collected within 60 days from the maturity date and which should, according to the Accounting Policies of the CBM, be impaired against provisions for potential losses. The Auditee should ensure that during the inventory taking of receivables all the required data, envisaged in Article 19 of the Rulebook on Inventory of the CBM, are entered, and doubtful, disputable or past due receivables to be included in a special inventory list. 5. In the ancillary book of fixed assets that the Auditee provided to the State Audit Institution there are no data on the area of land and business buildings that the CBM has at disposal. 17