MONTENEGRO STATE AUDIT INSTITUTION

Transcription

1 MONTENEGRO STATE AUDIT INSTITUTION Number: 4011/ Podgorica, 27 October 2016 ANNUAL REPORT on Performed Audits and Activities of the State Audit Institution of Montenegro for the period October 2015 October 2016 Podgorica, October 2016

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3 CONTENTS Introduction 5 I Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for OPINION AND RECOMMENDATIONS 15 PART I Basic Elements Legal basis for performing the audit Objective, subject-matter, type and scope of audit Audit methods Recording system 21 PART II Identified factual findings Financial Statements and Computational Accuracy Cash Deposits Final Statement of Accounts for the Tax Authority Budget Receipts Budget Expenditures Report on Budget Reserves Expenditures Report on Capital Projects - Capital Budget Report on Public Debt as of 31 December Report on Guarantees Issued in Property Public Procurements Internal Financial Control System 77 II Implementation of Recommendations from the Audit Report on the 2014 Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro 78 III Report on Assessment of Application of Fiscal Responsibility Criteria for IV Excerpts from the final audit reports on individual audits performed in the period October October Excerpt from Audit Report on 2015 Annual Financial Statement of Public Procurement Administration Excerpt from Performance Audit Report Expenditures from the Budget of Montenegro for Litigations 103 Arising from Labour Relations 3. Excerpt from the Follow up Audit Report on Register on Concession Contracts and Revenues of the 125 Budget of Montenegro from Concluded Concession Contracts for the Usage of Natural Wealth 4. Excerpt from the Follow up Audit Report on Revenues of the Budget of Montenegro from Concluded 131 Concession Contracts for the Use of forests 5. Excerpt from Audit Report on 2015 Annual Financial Statement of the National Security Agency Excerpt from Audit Report on 2015 Annual Financial Statement of the Environmental Protection Agency Excerpt from Audit Report on 2015 Annual Financial Statement of the Ministry of Science Excerpt from the Performance Audit Report Efficiency of Collection of Tax Liabilities from the 170 Property of the Taxpayer 9. Excerpt from Audit Report on 2015 Annual Financial Statement of the Ministry of Sustainable 185 Development and Tourism 10. Excerpt from the Follow up Audit Report on Efficacy of the Tax Administration in Implementing 204 Measures for Tax Debt Collection 11. Excerpt from Audit Report on 2014 Annual Financial Statement of the Compensation Fund Excerpt from Audit Report on 2014 Annual Financial Statement of the Health Insurance Fund of

4 Montenegro 13. Excerpt from Individual Audit Reports on Annual Financial Statements of Political Parties for 2014, 245 which were not included in the previous Annual Report of the State Audit Institution Albanian Alternative New Democratic Force (FORCA) Montenegrin Democratic Union Democratic Party Democratic Alliance in Montenegro Democratic Union of Albanians Association of Citizens Novska lista NGO Izbor Herceg Novi Excerpt from Audit Report on 2014 Annual Financial Statements of the Ministry of Exterior Affairs and 280 European Integrations 15. Excerpt from Audit Report on 2015 Annual Financial Statements of the Ministry of Justice Excerpt from Audit Report on 2015 Annual Financial Statement of the State Prosecutor s Office Excerpt from Audit Report on 2015 Annual Financial Statement of Democratic Party of Socialists of 319 Montenegro 18. Excerpt from Audit Report on 2015 Annual Financial Statement of Social Democratic Party of 324 Montenegro 19. Excerpt from Audit Report on 2015 Annual Financial Statement of Democratic People s Party of 330 Montenegro 20. Excerpt from Audit Report on 2015 Annual Financial Statement of Movement for Pljevlja Excerpt from Audit Report on 2015 Annual Financial Statement of Positive Montenegro Excerpt from Audit Report on 2015 Annual Financial Statement of Movement for Changes Excerpt from Audit Report on 2015 Annual Financial Statement of Liberal Party of Montenegro Excerpt from Audit Report on 2015 Annual Financial Statement of DEMOS Excerpt from Audit Report on 2015 Annual Financial Statement of New Serb Democracy Excerpt from Audit Report on 2015 Annual Financial Statement of Croatian Civic Initiative Excerpt from Audit Report on 2015 Annual Financial Statement of Democratic Party Excerpt from Audit Report on 2015 Annual Financial Statement of New Democratic Force (FORCA) Excerpt from Audit Report on 2015 Annual Financial Statement of Democratic Serb Party Excerpt from Audit Report on 2014 on the Final Statement of Budget Accounts of Municipality of 405 Zabljak 31. Excerpt from Audit Report on 2015 Annual Financial Statement of the Ministry of Transport and 422 Maritime Affairs 32. Excerpt from Follow up Audit Report of the Royal Capital of Cetinje 433 V Other activities of the State Audit Institution

5 Introduction The State Audit Institution, defined by the Constitution as the supreme authority of the state audit in Montenegro, submits the Annual Report on Performed Audits and Activities for the period of October 2015 October 2016 to the Parliament of Montenegro, in accordance with the obligation established by the Constitution of Montenegro and the Law on State Audit Institution. The Annual Report on Performed Audits and Activities for the period of October 2015 October 2016 contains the information on the execution of the Annual Audit Plan for 2016, on the given opinions and recommendations, the established findings of the audit, the fulfilment of the set goals and results of the activities which the State Audit Institution achieved during the reporting period. The State Audit Institution of Montenegro, in accordance with Article 26 of the Law on Budget and Fiscal Responsibility, has developed the Report on Assessment of Application of Fiscal Responsibility Criteria, which is an integral part of this Report. The State Audit Institution of Montenegro has continued the realization of activities defined by the negotiating Chapter 32 Financial Control, which aim to improve the quality of the audit procedure and to comply it with applicable International Standards of Supreme Audit Institutions (ISSAI) and with practices of the European Union Member States. The special attention was devoted to the further development of performance audit through the performance of a larger number of audits in comparison to the previous reporting period. In order to improve the performance audit and to acquire new methodologies, the State Audit Institution of Montenegro will conduct two parallel performance audits - "Energy efficiency in the public sector institutions" with the State Audit Office of the Republic of Croatia and "Efficiency of public procurement" with seven countries of the region, the National Audit Office of Sweden and the European Court of Auditors. In this sense, the parallel performance audits will strengthen the exchange of knowledge, experiences, practices and work methodologies of Supreme Audit Institutions. In order to enhance transparency, accountability and public trust in the work of the State Audit Institution of Montenegro, the State Audit Office of the Republic of Croatia, at the request of the Institution, conducted a financial audit of the Annual Financial Statement of the State Audit Institution of Montenegro for In the reporting period, the State Audit Institution of Montenegro was conducting the activities in accordance with its powers and was cooperating with the Parliament, the Government of Montenegro and other authorities, non-governmental sector, as well as with the Supreme Audit Institutions at the international and regional level and with international organizations. Through independent and transparent work, the State Audit Institution of Montenegro will continue to pursue its mission and to contribute to greater regularity, efficiency and effectiveness of management of public finances and state property. PRESIDENT OF THE SENATE Milan Dabović, PhD 5 472

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7 Pursuant to Article 144 of the Constitution of Montenegro ( Official Gazette of MNE, No. 01/07, 38/13) Article 38, in conjunction with Articles 18 and 19 of the Law on State Audit Institution, ( Official Gazette of RoM, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14), the Senate of the State Audit Institution, at its session held on 27 October 2016, adopted the following: ANNUAL REPORT ON PERFORMED AUDITS AND ACTIVITIES OF THE STATE AUDIT INSTITUTION OF MONTENEGRO FOR THE PERIOD OCTOBER 2015 OCTOBER 2016 According to the Constitution of Montenegro, the State Audit Institution (hereinafter: SAI) has been defined as an independent and supreme authority for state audit, which shall audit the legality and effectiveness of the management of state property and commitments, the budget and all financial transactions of entities financed by public sources of finance, or by those sources generated from the usage of state property. The Annual Report of the State Audit Institution represents an integrated and summarized overview of all the completed activities within the framework of SAI s mandate in the reporting period October October 2016, primarily those aimed at executing the Annual Audit Plan. The first part of the Annual Report, entitled Audit Report on the Final Statement of Accounts of the State Budget of Montenegro for 2015, presents the report on the Final Statement of Accounts of the State Budget of Montenegro for The audit of the Final Statement of Accounts of the State Budget of Montenegro for 2015 has included the verification of computational accuracy, receipts and expenditures, capital budget and financing transactions. The audit has rendered total of 11 recommendations aimed at improving the operations of budget users and strengthening fiscal discipline. Table: Statistics of the audit of the Final Statement of Accounts of the State Budget of Montenegro for 2015, with comparative data of the audit of the Final Statement of Accounts of the State Budget of Montenegro for 2014 Year Final Statement of Accounts of the State Budget of Montenegro for 2015 Final Statement of Accounts of the State Budget of Montenegro for 2014 Opinion Unqualified opinion with emphasis of matters on financial statement, qualified on regularity audit the Unqualified opinion on financial audit, qualified on regularity audit Number of recommendations 11 7 The second part of the Annual Report presents The SAI s Report on the Implementation of Conclusions of the Parliament of Montenegro upon Adoption of the Law on Final Statement of Accounts of the State Budget of Montenegro for The third part of the Annual Report presents: The Report on Assessment of Application of Fiscal Responsibility Criteria for The fourth part of the Annual Report, entitled Excerpts from Audit Reports on Individual Audits performed in the period October October 2016, provides excerpts from 32 performed audits representing the most significant findings, recommendations and measures recommended to eliminate irregularities in business practices of audited entities encompassed by the reporting period. The completed individual audits rendered 354 recommendations and 66 opinions (30 unqualified,

8 qualified and 8 adverse). In addition, two opinions were given upon the completion of performance audits during the reporting period of October October Overview of Financial and Regularity Audits Audited Entity and/or Subjectmatter of Audit Final Statement of Account of the Budget of Montenegro for 2015 Public Procurement Administration for 2015 National Security Agency for 2015 Agency for Environmental Protection for 2015 Ministry of Science for 2015 Ministry of Sustainable Development and Tourism for 2015 Compensation Fund for 2014 Health Insurance Fund for 2014 Ministry of Foreign Affairs and European Integration for 2014 Ministry of Justice for 2015 State Prosecutor s Office for 2015 Municipality of Žabljak for 2014 Ministry of Transport and Maritime Affairs for 2015 Type of Audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Type of Opinion Unqualified opinion with emphasis of matters on the financial audit, qualified opinion on regularity audit Unqualified opinion with emphasis of matters on the financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, unqualified opinion with emphasis of matters on regularity audit Qualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion with emphasis of matters on financial audit, qualified opinion on regularity audit Unqualified opinion to financial audit, qualified opinion on regularity audit Unqualified opinion with emphasis of matters on the financial audit, qualified opinion on regularity audit Adverse opinion on financial audit, adverse opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Qualified opinion on financial audit, adverse opinion on regularity audit Unqualified opinion with emphasis of matters on the financial audit, qualified opinion on regularity audit Number of recommendations Overview of Performance Audits Audited Entity and/or Subjectmatter of Audit Expenditures from the Budget of Montenegro for litigations arising from labour relations Efficiency of Collection of Tax Liabilities from the Property of the Taxpayer Type of audit Performance audit Performance audit Type of opinion The management of expenditures for labour relations litigations, which are paid from the Budget of Montenegro, was not cost-effective. Measures and activities that were conducted by the Ministry of Finance, Tax Administration, and Property Administration did not, sufficiently, provide that the application of the Decree on the Procedure of Collection of Tax Receivables by Taxpayers Assets gives the expected effects Number of recommendations

9 Overview of Follow-up Audits Audited Entity and/or Subject-matter of Audit Register on Concession Contracts and Revenues of the Budget of Montenegro from Concluded Concession Contracts for the Usage of Natural Wealth Revenues of the Budget of Montenegro from Concluded Concession Contracts for the Use of forests Efficiency of the Tax Administration in the implementation of measures of collection of tax debt Royal Capital Cetinje Type of Audit Number of recommendations Follow-up audit 15 Follow-up audit Follow-up audit Follow-up audit Conclusion 11 recommendations were implemented, 1 partially implemented and 3 were not implemented. 1 recommendation was implemented, 4 partially implemented and 3 were not implemented. 5 recommendations were implemented, 2 partially implemented and 1 was not implemented. 25 recommendations were implemented, 8 partially implemented and 5 were not implemented. In the period October 2015 October 2016, SAI performed audits of annual financial statements of political parties for 2014, which were not included in the previous report of the State Audit Institution, which entailed 8 parties. The audit resulted in 48 recommendations and 16 opinions (4 unqualified, 8 qualified, 4 adverse). Overview of audits of political parties Audited Entity and/or Subject-matter of Audit Democratic Party of Socialists of Montenegro Social Democratic Party of Montenegro The Democratic People's Party of Montenegro Movement for Pljevlja Positive Montenegro Movement for Changes Montenegro Liberal Party of Montenegro DEMOS New Serbian Democracy Croatian Civic Initiative Democratic Party New Democratic Force FORCA Democratic Serbian Party Type of Audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Financial audit and regularity audit Type of opinion Unqualified opinion on financial audit, unqualified opinion with emphasis of matters on regularity audit Unqualified opinion on financial audit, unqualified opinion with emphasis of matters on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion with emphasis of matters on financial statement, unqualified opinion on regularity audit Unqualified opinion on financial audit, unqualified opinion with emphasis of matters on regularity audit Unqualified opinion with emphasis of matters on financial audit, qualified opinion on regularity audit Adverse opinion on financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Unqualified opinion on financial audit, qualified opinion on regularity audit Qualified opinion on financial audit, qualified opinion to regularity audit Unqualified opinion with emphasis of matters on financial audit, unqualified opinion with emphasis of matters on regularity audit Unqualified opinion with emphasis of matters on financial audit, qualified opinion on regularity audit Number of recomme ndations

10 Graphical representation of performed audits, given opinions and recommendations in the period October October 2016, with comparative figures for the period October October 2015 audits opinions recommendations October 2015 October 2016 October 2014 October 2015 By the end of 2016, the following audits will be performed as well: Capital City Podgorica Financial audit and regularity audit; Clinical Centre of Montenegro Financial audit and regularity audit; Insurance Supervision Agency Financial audit and regularity audit; Socialist People's Party of Montenegro Financial audit and regularity audit; Bosniak Party Financial audit and regularity audit; Democratic Alliance in Montenegro Financial audit and regularity audit; Democratic Union of Albanians Financial audit and regularity audit; Montenegrin Democratic Union - Financial audit and regularity audit; Democratic Montenegro Democrats Financial audit and regularity audit; NGO Izbor Herceg Novi Financial audit and regularity audit; Albanian Alternative Financial audit and regularity audit; Democratic Party of Unity Financial audit and regularity audit. In November 2016, the performance audits will be completed and published: The efficiency of internal audit in the public sector Performance audit; The effects of the activities of the Council for Improvement of Business Environment, Structural and Regulatory Reforms Performance audit. Two parallel performance audits are underway: Energy efficiency in public sector institutions with the State Audit Office of the Republic of Croatia; The efficiency of planning the public procurement of medical equipment with seven countries of the region and the National Audit Office of Sweden and the European Court of Auditors. All reports on the performed audits are integrally published on the website of the State Audit Institution of Montenegro

11 The fifth part of the Annual Report entitled Other activities of the State Audit Institution presents the cooperation with the Parliament, the Government of Montenegro, state authorities and civil society, activities on the implementation of the obligations of the State Audit Institution from the negotiating process, as well as other activities carried out in the period of October October As a member of the International Organization of Supreme Audit Institutions (INTOSAI 1 ) and of the International organization gathering the Supreme Audit Institutions of Europe (EUROSAI 2 ), the SAI has continued its cooperation on both international and regional level, with the aim of strengthening development of external audit in Montenegro. The State Audit Institution of Montenegro is obliged in accordance with INTOSAI principles of transparency and accountability, to contribute also with its personal example to the greater public confidence in its expertise and independence. In this regard, at the request of the State Audit Institution of Montenegro, the State Audit Office of the Republic of Croatia performed the financial audit of the Annual Financial Statement of the SAI of Montenegro for In the opinion of the State Audit Office of the Republic of Croatia, and in accordance with accepted financial reporting framework, the financial statements of the State Audit Institution for 2015, in all material aspects, have been prepared and presented in a fair and objective manner and in this regard, the unqualified opinion was expressed on the audit of the Annual Financial Statement of SAI for SAI is member of the INTOSAI from SAI is member of EUROSAI from

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13 PART I AUDIT REPORT OF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2015 Type of audit: Audited entity: Subject-matter of audit: Audit duration: Financial audit and regularity audit Government of Montenegro - Ministry of Finance Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for auditing days Auditing Board members: Mr Milan Dabović, PhD, President of Senate Head of Auditing Board Mr Nikola N. Kovačević, Member of Senate Member of Auditing Board

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15 OPINION AND RECOMMENDATIONS Based on Article 9 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board responsible for the audit, number date January 21, 2016, the State Audit Institution conducted the financial audit of the Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for The audit covered the legal part and the explanation, Report on Consolidated Public Spending for 2015, Report on Cash Flows for 2015 prepared according to the economic classification, Report on Cash Flows for 2015 prepared according to the functional classification, Report on Arrears as of 31 st December 2015, financial records system and the audit of regularity of the activities and financial transactions with the laws and secondary legislation. Responsibility of the Management for the Financial Statements According to Article 39 of the Law on the Budget and Fiscal Responsibility, the Minister of Finance shall be responsible for the execution of the state budget, as well as for the preparation and presentation of the financial statements in line with the Rulebook on the Manner of Drafting, Compiling and Filing Financial Statements of the Budget, State Funds and Local Self-Government Units. According to Article 40, Paragraph 4, of the Law on the State Budget and Fiscal Responsibility, it is the budget executor in the spending unit that shall be accountable for legality in the use of funds allocated to the said spending unit. This responsibility shall include designing, implementing and ensuring internal controls relevant for the preparation and presentation of the financial statements without materially incorrect presentations caused by fraud or by error. The Government of Montenegro and the responsible persons in the spending units shall be deemed accountable for ensuring compliance of all activities, financial transactions and information, entered into the financial statements, with the relevant legislation. Responsibility of the State Audit Institution The responsibility of the State Audit Institution is to express its opinion about the Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 on the basis of the audit it performed and to express its opinion on whether the activities, financial transactions and information given in the financial statements are, in all material respects, in compliance with the current applicable legislation. The audit was performed according to the Law on State Audit Institution, Rules of Procedure of the State Audit Institution, and Instruction on Methodology for Performing Financial and Regularity Audit. Adhering to the International Standards of Supreme Audit Institutions (ISSAI), the State Audit Institution complied with the requirements of ethics; it planned and conducted the audit in the way, which provided reasonable assurances that there were no material misstatements of disclosed data. The audit included the procedures for obtaining audit evidences about the amounts disclosed in the financial statements, including the assessment of risk of material misstatements caused by frauds or errors. The risk assessment dealt with internal controls relevant for preparation and fair presentation of the financial statements, with a view to designing the audit procedures that are appropriate in given circumstances, but not with a view to expressing opinion about effectiveness of the internal controls. The audit included the assessment of the applied accounting procedures and the assessment of the general presentation of financial statements. We are of the opinion that the audit evidence secured in the audit procedure is sufficient and appropriate to provide a basis for the expressed audit opinion. Based on the conducted audit and established facts, the Auditing Board comprised of Milan Dabović, PhD, Head of the Auditing Board - President of the Senate, and Nikola Kovacevic, member of the Auditing Board - a member of the Senate, at its session held on 6 September 2016 adopted the following:

16 AUDIT REPORT ON PROPOSAL OF LAW ON FINAL STATEMENTS OF ACCOUNTS OF THE BUDGET OF MONTENEGRO FOR 2015 A) FINANCIAL AUDIT of the Proposed Law on the 2015 Final Statement of Accounts of the State Budget of Montenegro, the end of which is on 31 December 2015, established that the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 was in all material aspects prepared in compliance with the Law on Budget and Fiscal Responsibility and the Rulebook on the Manner of Drafting, Compiling and Filing Financial Statements of the Budget, State Funds and Local Self-Government Units. Revenues and expenditures are presented in a true and fair way in all material respects and they do not contain any materially significant errors in the presentation of the results, and accordingly, we express UNQUALIFIED OPINION WITH EMPHASIS OF MATTER. The emphasis of matter: a) Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 stated a deficit on cash basis in the amount of 291,247, and the increase in deposits in the amount of 7,643,234.49, which amounts in total to 298,890, Financing of deficit and cash deposits was secured by net borrowings in the amount of 291,047, and the sale of assets in the amount of 7,843, After the performed audit, it was determined that the cash deficit of the budget should be increased by 974,079.58, deposits by 41, and the inflows from sale of state assets by 1,015,409.38, so that the cash deficit amounts to 292,221,343.90, net change of cash flows 7,684,564.29, cash inflows from the sale of assets 8,858, and cash balance as of 31 December ,885, b) Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 adjusted cash deficit was reported in the amount of 276,113, After the performed audit, the outstanding liabilities with the Employment Agency were reduced by the amount of 1,021,777.33, so that the net change in arrears amounted to 16,155,723.45, and adjusted cash deficit of the budget amounted to 276,065, B) REGULARITY AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 established that the spending units, users of the budget funds have not put their business activities in all material aspects in compliance with the legislation that governs budget operations in Montenegro. Therefore, the relevant Auditing Board expresses its QUALIFIED OPINION. THE BASIS FOR EXPRESSING QUALIFIED OPINION: FINANCIAL STATEMENTS AND ACCOUNTING ACCURACY 1. Statement on outstanding liabilities By auditing the Statement on outstanding liabilities, it has been identified the following: misstatement of outstanding liabilities in the Consolidated statement on outstanding liabilities in the amount of 1,021,777.33; the liabilities arising from the legal regulations and concluded contracts, reported as overdue, were not planned by the Budget Law of Montenegro for 2015 in the amount of 934,374.04; the outstanding liabilities related to contractual commitments above the level of the funds planned by the Budget Law of Montenegro for 2015 amounted to 391,

17 The Ministry of Finance should adjust the data stated in the statement on outstanding liabilities for an amount of 1,021, It is necessary that spending units in the annual budget law provide as a priority the funds for the settlement of legally prescribed liabilities and commitments arising from signed multi-year contracts. It is necessary that the spending units, upon contracting their commitments, act in compliance with the Article 40 of the Law on Budget and Fiscal Responsibility and commit to the liabilities up to the amount approved by the annual law on the state budget. 2. Budget overruns The audit established that in 2015 the budget spending was overrun by the amount of Out of the total expressed overrun of the budget spending, the amount of was the allowed overrun, while the non-allowed overrun amounts to and includes expenditures that were not planned in the annual Budget Law for It is necessary that the funds from the repayment of loans, given by the Directorate for Development of Small and Medium Enterprises, intended for the purchase of securities of the Investment Development Fund be planned by the annual Law on State Budget. 3. Reallocation of funds It was performed the reallocation of funds upon the conclusions of the Government of Montenegro between the spending units in the amount of 42,029, Out of the foregoing amount from the current budget reserve (the total expenditure of which amounted to 16,643,694.03), the amount of 5,437, was reallocated to several spending units, whereby the amount of 3,773, was allocated above the limit provided for in Article 45 of the Law on Budget and Fiscal Responsibility. It is necessary that the Government the Ministry of Finance, when reallocating the approved funds between the spending units, adheres to the limits laid down in Article 45 of the Law on Budget and Fiscal Responsibility. 4. The scope of public spending The Audit of Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 has found that spending units, i.e. direct budget users, used their own revenues, revenues generated from their own activity performance, according to Article 7 paragraph 1 of the Law on the Budget of Montenegro for 2015, up to the level of generated income and that those are not included in the system of public spending, i.e. that those are not stated in Article 3 of the Proposal of Law on Final Statement of Accounts of the Budget of Montenegro for The revenues of public institutions not included in the system of public expenditure amounted to 1,904,441.81, while expenditures amounted to 1,863, The balance of funding of public institutions as of 1 January 2015 stated in the amount of 1,161, and the balance of funds in the accounts as of 31 December 2015 in the amount of 1,202, are not included in the cash balance in the Proposal Law on Final Statement Accounts of the Budget of Montenegro for It was stated the reserve on the cash balance of public institutions reported as of 31 December, 2015 in the Statements of cash flows, Form IV, because certain public institutions reported cash balance at the end of the year that included the funds that, upon the requests for payment by the spending units, were transferred to the accounts of public institutions. The Ministry of Finance is recommended to state the revenues from performance of its own activities and expenditures funded from those revenues and incurred by a public institution i.e. a direct user of the budget, in the General Ledger of the Treasury. FINAL TAX STATEMENT 5. The Final Tax Statement - The Tax Authority has compiled the Final tax statement for 2015, for the period from January 1, 2015 to 31 December 2015, which was submitted to the Ministry of

18 Finance in the document No. 03/1-7719/1-16 dated 6 May 2015, which was not in accordance with Article 19 of the Rules on the Tax Bookkeeping, which stipulates that the Tax Authority is obliged to submit the final tax statement to the Ministry of Finance by 31 st March of the current year for the previous year. The audit has found that the method of keeping accounting records of public revenues, the manner of concluding accounting records and initializing the opening balance does not comply with the Rules on the Tax Bookkeeping. The final Tax Statement does not provide reliable information on the amount of the tax debt and the amount of prepaid funds as of 1 January 2015 and as of 31 December In accordance with the identified finding of the audit, the State Audit Institution, as in previous years, recommends to the Ministry of Finance - Tax Administration to provide accounting records complied with the Rules on the Tax Bookkeeping. 6. Report on deferred tax and non-tax receivables Upon controlling of the decisions on deferred tax and non-tax receivables, it was identified that all deferral of debt (4 decisions in the amount of 186,968.37) were not granted an approval with a condition that the taxpayer has provided a bank guarantee or other security instrument in the amount of the arrears, which is not in accordance with Article 2 of the Regulation on conditions for deferral of collection of tax and non-tax receivables. It is recommended that the Ministry of Finance - Tax Administration complies with the Regulation on conditions for deferral of collection of tax and non-tax receivables. BUDGET EXPENDITURES 7. Audit of expenditures recorded in the group of accounts Repayment of arrears from previous period has established that the payment of expenditures were not the outstanding liabilities but the extraordinary expenses that were not planned by the annual budget law. It is recommended to record the expenditures for repayment of arrears, which have not been planned in the budget of the spending units within the group of accounts Repayment of Arrears from Previous Years, as well as not to charge this account with the expenditures due for payment in the current fiscal year. REPORT ON EXPENDITURES OF THE BUDGET RESERVES 8. The audit has found an unauthorized overrun of funds from reserves in the amount of 7,898,805.20, which is not in accordance with Article 3, paragraph 1 of the Rules on detailed criteria for the use of current and permanent budget reserve, which stipulates that the funds shall be used amounting to 5% of the funds planned by the annual budget law of such a spending unit. It is recommended to use the reserve funds in accordance with the Rules on detailed criteria for the use of current and permanent budget reserve. PROPERTY 9. The audit of state property management identified the irregularities, some of which were identified upon the audit of the Proposal Law on Final Statement of Accounts of the Budget of Montenegro for 2013 and Accordingly, the State Audit Institution recommends to all spending units to intensify the implementation of the Law on Property and bylaws

19 PUBLIC PROCUREMENT 10. Audit of the public procurement system and compliance of the conducted public procurement procedures with the Public Procurement Law identified irregularities recurring over the previous period. The State Audit Institution recommends that spending units make the public procurement procedure transparent and ensure full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, in order to provide legitimate budgetary spending. SYSTEM OF INTERNAL FINANCIAL CONTROLS 11. In accordance with Article 27 of the Law on internal financial controls in the public sector, it is necessary for spending units that have not already done so to perform staff recruitment of a Head of Internal Audit position and to comply with the Regulation on titles of internal auditors in the public sector so as to amend the act on internal organization and systematization of jobs, in order to, within the Department of Internal Audit, have systematized a position of "Head of Internal Audit Unit". The State Audit Institution believes that there should be continued the performance of activities to establish the function of financial control and internal audit in spending units in accordance with the Law on internal financial control in the public sector and internal audit standards

20 I PART - BASIC ELEMENTS 1. Legal basis for performing the audit Legal basis for performing the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 9 ( Official Gazette of the Republic of Montenegro, No. 28/04, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); Annual Audit Plan of the State Audit Institution for 2016 (No dated 22 December 2015); Decision on Conducting Audit Number dated 21 January Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Performing Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI); Guidelines for audit quality control. 2. Objective, subject-matter, type and scope of the audit The objective of the audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 is determined for financial audit and regularity audit as follows: The objective of the financial audit is to express opinion on the level to which the financial statements are true and fair. The objective of the regularity audit is to express opinion on compliance with the legislation governing the budget operations in Montenegro. Subject-matter of the audit is the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015, delivered to the State Audit Institution by the memorandum No /1 (SAI number /81/) dated 15 June According to Article 68 the Law on the Budget and Fiscal Responsibility 1, the audit controlled the following: opening and closing balance in the Consolidated Account of the Treasury; overview of the deviations from the budgeted amounts; report on the borrowings; report on the expenditures from the budget reserves; report on the guarantees given throughout the fiscal year; report on the capital projects; report on the implementation of the programme budget; report on the state debt and issued guarantees; report on the written-off tax and non-tax claims as defined by Article 12 of this Law, and the report on receipts and expenditures of public institutions that are not included in the Consolidated Account of the State Treasury and report on the status of outstanding liabilities that are not considered borrowings in accordance with Article 14 paragraph 2 of the Law. Type of Audit - State Audit Institution has performed a financial audit and regularity audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, i.e. for the period from 1 January to 31 December Financial audit includes a control of the reliability and accuracy of financial statements. The regularity audit includes control of compliance with legal and other relevant regulations governing system of public spending in Montenegro. 1 Official Gazette of Montenegro, No. 20/14 and 56/

21 Scope of the Audit - The audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 included the system of planning, recording and reporting in the field of budget spending in line with the Rulebook on Unique Classification of Accounts for the State Budget, State Funds and Municipal Budgets 1 and the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self-Government. Alongside the documentation and reports that were controlled in the Ministry of Finance - State Treasury, the audit included individual financial statements, records and documentation by spending units. 3. Audit Methods The audit was planned and carried out in accordance with International Standards on Auditing ISSAI, in a way that allows it to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether the business activities, financial transactions and information comply with legal, bylaws and other regulations. In the preparatory phase of the audit, it was carried out an identification and risk assessment, through an understanding of the audited entity and its environment, including internal controls. In addition, there was determined the materiality at the planning stage of financial audit for financial statements as a whole, i.e. the assessment of the extent to which it can be tolerated a misstatement in the financial statements, which will not significantly affect their fairness and objectivity. 4. Recording System Accounting system of the Budget of Montenegro is organized on the cash basis and the modified cash basis, which is in based on the records in the General Ledger of the Treasury kept in the Ministry of Finance and the accountancy of the spending units that make the basis for development of the Final Statement of Accounts of the Budget of Montenegro. According to the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self-Governments, financial statements are prepared before 31st March of the current year for the previous year. The following forms are used: Statement of Cash Flows I - economic classification, Statement of Cash Flows II - functional classification, Statement of Cash Flows III, Statement of Cash Flows IV, Statement of Arrears, Consolidated statement of spending unit with public institutions in its structure, Statement on the consolidated budget spending, Statement on the manner of spending funds after the expiry of the fiscal year and the Statement on the manner of spending the funds from the budget reserve. The Ministry of Finance has not provided the records in the General Ledger of the Treasury in accordance with the Regulation on Unified Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets. According to the findings of the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, as in previous years, the Ministry of Finance did not through the General Ledger system of the State Treasury, which, in accordance with Article 2 of the Law on Budget and Fiscal Responsibility, is the main double entry bookkeeping ledger, provide a complete record of balances and transactions in accounts of prescribed classes, therefore, in the audit process, the auditor used auxiliary records submitted by the Ministry of Finance, which were confirmed by the documentation from external sources. The Ministry of Finance has submitted the Excerpts of outstanding items ( IOS ) from commercial banks, which were mutually signed and certified, but there was a discrepancy of data on the cash balance as of 31 December 2015 reported in the IOS of the banks with the data reported in the Review i.e. the list of domestic bank accounts and the parties opened in the country and abroad. Control of arrears was based on the statement of arrears, prepared and submitted to the State Audit Institution by spending units. 1 Official Gazette of Montenegro, No. 23/

22 II PART IDENTIFIED FACTUAL FINDINGS Description 1. FINANCIAL STATEMENTS AND COMPUTATIONAL ACCURACY The audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 included the audit of the public spending structure through its execution, as well as the structure of financing and the reasons for the cash deficit. Starting from the data given in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015, the budget deficit was stated in the amount of 291,247,264.32, while the adjusted deficit amounted to 276,113,318.20, as presented in the following table: Table 1: Adjusted Deficit for 2015 Law on Budget of Montenegro for 2015 Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 Available Executed Funds Adjustment (+) Audit finding Adjustment (-) 1. Cash inflows 1,329,179, ,329,179, ,326,708, ,988, , ,327,711, Current income 1,317,513, ,317,513, ,312,180, ,924, , ,313,120, Taxes 832,672, ,672, ,537, ,537, Social protection contributions 417,492, ,492, ,288, ,288, Duties 16,902, ,902, ,154, ,154, Fees 13,478, ,478, ,630, ,630, Other inflows 36,966, ,966, ,569, ,924, , ,509, Repaid loans inflows 5,073, ,073, ,929, ,929, Donations and transfers 6,592, ,592, ,598, , ,662, Cash outflows 1,598,779, ,598,779, ,617,955, ,855, , ,619,933, Gross salaries and contributions payable by employer 379,363, ,047, ,177, ,177, Other personal earnings 11,950, ,842, ,740, , ,003, Material expenses 29,426, ,457, ,584, , , ,084, Services supplies 52,503, ,769, ,461, ,016, , ,351, On-going maintenance 20,826, ,966, ,121, , ,237, Interests 75,765, ,935, ,802, , ,860, Rents 8,327, ,436, ,918, , , ,885, Subsidies 21,251, ,601, ,618, , ,606, Other outflows 34,215, ,087, ,746, , , ,270, Social protection transfers 504,845, ,549, ,041, ,041, Transfers to institutions, individuals, non-governmental and public sector 128,294, ,753, ,226, , , ,447, Capital expenditures 282,892, ,754, ,488, , ,937, Granted borrowings and loans 2,250, ,000, ,975, ,975, Guarantees repayment outflows Repayment of liabilities from previous period 33,811, ,861, ,407, , ,410, Reserves 13,055, ,717, ,643, ,643, Cash deficit (1-2) -269,600, ,600, ,247, , , ,221, Primary deficit -193,834, ,664, ,444, , , ,360, Sources of financing cash deficit 269,600, ,600, ,247, , , ,221, Net borrowings 269,600, ,600, ,047, ,047, Borrowings and loans from domestic and foreign sources 634,081, ,081, ,790, ,790, Debt repayment 364,481, ,481, ,742, ,742, Sale of assets ,843, ,099, , ,858, Net cash flow change ,643, , , ,684, Net increase/reduction of liabilities ( ) 33,811, ,811, ,133, ,021, ,155, Liabilities as of 31 December 2015 (current) 33,811, ,811, ,120, ,021, ,098, Liabilities as of 31 December 2014 (previous) ,254, ,254, Corrected outflows ( ) 1,632,590, ,632,590, ,602,821, ,855, ,899, ,603,777, Cash inflows (1.) 1,329,179, ,329,179, ,326,708, ,988, , ,327,711, Modified cash deficit (11-10) -303,411, ,411, ,113, , , ,065, Deficit financing sources 303,411, ,411, ,113, , , ,065, Net borrowings 269,600, ,600, ,047, ,047, Sale of assets ,843, ,099, , ,858, Donations 13.4 Liabilities to suppliers 33,811, ,811, ,133, ,021, ,155, Net cash change ,643, , , ,684, Balance During the audit of the Proposal the Law on Final Statement of Accounts of the Budget of Montenegro 2015, the adjustments were made on receipts and expenditures, which were not materially significant, and related to public revenues, public expenditures, and sources of financing and adjustments of arrears

23 Adjustments of public revenues in the net amount of 1,003, relate to: - Increase of public revenues in the amount of 1,988, as follows: own revenues - revenues from its own activities in the amount of 1,832,158.48, donations 63,955.00, other revenues 8, and current revenues in the amount of 83, Decrease of public revenues in the amount of 984,912.98, which were recorded as other revenues, and should have been recorded as receipts from the sale of state assets. Adjustments of public expenditures in the net amount of 1,977,471.01, refer to: - Increase of expenses in the amount of 2,855, as follows: expenditures financed from own revenues of public institutions in the amount of 1,863,111.63, expenses that are not recorded in the General Ledger of the Treasury in the amount of 114, and expenses relating to non-purpose spending of funds in the amount of 877, Decrease in expenses in the amount of 877,766.34, relating to non-purpose spending of funds. Adjustments of sources of financing of public spending in the net amount of 974, relate to: - Increase of the sources of financing of public spending based on receipts from the sale of state assets in the amount of 1,099, on the grounds of: unrecorded inflows in the amount of 114, and receipts from the sale of state assets, which were recorded as other revenues in the amount of 984, Decrease of the sources of financing of public spending based on receipts from the sale of state assets in the amount of and by the same amount increased the current revenue budget - other revenues. Adjustments of outstanding liabilities stated in the Consolidated statement in the net amount of 1,021,777.33, refer to: - Decrease in the balance of arrears in the amount of 1,021, Compliance Audit of the Cash Flow Collection of Public Revenues - the State Audit Institution has audited the compliance of the budget receipts and expenditures, as well as financing transactions with the records expressed in the Central Bank of Montenegro. It was done by checking the cash inflows and outflows on the accounts intended for collection and distribution of public revenues. Collection of public revenues in Montenegro is performed in accordance with the Order on Public Revenues Payment Method, which prescribes the accounts, through which the funds are transferred to the Central account of the State Treasury by the spending units that collect public revenues - Customs Administration No (identification number 805), Tax Administration No (identification number 820), Ministry of Interior No (identification number 825) and Police Directorate No (identification number 840). The table below presents an overview of inflows into the clearing accounts and the transfer of funds to the Central Account of the State Treasury. Table 2: Collection of Public Revenues by Units CLEARING ACCOUNTS Transfer to the DESCRIPTION Balance Central account of Inflow Outflow Balance Difference 01/01/ /12/2015 the State Treasury Custom Administration ,298, ,298, ,542, ,756, of Montenegro Tax Administration of 24, ,741, ,765, ,305, ,460, Montenegro Ministry of Interior 7,620, ,620, ,615, , Police Administration 4,712, ,712, ,697, , Total 24, ,450,373, ,450,397, ,429,161, ,236,

24 According to the data of the Central Bank, the total amount of inflows in 2015 on the clearing accounts of the collecting units totalled to 1,450,373, (i.e. 1,450,397, including cash balance as of 1 January 2015), while the outflows totalled to 1,450,397, The funds in the amount of 1,429,161, were transferred from the clearing accounts to the Central Account of the State Treasury, i.e. reduced by 21,236, The difference in the funds transferred from the clearing accounts to the Central Account of the State Treasury in the amount of 21,236, refers to: Customs Administration in the amount of 3,756,294.66, for the reimbursement of erroneous payments, return of overpaid funds and reallocation of funds between spending units as income collectors, under the decisions of the Ministry of Finance - Customs Administration. During this period, it was performed the following: refund on parties' requests for overpaid funds - from the account of the Customs Administration No it was paid the amount of 384,652.06, refund of excise funds - from the account of the Customs Administration it was paid the amount of 3,272,371.08, and - 13 reallocated funds to Tax Administration in the amount of 99,271.52, for the settlement of tax liabilities. Tax Administration in the amount of 17,460,770.76, for the reimbursement of erroneous payments, return of overpaid funds to taxpayers on the following basis: VAT, excise duties on mineral oils and their derivatives, contributions to personal income tax, real estate sales tax and other tax liabilities. The Ministry of Interior in the amount of 5, for reimbursement of erroneous payments or overpaid funds by the requests of the parties, based on the decision of the Ministry of Interior, after checking of the request submission merits. Police Administration in the amount of 14, for the reimbursement of erroneous payments or overpaid funds upon the requests of the parties, based on the decision of the Ministry of Interior, after checking of the request submission merits. The inflow of funds to the Central State Treasury Account in 2015 amounted to 1,473,839, and referred to the inflow of revenue units in the amount of 1,429,161,215.97, inflow in the amount of 44,676, collected through the accounts of small revenue institutions (accounts ministries, other authorities and the judiciary that represent transaction accounts held within the Central State Treasury account) and other inflows in the amount of 1, The following table provides an overview of the inflow and outflow of funds from the Central State Treasury Account: Table 3: Collection and Allocation of Funds from the Central Account of the State Treasury CENTRAL ACCOUNT OF THE STATE TREASURY Customs Administration of Montenegro 523,542, ,319,382, State Treasury General Account Tax Administration of Montenegro 893,305, ,735, Municipalities Ministry of Interior 7,615, , Veterinary Chamber and Veterinary ambulances Police Administration 4,697, ,504, Equalization Fund Inflows by collecting units 1,429,161, ,198, PE Morsko dobro Accounts of the Ministries and other state 44,676, , Union of Municipalities administration authorities Other inflows 1, ,401, Refunds and reclaiming wrong payments II Total inflows 1,473,839, ,473,839, Total outflows Total inflow of 1,473,839, collected in the Central Account of the State Treasury was allocated as follows: a portion of 1,319,382, to the State Treasury General Account, a transfer of 39,735, to the municipalities, a portion of 283, to the Veterinary Chamber and Veterinary ambulances, a portion of 27,504, to the Equalization Fund, a transfer of 4,198, to PE Morsko dobro, a portion to the Union of Municipalities amounting ,72 and a portion of ,80 for refunds and reclaiming wrong payments

25 State Treasury General Account The overview of balance and turnover of funds on the account number State Treasury General Account, through which the payment and disbursement of public money were performed for the needs of the users of the budget at the expense of the funds planned by the annual budget law, is given in the following table: Table 4: Inflow and outflow from the State Treasury General Account STATE TREASURY GENERAL ACCOUNT Opening cash balance 6,732, ,582,690, Account outflows in 2015 Inflow from the Central Account 1,319,382, ,911, Closing cash balance Other inflows 260,486, Total 1,586,601, ,586,601, Total The inflow of funds into the State Treasury General Account from the Central Account of the State Treasury amounts to 1,319,382, by means of Revenue Module in the amount of 1,319,144, and direct payment (as of 31 December 2015) the amount of 237, Other inflow of funds to the State Treasury General Account amounted to 260,486,538.03, which relates to the direct payments to the Treasury General Account, as follows: the amount of 1,757,548.39, recorded as inflows to eco code 71; the amount of 5,768,135.97, recorded as inflow to eco code 73; the amount of 6,238,195.46, recorded as inflow to eco code 74; the amount of 49,415,935.97, registered as inflow to the eco-code 75; the amount of 195,150,349.83, refers to the transfer from the Central Bank account number , by order of the Ministry of Finance and recorded in class "1"; the amount of 1,150, paid to the General account of the State Treasury from the account of the Equalization Fund for the reimbursement of short-term borrowings. the amount of 1,006, explained by the Ministry of Finance that the inflow in the amount of 966, relates to the recovered funds recorded as expenditure. Funds allocated to municipalities in line with legal decisions, the funds in the amount of 39,735, were transferred to municipalities, as shown in the table below: Table 5: Allocations of funds from the Central Account of the State Treasury to Municipalities Report on Allocated Revenues from the Central Account of the State Treasury for the period of 01/01-31/12/ Podgorica 10,832, Cetinje 746, Danilovgrad 762, Nikšić 2,208, Šavnik 45, Plužine 621, Pljevlja 2,539, Žabljak 277, Berane 816, Plav 172, Rožaje 984, Andrijevica 234, Petnjica 77, Bijelo Polje 1,223, Mojkovac 294, Kolašin 548, Bar 3,409, Budva 5,079, Ulcinj 1,280, Herceg Novi 2,923, Tivat 2,119, Kotor 2,535, Total 39,735,

26 Veterinary Chamber and Veterinary Ambulances Funds the funds in the amount of 283, were allocated from the Central Account of the State Treasury to the Veterinary Chamber and Veterinary Ambulance in accordance with the Decision on the Amount of Fees for Veterinarysanitary Inspection in Domestic Trade 1. Equalization Fund 2 According to the records of the Central Bank, the opening balance of the account of the Equalization Fund, account number , amounted to 139, on 1 January The inflow in 2015 amounted to 28,874,379.59, while the outflow totalled at 28,537,334.32, with the closing balance of 476, on 31 December The funds in the account Equalization Fund in the amount of 28,874, were transferred as follows: a portion of 27,504, from the Central Account of the State Treasury, as a regular allocation of collected public revenues; the amount of 1,150, from the Treasury General Account, on the basis of short-term loans repayment, as well as from other accounts in the amount of 220, The outflow of funds was allocated as follows: 28,537, to the Central Account of the State Treasury, for the repayment of short-term loans amounting to 1,150,000.00, the amount of 27,197,539.13, to the accounts of municipalities and banks (on the basis of cession contracts and agreements on assignment), in line with the Plan on advance distribution of funds from the Equalization Fund to municipalities and in accordance with the Conclusion on final distribution of funds from the Equalization Fund. A total of 29, was paid to the bank accounts of individuals as remuneration for their engagement in the commissions. A total of 160, was transferred for the refund of payments made by mistake. PE Morsko dobro the amount of 4,198, was transferred from the Central Account of the State Treasury to the PE Morsko dobro. Union of Municipalities - the amount of 334, was transferred from the Central Account of the State Treasury to the Union of Municipalities. Refund and reallocation of funds - The outflow of funds from the Central Account of the State Treasury for the refunds, reclaiming wrong payments and reallocation of funds to other spending units that perform the collection of revenues, in the amount of 82,401, refer to: The amount of 169, for the refunds and diversion of funds paid into the accounts of "832" of the small revenue institutions (accounts of ministries, other administrative authorities and the judiciary), based on the decision of the Ministry of Finance. The amount of 81,232, refers to the outflow of funds from the Central Treasury Account for a refund of VAT credits in the amount of 53,893, and the diversion of funds to spending units that collect revenues in the amount of 27,339,220.05, based on the decision of the Ministry of Finance. The amount of 1,000, for the correction of errors in diverting funds from the Central Treasury Account on the account of the Customs Administration, thus diverting VAT credit for settling the VAT on imports General Ledger of the State Treasury General Ledger of the State Treasury - Turnover of funds recorded on the debit side of the General Ledger of the State Treasury amounted to 2,179,542,383.92, out of which 12,200, are deposits from the previous year. The amount of 1,319,144, are transferred revenues from the Central Account of the State Treasury, receipts recorded as direct payments to General account of the State Treasury in the amount of 62,986, (out of which 237, is the amount transferred from the Central account of the State Treasury as at 31 December 2015) and the receipts 1 Official Gazette of Montenegro, No. 06/11 2 According to the Law on Local Government Financing through the Equalisation Fund it was performed the financial equalization, i.e. equalization in municipal financing. Funds are provided from the revenues from personal income tax, property tax, the use of motor vehicles and from concession fees

27 evidenced by the decisions of the Ministry of Finance in the amount of 785,210, (out of which the reversed amount was 271,447.28, which referred to receipts from the sale of assets). The payments recorded in the General Ledger of the Treasury amounted to 2,159,698,670.16, while the cash at the end of a period amounted to 19,843,713.75, as given in the following table: Table 6: Inflows and Outflows of Funds Recorded in the General Ledger of the State Treasury General ledger of the State Treasury Transferred balance 12,200, ,177, Gross salaries and contributions paid by the employer Transfer from the Central State account of the state treasury (income module) 1,319,144, ,740, Other personal earnings Current revenues ,584, Expenses for materials Inflows from sale of assets 8,114, ,461, Expenses for services Inflows from repayment of loans 1,253, ,121, Maintenance costs Inflows from loans and borrowings ,802, Interest Direct payments 62,986, ,918, Rent Current revenue 1,564, Subsidies Proceeds from repayment of loans 5,768, Other expenditure Grants and transfers 6,238, ,836, Rights from the field of social protection Loans and borrowings 49,415, ,655, Redundancy funds Proceeds recorded through decisions of the Ministry of Finance 785,210, ,038, Rights from the field of pension and disability insurance Current revenue 839, ,450, Other rights in the field of health care Inflows from sale of assets 271, ,061, Other rights in the field of health insurance Proceeds from repayment of loans 907, ,771, Transfers to institutions, individuals, non-government and public sector Grants and transfers 359, , Other transfers Loans and borrowings 783,374, ,488, Capital expenditure 2,975, Loans and borrowings 541,742, Repayment of debt Repayment of guarantees 77,407, Repayment of liabilities from the previous period 16,643, Current budgetary reserve TOTAL INFLOW 2,167,341, ,159,698, TOTAL OUTFLOW TOTAL INFLOW + opening balance 2,179,542, ,843, Balance as of 31 December 2015 Total recorded inflows and outflows of funds in the General Ledger of the State Treasury correspond to the revenues and expenditures reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for Sources for Deficit Financing Sources for deficit financing are expressed for the cash and modified cash deficits. Sources for financing cash deficit are expressed through net borrowings and the inflows from the sale of property, which led to increase in deposit, while financing of the adjusted cash deficit was increased by net change of the arrears towards suppliers. Structure of the sources for deficit financing on the cash and modified cash basis is presented in the following table: Table 7: Structure of financing of cash and adjusted cash deficit in 2015 AMOUNTS DESCRIPTION Proposal of the Law on Final Statement of Accounts of the Law on Budget of 2015 Adjustments Determined by audit The cash budget deficit -291,247, , ,221, Increase in deposits -7,643, , ,684, TOTAL -298,890, ,015, ,905, Domestic sources of financing -46,461, ,461, Foreign sources of financing 337,508, ,508, Property sales 7,843, ,015, ,858, TOTAL 298,890, ,015, ,905, Adjusted cash budget deficit -276,113, , ,065, Increase in deposits -7,643, , ,684, TOTAL -283,756, , ,750, Domestic sources of financing -46,461, ,461, Foreign sources of financing 337,508, ,508, Property sales 7,843, ,015, ,858, Net adjustment in outstanding liabilities -15,133, ,021, ,155, TOTAL 283,756, , ,750, According to the data from the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, it was reported a deficit on a cash basis in the amount of 291,247,

28 and the increase in deposits in the amount of 7,643,234.49, which total amounts to 298,890, The financing of deficit and cash deposits was ensured through net borrowings in the amount of 291,047, and the sale of assets in the amount of 7,843, After the audit performed, it was determined that the cash deficit of the budget should be increased by 974,079.58, deposits by 41, and the inflows from the sale of assets by 1,015, With such an adjustment, the amount of cash deficit is recognized in the amount of 292,221,343.90, net change in cash in the amount of 7,684,564.29, and the inflows from the sale of assets in the amount of 8,858, Adjusted cash deficit reported in the Proposal of the Law on the Final Statement of Accounts of the Law of Budget of Montenegro for 2015 amounts to 276,113, After the audit, there were decreased the outstanding liabilities with the Employment Agency in the amount of 1,021,777.33, so that the net change in arrears amounts to 16,155, and adjusted deficit amounts to 276,065, Report on outstanding liabilities Opening balance of arrears net of repayment of arrears and increased by the increase in arrears, amounted to 77,120, If adjusted the expenditures reported on a cash basis, there shall be received the amount of adjusted deficit, as presented by the Proposal of Law on Final Statement of Accounts of the Budget of Montenegro for Table 8: Net changes of outstanding liabilities No. DESCRIPTION Liabilities on 31/12/2011 Difference Liabilities on 31/12/2012 Difference Liabilities on 31/12/2013 Difference Liabilities on 31/12/2014 Difference Liabilities on 31/12/ = = = = Liabilities for current expenditures ( ) 13,356, ,765, ,122, ,193, ,929, ,193, ,390, ,819, ,570, Liabilities for gross earnings and contributions charged to employer 487, ,423, ,910, , ,572, ,559, , , , Liabilities for other personal earnings 486, , ,000, , ,357, , ,100, , ,676, Liabilities for other current expenditure 12,383, ,828, ,211, ,211, ,999, , ,277, ,416, ,861, Liabilities for transfers for social welfare 41,426, ,679, ,105, ,600, ,706, ,818, ,524, ,862, ,661, Liabilities for transfers to institutions, individuals and creditors 5,664, ,623, ,287, ,127, ,415, ,092, ,507, ,605, ,902, Liabilities for capital expenditures 400, , , , , , , , , Liabilities for borrowings and loans 563, , , , , , , , , Liabilities based on debt repayment 477, , ,670, ,670, ,196, , , , Liabilities from reserves Balance of liabilities at the end of the year ( ) 61,889, ,835, ,724, ,363, ,088, ,165, ,254, ,133, ,120, Article 40 of the Law on Budget and Fiscal Responsibility stipulates that spending units are obliged to use the funds within the limits established by the annual Law on State Budget, while Article 5 of the Law on Budget of Montenegro for 2015 stipulates that a spending unit may contract the commitments up to the amount of funds that are, in accordance with the spending plan, approved by the Ministry of Finance. In accordance with item 20 of the Instructions on the State Treasury, spending organizations are required to prepare an annual review of outstanding commitments in order to determine the liabilities, which will be paid in the following fiscal year. Item 20 of the Instructions on the State Treasury stipulates that the arrears be considered liabilities for expenditures that were planned by the annual Budget Law, and were not paid within the maturity and repayment of arrears can be made for those liabilities that were previously recorded as arrears. Consolidated statement of arrears as of 31 December 2015, submitted by the Ministry of Finance, amounted to 77,120, Control of eleven spending units within the selected sample, found irregularities relating to: a) Misstatement of outstanding liabilities in the Consolidated statement of arrears, as follows:

29 In the Statement of arrears, the Employment Agency stated the outstanding liabilities in the amount of 1,021,777.33, referring to the organization of seminars in 2016 in the amount of 13, and services for the realization of contracted projects in the amount of 1,008,761.33, for which there were no debtor-creditor liability in The Ministry of Finance should adjust the data stated in the Statement on arrears. b) The liabilities arising from the legal regulations and concluded contracts, which are not planned by the Budget Law of Montenegro for 2015, stated as overdue as of 31 December 2015 in the amount of 934, as follows: Centre for Vocational Education did not plan the funds for financing salaries for teachers and material costs of organizers of elementary education for adults, defined by the Law on Adult Education 1. In order to implement the program of elementary education of adults, at the end of 2015, the related outstanding due liabilities were reported in the amount of 70, The Ministry of Agriculture and Rural Development, the Ministry for Information Society and Telecommunications, the Ministry of Sustainable Development and Tourism and the Ministry of Education and Sports, did not plan the funds for financing the third year of scientific research for which the above ministries undertook by agreements to finance the research projects and decisions on acceptance thereof, which led to the Ministry of Science having stated the matured but outstanding related liabilities in the amount of 363, The Ministry of Health has not adequately planned the funds for expenditure on other fees (4127) members of the working bodies formed by the Government and expenditures for consulting services (4127) for the co-financing of contracted research projects, and at the end of 2015, it reported overdue outstanding liabilities in the amount of 202, Employment Agency did not adequately plan the funds for financing the expenditure for other transfers (4318) and for financial aid to participants of measures and activities of professional rehabilitation, in accordance with the Law on professional rehabilitation and employment of persons with disabilities, and, as of the end of 2015, it stated the amount of 35, as due but outstanding liabilities. The Ministry of Agriculture did not plan the liabilities in the amount of 464, for contributions to the insured farmers, in accordance with the Regulation on exemptions for payment of contributions for compulsory social insurance of farmers (number dated 10 July 2008). It is necessary that spending units plan within the annual budget law the funds for settlement legally prescribed commitments and liabilities arising from the concluded multi-year contracts, in accordance with the Law on Budget and Fiscal Responsibility and Instructions on State Treasury. c) Outstanding liabilities referring to the contracting of liabilities exceeding the level of funds defined by the Law on Budget of Montenegro for 2015 in the amount of 391, as follows: The Ministry of Interior has contracted the liabilities in the net amount exceeding the approved funds by 304,593.90, relating to the procurement of administrative materials (4131) in the amount of 29,416.91, fuel supply (4135) in the amount of 245,934.04, lease of equipment (4172) in the amount of 11, and services for development and maintenance of software (4191) in the amount of 17, Official Gazette of Montenegro, No. 20/

30 Inspection Directorate has contracted the liabilities in the net amount of 14, in excess to the approved funds, relating to purchase of fuel (4135) in the amount of 1, and services for current maintenance of equipment (4153) in the amount of 13, The Ministry of Health has contracted the liabilities in the net amount of 2, for other services (4149) above the level of the approved funds. The Judiciary has contracted the liabilities in the amount exceeding the approved funds by 18,602.17, relating to the purchase of materials for special purposes in the amount of 6,819.38, for entertainment (4142) in the amount of 4,004.21, for the services of current maintenance of equipment (4153) in the amount of 7, The Ministry of Education has contracted the liabilities in the amount exceeding the approved funds by 49,747.63, for the fuel supply (4135). Employment Agency of Montenegro has contracted the liabilities in the amount exceeding the approved funds by 1,357.67, for copy services and data entry and processing (4149). It is necessary that the spending units, when contracting the liabilities, abide by the Law on Budget and Fiscal Responsibility and the amounts approved by the annual budget law Budgetary Overrun The audit has established the budgetary overrun in the amount of 280,811, in 2015, as presented in the table below: Table 9: Budgetary overruns DESCRIPTION AMOUNT TOTAL OVERRUN 280,811, Allowed overrun 261,583, Allowed overrun - the interests 19,338, Allowed overrun - repayment of principal debt 177,261, Allowed overrun - international agreements 26,068, Allowed overrun expenditures financed by the sale of state property 2,914, Repayments of outstanding liabilities 36,000, Unauthorized overrun 19,228, Unauthorized overrun- repayment of liabilities from the previous period 18,088, Expenditure on the purchase of securities 1,139, Out of the total expressed overrun of the budget spending, the amount of 261,583, was the allowed overrun for the expenditures related to the following: interest payments, repayment of the principal debt, expenditures financed through the implementation of international loan contracts, expenditures financed by the sale of state property as well as expenditures expressed as the repayment of arrears from the previous period. Allowed budgetary overruns are in accordance with Article 60 of the Law on the Budget and the Fiscal Responsibility and the Law on Budget of Unauthorized overruns in the amount of 19,228, refer to the expenses, which were not predicted by Law on the Budget for Expenditure based on the court rulings in the amount of 18,088,327.65, excluding the expenditures for court rulings of the Ministry of Finance, was carried out at the expense of the spending units, which caused the court costs. However, the Ministry of Finance did not reallocate funds to the expenditure position of the budget user, which caused these expenses up to the level of realization, as stipulated by Article 11 of the Budget Law for The amount of 1,139, refers to the expenditures for purchase of securities from the Investment Development Fund of Montenegro. The Directorate for Development of Small and Medium Sized Enterprises informed the Investment Development Fund on the amount of available funds, collected as the repayment of loans from the previous period, which should be invested into

31 the Fund capital, as stipulated by the Law on the Investment Development Fund. The audit found that the Budget Law for 2015 did not plan the funds for these purposes. Payments based on court decisions had to be brought into line with Article 11 of the Budget Law for 2015 in a way that from the planned funds of the Ministry of Finance, position repayment of liabilities from previous years, there shall be reallocated the funds to the side of the same position of a budget user that caused there expenditures, up to the amount of their execution. It is necessary to plan the funds from the repayment of loans granted by the Directorate for Development of Small and Medium Enterprises, intended for purchase of securities of the Investment Development Fund, in the annual budget law Reallocation of Funds Reallocation of funds - Based on the Conclusions of the Government of Montenegro, the funds were reallocated in the total amount of 42,029, among the spending units. Out of the foregoing amount, from the current budget reserve (whose total expenditure amounted to 16,643,694.03) to several spending units in the amount of 5,437,700.64, where the reallocated amount was by 3,773, in excess of the limit provided for in Article 45 of the budget and fiscal responsibility. It is necessary that the Government - Ministry of Finance, upon reallocation of the approved funds between the spending units, adheres to the limits laid down in Article 45 of the Law on Budget and Fiscal Responsibility. Reallocation of funds in the spending unit according to programs and individual expenditures the Ministry of Finance, at the request of spending units, conducted the reallocation of approved funds according to programs and individual expenditures in the amount of 30,550, On the controlled sample, there were identified the minor irregularities that were not materially significant Scope of Public Spending Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 presented "THE REPORT ON RECEIPTS AND EXPENDITURES OF PUBLIC INSTITUTIONS IN 2015 NOT INCLUDED IN THE CONSOLIDATED ACCOUNT OF THE STATE TREASURY". Based on examination of revenues from its own activities in five public institutions and on the data in the statement on cash flow IV, the State Audit Institution composed an overview of receipts and expenditures for public institutions as presented in the table below: Table 10: Overview of receipts and expenditures of public institutions, which are not included in Consolidated Account of the State Treasury DESCRIPTION Own revenues Earmarked revenues Cash inflows Donations Other inflows Total inflows Cash payments PE Examination Centre 36, , , Police Academy 318, , , Faculty for Montenegrin language and literature 3, , , Montenegrin National Theatre 149, , , , Royal Theatre Zetski Dom 50, , , National Library of Montenegro "Đurđe Crnojević" 43, , , Natural History Museum of Montenegro 40, , , PE Montenegrin Cinematheque 8, , , PE Music Centre of Montenegro 41, , , , Library for the Blind of Montenegro PE National Museum of Montenegro 387, , , , , Maritime Museum of Montenegro 81, , , PE Centre for Contemporary Art of Montenegro 8, , , Centre for conservation and archaeology of MNE 7, , , National Tourism Organisation of Montenegro 647, , ,416, ,338, Montenegrin Academy of Sciences and Arts 7, , PE Regional Centre for Divers Training - - Total 1,832, , , , ,673, ,631, In the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, it was identified that these spending units used their own income, income from their own

32 activities, in accordance with Article 7 paragraph 1 of the Law on Budget for 2015 to the level of generated income and that those were not included in the system of public expenditure, i.e. that those were not stated in Article 3 the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for Based on the data presented in the Table, it was established that the above mentioned public institutions generated cash receipts in the amount of 2,673, (own revenues in the amount of 1,832,158.48, earmarked revenues stated in the General Ledger of the Treasury of 768,736.72, donations amounting to 63, and other revenues in the amount of 8,328.33) and cash payments amounting to 2,631, (Expenditures financed from revenues in the amount of 768, are recorded in the Treasury's General Ledger). The balance of funds of public institutions as of 1 January 2015 was stated in the amount of 1,161, and the balance of funds in the accounts as of 31 December 2015 in the amount of 1,202, were not included in the cash balance in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for It presented the reserve of the cash balance of public institutions reported as of 31 December 2015 in the Statement of Cash Flows, Form IV, because certain public institutions reported at the end of the year the cash balance that included the funds that were, upon the requests for payment by the spending units, transferred to the accounts of public institutions. Revenues of public institutions that are not included in the system of public expenditure amount to 1,904, and refer to: own revenues, i.e. the revenues from its own activities, in the amount of 1,832,158.48, revenues from donations in the amount of 63,955.00, and other income in the amount of 8, Expenditures of public institutions that are not included in the system of public expenditures amount to 1,863, and are presented in the following table according to economic classification. Table 11: Review of expenditures of public institutions not included in the Consolidated Treasury Account DESCRIPTION Other personal income Material expenses Services expenses Maintenan ce costs Interest Rent Other expenditur Transfers es Capital expenditur es Debt repayment S PI Examination Centre 3, , , , , Police Academy 40, , , , , , , Faculty for Montenegrin language and 1, , , literature MNE National Theatre 39, , , , , Royal Theatre Zetski Dom 46, , National Library of MNE "Đurđe Crnojević" 13, , , , , Natural History Museum of MNE 1, , , , , , PI Montenegrin Cinematheque 2, , , PI Music Centre of Montenegro 13, , , , , Library for the Blind of MNE PI National Museum of MNE 17, , , , , , , , , Maritime Museum of MNE , , , , , , , , PI Centre for Contemporary Art of MNE 7, ,77 7, PI Centre for conservation and 27, , , archaeology of MNE National Tourism Organisation of MNE 65, , , , , , , , MNE Academy of Sciences and Arts PI Regional Centre for Divers Training Total 261, , , , , , , , , , ,863, Total

33 2. CASH DEPOSITS The State Audit Institution confirmed the cash deposits on bank accounts opened with the Central Bank of Montenegro, as well as with the commercial banks where the accounts or sub-accounts were opened. Cash presented in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 has been confirmed based on the data and documentation obtained from the Ministry of Finance (State Treasury Directorate and Department for Debt Management, Analysis of Debt, Cash Management and International Relations) and the Excerpt of the open items (hereinafter referred to as: IOS Form) obtained from the Central Bank and the commercial banks. Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, page 176, stated the balance of deposits as of 31 December 2015 in the amount of mil., and ounces of gold at a market price of mil., totalling mil. The following table provides an overview of the balances of funds as of 31 December 2015 stated in the Proposal of Law on Final Statement of Accounts of the Budget of Montenegro for 2015 and the funds in bank accounts as follows: Table 12: Balance of deposits as of 31 December 2015 No. Bank Proposal of the Law on Final Statement of Accounts as of 31 December 2015 Balance of deposits at the accounts as of 31 December 2015 Deposits at the Unused funds of the accounts Of the state funds as of 31 December 2015 budgetary users as of 31 December 2015 TOTAL Amount of funds as Amount of Funds as of 31 December of 31 December of the according to data spending units and obtained from the state funds banks (IOS forms) according to data PIB-MF from MF TOTAL Funds held with bank accounts Funds not disclosed in Proposal of the Law on Final Statement of Accounts as of 31 December Central Bank of Montenegro 14,698, ,698, ,747, ,747, ,049, Crnogorska komercijalna banka 214, , , ,740, , ,397, ,974, NLB Montenegro banka - 10, , ,150, , ,861, ,851, Prva banka Crne Gore 69, , ,238, , ,864, ,794, Erste banka 3,000, ,000, ,555, ,555, ,555, Podgorička banka 7, , , ,683, ,998, ,991, Komercijalna banka a.d. Budva , , , Hypo Alpe Adria banka - - 1,822, ,822, ,822, Hipotekarna banka - - 7, , , , Atlas banka 114, , , , , , Invest banka Montenegro Unused funds of the spending units 1,519, ,519, Directorate for small and medium enterprises 907, , Total 18,105, , ,519, ,843, ,273, ,876,076.3S 75,149,521,04 5S,305, The audit identified that the funds of deposits, stated in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 in the amount of 19,843,713.81, are on the accounts held with the Central Bank of Montenegro in the amount of 14,698, and the accounts held with commercial banks in the amount of 5,144, The balance of funds on the bank accounts/parties of the spending units and state funds, according to the Review a list of state bank accounts and open parties in the country and abroad submitted by the Ministry of Finance, amounts to 4,876,076.35, US , CHF , DDK and , The above amount includes funds of the Directorate for Development of Small and Medium Enterprises in the amount of 907,910.38, relating to the repayment of loans. Deposit funds, stated in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 in the amount of 19,843, relate to: I. The funds at the accounts of the Ministry of Finance - Balance as of 31 December 2015 on the accounts of the Ministry of Finance amounted to 18,105,093.84, and those were held with the following banks: a. Central Bank of Montenegro in the amount of 14,698,742.68, which relate to: General State Treasury Account number in the amount of 3,911,766.31; Demand deposit of EUROBOND securities in the amount of 10,726,330,66, which refers to the deposit of the Ministry of Finance achieved by issuing Eurobonds in the amount of

34 10,657, and the means of advances received from residents in the amount of 64,858.88, Funds in the amount of 3, are not stated on the IOS of the bank, which were identified in 2016 as a deposit of Eurobonds, Funds in the amount of 68, are recorded in the Treasury's General Ledger as an increase in deposits pursuant to the Decision No /1 dated 1 February Funds for repayment of the foreign currency savings in the amount 60,645.71, relating to the advance payments and payment of old foreign currency savings are held at the bank account. The result of harmonizing the status of funds with the bank's records is an evidence of the increase in deposits, according to the Decision of the Ministry of Finance No /1 as of 26 January 2016, in the amount of 16, b. Montenegrin Commercial bank in the amount of 214,681.14, referring to: Collateral for 14 credit lines in the amount of 67,904.03, according to the Arrangement on the provision of credit lines to support the Programme "Legalization of Existing and Opening New Positions" number The Government of Montenegro provided an amount of 1,000, as a deposit for interest subvention on granted loans. Funds for payment of foreign currency savings in the amount of 146,833,64 were recorded in the General Ledger of the Treasury, pursuant to a decision of the Ministry of Finance number /1 dated 26 January 2016 as an increase in deposits. Opening balance of these accounts was not recognized as a deposit as of 31 December c. Prva banka in the amount of 69,983.93, and refers to the funds for payment of foreign currency savings in the amount of 69,983.93, which are, pursuant to the Decision No dated 9 February 2016, recorded as an increase in deposits. These amounts are not shown on the IOS of the bank and have not been the subject of harmonization with the bank. d. Erste Bank in the amount of 3,000, The funds refer to the purpose term deposit placed by the Government of Montenegro pursuant to the Agreement on term deposit number / concluded between Erste Bank a.d. Podgorica and the Ministry of Finance as of 18 March 2015, for the security of the loans granted by Erste Bank of Austria. e. Podgorička banka (Societe Generale Banka Montenegro) in the amount of 7,421.70, referring to the funds for repayment of the foreign currency savings. Opening balance on this account amounted to 12,224.81, payments in ,803.11, for which the amount, pursuant to the Decision No dated 27 January 2016, a decrease in deposits was recorded, so that the balance as of 31 December 2015 amounted to 7, f. Atlas Banka in the amount of 114,264.39, relating to the funds for repayment of foreign currency savings in the amount of 114,264.39, as a result of approved advance and payments made on the basis of old foreign currency savings, for which the amount, pursuant to the Decision No /1 dated 8 February 2016, an increase in deposits was recorded. II. Funds in the accounts of state funds the balance of funds as of 31 December 2015, which are kept in the accounts of state funds amounted to 218,921.87, with the following banks: a. Montenegrin commercial bank in the amount of 208, refer to: Pension and Disability Insurance Fund/collateral in the amount of 121, According to the Earmarked Deposit Contract No /2 dated 11 August 2006, the funds amounting 115, were deposited as earmarked credit funds for covering loans granted to the employees. Pursuant to the Decision of the Ministry of Finance number /1 dated

35 January 2016, it was recorded a decrease in deposits at the expense of budget position repayment of liabilities from the previous period, due to irregular repayment of loan liabilities by employees. The amount of 1, was recorded as an increase in demand deposit arising from interest collection, in accordance with the Decision of the Ministry of Finance No /1 as of 29 January Health Insurance Fund/collateral in the amount of 17, Under the provisions of the Earmarked Deposit Contract No as of 20 November 2009, the funds amounting 20, were deposited as an earmarked deposit for covering Loan Contracts No , and Health Insurance Fund/ collateral in the amount of 46, Based on the Term Deposit Contract No as of 4 August 2004 and the Annex to the Contract, Annex No as of 20 November 2009, the funds amounting to 40, were deposited as an earmarked collateral for credits under the contracts No and The Decision of the Ministry of Finance No /1 as of 29 January 2016 recorded the inflow of funds in the position payment of liabilities from the previous period, due to irregular repayment of loan liabilities by employees, Pursuant to the Decision No /1 dated 29 January 2016, it was recorded an increase in deposits and inflow of funds to the position Interest receipts. Health Insurance Fund/collateral in the amount of 30, Based on the Term Deposit Contract No. 03 as of 3 January 2007 and Annex No. 3 as of 14 April 2008, the funds amounting to 30, were deposited as an earmarked collateral deposit for the credits under the Contract No as of 14 April b. NLB Montenegrobanka in the amount of 10,150.79, referring to: Pension and Disability Insurance Fund/collateral in the amount of 10,150.79, according to the Agreement on earmarked deposit number dated 1 July 2009, which was drawn up under Article 1 of the Agreement on time deposit DP 2008/671 and Annex I and Annex II, under which the funds were deposited in the amount of 10,000.00, as a designated deposit for the loans to employees. III. Budget Users' Unspent Funds - Deposit balance on 31 December 2015 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 amounts to 1,519, and is related to: Deposits of the Embassies in the amount of 231,376.66, which are pursuant to the decisions recorded as inflow in the Treasury's General Ledger and those relate to income from the collection of consular fees and interest. The funds of the Ministry of Foreign Affairs and European Integration in the amount of 76,438.70, related to unspent funds on 31 January 2016, according to the Form 8 Statement on the manner of spending funds after the expiry of the fiscal year, The funds of the Ministry of Culture in the amount of related to unspent funds on 31 January 2016, The funds of the Directorate for Development of Small and Medium Sized Enterprises in the amount of 907, related to repayment of loans and kept in the accounts with commercial banks. In the Decision of the Ministry of Finance No /11 as of 3 February 2016, the funds were recorded as an inflow into the position 7311-Receipts from repayment of Credits

36 The funds of the Centre for Conservation and Archaeology in the amount of 7,919.39, related to unspent funds on 31 January 2016, and according to the letter of the Centre for Conservation and Archaeology No as of 21 January 2016, the funds were not spent from the group of accounts 4131, 4144, 4147, 4152 and The Ministry of Agriculture and Rural Development in the amount of 5,206.53, which related to unspent budget funds as of 31 January 2016, according to the Form 8 - Declaration on the manner of expenditure of funds after the end of the fiscal year. Pursuant to the Decision of the Ministry of Finance number /1 dated 22 February 2016, it was recorded an increase in deposits. Music Centre of Montenegro in the amount of 60.40, which related to unspent budget funds as of 31 January 2016 in accordance with the Form 8 - Declaration on the manner of expenditure of funds after the end of the fiscal year. Pursuant to the Decision of the Ministry of Finance number /1 dated 22 February 2016, it was recorded an increase in deposits. The Ministry of Sustainable Development and Tourism in the amount of 290,146.07, which, pursuant to the Decision of the Ministry of Finance number /1 dated 18 January 2016, was recorded as an increase in deposits, The funds are on the account number account for conducting public tenders of the Ministry of Sustainable Development and Tourism, which is held with Prva banka. The audit of cash deposits identified that the Ministry of Finance did not provide in the General Ledger of the Treasury a complete record of the balances and transactions on accounts of the class "1". IV. The audit covered the control of individual accounts held with the Central Bank and commercial banks, namely: a. The account for collection of due and unpaid taxes and contributions number held with the Central Bank of Montenegro on the basis of the Regulation on collection of due but unpaid taxes and contributions and other public duties 1, managed by the Ministry of Finance. This Regulation established the conditions and method of payment of due and unpaid liabilities for taxes, contributions for compulsory social insurance and other public revenues, except for value added tax (VAT), incurred up to 31 December According to the Central Bank data, the balance on the account as of 31 January 2015 amounted to 222, In 2015, the inflow of funds (from the Settlement account with the Tax Administration ) amounted to 2,838.14, and the outflow of funds to the transaction account of the Tax Administration 225,049.11, so that there were no funds as of 31 December Pursuant to the Decisions from 2015, the Ministry of Finance performed allocation of funds to the transaction accounts of the Tax Administration, i.e. pursuant to the Decision No /1 dated 30 December 2015, it was performed the allocation of funds in relevant percentages to the accounts of the funds in the amount of 195, b. Solidarity funds for damages caused by natural disasters, Number held with Podgorička banka. After a review of the documents, it was found that the account was used for payment of funds to final beneficiaries on the basis of the decisions of the Commission for assessment of the damages caused by natural disasters, which was established by the 1 Official Gazette of the Republic of Montenegro, No. 24/

37 Decision of the Government of Montenegro No /3 dated 23 January , while the authorized person was the Secretary to the Commission. Account Balance as at 1 January 2015 amounted to 48, In 2015, the inflow of funds in the amount of 185, was transferred to the General Account of the State Treasury on the basis of the payment requests upon the five Decisions of the Commission to assess the damage of the natural disasters from 2015 (No dated 18 February 2015, dated 16 March 2015, dated 12 May 2015, and dated 11 February 2015). The outflow of funds from the account in 2015 related to payments to final beneficiaries in the amount of 163,838.00, so that the account balance as of 31 December 2015 amounted to 70, The outflow of funds in the amount of 163, was carried out in such a way that the funds in the amount of 96, were paid to the end beneficiary based on the decisions of the Commission to assess the damage from the natural disasters of 2015, i.e. the funds were not fully paid upon these decisions by which the withdrawals were performed from the General account of the State Treasury. Funds in the amount of 38, were paid to end beneficiaries on the basis of the four decisions of the Commission to assess the damage from natural disasters ( dated 23 March 2015, dated 14 May 2015, dated 24 July 2015, and dated 27 October 2015), for which no payment request was submitted. Funds in the amount of 28, were paid on the basis of outstanding liabilities from the previous period. After a review of the documents, it was identified that the use of the funds, i.e. payments from this account were done on the basis of four decisions of the Commission to assess the damage from natural disasters for which there were no requests for budget spending submitted, which is not in accordance with the annual budget law, nor were the payments approved in accordance with the procedures prescribed by the Instruction on State Treasury. c. Accounts opened for the needs of the Customs Administration - According to data obtained from the commercial banks, the Customs Administration, a body within the Ministry of Finance, has opened 13 bank accounts/parties. Customs Administration uses five accounts, while seven other accounts are kept with the banks as accounts of the Customs Administration through which no transactions were carried out for the needs of the Customs Administration in Business transactions through the five accounts, carried out upon order and on behalf of the Customs Administration, related to the cash deposit until the completion of customs procedures, payment of the customs debt (tax on coffee), collections of revenues from the sale of customs goods at public auctions, payment of expenses related to the implementation of public auctions. Collected funds were not fully disclosed as receipts of the budget (partly carried out the transfer of the collecting accounts of the Customs Administration prescribed by the Order on public revenue collection), while the paid expenses were not reported as expenditure in the budget. The funds in government bank accounts, in all cases, are not used in accordance with the annual Budget Law, and in accordance with regulations governing the field for which purpose the government accounts are used. d. Turnover of funds from donations through the state accounts with the Central Bank and commercial banks - Upon the audit performance, it was found that, as of 31 December 2015, the government has opened 295 government accounts with the Central Bank of Montenegro 1 Official Gazette of the Republic of Montenegro, No. 5/

38 and with eight commercial banks through which, in addition to the General Account of the State Treasury, the financial transactions related to donations funds were conducted. Based on the Overview the list of government bank accounts, submitted by the Ministry of Finance (Act No /2), it was identified the balance of funds from donations in the accounts as follows: Table 13: Balance of funds from donations on the accounts with the Central Bank and commercial banks EUR USD NOK CHF Balance as of 1 January ,565, , Inflows in ,228, , , , Outflows in ,006, ,050, , Balance as of 31 December ,787, , , Stated balance as of 1 January 2015 amounted to 18,565, and is different from the stated balance of funds as of 31 December Namely, in the Report on the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2014, the identified balance amounted to 17,986,945.69, which was agreed with the Ministry of Finance. Also, based on the IOS forms, submitted by the Central Bank and the commercial banks, it was found the non-compliance of data on the cash balance as of 31 December 2015 reported in the IOS forms (which are mutually stamped and signed) with the data in the Overview - the list of state bank accounts, submitted by the Ministry of Finance. Total turnover on the inflow side in these accounts in 2015 amounted to 5,228,152.65, $729,018.36, NQF 120, and CHF 2,500.00, Inflows in the accounts relate to inflows from donors, inflows from the conversion to euro currency from accounts and parties in other currencies, as well as the movement of funds within parties on various grounds (loans, transfer funds from one account to another, carried out at the request of spending units and the approval of the Ministry of Finance and errors in the implementation of the issued orders for the transfer). Total turnover on the outflow side in these accounts in 2015 amounted to 8,006,132.43, $1,050, and NOK 120, Outflows from foreign currency accounts related to the conversion of currencies ($1,050, and NOK 120,000.00). Outflows for transfers of funds from the state bank accounts related to: The transfer of funds to the General account of the State Treasury in the amount of 6,238,195.46, which is recorded as inflow in the Treasury's General Ledger; The outflow of funds in the amount of 5,18.97 on behalf of the banking commissions of domestic bank charges collected by the Bank, which is recorded in the General Ledger of the Treasury both on the inflow and the outflow side; The transfer of funds to municipalities in the amount of 1,074,174.65, for the realization of the project of construction of the main collector in the Municipality of Pljevlja and the development of a system for wastewater management and water supply construction project in Cetinje; Returns of funds to the donor in the amount of 532,600.92; The outflow of funds in the amount of 11,756.58, for which, in earlier periods, it was performed the transfer of funds to the General account of the State Treasury; The outflow of funds in the amount of 3, on behalf of the banking commission of domestic bank charges collected by the bank, which was not recorded in the General Ledger of the Treasury; The outflow of funds in the amount of 140,803.79, which refers to the transfer of money on the basis of borrowings at the request of spending units approved by order of the Ministry of Finance, errors in processing of orders given to banks),

39 e. Turnover of funds from loans and borrowings in state accounts of the Central Bank and commercial banks - In the process of audit, it was found that, as of 31 December 2015, the government has opened 19 state accounts with two commercial banks through which, in addition to the General Account of the State Treasury, the financial transactions related to loans and borrowings were conducted. Based on data obtained from the Ministry of Finance, it was established the balance and transactions of funds from loans and borrowings in the accounts as follows: Table 14: Balance of funds from loan and borrowings in the accounts with the Central Bank and commercial banks EUR US Balance as of 1 January ,015, , Inflows in ,504, Outflows in ,944, , Balance as of 31 December ,575, Balance as of 1 January 2015 amounts to 14,015,408.36, while the balance as of 31 December 2014, stated in the Report of the audit of Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2014 and confirmed by the Ministry of Finance, amounted to 14,011, Total transactions on the inflow side in these accounts in 2015 amounted to 18,504, and $ The inflows in the accounts are based on withdrawal of funds from creditors and from returns of granted loans to the account Total transactions on the outflows side in 2015 amounted to 16,944, and $51, The amount of $51, was returned to the creditor - World Bank, pursuant to the Decision of the Ministry of Finance /1 dated 4 February 2015, including the bank commission. Outflows based on the transfer of funds from the state bank accounts related to: The amount of returned to the creditor - World Bank after the Decision of the Ministry of Finance /1 dated 4 February 2015; The amount of 369, was returned to the creditor - World Bank; The amount of 66, was transferred to the account of Deponija d.o.o. Podgorica, under the Agreement on loan funds forwarding number dated 6 September 2013; The amount of 381, on behalf of the paid principal and interest related to the implementation of the International Agreement between the Government of the Republic of Poland and the Council of Ministers of the Government of Serbia and Montenegro on providing loans to a related aid, within which are legal entities from Montenegro concluded contracts with production companies from Poland, as well as loan agreements with CKB, with the exception of Željeznice Crne Gore for which the Government of Montenegro assumed the commitment of repayment. It is stated in the letter that the Bank Gospodarstwa Krajowego submitted a request for payment of interest and principal even on the part of the funds for promotion of the development of agriculture that were due as of 15 December CKB charged related interest in accordance with the Agreement on commission concluded with the Ministry of Agriculture as at 20 October These transactions were not recorded in the General Ledger of the Treasury. Upon the orders of the Ministry of Finance, the amount of 3,085, was transferred to municipalities and other legal entities in order to implement the project "Montenegro Water and repair C". Those financial transactions are not recorded in the General Ledger of the Treasury;

40 The amount of 7, applies to the banking commission in the domestic payment system, charged by the bank, which are not recorded in the Treasury's General Ledger; The amount of funds of 13,018, was transferred to the General Account of Treasury and recorded in class 7 in the Treasury's General Ledger. f. Balance of funds in accounts held with commercial banks under the Project "1000+ flats" - In accordance with Article 3 of the Agreement on cooperation in the implementation of the Project flats concluded between commercial banks and the Government of Montenegro in 2011, funds from loan of the CEB shall be deposited with the banks for a period of 20 years with a grace period of 5 years, during which the Government of Montenegro, as the depositor, shall be paid the interest. The bank will repay the funds (including principal and interest) at the end of the grace period, carried out in 15 equal instalments. Total receivables of the Government of Montenegro on the basis of a cooperation agreement on the implementation of the foregoing project, according to IOS of the banks that are not fully reconciled as at 31 December 2015 for the amount of 9,079,159.75, as given in the following table: Table 15: Balance of receivables under the Project flats as of 31 December 2015 Balance of funds on the IOS forms as of 31 December 2015 Amount Crnogorska komercijalna banka 1,330, Erste banka 2,231, Hypo Alpe Adria banka 1,783, Komercijalna banka a.d. Budva 456, NLB Montenegro banka 3,277, Total 9,079, Based on the information and documentation submitted by the Ministry of Finance and submitted Excerpts of open items ( IOS forms) by the Central Bank and the commercial banks, it was found that the balance of the state accounts as of 31 December 2015 comprised the funds from donations and IPA funds in the amount of 15,787,596.93, funds from loans and borrowings in the amount of 15,575, and the funds deposited under the Project " flats" in the amount of 9,079, It is recommended that, in the proposal of the Law on Final Statement of Accounts of the Law of the Budget of Montenegro, there shall be stated the amounts withdrawn, but unspent at of the end of the year at all the accounts held with commercial banks, as a specific amount that has a pre-determined purpose. 3. FINAL STATEMENT OF ACCOUNTS OF THE TAX AUTHORITY The tax authority has prepared the Final Statement of Accounts of the Tax Authority for 2015, for the period from 1 January 2015 until 31 December 2015, which was submitted to the Ministry of Finance by the document No. 03/1-7719/1-16 dated 6 May 2015, which is not in accordance with Article 19 of the Rules on the tax bookkeeping, which established that the Tax authority should be obliged to submit the Final Statement of Accounts to the Ministry of Finance by 31 March of the current year for the previous year. The audit has found that the method of keeping accounting records of public revenues, the manner of accounting records and initializing the opening balance does not comply with the Rules on the tax bookkeeping. Final Statement of Accounts of the Tax Authority does not provide reliable information on the amount of the tax debt and the amount of prepaid funds as of 1 January 2015 and as of 31 December In accordance with the factual findings of the audit, the State Audit Institution, as in previous years, recommended the Ministry of Finance - Tax Administration to provide accounting records complied with the Rules on the tax bookkeeping,

41 Report on deferred tax and non-tax claims - The Regulation on conditions for deferred collecting of the tax and non-tax claims 1, lays down the conditions and deadlines for issuing permission to taxpayers to defer payments of tax and non-tax debt due and payable. According to Article 3 of the Regulation, upon the request submitted by the taxpayer, the Ministry of Finance shall grant deferral of the tax liability. The Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 included the Report on deferred tax and non-tax receivables for the period 1 January - 31 December 2015, which reported deferred payment in instalments for 65 legal and physical entities in the total amount of 14,317, A control of the Report on deferred tax and non-tax receivables carried out through a review of the decision of the Ministry of Finance in the Customs Administration and the Tax Administration, and thus it was established that the Ministry of Finance approved a deferral of the settlement of liabilities in the amount of 14,384, as follows: Tax Administration (based on 62 decisions) in the amount of 13,858, Customs Administration (based on 4 decisions) in the amount of 526, The report on deferred tax and non-tax receivables for the period from 1 January to 31 December 2015 did not comprise the Decision No /1/1 dated 6 October 2015, which approved the payment of liabilities based on contributions on personal income of AST" DOO in the amount of 66, By controlling the decision on deferred settlement of tax and non-tax receivables, it was determined that all debt deferral (4 decisions in the amount of 186,968.37) were not granted on condition that the taxpayer has provided a bank guarantee or other security instrument in the amount of the arrears, which is not in accordance with Article 2 of the Regulation on conditions for deferral of collection of tax and non-tax receivables. It is recommended to the Ministry of Finance to comply with the Regulation on conditions for deferred settlement of tax and non-tax receivables. 4. BUDGET RECEIPTS Budget receipts generated in 2013 and 2014 and receipts reported in the Proposal Law on the Final Statement of Accounts of the Budget for 2015, in accordance with Article 5 of the Law on the Budget and Fiscal Responsibility are presented in the following table: Table 16: Budget Receipts Economic classification 2013 Final Statement of Budget Accounts 2014 Final Statement of Budget Accounts 2015 Final Statement of Budget Accounts Index achieved 2014/2013 Index achieved 2015/ Current revenues 1,228,279, ,339,592, ,312,180, Proceeds from sale of assets 11,948, ,691, ,843, Proceeds from repayment of loans 8,633, ,522, ,929, Donations and transfers 6,614, ,554, ,598, Borrowings and Loans 333,867, ,749, ,790, TOTAL 1,589,342, ,896,110, ,167,341, The total amount of budget receipts generated in 2015 exceeded the amount of receipts generated in 2014 by 14.30%. The table below shows the overview of generated receipts as recorded in the General Ledger of the Treasury, through the Revenue collection module, as follows: 1 Official Gazette of Montenegro, No. 67/09, 23/10, 26/10 and 53/

42 Table 17: Revenues collected Budget Execution Manner of revenue collection Economic classification Direct payments to the Recorded by the Revenue Module General account of the Decisions of the Treasury Ministry of Finance 71 Current revenue 1,312,180, ,309,776, ,564, , Proceeds from sale of assets 7,843, ,843, Proceeds from repayment of 7,929, ,253, ,768, , loans 74 Donations and transfers 6,598, ,238, , Borrowings and Loans 832,790, ,415, ,374, Total 2,167,341, ,318,873, ,986, ,481, Revenues collected in the amount of 2,167,341, show that the structure of the revenue collection per revenue units corresponds to the funds registered in the Treasury's General Ledger as shown in the following table: Table 18: The structure of the revenue collection per revenue units Ec, Cl, Description Proposal of the Tax Administration Final Statement of Accounts for 2015 Customs Administration Ministries and other institutions Ministry of Interior Police Directorate Total revenue generating units 7 Inflow 816,677,424,40 448,186, ,754, ,025, ,697, ,167341, Source revenues 816,677,424,40 448,186, ,522, ,025, ,697, , Current revenues 1,312,180, ,677,424,40 448,186, ,592, ,025, ,697, , Taxes 805,537, ,540,843,87 447,996, B05,537, Contributions 437,288, ,288,820,67 437,288, Fees 13,154,413, ,10 44, , ,197, , ,154, Compensations 29,630, ,473, ,156, ,630, & Other income 26,569, ,025,76 145, ,412, ,828, ,532, ,569,763, Proceeds from sale of assets 7,843, ,543, , Proceeds from repayment of 7,929, ,929, , loans 74 Grants and transfers 6,598, ,598, ,063,90 75 Loans and borrowings 832,790, ,790, ,790, Total 2,167,341, ,677, ,186, ,754, ,025, ,697, ,167,341, Current Revenues According to data reported in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, the current revenues amounted to 1,312,180, The structure of current revenues in accordance with the manner of collection of revenue is as follows: Current revenue in the amount of 1,309,776, relate to the revenues collected and distributed through the Revenue module, in accordance with the Order of manner of payment of public revenues; funds in the amount of 1,564, as direct payments to the General account of the State Treasury, while the amount of 839, was recorded in the General Ledger of the Treasury on the basis of the decision of the Ministry of Finance. The audit covered the other revenues recorded on the group account 715, which are, according to the Budget Law for 2015 planned in the amount of 36,966,986.34, while in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 those were stated in the amount of 26,569,763.29, Those revenues are recorded in the General Ledger of the Treasury as follows: Transfer of funds through Revenue module in the amount of 24,818, and refer to the collection of other revenues from the spending units that carry out the collection of revenues; By payments to the General account of the State Treasury in the amount of 1,382,000.81, with the identification of the payments made on the basis of the contents of the bank MT103 message. In the General Ledger of the Treasury thus were recorded the following: - Funds amounting to 327,355.99, relating to revenues from rentals, interests on deposits and receipts from net corporate income;

43 - Funds in the amount of 1,061,647.52, which relate to payments made to the General account of the State Treasury, where, according to the responsible persons, it may not make a positive identification of revenues in order to ensure adequate records. By records of the revenues, based on the decision of the Ministry of Finance, in the amount of 362, which relate to: - Interest income on deposits, income from positive interests on consular accounts and the positive interest from deposits and transfers in the amount of 72,069.17; - Revenues generated by issuing urban and architectural competitions in the amount of 290, Receipts from the sale of property The Law on Budget for 2015 did not plan the proceeds from the sale of assets, while in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 those were stated in the amount of 7,843, Inflow of funds from the revenue accounts intended for collection of income were paid on the General account of the State Treasury in the amount of 9,108, and recorded in the General Ledger of the Treasury in the accounts as presented in the following table: Table 19: Receipts from the sales of state property Receipts from Unrecorded in the Other current income Spending Unit property sale Total General Ledger of the Treasury Ministry of Defence 4,335, ,335, , Ministry of Finance 395, , Privatization Council 762, ,601, ,363, , Restitution Fund 231, , , Ministry of Interior 2, , Total 993, ,843, ,836, , The difference between the funds paid to the General Account of Treasury and the inflow recorded in the General Ledger of the Treasury in the amount of 271, refers to funds that are cancelled by the decision of the Ministry of Finance, on the ground that the foregoing amount was recorded as an inflow in Having reviewed the accounts with commercial banks, it was identified that proceeds from the sale of state property in the amount of 121, are not recorded in the General Ledger of the Treasury in accordance with Article 9 of the Law on Budget and Fiscal Responsibility, and relate to: funds of the Ministry of Defence, paid as at 17 March 2015, as advance payments in accordance with the commission contract, in the amount of 7, ($7,482.20), which are on the foreign currency account of the Ministry of Finance; funds in the amount of 114, paid to the lawyer's office on behalf of consultancy services are recorded neither as inflow from the sale of state property nor as expenses for services rendered. The inflow of funds in the account of the Ministry of Finance - Directorate for Property and Legal Affairs in the amount of 15,000.00, collected from customers on behalf of fees for the work of commission for the sale of state property and the outflow of funds in the amount of 17, on behalf of paid gross fee for the work of the commission for the sale of state assets, was carried out based on the decision of the Ministry of Finance in accordance with the Guidelines of the Commission for the sale and lease of state property, whereby the inflows and outflows are not recorded in the Treasury's General Ledger. The audit has identified that funds are not recorded in

44 the General Ledger of the Treasury in accordance with Article 10 of the Rules on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets, and it is necessary to reclassify funds as set out in the following table: Table 20: Reclassification of funds from the sale of state property From the account 715 Other income To the account 721 Receipts from sale of state property 721 Receipts from sale of state property 715 Other income Amount 762, , , , From the total recorded revenues at the account group Other income, it is necessary to perform a reclassification in a manner that the amount of 984, shall be recorded in the account group 721- Receipts from sale of state property, because out of the following amount: the amount of 731, refers to receipts from the sale of capital (privatization of companies Poliex Berane and Montenegro Defence Industry), while the amount of 30, refers to the name of the assigned revenue of 1% of the privatization Council of the realized price in the privatization and the amount of 222, which refers to the income from privatization. From the total inflows recorded in the account group Proceeds from the sale of state property, it is necessary to perform a reclassification in a manner that the amount of 83, shall be recorded on the account group 715 -Other income, because it does not apply to the inflow of the Ministry of Defence from the sales of state assets, but the amount of 65, refers to the lease of real property, compensation of water consumption and the use of sewage, the lease of military equipment and, other, while the amount of 18, refers to the inflow of the Ministry of Finance on the basis of leasing the site of the Hotel "Park ". In 2015, the Ministry of Defence has generated the revenues from the sale of arms and military equipment in the amount of 4,270, Out of this total amount of receipts collected, the amount of 3,140, relates to inflows from the concluded contract on the sale of arms and military equipment in recent years and the amount of 1,129, based on contracts concluded in In 2015, the Ministry of Defence implemented one procedure for selling surplus weapons and concluded two commission contracts in the total amount of 1,916, (contracts are concluded in dollars $2,168,280.00, whereby the broker shall get the 5% commission fee on the amount of the contract and it will be charged prior to the payment of the agreed amount). The total amount of the paid commission fee in the amount of $247, refers to the commission contracts realized in 2015 (fee charged by the commissioner before the transfer of the agreed amount). By controlling the conducted procedure of the sale of surplus weapon, it was identified as follows: the Government adopted a Conclusion granting permission to execute the sale of surplus weapons; The Ministry of Defence has formed a committee in order to implement the sale procedure (collection and evaluation of the bids received); The Ministry of Defence sent a notice of the sale of surplus weapons and military equipment to companies that are registered for trade in arms and military equipment, based on the list of companies acquired by the Ministry of Economy; the formed Commission prepared the minutes to note the submitted bids and adopted the Decision on the selection of bidders who offered the highest price. Privatization Council - on the account group Receipts from the sale of state assets, it was recorded the amount of 2,601, as proceeds from privatization conducted by the Privatization Council, in accordance with the Decision on Privatization Plan of the Government of Montenegro 1, In 2015, it was completed the privatization of four companies, namely: 1 Official Gazette of Montenegro, No. 09/

45 "Poliex" AD, Berane (subject of the tender was % of the share capital of which 26.65% was owned by the Government of Montenegro, 19.75% owned by the State of Montenegro and 4.35% owned by the Compensation Fund); "Montenegro Defence Industry" doo, Podgorica (the subject of the tender was the sale of 100% ownership of the limited liability company owned by the Government of Montenegro); Hotel "Park" with related land, Bijela (the subject of the tender was the sale of the hotel "Park" with related land and equipment, including reconstruction and/or demolition and construction of a new hotel in accordance with the terms of the Detailed Urban Plan "Blaca -Jošica", sales in the function of hospitality and tourism, known as the "House of the family Đurković" with the associated buildings and land, lease of the site being a park); Locality "Gornji Ibar", Rožaje (the subject of the tender was the sale and leasing of part of the site of the factory "Gornji Ibar" Rožaje). For all the privatization processes, the Privatization Council announced on its website and in the daily newspapers the public calls for participation in the public tenders for the privatization of the underlying companies, the reports of tender commissions were prepared with the proposal of the contract adopted by the Government of Montenegro with its conclusions, and all the presented contracts contained the clauses referring to a failure to meet contractual obligations. Privatization Council requested a deposit in the amount of 200, or guarantees on offer. The realized selling price, upon the four-privatization processes carried out, amounted to 3,468,500.00, while the total cost of giving real estate to lease amounted to 25,588.80, as shown in the following table: Table 21: Overview of the proceeds from the sale of state property of the Privatization Council Privatization object Contracted selling price Contracted lease value Recorded in the General Ledger of the Treasury Not recorded in the General Ledger of the Treasury "Polex"AD Berane 38, , , , Montenegro Defence Industry doo, Podgorica 680, , , Hotel Park with related land, Bijela 2,250, , ,202, , , The site Gornji Ibar, Rožaje 400, , , , Total 3,468, , ,610, , , Those inflows were recorded in the General Ledger of the Treasury in the amount of 3,372,286.16, while the amount of 121, was not recorded in the General Ledger of the Treasury. The funds in the amount of 121, were used to pay for the consultancy - legal services in the amount of 114, while the funds in the amount of 7, relating to income from lease and valorisation of the site "Gornji Ibar" Rožaje, were used to pay the costs arising from bank commissions. Ministry of Finance - the revenue account Revenue from sales of property based on the sale of state property, performed by the Ministry of Finance, was paid the amount of 667, and it refers to the following: Transfer in the amount of 271, from the current account of the Ministry of Finance , which refers to the proceeds of the sale of property in 2014, which have not been transferred from that account to the current revenue account till the end of 2014 (transferred to the revenue account in 2015) and those were supported by the Decision No /1 dated 31 March 2015 as receipts from The payment of for reimbursement of expenses of the members of the commission responsible for the sale of the cadastral parcel No. 4080/11 and No. 4080/27 of the total area of

46 58m2, PL No CM Donja Gorica - Podgorica, which is redirected to the current account of the Ministry of Finance Payment of the proceeds from the sale of movable state property, carried out by the Ministry of Finance Property Administration in the amount of 18, Transfer of the deposit (part of the total estimated value of the real estate which the potential bidder was required to pay in order to obtain a public tender), from the current account of the Ministry of Finance , on the basis of the procedures conducted by the Ministry of Finance - Directorate for Property-Legal relations, the sale of immovable state property in 2015, in the total amount of 13, The payment of the remaining amount (the purchase price less the amount of the deposit paid) by buyers of real estate owned by the state, which were the subject of sales in 2015, in the total amount of 362, Transfer in the amount of 1, from the current account of the Ministry of Finance to the revenue account , which was recorded in the account group 721- Proceeds from the sale of state property. Other payments in the amount of recorded in the account group Receipts from sale of property. Out of the amount of 667,313.91, which was paid to the sub-account of the Central State Treasury account, from the sale of state property or by the Ministry of Finance (the transfer of deposits and funds which were located in the current account of the Ministry of Finance), on the account group Receipts from the sale of state property, it was recorded the amount of 395, In 2015, the Ministry of Finance - Property Administration conducted the sale of movable property (vehicles) and generated revenues in the amount of 1,255.00, while, after the sale of temporarily or permanently seized assets, it was recorded the inflow in the amount of 17, The Ministry of Finance - Property Administration has conducted two proceedings of selling the vehicles at public auction, after which it approached the process of direct negotiations for unsold vehicles, while the other movable property (seized from the prior owners) was sold at public auction, except for the special and perishable goods, as well as movable property that was sold by direct negotiation. In 2015, the Ministry of Finance - Directorate for Property-Legal Affairs has completed 18 procedures of sale of property owned by the state, out of which 11 sales referred to the sale of property through the public auction, while 7 procedures referred to the sale of real estate through direct negotiations. Direct negotiations were carried out for the purpose of completing lots by applicants for purchase of property. Methods of public sale were run by decisions on the sale of state property issued by the Director of the Real Estate Administration, based on the conclusions of the Government of Montenegro, which were announced on the internet portal of the Real Estate Administration and in daily newspapers. Commissions were formed for all the procedures and they carried out the procedures and prepared the reports on the public opening of tenders upon the call for bids for the related sales. The value of property was evaluated by Real Estate Administration, while the sales of property were made at the estimated value, or higher one. Restitution Fund - The inflows recorded in the General Ledger of the State Treasury, totalled at 739,912.96, out of which the amount of 508, was generated through the revenue account No , while direct payments to the Treasury General Account amounted to 231,557.38, and were recorded in the group of accounts Other Revenues, which were paid after the conclusion of the transfer from the revenue accounts

47 The Inflows are related to the portion of 10% of the total revenue generated from the sale of the state property, as stipulated by Article 44 of the Law on Restitution of Property Rights and Compensation Receipts from the loan repayments Pursuant to the Law on Budget for 2015, the revenues from loan repayments were planned in the amount of 5,073,747.88, and were stated in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 in the amount of 7,929, as follows: Proceeds from repayment of loans granted to other levels of government in the amount of 7,839, and receipts from repayment of loans granted to other institutions in the amount of 90, Proceeds from repayment of loans granted to other levels of government (account group 7311) - in the amount of 7,839, relate to: Receipts from repayment of loans for self-employment in the amount of 1,163,529.96, which are recorded in the Treasury's General Ledger through the Revenue module, The inflow of funds in the amount of 5,768,135.97, which was paid to the General Account of the State Treasury (upon which the identification of the payments is made on the basis of the contents of the bank messages MT 103), and applies to payments made by: PoM Tivat, Montenegro bonus, Crnogorski elektroprenosni sistem, Deponije DOO, Elektroprivreda Crne Gore, Komunalno preduzeće Tivat, Čistoća DOO and PoM Nikšić. The inflow of funds in the amount of 907,910.38, which was recorded by a Decision of the Ministry of Finance number /1 dated 3 February 2016, and referred to the repayment of the loans given by the Directorate for Development of Small and Medium Enterprises. Proceeds from repayment of loans granted to other institutions (account group 7313) in the amount of 90, The transfer of funds made from the payment account through the Revenue module, and refers to interest income for the Project " flats" by the commercial banks. 5. BUDGET EXPENDITURES Budget expenditures reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 amount to 2,159,698, The following table provides an overview of expenditures realized in 2015, by their structure, as follows: Table 22: - Overview of realized expenditures in 2015 Proposal of the DESCRIPTION Law of Final Law on Budget of Current Budget Reallocated + Reallocated Statement of 2015 for 2015 Accounts of the Budget Current expenditures 633,631, ,404, ,891, ,144, ,171, Transfers for social welfare 504,845, ,397, ,693, ,549, ,041, Transfers to institutions, 128,294, ,189, ,731, ,753, ,226, individuals and NGO Capital expenditures 282,892, ,688, ,825, ,754, ,488, Borrowings and Loans 2,250, , ,000, ,975, Repayment of Debt 398,292, , ,342, ,150, Reserves 13,055, ,099, ,437, ,717, ,643, Total 1,963,260, ,579, ,579, ,963,260, ,159,698, The expenditures in the structure of realized ones are as follows: current expenditures with 29.69%, social welfare transfers with 22.55%, expenditures for transfers to institutions, individuals, NGO and the public sector 6.31%; capital expenditures 11.88%; borrowing and loans 0.14%; repayment of debts with 28.67%, and reserves 0.77%. Budget expenditures in 2015 were executed in the amount 1 "Official Gazette of Montenegro, No. 21/04, 49/07, 60/07, 12/07, 73/

48 of 2,159,698,670.16, which exceeds the available funds reported in the current budget by 10.01%, as compared with the expenditures realized in 2014 by 14.22% Current Expenditures According to the Law on the Budget for 2015, the funds for current expenditures are planned in the amount of 633,631,276.86, while this plan was increased through reallocation by 33,404, and reduced by 33,891, Therefore, the available funds stated in the current budget plan amount to 633,144, The generated current expenditures reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 amount to 641,171,576.11, as presented in the following table: Table 23: Current expenditures DESCRIPTION The Law on Budget for 2015 Reallocated + Reallocated Current Budget Proposal of the Law of Final Statement of Accounts of the Budget 411 Gross salaries and contributions 379,363, ,836, ,152, ,047, ,177, payable by employer 412 Other personal income 11,950, ,603, , ,842, ,740, Expenses for materials 29,426, ,392, ,361, ,457, ,584, Services costs 52,503, ,412, ,145, ,769, ,461, Current maintenance costs 20,826, , , ,966, ,121, Interests 75,765, ,830, ,935, ,802, Rents 8,327, , , ,436, ,918, Subsidies 21,251, , ,078, ,601, ,618, Other expenses 34,215, ,343, ,472, ,087, ,746, Total current expenditures 633,631, ,404, ,891, ,144, ,171, When it comes to current expenditures, there were noted minor irregularities relating to payments of pre-invoices, i.e. advance payments, which is not in accordance with the Instructions on State Treasury. In addition, there were found the irregularities relating to non-purpose spending of funds, i.e. the payments that are not in accordance with the Regulation on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets and in accordance with the Instructions on State Treasury. The State Audit Institution has performed the adjustment of current expenditures that relate to non-purpose spending of funds in the amount of 877, Interest Payments According to the Law on the Budget for 2015, the planned funds for interest payments amount to 75,765,883.97, while this plan was increased through reallocations by and reduced by 12,830, Therefore, the available funds in the current budget amount to 62,935, The expenditures for interests totalled at 81,802,749.75, which exceeds the amount of funds available in the current budget by 29.98%, as shown in the table below: Table 24: Interests expenses DESCRIPTION Expenses of interests to residents Expenses of interests to nonresidents 1) Established by 2015 Budget Law 6,789, ,976, ,65, ) Increased by reallocations ) Reduced by reallocations 39, ,790, ,830, ) Available funds current budget 6,749, ,186, ,935, ) Executed 6,278, ,524, ,802, ) Executed/planned Total Repayment of interests to residents The realized expenditures on the basis of interest payments to residents amount to 6,278,586.89, which is less than appropriated by the current budget by 6.98%. Funds in the amount of 6,064, were recorded as interest payment expenditure with

49 the Ministry of Finance, while the funds in the amount of 103, were recorded as interest payment expenditure with the Ministry of Defence, the Ministry of Economy and the Ministry of Sustainable Development and Tourism, while the Health Insurance Fund and the Employment Agency stated the expenditures on the basis of interest payments 110, Expenditures of the Ministry of Finance of paid interests related to: expenses for interest on loans from commercial banks in the amount of 3,640,064.93; expenses for interest on treasury bills in the amount of 394,908.20, according to the results of the seven auctions held daily T-bills; expenditures for interest on bonds of the Labour Fund in the amount of 367,839.55, in accordance with the Decision on Montenegrin bonds issuance for payment of the outstanding receivables of employees who have been declared redundant; expenditures for interest on Government bonds GB1/2014 in the amount of 1,761,848.70, in accordance with the Decision on issuance of Treasury bonds in the amount of 43,150,000.00, which are issued in order to finance budgetary needs. Repayment of interests payments to non-residents - The expenditures on the basis of interest payments to non-residents amount to 75,524,162.86, with repayment of interest in the amount of 68,637,589.81, and other expenses amounting to 6,886,573.05, which exceeds the amount of funds available in the current budget by 34.42%. An overview of interest expenses is given with the review of expenditures for repayment of securities and loans to non-residents Subsidies Expenditures for subsidies amounted to 19,618,046.83, and their execution with the spending units is shown in the following table: Table 25: Expenditure for subsidies DESCRIPTION The Law on Budget Proposal of the Law on 2015 Current budget for 2015 Final Statement of Accounts Ministry of Economy 5,925, ,447, ,314, Ministry of Transport and Maritime Affairs 3,800, ,800, ,800, Ministry of Agriculture and Rural Development 10,570, ,250, ,399, The Ministry of Sustainable Development and 500, , , Tourism Pension and Disability Insurance Fund 456, , , Total 21,251, ,601, ,618, The audit of expenditures for subsidies covered the following spending units: Ministry of Economy made actual expenditures for subsidies in the amount of 5,314, These expenditures relate to subsidizing of the bills for electricity consumed by the most vulnerable categories of population. By the Conclusion number dated 28 August 2015, the Government adopted the Information on the program of subsidizing the bills for electricity consumed for the most vulnerable categories of population for the period from July 2013 to May 2014 and assigned the Ministry of Economy, Ministry of Labour and Social Welfare and the Ministry of Finance to, in cooperation with Elektroprivreda Crne Gore, consider the possibility of further subsidies of the bills for electricity consumed for socially vulnerable categories of the population. Ministry of Agriculture and Rural Development had expenditures for subsidiaries in the amount of 9,399, In a sample of 56.63%, it was found that the funds are used for: support to agricultural production in the amount of 442,794.74; premiums in cattle breeding and support to development of animal husbandry in the amount of 1,836,939.50; milk premiums in the amount of 1,018,994.02, support to agricultural production in the amount of 500,327.70; support to planting and modernization of orchards in the amount of 165,887.59;

50 purchase of seedlings and seeds in the amount of 213,425.54; support to development of viticulture and winemaking in the amount of 141, and other subsidies in the amount of 707, Ministry of Agriculture and Rural Development has made an advance payment to the municipality of Bijelo Polje by the Decision No /15-1 dated 23 December 2015 in the amount of 240, on behalf of the registered fattening for the first half of 2016 for the cattle in the number of 2,127. From the account group of the subsidy there were paid the expenses in the amount of 12, and the amount of 6, by the account number 010/2015 dated 23 December 2015, for developing a mobile application and the amount of 6, for preparation of website of e-market under the account number 011/2015 dated 23 December 2015, which is not in accordance with the Regulation on unique classification of the accounts of the Republic budget, extra budgetary funds and budgets of municipalities Transfers for Social Care Expenditures pertaining to social care transfers in 2015 amounted to 487,041,860.10, out of which 387,038, was spent on expenditures arising from the Pension and Disability Insurance Fund operation. According to the cash flow statement III, the Pension and Disability Insurance Fund recorded the earmarked revenue in the amount of 266,771, and the general revenue of 125,553,429.17, as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for The following table shows the expenses generated by rights from pension and disability insurance for 2014 and 2015 as follows: Table 26: Overview of expenditures based on rights in the field of pension and disability insurance DESCRIPTION Actual expenditures Actual expenditures Age pension 218,172, ,428, Invalidity pension 68,774, ,308, Family pension 76,276, ,132, Compensations 9,548, ,434, Additional aid 2,458, ,268, Other rights 9,161, ,467, Total 384,390, ,038, The amount of actual expenditures for 2015 in the amount of 387,038, included the expenditures on the basis of postal services cost in the amount of 1,328, Repayment of Debts Debt repayment covers the expenditures for the repayment of securities and loans to residents and non-residents, repayment of guarantees in the country and abroad and the repayment of liabilities from the past. According to the Law on the Budget for 2015, the expenditures for debt repayment amounted to 398,292,084.42, while the plan was increased through reallocation of resources by 50, Therefore, the available resources reported in the current budget totalled at 398,342, Expenditures for debt repayment recognized in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 amount to 619,150,905.91, as shown in the following table: Table 27: Expenditures arising from Repayment of debts DESCRIPTION Total 1) The Budget Law for ,292, ) Increase by reallocations 50, ) Reduced by reallocations - 4) Available funds by current budget 398,342, ) Executed 619,150, ) Executed/planned

51 Repayment of Debt (461) According to the Law on the Budget for 2015, the funds for debt repayment amounted to 364,481,004.42, while the actual expenditures totalled at 541,742, i.e. as shown in the following table: Table 28: Expenditures for Debt Repayment DESCRIPTION Repayment of securities and loans to residents 4611 Repayment of securities and loans to nonresidents ) 2015 Budget Law 46,710, ,770, ,481, ) Increase by reallocations ) Reduced by reallocations ) Available funds by current budget 46,710, ,770, ,481, ) Executed 221,709, ,033, ,742, ) Executed /planned Repayment of securities and loans to residents (4611) - According to the Law on the Budget for 2015, the funds for expenditures pertaining to repayment of securities and loans to non-residents were planned in the amount of 46,710,121.92, while the expenditures stated in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 totalled at 221,709, The structure of expenditures recorded at the Ministry of finance for repayment of securities and loans to non-residents is presented in the table below: Table29: Repayment of Securities and Loans to Residents Serial Number DESCRIPTION Interest Principal 1 Interest payments on loans from commercial banks 3,640, ,794, Interest payments on the loan for Police Administration building 7, , Interest payments on the loan for the restoration of cultural monuments in 17, , Cetinje Interest payments on loans assumed 481, ,326, Interest payments on long-term loans 3,058, ,959, Interest payments under the Agreement on financial leasing 74, , Principal and interest payments on treasury bills 394, ,248, Principal and interest payments on Labour Fund bonds 267, ,195, Principal and interest payments on government bonds 1,761, ,471, Total 6,064, ,709, Expenditures for principal repayment to residents in the amount of 221,709, relate to: expenditures for repayment of loans to commercial banks in the amount of 34,794,281.05; expenditures for repayment of debt arising from the emission of Treasury bills amounted to 175,248, In 2015, the bills were issued in the amount of 175,248, Expenses incurred in respect of repayment of principal for 10, 11 and 12 auction of 2014 in the amount of 15,514, and the first auction of 2015 in the amount of 21,103,900.00, The outflow of funds for repayment of principal in the amount of 138,630, relates to the refinancing of treasury bills on the basis of maturity of 8 and 9 auctions from 2014 and 2, 3, 4 and 7 auctions from 2015, Expenditures for repayment of principal debt on Labour Fund OBFR bonds, in the amount of 1,195,369,40, in line with the Decision on emission of bonds of the State of Montenegro, for covering unsettled liabilities to employees who became redundant, The expenditures in the amount of 10,471,801.67, incurred on basis of repayment of principal on treasury bills GB1/2014 in the amount of 10,258, and treasury bills DP-15 in the amount of 213, The following table provides an overview of interest and repayment of loans with commercial banks: Total

52 Table 30: Expenditures for principal and interest on loans from commercial banks No. Bank Purpose Number of Contract Date of signing Contracted amount Outflow for the principal Outflow for the Total outflow for interest Erste banka Police Directorate Building L ,02,2010 6,000, ,555,.75 7,187,31 434, Rehabilitation of the cultural monuments L01O1O37X ,000, , ,957,46 725, Assumed debt L ,02,2010 3,800, , ,894,76 295, Assumed debt LD ,000, , ,846,52 1,133, S Assumed debt L310117/00002-S100S ,04,2010 7,000, , ,267,54 673, Agreement on long-term loan 51X ,000, ,056, ,662,31 7,670, Assumed debt L311iS6/OOC»6-51C ,12,2011 3,500, , ,934,03 705, Agreement on long-term loan ,000, ,781, ,491, Total Erste banka 63,300, ,299, ,830,097,83 17,129, Societe Generale bank Agreement on long-term loan ,4 27,12, ,000, ,000, ,654,29 2,360, Agreement on leasing ,8 19,02,2013 1,896, , ,945,02 448, Agreement on long-term loan ,4 09,12,2013 5,000, ,666, ,211,59 1,893, Total Societe Generale bank 16,896, ,039, ,801,90 4,702, Crnogorska komercijalna banka Agreement on long-term loan ,08, ,500, ,454, ,147,165,20 16,601, Total Crnogorska komercijalna banka 42,500, ,454, ,147,165,20 16,601, Total 122,696, ,794, ,640,064,93 38,434, Repayment of securities and loans to non-residents (4612) - Expenditures for repayment of debt arising from securities and loans to non-residents amounted to 320,033, The table below provides an overview of expenditures pertaining to principal debt repayment and payments of interests on loans and securities in the international financial market, as follows: Table 31: Repayment of Principal Debt and Interests on Loans and Securities to Non-residents Creditor Principal Interest Commitment fee Commission Engagement fee Other Total CEB 116, , CITIBANK 15,050, , , CREDIT SUISSE 38,000, ,317, , ČEŠKA EKSPORTNA BANKA 5,122, , , DEUTSCHE BANK AG 184,360, , , EBRD 3,337, , , DB 5,756, ,400, ,156, ERSTE BANKA 7,218, ,254, , EUROFIMA 3,329, , , ,082, EVROPSKA ZAJEDNICA 1,040, ,209, EXIM BANKA KINA , , EXIM MAĐARSKA 1,262, , , IBRD 15,588, , ,523, ICO 452, IDA 5,265, , , KfW 7,179, , ,247, MORGAN STANLEY 35,200, , , NATIXIS 845, , PARISKI KLUB 3,524, , , POLISKA BANKA 347, , , SAVJET EVROPE 2, , STELEMARKISCHE BANK UND SPARKASSEN AG 2,200, ,554, TOTAL 320,033, ,637, , ,231, , ,922, ,557, Repayment of foreign debt based on issued bonds in the amount of 219,560, relates to: repayment of debt of Deutsche Bank AG in the amount of 184,360, based on issuance of Eurobond bonds (in the amount of mil) and loans for budgetary expenditures (in the amount of mil). Repayment of debt of Morgan Stanley in the amount of 35,200, under the Contract number dated 6 December 2013 on the basis of issuance of Eurobonds (in the amount of mil). The funds in the amount of 2, were paid to the Bank for Development of the Council of Europe on behalf of financial liabilities - contributions for membership and are not related to repayment of foreign debt. Repayment of Liabilities from the Past Budget Law appropriated a total of 33,811, for the repayment of liabilities from the previous period, while this figure was increased through the

53 reallocation of resources by 50, Therefore, the available resources reported in the current budget plan totalled at 33,861, The actual expenditures for repayment of liabilities from the previous period amounted to 77,407,937.15, or exceeded the estimated plan by %, as indicated in the table below: Table 32: Expenditure for Repayment of Liabilities from previous period 1) The Law on Budget for ,811, ) Increase by reallocations 50, ) Reduced by reallocations ) Available funds by current budget 33,861, ) Executed 77,407, ) Executed /planned x Actual expenditures in the amount of 77,407, pertain to the liabilities arising from the court decisions in the amount of 21,051, and other liabilities in the amount of 56,356,659.99, which refer to the Ministry of Finance, with 17,671,990.05, the Ministry of Defence with 434,827.01, the Health Insurance Fund with 36,000, and the Restitution Fund with 2,249, Expenditures arising from the court decisions in the amount of 19,824, were executed against the accounts of the spending units which caused the said expenditures. However, the Ministry of Finance did not reallocate funds to the expenditure position of the budget user, which caused these expenses up to the level of their realization, as stipulated by Article 11 of the Budget Law for The Ministry of Finance executed payments against the account of repayment of liabilities from the previous period in the amount of 17,671,990.07, as follows: repayment of debt on the basis of foreign currency savings in the amount of 13,502,715.33, in line with the laws and the Regulation on converting the citizens' foreign currency savings into bonds 1, Repayment of the debt taken over from Montenegro Airlines a.d. Podgorica to the BNDES (Banko Nacional De Desenvolvimento Economico E Social Rio Se Janeiro Brazil), in the amount of 3,214,089.18, for financing the purchase of the airplane Embraer 195. In accordance with the Decision of the Government of Montenegro, No dated 2 April 2015, it was concluded an Agreement on taking over and converting the debt into share capital between the Ministry of Finance and Montenegro Airlines a.d. Podgorica, and in accordance with Article 11 of the Law on the Budget for Repayment of liabilities of UNDP office in Podgorica in the amount of 382,113.94, according to Decision of the Government of Montenegro No dated 26 February Repayment of assumed debt for consumed electricity from the local water supply system of the Capital City of Podgorica in the amount of 60,000.00, according to the Decision of the Government of Montenegro No dated 29 December Repayment of debt on the basis of compensation to persons retired from the army in the amount of 4,086.66, in accordance with the Law on Pension and Disability Insurance 2 and the Conclusion of the Government of Montenegro No /3 as of 3 July Expenditure in the amount of 8, was recorded by the Decisions of the Ministry of Finance number 356 and 357 dated 29 January 2016, for the collection by Crnogorska komercijalna banka 1 Official Gazette of MNE, No.42/04 and 40/08 2 Official Gazette of Montenegro, No. 79/08, 14/10,78/10 and 34/

54 on the basis of due repayment of loans of the employees of the Fund for Pension and Disability Insurance. Expenditure in the amount of 47,138.91, based on the final decisions of the European Court of Human Rights, according to the requirements of the Representative of Montenegro before the European Court, for incurred international legal obligations. Payments performed in accordance with: Decision No dated 20 January 2015 in the amount of 27, for a settlement of the claim on the basis of court settlement, including costs of the court proceeding; Decision number /1 dated 8 October 2015 in the amount of 3, Decision number /1 dated 14 September 2015 in the amount of 1,020.00, Decision number /1 dated 8 October 2015 in the amount of 13, and the Decision number /1 dated 30 November 2015 in the amount of 1, for the applicants. The foregoing expenditure in the amount of 3,214,089.18, incurred as a conversion of debt into share capital, or from the purchase of securities of "Montenegro Airlines" ad Podgorica, had to be recorded in the group of accounts Capital expenditures (expenditures for the purchase of securities) in accordance with the Regulation on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets. The audit of expenditure recorded in the group of accounts Repayment of liabilities from the previous period identified that paid expenses did not present the outstanding liabilities but already extraordinary expenses that were not planned by the annual budget law. Health Insurance Fund On the debit side of the account number Repayment of liabilities from the previous period, in accordance with Article 11 of the Budget Law for 2015, which stipulates that the Government of Montenegro can borrow the funds for the purpose of settling liabilities of the Health Insurance Fund and public health institutions, the expenditure was recorded in the amount of 36,000, Arrears were paid on the basis of Specification of the arrears as of 31 December 2014, delivered by the Ministry of Health, according to the Conclusion of the Government of Montenegro, number dated 8 May The Compensation Fund has charged the account of the repayment of liabilities from the previous period with the performed payments in the amount of 2,249, for the payment of the instalment of the compensation to former owners of confiscated property rights in accordance with the decisions of the Compensation Fund. Compensation Fund shall plan the funds for former owners of confiscated property rights and execute those at the expense of the expenditures Transfers to institutions, individuals, NGO and public sector. 6. REPORT ON BUDGET RESERVES EXPENDITURES The Article 43 of the Law on Budget and Fiscal Responsibility prescribes that the funds of the current and permanent budget reserve shall be used for unplanned and insufficiently planned expenditures during the fiscal year. Rules on detailed criteria for the usage of current and permanent budget reserve prescribe the criteria for the use of current and permanent reserve 1. Funds of the current budget reserve shall be used for: the provision of insufficient funds to finance regular activities of spending units, support to legal entities for financing activities, support to individuals for treatment, education and to improve the financial situation and for other purposes in accordance with the Law. Law on Budget for 2015 envisages funds for the purpose of the budget reserve in the total amount 1 Official Gazette, No. 23/

55 of 13,055, After allocation of the funds, the budget reserve increased by 9,099,684.30, and decreased by 5,437, so that the funds available for spending amounted to 16,717, Realized funds for the current budget reserve amounted to 16,643,694.03, or 99.56% of the available funds, as provided in the following table: Table 33: Overview of current budget reserves expenditures 1) The Law on Budget for ,055, ) Increase by reallocations 9,099, ) Reduced by reallocations 5,437, ) Available funds by current budget 16,717, ) Executed 16,643, ) Executed /planned x Spending of the funds from the current budget reserve was approved by the decisions of the Government and the decisions of the Inner Cabinet of the Government in the amount of 14,405, and the decisions of the Commission for allocation of funds from the current budget reserve in the amount of 2,237, Funds approved by the decisions of the Government and the Inner Cabinet of the Government were recorded as an expense of the current budget reserve in the amount of 14,405,799.03, and those relate to: financing of unforeseen and insufficiently planned resources for the spending units activities, in accordance with Article 43 of the Law on Budget and Fiscal Responsibility, in the amount of 12,389,577.31; support to legal entities for financing their business operations in the amount of 222,170.54; medical treatment support to the physical persons in the amount of 659,217.50; support for the improvement of financial situation in the amount of 680,093.68; support for education in the amount of 60,850.00; other forms of financial aid in the amount of 208,550.00; The payment of funds for compensation of damages from natural disasters in the amount of 185,340.00, and on the basis of the report of the Commission to assess the damage from natural disasters. The funds were transferred to the account of the Ministry of Finance number held with Societe Generale bank the solidarity funds, pursuant to the decisions of the Commission that follow: Decision No dated 18 February 2015 in the amount of 24, Decision No dated 16 March 2015 in the amount of 47, , Decision No dated 12 May 2015 in the amount of 31,570.00, Decision No dated 2 November 2015 in the amount of 24, and the Decision No dated 29 July 2015 in the amount of 57, Funds approved by the decisions of the Commission for Allocation of the portion of funds of the current budget reserve in the amount of 2,237, relate to: support to legal entities for financing their business operations in the amount of 108,650.00; support to physical entities for medical treatment in the amount of 21,150.00; support for the improvement of financial situation in the amount of 2,078,635.00; support for education in the amount of 18,160.00; and other forms of financial aid in the amount of 11, Overview of spending units that used the funds of the budget reserve in the amount of 12,388, is given in the following table: Table 34: Overview of the budget reserve Spending unit The Law on Budget for 2015 Proposal of the Law of Final Statement of Accounts of the Budget Allowed overrun Overrun Ministry of Transport and Maritime Affairs 25,461, ,937, ,273, ,664,

56 Ministry of Economy 8,954, ,909, , ,461, Ministry of Health 998, ,534, , ,484, Ministry of Interior 13,671, , , Secretary-General of the Government 3,913, , , , Ministry of Interior 70,623, , ,531, Ministry of Defence 36,438, , ,821, Ministry of Finance 120,230, , ,011, Ministry of Agriculture and Rural 22,682, , ,134, Development Ministry of Sustainable Development 6,179, , , Ministry of Culture 6,147, , , The Parliament of Montenegro 7,060, , , Ministry of Human Rights 871, , , , President of Montenegro 700, , , Ministry of Labour and Social Welfare 70,507, , ,525, Judiciary 20,793, , ,039, Total 415,234, ,383, ,761, ,898, According to the presented data, the allowed spending of funds from the reserves was overrun by 7,898,805.20, as follows: the Ministry of Transport and Maritime Affairs in the amount of 3,664,385.99, the Ministry of Economy 2,461,666,65, the Ministry of Health 1,4894,533.69, the Government of Montenegro-Secretariat General in the amount of 251,794.19, the Ministry for Human and Minority Rights in the amount of 36,424.68, which is not in accordance with Article 3, paragraph 1 of the Rulebook on Detailed Criteria of the Current and Permanent Budget Reserve, which stipulates that the funds from the current budget reserves can be used up to the amount of 5% of the funds planned in the annual law on budget of that particular spending units. The Ministry of Transport and Maritime Affairs used the reserve funds in the amount of 4,937, for: Settlement of the loan liabilities of Željeznička infrastruktura and Željeznički prevoz in accordance with the Conclusion of the Government of Montenegro No dated 15 September 2015 and the Agreement on debt assuming and its conversion into equity concluded between the Government of Montenegro - Ministry of Finance, Ministry of Transport and Maritime Affairs, and Željeznička infrastruktura and Željeznički prevoz in the amount of 1,726, Željeznička infrastruktura transferred the funds to settle loan liabilities towards the CZCH Export Bank in the amount of 287, and loan liabilities towards the IBRD in the amount of 837, Željeznički prevoz Crne Gore transferred the funds in the amount of 601, to settle its loan liabilities towards the EBRD. Settlement of the loan liabilities of Crnogorska plovidba AD Kotor, in accordance with the Resolution of the Government of Montenegro No dated 2 July 2015 in the amount of 1,090,891,40, for repayment of part of the first instalment of the loan from Exim Bank, which was intended to build two ships for the needs of Crnogorska plovidba. Addressing the redundancies in Jadransko brodogradilište AD Bijela and on behalf of outstanding taxes and contributions, according to the Resolution of the Government of Montenegro No dated 18 June 2015, the funds were disbursed in the amount of 2,085, Pre- financing of the MEDESS4MS project in the amount of 34,302.60, in accordance with the Resolution of the Government of Montenegro No dated 26 February The Ministry of Economy used the reserve funds in the amount of 2,909, for: Settlement of the part of liabilities under the Resolution of the Government of Montenegro No dated 20 August 2015 for contributions for pension and disability insurance for employees of Rudnici boksita d.o.o. Niksic in the amount of 1,269, Settlement of the liabilities under the Resolution of the Government of Montenegro dated 4 June 2015 for contributions for pension and disability insurance of employees who met the requirements for entitlement to a pension i.e. Montavar metalac d.o.o. Niksic in the amount of 489,775.92, Fabrika Elektroda Piva AD Plužine in the amount of 976, and Kombinat aluminijuma Podgorica in the amount of 173,

57 The Ministry of Health used the reserve funds in the amount of 1,534, for: Solving of a part of the current problems in the Clinical Centre of Montenegro in the amount of 10,000.00, according to Resolution of the Government of Montenegro, No dated 28 May Recapitalization of Hemomont d.o.o. Podgorica for the implementation of the SNUP Project, by Resolution of the Government of Montenegro No dated 9 April It was paid in a portion of the funds in the amount of 1,506, Solving a part of the current problems in Rožaje Health Centre in the amount of 10, according to Resolution of the Government of Montenegro No dated 2 July Solving the housing problem, by Resolution of the Government of Montenegro No dated 23 July 2015 in the amount of 7, The Ministry of Foreign Affairs and European Integration used the reserve funds in the amount of 633, for: Settlement of liabilities under the Service Agreement with the organization Orion Strategies Lic - USA number dated 27 February 2015, upon the Conclusion of the Government of Montenegro No dated 2 February 2015 for the payment of the first and the second instalment in the amount of 69, Support to the Atlantic Alliance of Montenegro for the organization of the 2BS Forum amounting to 50, Financing the Agreement on joint funding between the Program of the United Nations for Development and the Government of Montenegro signed on March 4, 2015 in the amount of 300,000.00, according to the Resolution of the Government of Montenegro No dated 28 May Payment of invoices for services performed on behalf of the visit of NATO officials in the amount of 74,729.10, according to the Conclusion of the Inner Cabinet of the Government of Montenegro number dated 17 October The Secretariat General of the Government used the reserve funds in the amount of 447, for: Settlement of the costs of Montenegro's participation at the EXPO-Milano 2015 in the amount of 280,000.00, according to the Resolution of the Government of Montenegro No dated 25 June Celebration of the "70th anniversary of victory over fascism" in the amount of 47,942.76, according to Resolution of the Government of Montenegro No dated 5 May Coordinating Committee for celebrating the "70th anniversary of victory over fascism" in the amount of 92,401.60, according to Resolution of the Government of Montenegro No dated 4 June The needs of the organization of the Third International Ministerial Forum (IDAHO forum) amounting to 27,100.04, according to Resolution of the Government of Montenegro No dated 8 May The Ministry of Interior used the reserve funds in the amount of 372, for the implementation of the Law on electoral list and the Law on Amendments to the Law on Election of Councillors and MPs in the amount of 372,939.60, according to the conclusions of the Government of Montenegro No dated 26 June 2014, No /3 dated 18 September 2014 and No dated 23 October The funds are paid on the basis of submitted invoices of the company "S&T" Montenegro in the amount of 235, and the company "COREIT" doo Podgorica in the amount of 37, The Ministry of Defence has used the reserve funds in the amount of 366, for funding a support to Afghan security forces in the amount of 366,990.56, according to Resolution of the Government of Montenegro No dated 27 July

58 The Ministry of Finance used the reserve funds in the amount of 341, for: The needs of the Council for membership in NATO, financing the regular activities and campaigns, recording and broadcasting videos in the amount of 35,000.00, according to Resolution of the Government of Montenegro No dated 10 December Payment of the funds in the gross amount to the members of the Working Team for coordination of activities on implementation of the Strategy of implementation of ESA 2010 methodology in the statistics of public finances of Montenegro in the amount of 3,029.32, according to Resolution of the Government of Montenegro No dated 12 December Payment of fees to the members of the Working Team for preparation of the program of economic reforms for Montenegro in the amount of 26,240.00, according to Resolution of the Government of Montenegro No dated 22 October 2015, Payment of fees to the members of the Working Group for preparation of Development Directions of Montenegro in the amount of 21,468.33, according to the conclusions of the Government of Montenegro No dated 9 July 2015 and No dated 3 September Payment of fees to the members and coordinators of the Working Team for preparation of National Economic Reform Programme in the amount of 31,370,10, according to Resolution of the Government of Montenegro, No dated 2 April Settlement of liabilities under the contract concluded with the institutions responsible for the implementation of the project "Involvement of citizens in the fight against the grey economy" in the amount of 196,464.07, according to Resolution of the Government of Montenegro No dated 19 February 2015, The funds in the amount of 28, were paid to UNDP to finance the continued implementation of the project in Ministry of Agriculture and Rural Development used the reserve funds in the amount of 209, for processing of applications for connection of service for 17 employees of Duvanski kombinat AD Podgorica in bankruptcy, which were entitled to a pension in the amount of 209,461.48, after the conclusion of the Government of Montenegro No dated 17 December Ministry of Sustainable Development used the reserve funds in the amount of 205, for: Settlement of liabilities for land expropriation in order to implement the project of Improvement of water supply system and construction of waste water treatment in the municipality of Berane in the amount of 125,000,00, according to Resolution of the Government of Montenegro No dated 18 June A borrowing to the Commercial Court for the costs of bankruptcy proceeding in order to solve the problem of Solana "Bajo Sekulic" and rehabilitation of part of infrastructure of Solana in the amount of 80,000.00, which will be returned to the Budget of Montenegro, after the sale of the bankruptcy debtor, according to Resolution of the Government of Montenegro number dated 1 June The Ministry of Culture used the reserve funds in the amount of 179, for co-financing of projects in the field of culture and for financial support for projects and programs of importance for culture in the amount of 179,494.00, according to Resolution of the Government of Montenegro No dated 5 November The Parliament of Montenegro used the reserve funds in the amount of 82,195,47 for settlement of liabilities under invoices, followed by a warning before litigation, of the company "Aero team" doo Podgorica in the amount of 50,200.00, according to Resolution of the Government of Montenegro, No dated 29 December 2015; provision of funds for operation and conditions for the start of working of the Agency for Prevention of Corruption in the amount of 31,996.36, according to the Resolution of the Government of Montenegro No dated 28 September

59 Ministry of Human Rights used the reserve funds in the amount of 80,000,00 for: disbursement for Roma Education Forum (REF), in accordance with the Strategy for improving the position of Roma and Egyptians in Montenegro in the period in the amount of 80,000,00, according to Resolution of the Government of Montenegro No dated 3 September President of Montenegro, as a spending unit, used the reserve funds in the amount of 30, for preparation of the first, second and third degree medals, according to the Resolution of the Government of Montenegro, No dated 15 October Ministry of Labour and Social Welfare used the reserve funds in the amount of 30,000,00 for the payment to Trade Union Organization "Montevar metalac" Niksic, according to the Resolution of the Government of Montenegro, No dated 8 October The judiciary, due to lack of funds, requested from the Ministry of Finance to pay from the reserves the sum of 22, to account of deposits of the Commercial Court, by Resolution of the Government of Montenegro, No dated 18 December REPORT ON CAPITAL PROJECTS - CAPITAL BUDGET According to the data provided in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015, the capital budget was estimated in the amount of 284,697, By allocating the funds, the budget increased and decreased by the same amount of 6,044,584.57, so that the funds available for consumption amounted to 284,697, Realized funds for the capital budget amounted to 238,422,907.70, or 83.75% of the available funds, as provided in the following table: Table 35: Capital budget DESCRIPTION Directorate for Directorate of Public Transport Works Total 1) 2015 Budget Law 242,500, ,197, ,697, ) Increase by reallocations 2,123, ,921, ,044, ) Reduced by reallocations 5,122, , ,044, ) Available funds by current budget 239,500, ,197, ,697, ) Executed 202,745, ,677, ,422, ) Executed /planned 84.65% 78.94% 83.75% 7.1. Directorate for Transport - Capital Budget By the Capital budget for 2015, Transport Directorate estimated resources in the amount of 242,500, for the projects initiated in previous year and the years before, as well as the projects whose tender procedure started in 2014 and the contracts were concluded in 2015 and the projects that were implemented in 2015 or will be continued over the next years. Actual expenditures of the Capital Budget of the Directorate of Transport amounted to 202,745,099.46, or 84.65% of the funds planned by the current budget. The planned funds in the amount of 36,754, or 15.35% were not implemented on the ground of delays with the preparation of technical documentation, as well as the long duration of the tender procedure. The Capital budget of Transport Directorate was funded from the general revenues in the amount of 60,269,030.50, as well as from the loan granted in the amount of 142,476, Table 36: Capital budget of Transport Directorate S, No. Code Title of the project Budget Funding sources Loan Proposal of the Final Statement of Accounts of the Budget for Reconstruction of regional roads and highways in 8,147, ,147, Montenegro Reconstruction and rehabilitation of critical points Debt repayment for the road Risan - Zabljak 6,662, ,662, Highway Bar-Boljare, the section from Smokovac to 37,026, ,628, ,654,

60 Mateševo Road crossings 73, , The program of reconstruction of intersections 958, , Restoration of bridges, landslides and slope on the main and 722, , regional roads Solving bottlenecks in the transport network in Montenegro 84, , , Investment repaving of highways and regional roads 3,851, ,851, Investment maintenance of regional and main roads, control, 1,822, ,822,411,92 design, expropriation, audit The construction of third lanes 549, ,592, ,142, Program elimination of consequences of floods on the main and regional roads 369, ,946, ,316, TOTAL: 60,269, ,476, ,745, After examining the documentation of projects envisaged by the Capital Budget for 2015, contracts, temporary and final payments, analytical cards of contractors and other supporting documentation it was identified as follows: The expenses were paid with the Program Investment maintenance of regional roads and highways, control, design, expropriation and audit in the amount 397,276.48, for the reconstruction of lighting in the tunnel Budos on the main road Podgorica - Nikšić, according to the concluded contract on construction number /1 dated 20 January 2015, and submitted reports on status. Expenditure in the amount of 39,727.65, after final payment, was paid from the account Consulting, projects and studies, while the payment should be made from the account Expenditures for infrastructure of general importance. that the costs of one project were paid from the funds of other project i.e.: Expenditures from the Program Reconstruction of regional roads and highways in Montenegro, according to the Conclusion of the Government No dated 10 December 2015, form the account Expenditures for infrastructure of common interest, the payment was made on the basis of land expropriation for the purposes of reconstruction of the main road M-2 connecting two boulevards from Budva to Becici with reconstructing of intersections Cetinje-Budva-Becici in the amount of 1,597, These works were planned in the Project Resolving bottlenecks in the transport network, where at the group account Other, they had unused funds, so these costs should be made from the program and the group account to which the costs related. For the preparation of the technical documentation for reconstruction of the road Berane- Kolašin, section Lubnice-Jezerine, it was concluded a contract on the amount of 283, Capital Budget for 2015, for the realization of the mentioned project, planned the funds in the amount of 1,300,000.00, while the value of contracted and paid value on this basis amounted to 283, The amount of 179, was paid from this project (761), while the amount of 103, was paid from the project Investment maintenance of regional roads and highways, which had to be made from the program to which the costs related. It is necessary to pay for expenditures made from the projects and the group accounts in accordance with the Budget Law for 2015 and in accordance with the Regulation on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets Public Works Directorate - Capital Budget In 2015, the Public Works Directorate estimated resources in the amount of 42,197, Reallocation of the funds resulted in the budget increase by the amount of 3,921,584.57, and decrease by the amount of 921,584.61, so that the funds available for consumption amounted to 45,197, Realized funds for the capital budget amounted to 35,677,808.24, or 78.94% of the available funds, as provided in the following table:

61 Table 37: Capital Budget of the Public Works Directorate S, Code Title of the project Funding sources Proposal of the Final No. Statement of Budget Loan Donations IPA Accounts of the Budget for Construction and reconstruction of 6,969, , , ,324, administrative premises for the work of state bodies The construction, reconstruction and 722, , renovation of cultural facilities Construction and recon, sports facilities 1,586, ,586, The construction of local infrastructure 9,136, ,136, Environmental protection Projects 2,509, ,509, Construction and reconstruction of health 1,752, ,752, facilities Construction and reconstruction of health 1,356, ,356, facilities Construction and recons, Of education 4,830, , ,315, facilities Emergency aid and flood prevention 736, , ,714, Improving tourism offer 2,675, ,675, Projects financed from IPA 237, ,347, ,585, TOTAL: 32,513, ,673, , ,347, ,677, Capital Budget in the amount of 35,677, was funded by the Department of Public from general revenues in the amount of 32,513,158.15, loan funds in the amount of 1,673,054.73, donations in the amount of 144, from IPA funds in the amount of 1,347, The Government of the Republic of Italy - Donation for the Project Eco efficient building MORT According to the Agreement signed between the former Ministry of Tourism and Environmental Protection of Montenegro and the Ministry of Environment, Land and Sea of Italy, special Montenegrin-Italian financial instrument for the environmental protection has been established (EMIF - Environment Montenegrin-Italian Facility), within which the project of construction an Eco - building for the Ministry of Sustainable Development and Tourism has been implemented. The energy efficient building has been designed to accommodate the Ministry of Sustainable Development and Tourism, with the department Ecology Studies for the needs of the University of Montenegro. The contracting parties have been participating in financial structure of the said project with a portion of 56.19% for Italy, and 43.81% for Montenegro. In 2015, out of the amount of 287,864.65, the amount of 144, was paid from funds of the grant, while the amount of 143, was paid from the budget. By the Grant Agreement signed between MORT and CMSR Slovenia, it was defined a co-financing of the Republic of Slovenia, through CMSR, of the construction of the Sports Hall in Zabljak and a recycling yards and transfer station at Zabljak. In 2015, the amount of 822, was realized from donor funding and 770, from the budget, for the implementation of the project of a Recycling yard and transfer station at Zabljak. 2. Grant from IPA pre-accession program for the projects of construction of WWTP and sewerage network, rehabilitation of sanitary landfills and rail infrastructure projects as well as for technical assistance in order to strengthen the administrative capacities of bodies within the Operating Structure, it was realized in the amount of 1,347, Projects financed by loan funds, as follows: European Investment Bank (EIB) for the Project "Plant for wastewater treatment, sewage networks and water supply"; Loan of the Europe Development Bank (CEB) for projects: Kindergarten on Stari aerodrom in Podgorica; Kindergarten in Zagorič in Podgorica; Kindergarten in Block VI in Podgorica; Nursery school in Tuzi; Kindergarten in Bar; Kindergarten in Ulcinj; Kindergarten in Pljevlja and reconstruction of kindergarten in Zabljak. World Bank loan for the Project of cadastre (LAMP). The audit has found the adjustments made in the realization of the capital budget at the conclusions of the Government of Montenegro, as follows:

62 Resolution of the Government of Montenegro No dated 6 March 2015, which was adopted the information on the reasons for urgent adaptation of Internal Medicine and Infectious Diseases Department of the General Hospital Bijelo Polje. It was assigned the Directorate of Public Works to, from the funds of the capital budget for 2015, from the Programme "Construction and reconstruction of health facilities", the position of Expenditures for construction projects, transfer the funds in the amount of 85, to General Hospital in Bijelo Polje, upon submitted progress reports, which were signed by the technical supervision and representative of the General hospital Bijelo Polje for execution of works on reconstruction of Internal Medicine and Infectious Diseases Department of the General hospital Bijelo Polje. In the explanation of the Proposal of the Law on Budget for 2015, the funds in the amount of 20, were planned for preparation of project documentation for reconstruction of the Department of Internal Medicine of the General Hospital Bijelo Polje. Resolution of the Government of Montenegro, No dated 19 November 2015, which adopted the Information on realization of the project of construction of a road from Solila to the roundabout for Pržno-MR1, the Municipality of Tivat. The Government adopted the Protocol on realization of the project of construction of a road from Solila to the roundabout for Pržno - MR1 between the Directorate of Public Works and the Municipality of Tivat. The Government has approved the reallocation of funds in the amount of 3,000, to the spending unit Ministry of Transport and Maritime Affairs - Directorate for traffic for the spending unit Ministry of Sustainable Development and Tourism - Directorate of Public Works. Resolution of the Government of Montenegro No dated 10 December 2015 which adopted the Information on cooperation with the company Paradores de Turismo, S.A. The Ministry of Sustainable Development and Tourism was obliged to ensure the funds in the amount of 24, from the Program Improvement of the tourist offer, from the position of Consulting, projects and studies. Resolution of the Government of Montenegro No dated 10 December 2015 which adopted Information on the provision of funds for the rehabilitation of the environment in the Municipality of Pljevlja. The government, according to Conclusion No , dated 30 July 2015, tasked the Directorate of Public Works pay the funds from the Capital budget, from the Project Environmental protection Projects, from the expenditure Expenditures for local infrastructure, to the Municipality of Pljevlja in the amount of 500, In the Explanation of the Law on Budget for 2015, the Project Environmental protection Projects had no plan for those funds. By the Resolution of the Government of Montenegro, No dated 10 December 2015, the Government adopted the Information on the provision of funds to address emergency management measures in the area of Solana in Ulcinj. The Government, according to Conclusion No , dated 30 July 2015, tasked the Directorate of Public Works, out of the funds from the capital budget, from the Project Improvement of tourist offer, from the expenditure Expenditures for construction projects, transfer the funds to the Public Company for national parks of Montenegro in the amount of 70, In the Explanation of the Proposal of the Law on Budget of Montenegro for 2015, the Project Improvement of tourist offer had no plan for those funds. Resolution of the Government of Montenegro No dated 22 December 2015, pursuant to which the Government adopted the Information on the provision of funds for the improvement of tourism in the Municipality of Rožaje. It was tasked the Department of Public Works that, from the capital budget for 2015, under the Program Improvement of tourist offer (organizational code 826), from the position Expenditures for construction projects, allocate the funds in the amount of 300, to a special account of the Municipality of Rozaje for the purpose of improving the tourist offer. In the Explanation of the Proposal of the Law on Budget for 2015 on the Project Improvement of tourist offer, those funds were not planned

63 It is necessary that the Capital Budget is executed in accordance with Article 9 of the Law on Budget and Fiscal Responsibility Act which provides that no expenditure from the Consolidated Treasury Account shall be paid unless approved by an annual budget law. The audit has found that the available funds were used to finance new capital projects that were not included in the capital budget in the annual budget law. The introduction of new projects was not a good budgetary practice, although new projects are implemented from the budget for 2015 may be assessed as purposeful. 8. REPORT ON PUBLIC DEBT AS OF 31 DECEMBER 2015 In accordance with the Article 59 of the Law on Budget and Fiscal Responsibility, state debt is managed and the existing state debt recorded, as well as the taken long-term and short-term loans and guarantees issued, by the Ministry of Finance. The competent authority in the municipality shall keep records on existing municipality debt, taken long-term and short-term borrowings and issued guarantees and provide information thereof to the Ministry of Finance as a part of a quarterly report within 30 days of the end of the quarter. The Ministry of Finance compiles records of public debt. According to Article 71 (paragraph 15-17) of the Law on Budget and Fiscal Responsibility, State Treasury manages the debt incurred on the basis of securities issued by the Government, manages the debt incurred by issued guarantees and borrowings, and operates domestic and external debt. The Treasury's General Ledger has no records of liabilities in accordance with the Regulation on Unique Classification of the accounts of the State Budget, Extra-Budgetary Funds and Municipal Budgets, under which, for the records of liabilities on loans taken, there is used the accounts of the class "2", so that those indicate the status of arrears. External debt - Total reported balance of the external debt as of 31 December 2015 amounted to 1,956,353, as shown in the table below as follows: Table 38: External Debt Serial Number Creditor Balance of the debt as of 31 December International Bank for Reconstruction and Development (IBRD) 220,926, Paris Club 98,531, International Development Association (IDA) 59,969, The European Investment Bank (EIB) 105,370, European Bank for Reconstruction and Development (EBRD) 12,791, Council of Europe Development Bank (CEB) 12,829, European Commission 3,900, German Development Bank (KFW) 33,585, Hungarian loan 8,017, Polish loan 7,632, French loan-natixis 6,410, EUROFORM 15,720, Czech Exim Bank 9,480, Steiermarkische Bank und Sparkassen AG 12,100, Erste banka 12,000, CreditSuisse Banka 166,000, Chinese Exim Bank 172,797, Institutodel creditio oficial (ICO) Spanish loan 4,302, Erste banka Health Fund 6,191, EUROBOND 957,796, Deutsche Banka 30,000, TOTAL 1,956,353,

64 Domestic debt - Balance of the domestic debt as of 31 December 2015 is shown in the following table: Table 39: Domestic debt No. DESCRIPTION AMOUNT 1 Commercial Bank 36,578, Foreign currency savings 43,137, Restitution 93,124, Overdue pensions 1,946, Treasury bills 77,714, Bonds of the Labour Fund 2,645, Government bonds 27,976, Legal entities 37,343, TOTAL 320,467, Loans from commercial banks The stated balance of debt on loans taken from commercial banks amounted to 36,578,787.99, as stated in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for Based on a review of documentation and IOS forms of the banks submitted by the Ministry of Finance (letter No /1 dated 9 February 2016), the following table provides an overview of the loans i.e.: Table 40: Loans with the commercial banks No. Bank Purpose Contract Number Contract Contract Requirements Repayment term Debt Date amount balance as of Dec 31, Erste banka Assumed debt from LD ,000, MEURIBOR at Monthly from ,469, Regionalni vodovod the remaining portion of the principal Erste banka Long-term loan ,000, MEURIBOR Quarterly from to 5,578, agreement Erste banka Assumed debt from LD ,500, MEURIBOR at Monthly from ,916, Prevoz the remaining portion of the principal Erste banka Long-term loan ,000, MEURIBOR + Quarterly from ,068, agreement 5.75% annually Total Erste banka 1,500, ,034, Societe Generale bank 6 Societe Generale bank Long-term loan agreement ,000, MEURIBOR + 6% annually Annually from Leasing agreement ,896, % annually Monthly from ,000, , Societe Generale bank Long-term loan agreement ,000,000,00 6MEURIBOR % annually Quarterly from to ,916, Total Societe Generale bank 16,896, ,817, Crnogorska komercijalna banka Long-term loan agreement ,500, MEURIBOR +.5% margin Quarterly from to ,727, Total Crnogorska komercijalna banka 42,500, TOTAL 36,578, Erste Bank: Total balance of the debt with this bank as of 31 December 2015, based on the IOS form of the bank reconciled with the Ministry of Finance amounted to 21,034,250.10, i.e. as follows: Loan Agreement LD 10196/ dated 15 July 2010 concluded between Erste Bank and Public Enterprise for Regional Water Supply Regionalni vodovod Crnogorsko primorje to the amount of 7,000, The Underlying agreement was made an Annex No. 01/13 dated 12 September The Article 1 of the Annex "Contracting Parties have agreed to amend Article 2, paragraph 1, item 2 of the Loan Agreement number LD/10040/00086 dated 23 February 2010, to change it to read as follows: the interest rate is variable and consists of a fixed part amounting 6.5% and the variable part in the amount of six-month EURIBOR (6.5% + 6M EURIBOR) to the principal". Starting from 1 January 2014, all subsequent adjustments of the variable part of the interest rate will be carried out on two dates during the loan repayment period i.e. as at January 1 and July 1. The contract on debt assuming and its conversion into equity No /1 dated 29 June 2011, concluded between the Government of Montenegro - Ministry of Finance and PE Regionalni vodovod Crnogorsko primorje. Pursuant to the contract, there were assumed the liabilities of the PE Regionalni vodovod Crnogorsko primorje towards Erste Bank a.d. Podgorica in

65 the amount of 7,000,000.00, including all costs arising from the Loan Agreement. Debt balance upon this loan amounted to 4,469, Agreement on long-term loan number dated 16 September 2013 concluded between Erste Bank and the Government of Montenegro - Ministry of Finance in the amount of 16,000,000.00, with the purpose of budgetary needs. The repayment period is 36 months with a grace period of 9 months. The interest rate is variable and consists of a fixed part which is 5.95% plus 6M Euribor and is calculated on the remaining portion of the principal. Interest was paid quarterly even during the grace period. Debt balance of this loan amounted to 5,578, Contract No. LD 11286/ dated 13 December 2011 concluded between Erste Bank and Željeznički prevoz Crne Gore to 3,500, Debt arising from the said contract was taken over by the Government of Montenegro - Ministry of Finance, in accordance with Article 11 of the Budget Law of Montenegro for 2013, which stipulated that the Government of Montenegro will assume debts in the total amount of 9,600, and Decision on borrowing and issuing guarantees of Montenegro for 2013 ( Off. Gazette of Montenegro, No. 14/13), which defined the assuming of debt of Željeznički prevoz Crne Gore ad Podgorica in the amount of 3.5 million. In accordance with the Conclusion of the Government of Montenegro, No /2 dated 1 August 2013, a Contract was concluded on assuming the debt and its conversion into equity, number dated 5 September 2013, between the Government of Montenegro - Ministry of Finance and Željeznički prevoz Crne Gore ad Podgorica, assuming the liabilities of Željeznički prevoz Crne Gore towards Erste Bank a.d. Podgorica in the amount of 3,500,000.00, including all costs arising from the Loan Agreement. Pursuant to the Contract number , it was signed a protocol on assuming the debt arising from the loan LD 11286/00096 number /2 dated 13 September 2013, between the Government of Montenegro - Ministry of Finance and Erste Bank a.d. Podgorica. Amount of the debt arising from this loan amounted to 1,916, Agreement on long-term loan number dated 20 December 2013, concluded between Erste Bank of the Government of Montenegro - Ministry of Finance in the amount of 15,000,000.00, intended for budgetary purposes. The repayment period is 45 months with a grace period of 9 months. The interest rate is variable and consists of a fixed part which is 5.75% plus 6M Euribor and is calculated on the remaining portion of the principal. Interest is paid quarterly during the grace period as well. Debt balance of this loan amounted to 9,068,915, Societe Generale Banka Montenegro AD - Total balance of the debt with this bank as of 12 December 2015, based on the IOS form of the bank, which is signed and agreed with the Ministry of Finance, amounted to 7,817, i.e. as follows: Agreement on long-term loan number concluded as of 27 December 2012 between Podgorička banka and the Government of Montenegro - Ministry of Finance on the amount 10,000,000. Purpose of the loan is financing of the budget and the payment of debts with a repayment period from 27 December 2013 to 27 December The interest rate is on three-month period and Euribor plus 6% per annum. Debt balance of this loan amounted to 4,000, The contract on financial leasing UZZ No. 121/2013 dated 19 February 2013 (Party ,8) concluded between "Societe Generale Banka Montenegro" AD Podgorica (Lessor) and the Government of Montenegro - Ministry of Finance (Lessee) in the amount of 1,896, Pursuant to the Decision of the Government, No /5-12 dated 17 January 2013, it was

66 approved the Financial Leasing Contract between "Societe Generale Banka Montenegro" AD Podgorica and the Government of Montenegro-Ministry of Finance for a period of 5 years, where the subject to the Agreement is the immovable property (transcript of the property list 601 of the CM Podgorica, the number /2013 and the copy of the property list 648 CM Podgorica II dated 18 February 2013). Debt balance of this loan amounted to 900,595, The contract on long-term loan number dated 9 December 2013 concluded between Podgorička banka and the Government of Montenegro - Ministry of Finance on the amount of 5,000, The agreed interest rate was 6M Euribor % per annum. Debt balance of this loan amounted to 2,916, Crnogorska komercijalna banka - Total balance of the debt with this bank as of 31 December 2015, based on the IOS forms of the bank, signed and verified but not agreed with the Ministry of Finance, amounts to 7,272, i.e. as follows: Agreement on long-term loan number dated 7 August 2013 concluded between CKB and the Ministry of Finance in the amount of 42,500, Purpose of the loan is payment to OTP Bank for the issued guarantees for KAP as at 20 November Debt balance for this loan amounted to 7,272, Foreign currency savings - Balance of liabilities based on old foreign currency savings amounted to 43,137, Based on the documentation submitted by the Ministry of Finance (Letter number /1 dated 2 September 2016), it was stated that the stated balance referred to the liability for payment of foreign currency savings, foreign currency funds of citizens deposited with banks and foreign exchange funds of citizens placed as term deposits with the banks. The Ministry of Finance has submitted data on the debt by type of bonds as follows: OB in the amount of 32,780, DO in the amount of 8,681, and DF/JGSK in the amount of 1,675, Based on the available documentation, it has not been possible to check the status of the debt arising from old foreign currency savings in order to confirm the reported balance in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for Domestic debt on the basis of restitution - Total reported balance of domestic debt in respect of restitution amounts to 93,142, In the process of auditing, it was found that the Ministry of Finance stated the debt in respect of restitution on the basis of the report of the Compensation Fund. After a review of collected documents - the Report of the Compensation Fund and the documentation submitted by the Ministry of Finance (Act No /1 dated 9 February 2016), it was found that in 2015 the decrease of liabilities based on restitution were in the amount of 3,315, ( 2,232, for payment of liabilities in cash and 1,083, the payment of liabilities with bonds of restitution marked as FO02) and that the carrying amount of domestic debt in respect of restitution amounted to 93,142, In the process of audit on the basis of: Financial Statement of the Fund for Compensation (Form 3), it was found that in 2015 the payment was made on the basis of the restitution liability, in cash in the amount of 2,249,842.93, Excerpt of CDA, it was found that in 2015 the payment was made on the basis of the restitution liability, the bonds of restitution FO02 in the amount of 1,083, According to the audit findings, total liabilities impairment based on restitution in 2015 amounted to 3,333, and the reported balance of domestic debt in respect of restitution should amount to 93,124,

67 Overdue pensions In the Report on Public Debt, it was reported the balance of debt based on overdue pension amounts to EUR 1.79 mil. In the process of audit, it was found that the basis for disclosure of the debt balance of arrears on pensions were the reports prepared by the Directorate for Debt Management. Based on the documentation submitted by the Ministry of Finance (Act No /1 dated 9 February 2016), it was found that the stated balance applied to liabilities related to the compensation of pension and disability insurance, bonds (code PO), which are due for redemption in 2011 and which were not paid on 31 December Based on the available documentation, it was confirmed the debt in the amount of 1,946, The remaining balance of EUR 1.94 million - EUR 1.79 million amounting to EUR 0.15 million represents the amount of funds in the accounts held with CKB as of 31 December Treasury bills In the Report on the State Debt Public Debt, it was stated the balance on behalf of Treasury Bills in the amount of EUR mil. In the process of audit, it was performed the confirmation of the reported balance in its entirety with an excerpt of the Central Depository Agency (CDA) as of 31 December Accordingly, the total number of active treasury bills (D220, D221 and D222) amounted to 777,143, while their total nominal value was 77,714, Treasury bonds of the Labour Fund - In the Report on the State Debt Public Debt, the stated balance of the debt on "Domestic bonds" amounted to EUR 2.64 mil., and relates to liabilities in accordance with the Decision on Montenegro bonds issuance for payment of the outstanding receivables of employees whose employment was no longer needed ( Official Gazette of Montenegro, No. 44/12 dated 9 August 2012). Pursuant to this decision, the bonds were issued for the settlement of obligations for payment of outstanding receivables arising from the work of employees who, until the entry into force of the Labour Law ("Off. Gazette of Montenegro", No. 49/08 and 59/11), or up to 23 August 2008, were terminated the employment by the employer due to bankruptcy, and employees who have been made redundant due to technological, economic and restructuring changes under final decisions of the Labour Fund. The basic elements of the bonds: Issuer of the bonds Montenegro; Date of issuing bonds 27 July 2012; the emission amount 5,999,490.00; Type of the bond- amortizing bonds with annual payments of principal and interest on the remaining portion of the principal; Series: FR; The nominal value of one bond is 1,926.00; The bonds have a yield at a fixed interest rate of 7% per annum; Bonds are issued in total amount of 3115, with maturity on 25 July In the process of audit, it was carried out the verification of the stated amount of the liabilities arising from the issuance of bonds of Montenegro, of FR Series as of 31 December According to the Excerpt from CDA, as of 31 December 2015 for the Issuer - Ministry of Finance, the trading symbol - OBFR, it was registered a total number of 7 owners of these securities totalling According to the amortization plan for this securities, as of 31 December 2015, it was found that the total liability based on the issue of this series of bonds amounted to 2,926,417.90, with the payables for interest amounted to 280, and liabilities for the principal amount to 2,645, Domestic bonds In the Report on the State Debt - Public debt shown, it was stated a balance of debt upon "Domestic bonds" in the amount to EUR million ( 27,976,848.31) and referred to the liabilities of the principal in accordance with the Decision on issuance of Treasury bonds ("Official Gazette of Montenegro", No. 10/14 dated 26 February 2014). Pursuant to this decision, there were issued the treasury bonds, in order to provide funds to finance the deficit service the debt and create fiscal reserve of the Budget of Montenegro for The basic elements of

68 bonds: Issuer of bonds - Montenegro; Date of issuing bonds 27 February 2014; The issued amount 100,000,000.00; The issuance is considered successful if there has been implemented 30% of the issuance; The type of bond - amortizing bonds with equal semi-annual instalments; Series: GB1-2014; The nominal value of one bond is 10,000.00; The bonds have a yield at a fixed interest rate of 5.0% per annum; Bonds are issued in the total amount of 10,000 with semiannual maturity annuities, starting from 3 September 2014; Payment of bondholders shall be done according to the amortization schedule as of 3 March 2018 according to the Decision of the Commission for Securities on determining the success of issuance of government bonds number 02/1-1/4-14 dated 13 March 2014, the issuer the Government of Montenegro - Ministry of Finance has sold within the prescribed deadline the issuance of the government bonds in Total amount of 43,150, In the process of audit, it was carried out the verification of the carrying amount of the liability arising from government bonds of the series GB as of 31 December According to the excerpt of the Central Depository Agency (CDA) as of 31 December 2015 for the issuer - the Ministry of Finance, the trading symbol GB14, it was totally recorded 14 owners of this securities totalling Based on data from the amortization plan, the liabilities as of 31 December 2015 amounted to 30,050,971.76, out of which the payables for interest amounted to 2,104, and liabilities for the principal 27,976, Legal entities and companies In the Report on the State Debt public debt, it was stated the public debt owed to legal entities and companies in the amount of EUR mil. Based on the processing of the document "Form for establishing the portfolio of debts" submitted by the Ministry of Finance, other administrative authorities and funds, which contain information on debt (domestic debt, foreign debt and issued guarantees), it was determined that the carrying amount of the debt related to legal entities and commercial companies as set out in the following table: Table 41: Debt of legal entities and companies Review of the debt of legal entities and companies - Domestic debt Foreign debt Total Form for identification of portfolio debt The Ministry of Culture 1,781, ,781, Radio televizija Crne Gore 1,781, ,781, Ministry of Agriculture and Rural Development 312, , The Ministry of Education 72, , PPI Zagorka Ivanović Cetinje 43, PI ES Ivan Vušović Vidrovan Nikšić 8, PI ES Radojica Perović Podgorica 12, PI SMS Braća Selić Kolašin 5, PI SS Bijelo Polje 1, PI ES Luka Simonović Nikšić 2, The Ministry of Transport and Maritime Affairs 35,072, ,072, Željeznička infrastruktura Crne Gore 24,345, ,345, ŽPCG 10,727, ,727, The Ministry for Information Society of Montenegro 81, , Pošta Crne Gore AD 81, , Health Insurance Fund 22, , Health Centre Danilovgrad 2, Health Centre Tivat 12, Health Centre Herceg Novi 3, General Hospital Pljevlja 3, Total 1,958, ,385, ,343, Legal entities and companies stated the debt balance in the amount of 37,343,416.52, which was confirmed by the data of the commercial banks, and domestic debt in the amount of 1,958, and foreign debt in the amount of 35,385, as shown in the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for

69 9. REPORT ON GUARANTEES ISSUED IN 2015 Article 10 of the Law on Budget of Montenegro for 2015 and the Decision on borrowing and issuing guarantees of Montenegro for planned the issuance of guarantees in 2015 with the obligation of providing collateral to the State of Montenegro. The Government of Montenegro in 2015 issued the guarantees for concluded loan agreements with foreign creditors in the amount of EUR mil., and domestic creditors in the amount of EUR mil. i.e. in the total amount of EUR million. Guarantee issued to the foreign creditor - guarantee for the loan arrangement concluded between the European Bank for Reconstruction and Development (EBRD) and CGES (CGES) for the project of construction of "Kabal Tivat-Pljevlja" in the amount of 40,000, The security instrument of the guaranties the Mortgage agreement UZZ number 708/2015 dated 30 December 2015 and the Pledge Agreement of movables UZZ No. 709/2015. Guarantees issued to the domestic creditors in the total amount of EUR mil., as follows: The guarantee for the concluded loan arrangement between Societe Generale Banka Montenegro AD and Housing Cooperative of Education Employees Solidarno Podgorica 5,280, Guarantee No /1 dated 20 July 2015 was issued at 80% of the approved loan amount under the Loan Agreement number dated 20 July 2015, concluded between Societe Generale Banka Montenegro AD and Housing Cooperative of Education Employees Solidarno Podgorica in the amount of 6,600, to finance the construction of a residential building for teachers in Budva. The guarantee was issued at 80% of the approved loan in the amount of 5,280, in favour of Societe Generale Bank Montenegro AD, in accordance with the Resolution of the Government of Montenegro No dated 25 June As collateral guaranties established a first mortgage on the immovable property number 2523 CM Budva (UZZ No 703/2015 dated 5 August 2015). Guarantees for concluded loan arrangements between commercial banks and local selfgovernment units - In accordance with the Law on Amendments to the Law on Budget of Montenegro for and the Decision on amendments to the Decision on borrowing and issuing guarantees of Montenegro for , it has been established that the Government of Montenegro has issued guarantees for credit arrangements concluded between domestic creditors and local self-government units for the implementation of rehabilitation plans in the total amount of EUR million. The Ministry of Finance has concluded agreements on establishing of mutual relations on the basis of loan debt with a state guarantee, with the municipalities that have expressed the need for loan indebtedness arising from implementation of the rehabilitation plan. The agreements have stipulated the mutual rights and obligations of the parties regarding the implementation of the approved loan indebtedness and its security through the issuance of government guarantees. In accordance with the Article 4 of the Agreement on establishing of mutual relations on the basis of loan debt with a state guarantee, local self-government units have issued bills of exchange and letters of authority, as well as the authorities which authorize the Ministry of Finance to dispose the funds from the Equalization Fund and the revenue provided for in 1 Official Gazette of Montenegro, No. 6/15 and 54/15 2 Official Gazette of Montenegro, No. 47/15 3 Official Gazette of Montenegro, No. 54/

70 Article 25 of the Law on Financing the local self-government, belonging to local selfgovernment units that have taken the loan with a state guarantee, Upon the adopted conclusions, the Government of Montenegro accepted the issuance of state guarantees for loan indebtedness of local self-government units and the guarantee of the Loan Agreement between the Government of Montenegro - Ministry of Finance, local selfgovernment units and banks, the creditor, according to the proposals of the Ministry of Finance. Guarantees are given to banks for loan arrangements i.e. as follows: a) The guarantee for the loan arrangement concluded between the Royal Capital Cetinje and Erste Bank a.d. Podgorica in the amount of 7,000, Guarantee No /1 dated 9 November 2015, in accordance with Resolution of the Government No dated 29 October 2015 was issued in favour of Erste Bank a.d. Podgorica under the Loan Agreement number dated 20 October 2015 for the amount of 7,000, Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of Cetinje number /1 dated 26 October 2015, with credit debt with a state guarantee, concluded on 19 October 2015 between the Ministry of Finance and the Royal Capital of Cetinje. The security instrument is a Decision of the Real Estate Administration Branch Office Cetinje number UPI-967/2015 dated 6 November 2015 on the registration of the recordation of the mortgage lien in favour of the mortgagee i.e. the Government of Montenegro. Pursuant to Article 4 of the Agreement on establishment of mutual relations based on the realization of the rehabilitation plan of Royal Capital Cetinje for indebtedness with a state guarantee. Royal Capital Cetinje has issued a bill of exchange and a letter of authorization number / dated 9 November 2015, It was given an authorization number / dated 9 November 2015, which authorized the Ministry of Finance to dispose the funds from the Equalization Fund and the authorization No / dated 9 November 2015 to dispose the assigned revenues provided for in Article 25 of the Law on Local Government Financing, which belong to the Royal Capital Cetinje. b) The guarantee for credit arrangements concluded between the municipality of Bijelo Polje and commercial banks in the amount of 8,940, Contract on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Bijelo Polje number dated 26 October 2015, with loan indebtedness with state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Bijelo Polje, defines that the Municipality of Bijelo Polje can borrow the amount of 13,973,000.00, pursuant to the provisions of Article 64 paragraph 2 of the Law on Local Self-government Financing, with the prior approval of the Government of Montenegro. Pursuant to the Conclusion number dated 29 October 2015, the Government has accepted the issuance of state guarantee on the loan indebtedness of the Municipality of Bijelo Polje in the total amount of 8,940, and guarantees for loan contracts concluded with: o Komercijalna Banka a.d. Budva in the amount of 1,600, Guarantee No /1 was issued on 19 November 2015 under the Loan Agreement number dated 19 October 2015, in the amount of 1,600, in favour of Komercijalna Banka a.d. Budva. As a security instrument, it was issued a bill of exchange and bill authorization number /1 dated 10 November 2015, the authorization number dated 9 November 2015 by which it is authorized the Ministry of Finance to dispose the funds from the Equalization Fund and the

71 authorization number /1 dated 9 November 2015 on the assignment of revenues belonging to the municipality of Bijelo Polje. o Hypo Alpe Adria Bank a.d. Podgorica in the amount of 3,440, Guarantee number /1 issued as at 10 November 2015, according to the Loan Agreement number AA15306C3W5F dated 2 November 2015, the amount of 3,440, in favour of Hypo Alpe Adria Bank a.d. Podgorica. As security instrument, it was issued a bill of change and a letter of authorization number /1 dated 10 November 2015, the authorization number dated 9 November 2015 on disposal of the funds of the Equalization Fund and the authorization number /1 dated 9 November 2015 on assignment of revenues belonging to the municipality of Bijelo Polje. o Societe Generale Banka Montenegro AD Podgorica in the amount of 3,900, Guarantee number /1 issued as at 10 November 2015, according to the Loan Agreement number dated 10 November 2015, the amount of 3,900, in favour of Societe Generale Banka Montenegro AD Podgorica. As security instrument, it was issued a bill of change and a letter of authorization number /1 dated 10 November 2015, the authorization number dated 9 November 2015 on disposal of the funds of the Equalization Fund and the authorization number /1 dated 9 November 2015 on assignment of revenues belonging to the municipality of Bijelo Polje. o Crnogorska komercijalna banka a.d. Podgorica in the amount of 2,500, Guarantee number /1 issued as at 21 December 2015, according to the Loan Agreement number dated 15 December 2015, the amount of 2,500, in favour of Crnogorska komercijalna banka a.d. Podgorica. As security instrument, it was issued a bill of change and a letter of authorization number /1 dated 21 December 2015, the authorization number dated 9 November 2015 on disposal of the funds of the Equalization Fund and the authorization number /2 dated 21 December 2015 on assignment of revenues belonging to the municipality of Bijelo Polje. o NLB Montenegro banka a.d. Podgorica in the amount of 2,500, Guarantee number /1 issued as at 25 December 2015, according to the Loan Agreement number KR2015/29039 dated 21 December 2015, the amount of 2,500, in favour of NLB Montenegro banka a.d. Podgorica. As security instrument, it was issued a bill of change and a letter of authorization number /1 dated 21 December 2015, the authorization number /2 dated 21 December 2015 on disposal of the funds of the Equalization Fund and the authorization number /3 dated 21 December 2015 on assignment of revenues belonging to the municipality of Bijelo Polje. Security instruments for the given guarantees were a Decision of the Real Estate Administration - Branch Office Bijelo Polje, the number / dated 11 June 2015 and the Decision number / dated 25 March 2016 and the collaterals defined in Articles 3 and 4 of the Agreement on Establishment of Mutual Relations based on the realization of the rehabilitation plan of the Municipality of Bijelo Polje number dated 26 October c) The guarantee for the loan arrangement concluded between the Municipality of Kolasin and Erste Bank a.d. Podgorica in the amount of Guarantee number /1 issued on 10 November 2015, according to the Loan Agreement number

72 from 26 October 2015 concluded between the Municipality of Kolasin and Erste Bank a.d. Podgorica in the amount of 5,700, in accordance with the Resolution of the Government of Montenegro No dated 29 October The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Kolasin number dated 26 October 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Kolasin. The security instrument is a Decision of the Real Estate Administration Branch Office Kolasin, No. 464/498-2/15 date 11 November 2015 on inscription of recordation - mortgage. As security, the municipality of Kolasin issued a bill of exchange and a letter of authorization number dated 10 November 2015, the authorization number dated 10 November 2015 of disposal of funds of the Equalization Fund and the authorization number dated 10 November 2015 on assignment of revenues that belong to the Municipality of Kolasin. d) The guarantee for the loan arrangement concluded between the Municipality of Mojkovac and Societe Generale Banka Montenegro AD Podgorica in the amount of 650, Guarantee number /1 issued on 10 November 2015, according to the Loan Agreement number from 10 November 2015 in the amount of 650, on behalf of Societe Generale Banka Montenegro AD Podgorica in accordance with the Resolution of the Government of Montenegro No dated 5 November The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Mojkovac number dated 27 October 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Mojkovac. The security instrument is a Decision on inscription of recordation mortgage number /15 dated 11 November 2015, bill of exchange and a letter of authorization number dated 11 November 2015, the authorization number dated 11 November 2015 of disposal of funds of the Equalization Fund and the authorization number dated 11 November 2015 on assignment of revenues that belong to the Municipality of Mojkovac. e) The guarantee for the loan arrangement concluded between the Municipality of Mojkovac and Societe Generale Banka Montenegro AD Podgorica in the amount of 5,200, Guarantee number /1issued on 16 November 2015, according to the Loan Agreement number from 16 November 2015 in the amount of 5,200, on behalf of Societe Generale Banka Montenegro AD Podgorica in accordance with the Resolution of the Government of Montenegro No dated 17 November The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Berane number dated 6 October 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Berane. The security instrument is a Decision on inscription of recordation mortgage number /1 dated 18 November 2015 issued by the Real Estate Administration Branch office Berane, bill of exchange and a letter of authorization number dated 17 November 2015, the authorization number dated 17 November 2015 of disposal of funds of the Equalization Fund and the authorization number /1 dated 17 November 2015 on assignment of revenues that belong to the Municipality of Berane

73 f) The guarantee for the loan arrangement concluded between the Municipality of Šavnik and Societe Generale Banka Montenegro AD Podgorica in the amount of 150, Guarantee number issued on 1 December 2015, according to the Loan Agreement number dated 1 December 2015 in the amount of 150, on behalf of Societe Generale Banka Montenegro AD Podgorica in accordance with the Resolution of the Government of Montenegro No dated 17 November The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Šavnik number /1 dated 9 November 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Šavnik. The security instrument is a Decision on inscription of recordation mortgage number UPI-179/15 dated 3 December 2015, bill of exchange and a letter of authorization number /1 dated 2 December 2015, the authorization number dated 2 December 2015 of disposal of funds of the Equalization Fund and the authorization number dated 2 December 2015 on assignment of revenues that belong to the Municipality of Šavnik. g) The guarantee for the loan arrangement concluded between the Municipality of Rožaje and Societe Generale Banka Montenegro AD Podgorica in the amount of 3,500, Guarantee number / issued on 15 December 2015, according to the Loan Agreement number dated 15 December 2015 in the amount of 3,500, on behalf of Societe Generale Banka Montenegro AD in accordance with the Resolution of the Government of Montenegro No dated 10 December The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Rožaje number /1 dated 7 December 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Rožaje. The security instrument is a Decision of the Real Estate Administration Branch Office Rožaje on inscription of recordation mortgage number /15 dated 18 November 2015, bill of exchange and a letter of authorization, the authorization number 5079 dated 18 December 2015 of disposal of funds of the Equalization Fund and the authorization number 5080 dated 18 December 2015 on assignment of revenues that belong to the Municipality of Rožaje. h) The guarantee for the loan arrangement concluded between the Municipality of Danilovgrad and Societe Generale Banka Montenegro AD Podgorica in the amount of 2,500, Guarantee number /1 issued on 21 December 2015, according to the Loan Agreement number dated 21 December 2015 in the amount of 2,500, The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Danilovgrad number /1 dated 7 December 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Danilovgrad, The security instrument is a Decision on inscription of mortgage number up- 1208/15 dated 24 December 2015, bill of exchange and a letter of authorization number /1 dated 21 December 2015, the authorization number /1 dated 21 December 2015 of disposal of funds of the Equalization Fund and the authorization number /1 dated 21 December 2015 on assignment of revenues that belong to the Municipality of Danilovgrad

74 i) The guarantee for the loan arrangement concluded between the Municipality of Ulcinj and Erste bank a.d. Podgorica in the amount of 4,250, Guarantee number /1 issued on 29 December 2015, according to the Loan Agreement number dated 30 December 2015 concluded between the Municipality of Ulcinj and Erste bank a.d. Podgorica in the amount of 4,250,000.00, in accordance with the Resolution of the Government of Montenegro No dated 10 December The Agreement on establishment of mutual relations on the basis of implementation of the rehabilitation plan of the Municipality of Ulcinj number /1 dated 26 October 2015 with loan debt with a state guarantee, concluded between the Government of Montenegro - Ministry of Finance and the Municipality of Ulcinj. The security instrument is a Decision of the Real Estate Administration Branch Office Ulcinj on inscription of recordation mortgage number dated 30 December 2015, bill of exchange and a letter of authorization number /15/2 dated 28 December 2015, the authorization number /15-2 dated 28 December 2015 of disposal of funds of the Equalization Fund and the authorization number /15-2 dated 28 December 2015 on assignment of revenues that belong to the Municipality of Ulcinj. 10. PROPERTY Law on State Property 1 and by-laws governs the use, management and disposal of things and other goods that belong to Montenegro and local self-governments. Audit of the management of state property conducted in the budget spending units included in the audit scope established the following a) The Ministry of education, the Ministry of Labour and Social Welfare, the Ministry of Economy, the Ministry of Agriculture and Rural Development, Department of Education, Administration for Inspection Affairs, the Ministry of Culture, Human Resources Management Authority Data on property were delivered to the Property Administration after the expiration of the legally prescribed deadline. State authorities, in accordance with the Article 50 of the Law on State Property, are required to submit data on movable and immovable property to the competent administrative authority until the end of February of the current year for the previous year. b) The Ministry of Finance - information on the list of property for 2015 were not submitted to the Property Administration. Data on movable and immovable property, in accordance with Article 50 of the Law on State Property, shall be communicated to the Directorate for Property until the end of February of the current year for the previous year. c) The Ministry of Agriculture and Rural Development - The Decision on forming the Commission for making a list of property number 404-2/16-1 dated 20 January 2016 neither specified the period within which the list preparation should be done nor it determined the deadline for the submission of reports on the list. A document to establish the Commission must determine the period within which the list has to be prepared and the deadline for submission of reports on completed count list with the lists in accordance with the Article 12 of the Regulation on manner of keeping the records of movable and immovable property and the count list preparation of the items in state ownership. 1 Official Gazette of Montenegro, No. 47/

75 d) The Ministry of Education, Ministry of Economy, Department of Statistics, Department of Education, Administration for Inspection Affairs, Human Resources Management Authority, the Institute of Hydrometeorology and Seismology part of the listed official cars had no present value in The assessment of their value is not performed. If the official cars have no value, there should be prepared an assessment of their value in accordance with the Article 11 of the Instruction on the detailed manner of preparing the count list of movable and immovable property owned by the state. e) The Ministry of Education, Ministry of Finance, Ministry of Labour and Social Welfare, Human Resources Management Authority and the National Archives The count list of the fixed assets was not performed on the PL form. The count lists are missing the following information: the balance in the bookkeeping records, quantitative and value differences and the carrying amount and the amount obtained at counting. Commission for counting the property shall be liable to count the fixed assets in the PL form, as prescribed by the Instruction on the detailed manner of preparing the count list of movable and immovable property owned by the state. f) The Institute of Hydrometeorology and Seismology - Commission for counting the movable and immovable property, in the Report on executed counting No dated 24 February 2016, inserted in the count list an apartment in Podgorica of 44m2 (Sales and Purchase Agreement No dated 30 May 1995). The aforementioned object is not registered in bookkeeping evidences, i.e. there are no data on purchase, written-off and current value thereof. The Institute for Hydrometeorology and Seismology shall perform the valuation and make evidence in the accounting records of the residential facility in accordance with the Law on Property. Pursuant to the audit of management of state property, the irregularities were identified, out of which some were determined during the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2013 and Accordingly, the State Audit Institution recommends to all spending units to intensify the implementation of the Law on Property and related bylaws. 11. PUBLIC PROCUREMENT The aim of the audit of public procurement is the control of compliance with the Public Procurement Law 1. Scope of audit of public procurement included the procedures of public procurements that were conducted, as well as the Public procurement plan and Report on the public procurement contracts awarded in Findings of the audit and established factual findings a) The Ministry of Labour and Social Welfare, Department of Statistics, Administration for Inspection Affairs, Ministry of Culture, Institute of Hydrometeorology and Seismology, National Archives - The total annual value of public procurement contracts awarded under the direct agreement is higher than the statutory limit. Direct procurement agreements should be realized in the amounts prescribed by the Article 30 of the Law on Public Procurement. 1 Official Gazette of Montenegro, No. 42/11, 57/14 and 28/

76 b) The Ministry of Education has, by a direct purchase agreement, executed a procurement of computer equipment of the value of 18, The Ministry of Finance has, by a direct purchase agreement, executed a procurement of office equipment in the amount of 32, Ministry of Labour and Social Welfare has, by a direct purchase agreement, executed a procurement and maintenance of computer equipment in the amount of 25,696.77, travel agency services in the amount of 22, and translation services in the amount of 21, Ministry of Agriculture and Rural Development has, by a direct purchase agreement, executed a procurement of the marks for the animals in the amount of 10, and computer equipment in the amount of 5, The Contracting Authority shall be required to properly assess the value of public procurement and implement appropriate procurement procedure according to the established thresholds in accordance with the Law on Public Procurement, Procurement by direct agreement shall be implemented for procurement whose estimated value is up to 5, c) Administration for Inspection Affairs there were conducted two purchases via shopping method for the same type of public procurement under the requirements as follows: - The request for submission of bids by shopping method number / /2 dated 24 February The subject of public procurement CPV repair, maintenance and associated services of vehicles and related equipment and CPV Car maintenance services. - Invitation to tender in the public procurement procedure by shopping method number / /5 dated 26 November The subject of public procurement was CPV repair, maintenance and associated services of vehicles and related equipment and cars maintenance services CPV The National Archives There were conducted two procurements via shopping method for the same type of public procurement under the requirements as follows: - The request for submission of bids by shopping method number dated 9 February The subject of procurement was CPV printing services. - Invitation to tender in the public procurement procedure by shopping method number dated 24 June The subject of public procurement was CPV printing services. The public procurement procedure by shopping method, in accordance with the Article 29 and Article 42 of the Law on Public Procurement, can be implemented at the most once a year for one subject of public procurement. The subject of public procurement may be determined by lots of technology, quantity, type, place and time of delivery. d) Department for Transport has, in the report on conducted public procurement procedures for 2015, in the Form C for submitting information on awarded public procurement applying direct purchase agreement, showed the purchases that were not related to the year for which the report was made, but those have already been implemented in the previous year. When preparing the Report on conducted public procurement procedures, it is necessary to show the purchases that were implemented in the year for which the report is prepared. The audit of the public procurement system and compliance of the conducted public procurement procedures with the Law on Public Procurement identified the irregularities recurring in previous years. The State Audit Institution recommends that the spending units conduct the procurement process in a transparent manner and to ensure full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works in order to lawfully spend the budget funds

77 12. INTERNAL FINANCIAL CONTROLS SYSTEM The system of internal financial control represent the policies and procedures adopted by the management of budget funds users to achieve the determined objectives, efficiency and performance success ensuring and reliability of financial reporting. The audit of the system of internal financial controls, at the spending units that were the subject of the audit, identified that the Ministry of Education had unoccupied, and the Administration for Inspection Affairs and the Ministry of Culture did not systematize the job of a "Head of Internal Audit Unit". In accordance with the Article 27 of the Law on internal financial controls in the public sector, it is required a staffing of Head of Internal Audit Unit, while, in accordance with the Regulation on titles of internal auditors in the public sector, it is necessary to amend the act on internal organization and systematization of jobs by making systematized a job of the "Head of Internal Audit Unit" within the Department of Internal Audit. The Ministry of Finance has prepared the Annual Report on implementation of planned activities in the establishment and development of financial management and controls (Form GI-FMC) for 2015 in accordance with the Law on internal financial controls in the public sector and adopted a book of procedures with established procedures and responsibilities for business processes, but did not establish internal procedures for the tasks performed by the Directorate of the State Treasury. The State Audit Institution believes that there should be continued the performance of activities to establish the function of financial control and internal audit in spending units in accordance with the Law on internal financial control in the public sector and internal audit standards

78 PART II IMPLEMENTATION OF RECOMMENDATIONS FROM THE AUDIT REPORT ON THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR

79 79 472

80 The Parliament of Montenegro, upon reviewing the Proposal of Law on Final Statement of Accounts of the Budget of Montenegro for 2014 and the Annual Report on performed audits and activities of the State Audit Institution of Montenegro for period October October 2015, as at 28 th December 2015 adopted the Conclusion number 33/15-3/5 oo-72/15-44/3 ( Off. Gazette of Montenegro No. 78/15 dated 31 December 2015), which supports the recommendations of the State Audit Institution reported in the Auditors Report on the Proposal of the Law on Final Statements of Accounts of the Budget of Montenegro for Based on the findings identified by the Audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 and Information on the implementation of the Action Plan for implementing the recommendations of the State Audit Institution at the end of the first quarter of 2016, adopted by the Conclusion of the Government of Montenegro dated 28 July 2016 (document No /1 dated 29 August 2016), the State Audit Institution found the following: Budget overruns, reallocations and scope of public spending 1. The Ministry of Finance is recommended to fully align the general and the special part of the budget when planning the annual budget in the forthcoming period. The recommendation was implemented. The Ministry of Finance is recommended to consistently implement the established rules prescribed by the annual budget laws. Ministry of Finance, in accordance with Article 11 of the Budget Law for 2015, did not during the year exercise the reallocation of funds to the benefit of the same position of a budget user that incurred those costs to the amount of their achievement, which led to unauthorized overrun of the budget spending. The recommendation was not implemented. 2. The Government of Montenegro is recommended to anticipate, in the process of budget planning through annual budget laws, the revenues generated by the spending units in the course of their own business activities and to ensure that such revenues be used in line with the budget constraints defined in the annual Budget law. The Law on Budget of Montenegro for 2015 neither imposed an obligation to the spending units to plan by the annual budget law the amount of income generated by their own activities, nor an obligation to use the realized revenues in accordance with the limits established by the annual budget law. Specifically, Article 6 of the Law on Budget of Montenegro for 2015 provided for the income realized by a spending unit by performing its own activity, on the basis of legal powers, to be used exclusively to finance the expenditures of the concerned spending unit". State Cash Deposits 3. It is necessary that the Ministry of Finance ensures full records of the balance and turnover of monetary transactions on the deposit accounts in the system of the Consolidated account of the State Treasury in the class 1 of the General Ledger of Treasury, in accordance with the Article 6 of the Rulebook on Unified Classification of accounts for the State Budget, Extra- Budgetary Funds and Municipal Budgets

81 The Ministry of Finance did not harmonize the running of the General Ledger with the Rulebook on Unified Classification of accounts for the State Budget, Extra-Budgetary Funds and Municipal Budgets. According to the results of the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015, as in previous years, the Ministry of Finance through the General Ledger system of the State Treasury did not provide a complete record of balance and transactions on the accounts of a Class 1. The Recommendation was not implemented. 4. Tax administration should harmonize its accounting records, in the part on reported balances in the accounts of class "1" the monetary funds accounts, class "3" - accounts of public revenues payers (including the deposit accounts) and Class "7" accounts of public revenues, with the Rulebook on tax bookkeeping. Tax Administration, as well as in previous years, did not provide accounting records harmonized with the Rulebook on tax bookkeeping. The recommendation was not implemented. 5. The Ministry of Finance is recommended to comply with the Regulation on conditions for deferred collection of tax and non-tax claims. By controlling the decision on deferred settlement of tax and non-tax claims, it was determined that all debt deferral (4 decisions in the amount of 186,968.37) were not granted on condition that the taxpayer has provided a bank guarantee or other security instrument in the amount of the arrears, which is not in accordance with Article 2 of the Regulation on conditions for deferred collection of tax and non-tax claims. The recommendation was not implemented. Budget Expenditures 6. It is recommended to record the expenditures for repayment of arrears which have not been budgeted by the spending units within the group of accounts 463 Repayment of arrears from previous years, as well as not to charge this account with the expenditures due for payment in the current fiscal year. The recommendation was not implemented. The system of internal financial controls 7. Despite the evident improvements of this system, it should be continued the performance of activities to establish the function of financial control and internal audit in the spending units in accordance with the Law on internal financial control in the public sector and internal audit standards. The recommendation is partially implemented. Capital Budget 8. The spending units, which execute the capital budget, are recommended to harmonize the budget execution with the planned projects, or when changing the purpose of using the funds, notify thereof the Ministry of Finance and the Government of Montenegro, in order to obtain the appropriate approval in accordance with the Article 46 paragraph 3 of the Law on Budget and Fiscal Responsibility. When it comes to the Capital Budget, it was found that the recommendations given in the Report on the audit of the Final Statement of Accounts of Montenegro for 2014 were partly implemented in the part of harmonization of budget execution with the planned projects. The recommendation is partially implemented

82 Property 9. All spending units are recommended to intensify the activities on implementation of the Law on Property and related bylaws. When it comes to implementation of the recommendation referring to the state property, the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 identified the irregularities given in the text of the Report. The recommendation is partially implemented. Public Procurement 10. The spending units are recommended to make the public procurement process transparent and to ensure full implementation of the Law on Public Procurement, which stipulates the procedure of procurement of goods, services and works performance in order to achieve a lawful spending of budget funds. The recommendation is partially implemented. When it comes to implementation of recommendations concerning public procurement, the audit of the Proposal of the Law on Final Statement of Accounts of the Budget of Montenegro for 2015 identified the irregularities given in the text of the Report. On the basis of the findings identified, the State Audit Institution still recommends that spending units shall ensure the full implementation of the Law on Public Procurement

83 PART III REPORT ON ASSESSMENT OF APPLICATION OF FISCAL RESPONSIBILITY CRITERIA FOR

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85 At the 192 nd session of the Senate held as at 18 th October 2016, the State Audit Institution has adopted the Report on Assessment of Application of Fiscal Responsibility Criteria for 2015, which is an integral part of the Annual Report on performed audits and activities of the State Audit Institution for the period October October The legal basis for execution of the assessment of application of fiscal responsibility criteria in 2015 is stipulated by the Article 26, Paragraph 1, of the Law on Budget and Fiscal Responsibility. The Report on assessment of application of fiscal responsibility criteria was drawn up based on the data published by the Government of Montenegro, the Ministry of Finance, MONSTAT and the findings obtained in the course of audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014 and The State Audit Institution has taken over the data published by MONSTAT in the reported amounts relating to gross domestic product (as well as the GDP growth rates) 1 at market and fixed prices and data on the estimated gross domestic product referred to in the Statement of Reason of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2015 and Guidelines for macroeconomic and fiscal policy for the period The State Audit Institution completed the assessment of indicators in accordance with Articles of the Law on Budget and Fiscal Responsibility, and Guidelines for macroeconomic and fiscal policy for the period The Guidelines set the upper spending ceiling that is binding for 2015 and indicative of the next two years. The State Audit Institution has prepared a Report on assessment of application of fiscal responsibility criteria in 2015 based on the methodology agreed with SIGMA and in accordance with the objections and suggestions of SIGMA experts to the Preliminary Report on assessment of application of fiscal responsibility criteria in Assessment of Indicators Fiscal policy guidelines 2 were first adopted in April 2014 for the period , whereas it did not cover the spending ceilings for 2014, and thus the State Audit Institution conducted an assessment of dynamic indicators relating to spending ceilings in a way that, as the basis for that year, it took the data from the annual Law on Budget of Montenegro for Likewise, the State Audit Institution was monitoring the dynamic indicators, monitoring the relation between the Law on Budget for 2015 and its implementation, as well as the implementation of the budget in the particular year and the implementation of the budget in the previous year. The State Audit Institution has used data on cash deficit of the central government level rather than the general government deficit, i.e. surplus/deficit of local self-government was not included in the amount, because it was not published the official data on deficit of local self-government. 3 The Law on Budget and Fiscal Responsibility stipulates that the assessment of fiscal responsibility criteria be monitored through the static and dynamic indicators, as follows: Static indicators: o Primary budget balance should result in a cash surplus; o Current expenditures and transfers should be kept at a lower level than current revenues and donations; o General government level cash deficit shall not exceed 3% of gross domestic product (GDP) at market price; o Public debt 4 shall not exceed 60% of GDP at market prices; o Plan for the coming year must be within the defined spending ceilings set out in the guidelines of fiscal policy for the current year. 1 Taken on September 30, 2016 from: 2 Prescribed by the Article 18 of the Law on Budget and Fiscal Responsibility. 3 The State Audit Institution has not been able to confirm the real balance of deficit/surplus of local self-government because, it represented the preliminary data. 4 Public debt is prescribed by the Law on Budget and Fiscal Responsibility and includes general government level debt, i.e. the central government level (state authorities and and state administration bodies, legal entities and companies that mostly provide services of public interest which are under the management control and mainly financed by the state) and local level (municipal authorities, legal entities and companies that mostly provide services of local interest and which are under the management control and mainly financed by the municipality).

86 Dynamic indicators: o Spending ceilings growth rate for the current budget and the budget of state funds may not exceed the estimated growth rate of the real gross domestic product (ex-ante and ex-post, i.e. upon adoption and execution of the budget); o Spending ceilings growth rate for the capital budget and the budget reserve may not exceed the nominal GDP growth rate product (ex-ante and ex-post, i.e. upon adoption and execution of the budget). Data relevant to the assessment of indicators, as well as the expressed indicators are presented in the table below, along with the following parameters: Indicator implemented, parameter "YES" Indicator not implemented, parameter "NO" S, No. DESCRIPTION 5 Plan 2015 Execution Execution Execution , Cash Deficit (-)/surplus (+) , Interests , The primary cash deficit (1 + 2) I The primary cash surplus NO NO NO NO 4, Gross domestic product at market prices 3, , , , , The share of cash deficit in GDP at market prices 7.60% 8.06% 2.98% 8.06% 6, Allowed share of cash deficit to GDP 3.00% 3.00% 3.00% 3.00% II Cash Deficit <3% of GDP NO NO YES NO 7, Public debt 7 2, , , , , The share of public debt to GDP at market prices 65.85% 66.73% 59.91% 66.73% 9, Allowed share of public debt to GDP at market prices 60.00% 60.00% 60.00% 60.00% III The share of public debt to GDP at market prices <60% NO NO YES NO 10, Current budget revenues and donations 1, , , , ,1 Personal income tax ,2 Corporate income tax ,3 Property tax ,4 Value added tax and excise ,5 Taxes on international trade and transactions ,6 Other taxes ,7 Contributions ,8 Duties ,9 Fees ,10 Donations ,11 Other revenue , Current expenditures and transfers 1, , , , IV Current expenditures and transfers <current budgetary revenues YES YES YES YES 12, Current Budget and budget of state funds 1, , , , ,1 Interests ,2 Donations ,3 Co-financing grants ,4 Material damages-natural disasters , The current budget and state funds budget, net of exemptions 1, , , , , The growth rate of the current budget and the budget of state funds, net of exemptions 4.17% -1.08% 15, Real GDP 3, , , , , The growth rate (deviations from plan) of real GDP 1.80% 3.38% The growth rate of the current budget and the budget of state funds reduced by V exemptions <growth rate of real GDP ex post NO YES 17, Capital Budget , The Budget reserves , Total (17+18) , The growth rate of the capital budget and reserves % % 21, The growth rate of GDP at market prices 2.23% 4.83% The growth rate of the capital budget and reserves <growth rate of nominal GDP ex VI post YES NO The State Audit Institution has conducted an assessment of the 2015 fiscal responsibility criteria application, despite the fact that the Budget of Montenegro for 2015 envisaged a departure for the following fiscal responsibility criteria: achievement of primary budget cash surplus, participation of cash deficit in the amount less than 3% of nominal GDP, public debt below 60% of nominal GDP, planning within defined spending ceilings. 5 Note: Data on revenues and expenditures, as well as the types of budgets, which are used to create indicators, are given in the Tables 1 and 2 at the end of this report. 6 Information about the plan and execution of the cash deficit can be found in the reports on the audit of the Final Statement of the Accounts of Budget of Montenegro for 2014 and 2015 on the web page 7 Data on public debt can be found in the reports on the audit of the Final Statement of the Accounts of the Budget of Montenegro for 2014 and 2015 on the web page 8 The presented data on planned public debt is calculated in a way that the revised data on public debt at the end of 2014 was added the planned net borrowing in 2015 of the general government presented in the Statement of reasons to the Proposal of Law on Budget of Montenegro for 2015, page 27, Table - Public spending with the highway (position-borrowings and loans from domestic and foreign sources less positions - Repayment of debt to residents and non-residents)

87 1. Primary Budget Cash Surplus Analysis of data from the Budget Law of Montenegro for 2015 shows that the primary cash surplus of the central government level was not estimated, but instead, it was planned the primary cash deficit in the amount of EUR mil., which means that Budget Law for 2015 did not meet the fiscal responsibility criterion prescribed in Article 19, Paragraph 1, Item 1, of the Law on Budget and Fiscal Responsibility. Execution of the Budget of Montenegro in 2015 indicated that the primary cash deficit of the central government level was in the amount of mil euro, which is, in comparison to the planned primary cash deficit of the central government level that amounted to mil euros, increased by mil euro, i.e. 8.52%. Considering the achieved primary cash deficit of the central government level in 2015 ( mil euro) in relation to the achieved primary cash deficit of the central government level in 2014 (27.46 mil euro), it was identified an increase of the primary cash deficit of the central government level by the amount of mil euro or by 7.6 times. The growth of the primary cash deficit of the central government level in 2015 compared to 2014 can be mainly explained by the increase in expenditures of the capital budget by %, i.e. growth in the nominal amount of mil euro. 2. Cash deficit of less than 3% of Gross Domestic Product at market prices Figures reported in the Budget Law of Montenegro for 2015 show that the participation of cash deficit 9 in the nominal gross domestic product was planned at the rate of 7.60%, while the achieved participation was at the rate of 8.06%, and, thus, the requirement set out under Article 20, Paragraph 1, Item 1, of the Law on Budget and Fiscal Responsibility was met neither in the budget planning process nor in the budget execution process in Should we compare realized share of the cash deficit in nominal GDP in 2015 with realized share of cash deficit in nominal GDP in 2014, it is noted that there has been a deterioration of this criteria 10. The share of cash deficit in nominal GDP in 2015 amounted to 8.06%, while the share of the cash deficit in nominal GDP in 2014 amounted to 2.98%, i.e. there has occurred a participation increased by 2.7 times. 9 The State Audit Institution has used data on the cash deficit of the central level rather than the general level deficit i.e. surplus/deficit of local self-government was not included in the amount. 10 One of the reasons for deterioration in this indicator the greater realization of current expenditures and transfers in relation to the plan accompanied by decreased realization of current revenues and donations

88 3. The public debt below 60% of gross domestic product at market prices Public debt at the end of 2015 amounted to 2, mil euro and referred to: State debt in the amount of 2, mil euro which includes: o foreign debt in the amount of 1, mil euro; o domestic debt in the amount of mil euro; The debt of local self-government in the amount of mil euro. Pursuant to the Law on Budget of Montenegro for 2015, it was planned a net increase in the public debt in relation to 2014 by the amount of mil euro or 12.74%. In 2015, the public debt was increased by the amount of mil euro, or 16.75%, with the following trends identified: Foreign debt in 2015 compared to 2014 increased by the amount of mil euro or 25.27%, while the Budget Law for 2015 planned an increase in the amount of mil euro. Domestic debt, recorded in 2015, decreased compared to the same in 2014 in the amount of mil euro. The debt of local self-government - The Report on Public Debt as of 31 December 2015, Item 3 The Debt of Local Self-government, stated the consolidated debt of municipalities in the amount of mil euro i.e. domestic debt in the amount of mil euro and the foreign debt in the amount of mil euro. The amount of mil euro referred to foreign debt of municipalities under contracts signed by the Government of Montenegro with foreign creditors, and it was stated as state debt (Foreign debt of the state). The amount of mil euro is stated as the amount of local self-government debt. Pursuant to the Law on Budget for 2015, planned share of public debt to GDP ratio was 65.85%, while in 2015 the realized share was 66.73%. The realized share of public debt to GDP ratio in 2015 was increased by 6.82 percentage points compared to the results of share in The criteria set forth in Article 20, Paragraph 1, Item 2 of the Law on Budget and Fiscal Responsibility that the public debt must be less than 60% of gross domestic product at market prices was not fulfilled. 4. The level of current expenditures and transfers should be lower than current revenues and donations Budget Law of Montenegro for 2015 estimated the current revenues and donations exceeding the current expenditures and transfers by EUR mil, and thus the requirement set out under Article 19, Paragraph 1, Item 2, of the Law on Budget and Fiscal Responsibility was met in the planning process. Current revenues and donations in 2015 were realized in the amount of 1, mil euro or 99.67% compared to the funds planned by the Budget Law for Current expenditures and transfers in 2015 were realized in the amount of 1, mil euro, having exceeded the funds planned by the Budget Law for 2015 by 3.18%. In addition to realized current expenditures and transfers in excess of

89 the planned funds, the level of current expenditures and transfers were lower than current revenues and donations for mil euro thus, this indicator having been realized in the reporting year. Comparison of realized current revenues and donations in 2015 with realized current revenues and donations in 2014 showed that there was an under-realization of current revenues and donations by 2.14%. Under-realization in revenues was caused primarily by a lower realization of corporate income tax, decreased by 6.37%, and value added tax, decreased by 8.13%. 5. Compliance with spending ceilings while adopting the Law on Budget for 2015 By analysing data from the Law on Budget of Montenegro for 2015 and Guidelines of macroeconomic and fiscal policy for the period , it was perceived the application of indicators of the Articles of the Law on Budget and Fiscal Responsibility. Name Limit amount indicated in the Guidelines for the period Amount of the plan 11 for 2015 in million Were the limits defined during the budget planning for 2015 Difference between 2015 plan and 2015 limits % Trend Percentage of the plan in comparison to defined limit Current budget NO % State Funds Budget YES % Capital Budget NO % Budget Reserve NO % Total 1, , NO % Spending ceiling, as the sum of spending ceiling of the current budget, the budget of state funds, the capital budget and the budget reserve, specified in the Guidelines, was exceeded by the net amount of mil euro, i.e. by 18.27%, which shows that the provision of the Article 22, Paragraph 1, of the Law on Budget and Fiscal Responsibility was not met. If to observe the contents of the budget, the highest percentage the exceeding the limit was planned for the capital budget, because the Guidelines did not cover the spending limits for the Bar Boljare highway, (which were planned by the Budget Law for 2015 in the amount of mil euro), i.e. the limit for the capital budget was exceeded by mil euro. Limit for the budget reserve was exceeded by the amount of 5.17 mil euro, or by 65.46%, while for the current budget, it was planned the greater amount by mil euro, or by 9.94% more than projected by the Guidelines. Pursuant to the Guidelines of macroeconomic and fiscal policy for the period , the Government of Montenegro defined the spending ceilings for 38 budget beneficiaries of the first level within the part relating to the spending ceilings of the current budget and the budget of state funds. Comparing the planned amounts of funds for budget beneficiaries of the first level defined by the Budget Law for 2015 and the limits, it can be concluded that 26 spending units have not planned the budgets within defined limits, while 12 spending units complied with the defined spending limits. Spending ceilings did not cover the budget user Public Enterprise Radio and Television of Montenegro, for which, pursuant to the Law on Budget of Montenegro for 2015, the amount of 11 The plan was reduced by the exemptions relating to repayment of debt and interests, donations from EU funds and other donations (whereby the Plan referred to in the Treasury's General Ledger has been decreased by the identified donations), costs of donations co-funding, costs of financing the material damages resulting from natural disasters and other extraordinary and unforeseen circumstances

90 12.70 mil euro was planned. Considering the spending ceilings relating to budget funds as budget beneficiaries, it is evident that two out of five budget funds did not plan the funds within defined limits, while three complied with the set limits. The limits of gross salaries and other personal income of the current budget and the budget of state funds were defined at the level of mil, while expenditures for gross salaries and other personal income determined by the Budget Law of Montenegro for 2015 were in the amount of EUR mil., i.e. there were no exceeding the limits therein. 6. Dynamic indicators - the Guidelines for the period and the Budget Law for 2014 Dynamic indicators derived from the Guidelines indicate that decrease in the current budget and the budget of state funds was projected by 2.12%, while the projected real GDP growth amounted to 3.5% 12, while the growth of the capital budget was projected by 3.12%, and the budget reserves projected to be decreased by 10.85%, while the nominal GDP growth was projected by 5.6%, by which the criteria of the Article 22 of the Law on Budget and Fiscal Responsibility were met. 7. Dynamic indicators - plan and execution Considering the plan and realization for 2015, it can be noted the realization of planned real GDP of %, while the rate of realization of the current budget and the budget of state funds (realized versus planned ratio) was %. The realization of the planned amount in 2015 related to the capital budget amounts to 83.74%, while the realization of the budgetary reserve in 2015 amounted to %, with the realization of nominal GDP growth by the amount of % in comparison to the planned one. Considering the ratio of realization for 2015 and 2014, it is noticeable a decrease in the realization of current budget and the budget of state funds by 1.08%, with the increase in real GDP by 3.38%, while, on the other hand, the execution of the capital budget increased by %, and budget reserve by 22.98% with the nominal GDP growth by the amount of 4.83%. 8. The application of the Law on Budget and Fiscal Responsibility The Ministry of Finance was obliged to, in accordance with the provisions of the Article 25 of the Law on Budget and Fiscal Responsibility, prepare and publish the report on the preliminary levels of budget cash surplus or deficit, public debt and net borrowings within 90 days of the end of the fiscal year. As at 28 March 2016, the Ministry of Finance published the Analysis of public finances in , which presented the preliminary data on the cash deficit and net borrowings. As at 1 July 2016 i.e. 3 months after the deadline provided for in the Article 25 of the Law on Budget and Fiscal Responsibility, the Ministry of Finance presented the Report on public debt of Montenegro as of 31 December There were not carried out the activities related to the elimination of risk of public finance instability due to a growth of public debt above 60% of GDP, as defined in the Article 21 of the Law on Budget 12 Data on projections of real and nominal GDP were taken from the Guidelines of macroeconomic and fiscal policy so as to obtain as accurate information as possible. 13 Taken from the web page: 14 Taken from:

91 and Fiscal Responsibility. The fiscal situation deteriorated due to the increase of participation of cash deficit (from 2.98% in 2014 to 8.06% in 2015) and public debt to nominal GDP (from 59.91% in 2014 to 66.73% in 2015), and, therefore, to maintain fiscal discipline in Montenegro, it is necessary to stop this trend and consistently apply the Law on Budget and Fiscal Responsibility. 9. Conclusion Analysis of the realization of fiscal rules in summary form can be displayed through a summary of results that are shown in the following table: Description Number of indicators Static indicators Realized Dynamic indicators Number of indicators Execution 2015 /Plan Execution 2015/Execution Realized With the Law on Budget for 2015, it was met the static indicator that refers to criterion of current revenues exceeding the current expenditures, while the indicators related to realization of the primary budget surplus, the share of cash deficit in nominal GDP and the share of public debt in nominal GDP has not been met. With the realization of the Budget Law for 2015, the indicator relating to realized current revenues exceeding current expenditures was met. After comparison of the Guidelines of macroeconomic and fiscal policy for the period and the Budget Law for 2015, it was identified that, when planning the Budget for 2015, there were no compliance with the spending ceilings which were binding and which related to limits of current and capital budget, as well as the budget reserves. Considering the static indicators at the realization of the Budget in 2015 in relation to realization of the Budget in 2014, it is identified that there has been deterioration in the fulfilment of indicators, at the share of primary cash deficit and public debt in nominal GDP, which in 2014 showed the realization within the permitted level. Dynamic indicators related to the growth of spending ceiling in relation to the previous year shows that those are defined in the projected growth of nominal or real GDP. If considered the realization of the Budget Law for 2015 and the planned real GDP, it is concluded that the current budget and the budget of state funds were realized in an amount exceeding the realized planned real GDP. Comparison of the realization of the Budget Law for 2015 and the realization of the planned nominal GDP shows the realization of the capital budget in an amount lower than the realized planned nominal GDP, while the realization of budgetary reserve exceeded the realization of the planned level of nominal GDP in the current year. Comparing the trend of dynamic indicators through the relation of realizations for 2015 and 2014 and the trends of nominal and real GDP, it is concluded that there has been a decrease in spending the current budget and the budget of state funds with an increase in real GDP, while an increase in capital budget and the budget of state funds exceeds the growth of nominal GDP in the reporting period

92 APPENDIX: TABLE AND DATA SOURCES Economic classification Description Execution Adjusted Execution Adjusted Plan 2015 Execution Adjusted 7 RECEIPTS 1, , , , Current income 1, , , , Taxes Personal income tax Corporate income tax Property tax Value added tax Excise Tax on international trade and transactions Other taxes Contributions Contributions for pension and disability insurance Contributions for health insurance Contributions for insurance against unemployment Other contributions Duties Administrative fees Court fees Residency fees Other duties Fees Fees for use of goods of public interest Fees for use of goods of natural resources Environmental fees Fees for games of chance organizing Fees for roads Other fees Other income Income from capital Fines and confiscated property gains Revenues generated by authorities through their activities 7155 Other income Proceeds from sale of property , Proceeds from sale of non-financial assets , Proceeds from sale of non-financial assets , Proceeds from sale of financial assets , Proceeds from sale of financial assets Proceeds from repayment of loans Proceeds from repayment of loans Proceeds from repayment of loans Donations and transfers Donations and transfers Current donations Borrowings and loans Borrowings and loans Borrowings and loans from domestic sources Borrowings and loans from foreign sources Total 1, , , ,

93 Table 2: The Law on the Final Statement of Accounts of Budget for adjusted Current Budget Budget of state funds Capital Budget Financing Transactions Budget Reserve Total Current expenditures , Social security transfers , Transfers to institutions, individuals, NGO and public sector , Capital expenditure , Granted borrowings and loans , Repayment of principal debt , Guarantees , Payment of liabilities from previous years , Total , , The Law on Budget for 2015 Current Budget Budget of state funds Capital Budget Financing Transactions Budget Reserve Total Current expenditures , Social security transfers , Transfers to institutions, individuals, NGO and public sector , Capital expenditure , Granted borrowings and loans , Repayment of principal debt , Guarantees , Payment of liabilities from previous years , Total , , Proposal of the Law on the Final Statement of Accounts for adjusted Current Budget State Funds Budget Capital Budget Financing Transactions Budget Reserve Total Current expenditures , Social security transfers , Transfers to institutions, individuals, NGO and public sector , Capital expenditures , Granted borrowings and loans , Repayment of principal debt , Guarantees , Repayment of liabilities from previous years , Total , ,

94 PART IV EXCERPTS FROM THE FINAL AUDIT REPORTS ON INDIVIDUAL AUDITS PERFORMED IN THE PERIOD OCTOBER 2015 OCTOBER

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96 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF PUBLIC PROCUREMENT ADMINISTRATION Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board Members: Financial audit and regularity audit Public Procurement Administration Annual Financial Report of the Public Procurement Administration for auditing days Mr Milan Dabović, PhD, President of Senate - Head of Auditing Board Mr Nikola N. Kovačević, Member of Senate - member of Auditing Board

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98 I BASIC ELEMENTS 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of Public Procurement Administration for 2015 is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan for 2016 (No , dated 22 December 2015); Decision on Conducting Audit for the Public Procurement Administration for 2015 (Number dated 21 January 2016). Audit has been conducted in line with the following: The Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology of Performing the Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI) and Guidelines for quality follow up audit. 2. GENERAL DATA ON THE AUDITED ENTITY Public Procurement Administration, as an independent administrative authority, operates in accordance with the Regulation on the functioning of the state administration. Rules on internal organization and systematization of jobs in 2013 was effective until the new Regulation adoption, which was established by the Government of Montenegro pursuant to the Conclusion number dated 5 November Consent to the Proposed Rules on internal organization and systematization of jobs, in accordance with Article 15 of the Law on Civil Servants and State Employees, given by the Ministry of Finance (document No /1 dated 26 September 2015) and the Human Resources Administration (Opinion No. 02/2 011/ /2 dated 14 October 2015). 3. AUDIT OBJECTIVE, SUBJECT-MATTER, TYPE AND SCOPE The objective of the audit The objective on the financial audit is to express an opinion on whether: 1. the financial statements, in all material respects, are prepared in accordance with the applicable financial reporting framework; or 2. the financial statements, in all material respects, are given a fair and objective view in accordance with the given framework. The objective of the regularity audit is to express an opinion on whether the financial and other operations of the audited entity, in all material respects, comply with the laws, other regulations and acts that have been identified as criteria for a given audit. The subject-matter of the audit was the Annual Financial Statement of the Public Procurement Administration for 2015, which includes the Cash Flow Statement III, Statement of Arrears, Statement on the manner of expenditure of funds after the end of the fiscal year and Statement on the manner of expenditure of funds from the current budget reserve, as well as the harmonization of business performance with legal and other regulations

99 Type of Audit - State Audit Institution has performed a financial audit and regularity audit for the period from January 1 to 31 December The scope of the audit - The audit included a control of cash flows, the legality of funds spending, the accuracy of disclosed data and the extent of their disclosure, the functioning of the system of internal control, treasury operations, assets and procurement. Coverage, i.e. a scope of checks is determined depending on the determination of the degree of materiality (significance) and the established audit risk. 4. AUDIT METHODS The audit was planned and carried out in accordance with International Standards on Auditing ISSAI, in a way that allows it to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether the business activities, financial transactions and information comply with legal, bylaws and other regulations. In the preparatory phase of the audit, it was carried out an identification and risk assessment, through an understanding of the audited entity and its environment, including internal controls. Also, there was determined the materiality at the planning stage of financial audit for financial statements as a whole (0,98 % of total expenditures or expressed in the absolute amount of 2.787,07 ), i.e. the assessment of the extent to which it can be tolerated a misstatement in the financial statements, which will not significantly affect their fairness and objectivity. 5. ACCOUNTING SYSTEM The system of accounting records of the Public Procurement Administration is based on a cash basis and is linked to the information system SAP (software of the State Treasury in which the treasury operations are recorded). II OPINION AND RECOMMENDATIONS The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board number dated 21 January 2016, conducted a financial audit of the Annual Financial Statements and the regularity audit of the Public Procurement Administration for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of financial and regularity audit. The audit was conducted in accordance with International Standards on Auditing in the Public Sector (ISSAI). These standards require that we plan and perform the audit in a way that allows us to obtain reasonable assurance whether the financial statements are free of materially significant error. Based on the conducted audit and established factual findings, the Auditing Board comprised of Mr Milan Dabović, PhD, the Head of the Auditing Board - President of the Senate and Mr Nikola Kovacevic, member of the Auditing Board - a member of the Senate, at its session held on 13 June 2016, adopted the: Report on the Audit of the Annual Financial Statement of the Public Procurement Administration for 2015 During the FINANCIAL AUDIT, it was found that the financial statement for 2015, in all material respects, is compiled and presented in a fair and objective manner in accordance with the applicable financial reporting framework and competent Auditing Board expressed AN UNQUALIFIED OPINION WITH THE EMPHASIS OF MATTER. The following matter is hereby emphasized: 1. Pursuant to the expenditures control, it was found the following:

100 The invoice number 14 dated 25 June 2015 in the amount of , issued by Publishing Company "Prosveta", was paid by cash from the petty cash, from the account expenditures for official travel. The above expenditure should have been charged to expense of the account Material for special purposes. The expenditure in the amount of , based on several invoices relating to the costs of entertainment, was paid by cash from the petty cash, from the account expenditures for official travel. The above expenditure should have been charged to expense of the account entertainment expenses. Pursuant to the decisions (number and /1 dated 30 April 2015), the Public Procurement Administration made the payments from the item 4191-expenditure for payment of service contracts of the fees in the amount of for two employees, hired to maintain the training of officers for public procurement and for monitoring and preparation of activities in the Committee on government procurement with the WTO. Those fees should have been paid from the account Other personal income. Public Procurement Administration paid the fees to the employees due to increased workload in the amount of 3,000.00, from the account Other, without accrued taxes and contributions, while those should have been recorded as personal income at the expense of the account Other personal income. The Public Procurement Administration is recommended to pay and record the costs in accordance with the Regulation on Uniform Classification for the State Budget, Extra- Budgetary Funds and Municipal Budgets and to adhere to the limits of consumption in accordance with Article 40 of the Law on Budget and Fiscal Responsibility. Through the REGULARITY AUDIT it was found that the Public Procurement Administration has not put their business activities, financial trasactions and information in all material aspects in compliance with the laws and other regulation that were identified as criteria. Therefore, the relevant Auditing Board expresses its QUALIFIED OPINION. The basis for expressing qualified opinion: 2. Public Procurement Administration has no accounting records of liabilities in the accounts of class 2. In this way, no conditions were created for the application of the Rulebook on the method of preparation and presentation of financial statements of the budget, state funds and local governments, which stipulates that the Report on outstanding liabilities comprises the entries of data recorded in the accounts of class 2 - Liabilities (categories 21, 22, 23, 24, 25, 26 and 27). Public Procurement Administration should provide a record of liabilities in the accounts of class 2 and to prepare the Report on outstanding liabilities in accordance with the Instructions for completing the report on outstanding liabilities. 3. In 2015, the Public Procurement Administration paid the variable portion of salaries paid to employees for eight months (February, March, April, May, July, October, November and December), but for four months, those were paid by the amount of 1, more than defined by the decisions on the payment of the variable salary part number: , , and and decisions of variable part of the salary, signed by the Ministry of Finance, which indicates inadequate established system of internal controls. Control of expenses must be carried out in accordance with the Instruction for the State Treasury Operations, Chapter II - Control of expenses, item 25 d, which stipulates that the

101 authorizing officer verifies the request for payment if he finds that all amounts and calculations are correct. 4. Public Procurement Administration has not, within the legal deadline, submitted the reports on calculated and paid taxes and contributions to the Tax Administration (IOPPD forms). After examining the submitted IOPPD forms, it was found that there were not reported the payments of fees of commissions and working groups, which is not in accordance with the Law on integrated registration and reporting system of calculation and collection of taxes and contributions and the Rulebook on the form, content, manner of filling of a unified form of reports on calculated and paid tax on personal income and contributions for compulsory social insurance. The Public Procurement Administration is recommended to submit the IOPPD by the 15th of each month for the previous month and to provide the calculation of taxes and contributions for all personal income in the previous month in accordance with the Law on Tax on personal income. 5. Public Procurement Administration has paid the fees from the account 412 Other personal income for which it did not calculate the tax and contributions i.e. as follows: a) Fees to members of the Working Group for drafting bylaws in the amount of 1,270.00, according to the Decision of the Public Procurement Code dated 18 December 2015 and the Ministry of Finance's Decision No /1 dated 9 February 2015, and in accordance with the Articles 163, 166 and 167 of the Labour Law. b) Financial awards in the amount of 1,250.00, based on a special contribution to the achievement of program tasks, pursuant to the Decision No /1 dated 8 July 2015 and the decision of the Public Procurement number dated 8 July 2015, in accordance with Articles 3, 4 and 6 of the Regulation on the type of an award and the procedure of their awarding to a civil servant or state employee. The Public Procurement Administration is recommended to calculate the taxes and contributions on the paid fees the in accordance with Article 14 of the Law on Personal Income Tax, which stipulates that the income from fees shall be treated as personal income. 6. Expenditures for payment of service contracts - Public Procurement Administration has concluded Contract No dated 26 February 2015 with the person who signed a work contract for an indefinite period. The basis for the conclusion of such a contract was an increased workload, which is not in accordance with the Law on Civil Servants and Stated Employees and the Labour Law. Public Procurement Administration concluded the contracts (number dated 2 October 2015, No dated 8 July 2015, number dated 3 November 2015, number dated 1 September 2015) for tasks that are stipulated in the Rulebook on internal organization and systematization of jobs, which is not in accordance with the Law on Civil Servants and State Employees. Contracts were made with reference to the Labour Law (Articles 163, 166 and 167), which stipulate the areas of the agreements on temporary and occasional jobs. The audit has found that the Public Procurement Administration in 2015 engaged pursuant to the contracts the persons to carry out the activities under the competence of the Administration, which are contained in the description of the systematized job, which is not in accordance with the Law on Civil Servants and State Employees and the Labour Law

102 7. The system of internal financial controls - in accordance with the Law on internal financial controls in the public sector, the Public Procurement Administration adopted the Book of Procedures (FMS) number dated 14 September 2015, which includes the internal documents which regulate the financial management and control. It was prepared the annual report on the implementation of planned activities in the establishment and development of financial management and control system (Form G-FMS). The audit has found that control activities were not applied in all processes, and duties were not segregated, and the audited entity did not fully implement all activities aimed at establishing an adequate system of internal controls. The audited entity is obliged to carry out all activities and actions in order to establish a system of financial management and control in accordance with the Law on internal financial controls in the public sector. 8. The records of state property the audit of state property records identified the following: The inventory of state property was not prepared on the PL form. The inventory lists were entered neither all the necessary data such as inventory numbers, the location of the item, unit of measure, balances determined by the accounting records, nor the possible differences in quantities and values determined through the list and accounting balance. Also, it was found that the list of assets did not cover all movable items, i.e. the inventory lists did not recorded the vehicle Opel Vectra 1.9. The Commission for inventory of property entered in the inventory lists the write-off value. However, it was found that the calculation of depreciation has not been conducted on Form OA, that it was not signed and verified by the head of accounting and head of the authority. Also, the depreciation calculation did not include all movable and immovable property which is subject to annual accounts, so that one business vehicle, projector and other items were measured at the same values at the beginning and end of the accounting period. For inventory of assets, the Commission is required to perform an inventory on Form PL and to enter in the inventory lists all data in accordance with the instructions on the detailed manner of carrying out the inventory of movable and immovable property owned by the state, as well as all movable and immovable property. Calculation of depreciation of tangible and intangible values should be carried out in accordance with the Regulation on classification of fixed assets by groups and methods for determination of depreciation of budgetary and extra-budgetary users. 9. The audit of the system and compliance of conducted public procurement procedures identified the following: There were not prepared the Minutes on negotiations during the implementation of the negotiation procedure without prior publication of the invitation to tender for the procurement of services of repair and maintenance of motor vehicles, Invitation No dated 20 February The data in Form C (direct agreement), in column IV (the subject of public procurement) were not entered in accordance with the Common Procurement Vocabulary (CPV), in accordance with the Regulations on records of public procurement procedures. Public Procurement Administration is obliged to ensure full implementation of the Law on Public Procurement and by-laws regulating the procedure of procurement of goods, services and works, in order to lawfully spend the budget funds, so that the procurement process is transparent and cost-effective

103

104 EXCERPT FROM PERFORMANCE AUDIT REPORT EXPENDITURES FROM THE BUDGET OF MONTENEGRO FOR LITIGATIONS ARISING FROM LABOUR RELATIONS Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board Members: Performance audit Protector of property-legal interests, the Ministry of Finance, Ministry of Interior, Ministry of Defence, Ministry of Justice, Ministry of Finance, Centre for mediation and the Agency for peaceful settlement of labour disputes. Activities conducted by the Protector of the property-legal interests and respondent authorities for the purpose of economic management of expenditure for litigations arising from labour relations. 120 auditing days Mr Branislav Radulović, PhD, member of Senate - Head of Auditing Board Mr Nikola N. Kovačević, Member of Senate - member of Auditing Board

105 1. GENERAL PART Pursuant to the Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07 and 38/13), the Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); the State Audit Institution Annual Audit Plan, dated 22 December 2015 (No ) and Decision on Conducting Audit passed by the Auditing Board of the State Audit Institution composed of Mr Branislav Radulovic, PhD (member of Senate and the Head of the Auditing Board) and Mr Nikola Kovacević (member of Senate member of the Auditing Board) dated 30 July 2016 (No: ) it was performed the Performance Audit of Expenditures from the budget of Montenegro for the litigations arising from the labour relations. Audit has been conducted in line with the Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15), the Instruction on Methodology of Conducting the Performance Audit and International Standards for Supreme Audit Institutions (ISSAI-level III) Basis for the audit Montenegro and its institutions appear as a defendant in civil proceedings before the competent courts and, consequently, the State Audit Institution (SAI) pointed out in several of its findings the growth of expenditure on this basis. In 2009, in its Report on the audit of the Final Statement of Accounts of the Budget of Montenegro, SAI pointed to the constant growth of the amount of funds on the basis of court verdicts against the state that are paid by enforced collection. SAI recommended that the entities that caused these costs should be reduced the budgets for the amount of the incurred court costs. This would reduce the costs of enforced execution, increase the accountability of budget users and allow better monitoring of these costs by location and type of occurrence. It is recommended to exercise increased control over the execution of this position, checking the structure and causes of these expenditures. 1 According to data of the Ministry of Finance from the budget of Montenegro, in the period , for this type of expenditure it was paid the amount of 71,305,707. Number of cases processed by the Protector of property-legal rights interests and before the Agency for peaceful settlement of labour disputes tends to increase. 2 The records of the Ministry of Finance does not provide analytical insight into the costs of a dispute, while the recording of cases at the Protector of property-legal Interests is done manually according to the records makers and it hinders the analytical approach to the available data. The existing system of records may be a limiting factor in the implementation of measures and activities that should have an impact on the increased surveillance and the reduction of budget expenditures on litigations. 1 The Report on the audit of the Final Statement of Accounts of the Budget of Montenegro for 2009, page 7 2 Reports of the Protector of property-legal interests and the Agency for peaceful settlement of labour disputes.

106 Graph 1. Trends of litigation expenses that were paid from the budget of Montenegro for the period The objective of the audit The objective of the audit was to determine whether, in the area of labour disputes, the competent institutions took appropriate measures to prevent the occurrence of expenses for litigation and/or contributed to their reduction. Also, the objective of the audit was to, on the basis of costs for litigation in labour relations, consider the overall system of supervision and control over these expenditures and provide recommendations for it improvement. In order to achieve the objective of the audit, it was necessary to answer the audit questions, namely: The main audit question: Did the competent authorities take appropriate measures and activities to prevent/reduce expenditures for litigation on the basis of labour relations? In addition, the audit sub-questions: 1. Did the defendant authority and the Protector of property-legal interests take the necessary actions to resolve the litigation amicably? 2. Did the Protector of property-legal interests, defendant authority and the Ministry of Finance take the appropriate actions for timely execution of final court decisions? 3. Did the defendant authority carry out an appropriate analysis of finalized court cases? 1.3. Scope and limitations The subject of the audit was legal disputes arising from the labour relations in which a defendant was a public authority and analysis of expenditures to the same cause. Then, measures and activities undertaken by the defendant authority, the Ombudsman and the Ministry of Finance that could have an impact on reducing costs for litigation. In particular, the focus of the audit were the possibilities to resolve a labour dispute amicably (before the occurrence of litigation in communication of the budgetary user and the employee or through the Agency for peaceful settlement of labour disputes, i.e. the Mediation Centre) and the possibilities for timely action on final decisions. The audit was carried out on the basis of the sample, where the sample was an individual and collective litigations arising from labour relations, which were at the Protector of property-legal Interests archived in The sample included cases that were conducted against four spending units - Ministry of Interior, Ministry of Defence, Ministry of Justice and Ministry of Finance, taking into account their participation in total realized annual expenditure for litigations and the total number of cases in respect of employment which were conducted before the Protector of property-legal interests in For all the cases that were taken by a sample, the expenditure was evidenced with the Ministry of Finance in The amount of expenses for litigation for 2012, 2013 and 2014 submitted by the Ministry of Finance, while the amount of expenditure for the year 2015 was determined by examining the data in the general ledger of the treasury - account Repayment of liabilities from the previous period, the name of the supplier Court Decisions

107 In the audit process, it was requested the documentation from the Agency for peaceful settlement of labour disputes, the Centre for Mediation and Judicial Council Audit Criteria For the assessment of measures undertaken by the authorities to resolve the labour dispute by peaceful means - before the occurrence of litigation in communication of budget users and employees, as well as through the Agency for peaceful settlement of labour disputes, or the Centre for mediation - we used the ratio of the number of cases for which there was an initiative for resolving the dispute by peaceful means in relation to the number of cases analysed. As a criterion for the assessment of the possibilities for spending units to promptly act on the final decisions of the competent courts and decisions of the Agency for peaceful settlement of labour disputes, there were used the annual budget laws, proposals for the provision of budget funds submitted by the spending units annually to the Ministry of Finance and the written correspondence, concerning the timely provision of the budget funds. The related audit included the analysis of expenditures that were carried out by the spending units and the activities carried out on the basis of the analysis, which should aim to reduce the total number of disputes and litigations on the same basis. Those were rated by a number of activities undertaken and the phase of implementation Sources of information and methods of data collection The primary source of information during the audit was the documentation at disposal to the Protector of property-legal interests. The cases taken over from the Protector include a process of dispute from the moment of filing a claim of the complaint till the final judgment of the basic or the higher court if it has processed the related procedure. Then, annual reports on the work of the Protector of property-legal interests, legal acts and appropriate written correspondence. The primary source of information was also the documentation of the Ministry of Interior, Ministry of Defence, Ministry of Justice and Ministry of Finance concerning the execution and payment of expenses from the budget, annual budget planning and undertaking measures and activities in order to reduce expenditure on this basis. We analysed the annual reports on the work and documentation of the Agency for peaceful settlement of disputes and the Centre for mediation. An additional source of information during the audit accounted for the domestic publications and bulletins, the practice of countries in the region, documents the recommendations of the European Commission for the Efficacy of Justice (CEPEJ), Working Group on Mediation (CEJEP-GT-MED), the International Mediation Institute (IMI), and the Convention recommendations of the International Labour Organisation (Convention on labour relations - public service No. 151; Collective Bargaining Convention No. 154; Recommendation on voluntary conciliation and arbitration No. 92; Recommendation on consideration of the appeal No. 130, Labour administration Recommendation No. 158) etc. Data collection methods that were used in the audit procedure were: sample assessment, documents examination and interview The institutional framework The legal representative of Montenegro, its authorities and public services founded by the state but not having the status of a legal entity before courts and other state authorities, was the Protector of property-legal interests of Montenegro 5, which was established under the Law on State Property. In addition to representation, the competence of the Protector was provision of legal opinions in connection with the conclusion of the contract, or other property-legal issues, and taking legal 4 For the purposes of audit performance, there were inspected the records of the Judicial Council, which applies to cases in which the respondent was the state of Montenegro - Judicial Information System (JIS). 5 Article 53 of the Law on State Property ("Official Gazette of Montenegro", No.21/09 and 40/11)

108 action in relation to the disposal of state assets in case that it is determined that there were justifiable reasons thereof. 6 Protector of property-legal interests of Montenegro, in the period represented the state authorities in 15,214 cases. 7 The total cost for those cases (principal debt, the cost of enforcement and litigation expenses) amounted to 34,420, Number of cases and enforcement costs are increased in the period The highest number was the one of civil cases, where there was a growth in the number of new cases and the number of cases that were transferred through years. The largest increase in the number of archived cases referred to disputes arising from employment relations. In accordance with the law, the Protector may, prior to a proceeding initializing, take the necessary actions in order to achieve a consensual solution to the dispute 9, or to undertake measures and activities to resolve a labour dispute amicably before the Agency for peaceful settlement of labour disputes. Agency for Peaceful Settlement of Labour Disputes was established by the Decision of the Government of Montenegro 10, in accordance with the provisions of the Law on peaceful settlement of labour disputes 11 and commenced its operations in The Agency is, among other issues, responsible for the process of peaceful settlement of labour disputes - individual 12 and collective 13. The law stipulates that, if a judicial proceeding is in due course, the parties to the dispute may agree to initiate mediation proceedings before an arbitrator, at any stage of the proceedings. In the event that the litigation parties do not settle the dispute before the Agency, they may contact the competent court for protection of rights, in accordance with the law. According to the Law on Mediation 14 and Decision of the Government of Montenegro 15, it was formed the Centre for Mediation for performance of professional and administrative tasks related to mediation, while the mediation process in the dispute is performed by licensed intermediaries from the register of mediators maintained by the Ministry of Justice. According to the Register for mediation in civil matters, which include labour relations disputes, 80 licensed intermediaries are authorized. The mediation procedure is initiated on the basis of agreement between the parties, or if judicial proceeding is initiated, based on the recommendation of the court Protection of the rights of civil servants and state employees The rights and obligations of a civil servant or state employee in connection with labour-based and from the employment 16 are decided on by the head of state authority 17. The head of the authority can transfer the tasks of deciding on the rights and responsibilities of civil servants or state employees in connection with labour or on the basis of employment to the managing person. Regardless of the delegated powers, the head of the authority always has the right to decide. The authorization may be given only to one person explicitly in writing, in time manner and limited in content. 6 A report on the work of Ombudsman for 2012, page 7 7 According to the annual reports on the work - in ,656 cases. In ,246 cases, in ,312 cases. 8 According to the annual reports of the total costs of a dispute (principal debt, the cost of enforcement and litigation expenses) in 2012 amounted to 9,598,294, in ,973,356, and in ,848, Article 55 of the Law on State Property ("Official Gazette of Montenegro", No. 21/09 and 40/ Official Gazette of Montenegro, No.69/ Official Gazette of Montenegro. 16/ / Individual labour dispute shall be a dispute which arose in the exercise of the rights of the employee from work and on the basis of work defined by the law, collective agreement, by an act of the employer and the labour contract - Article 4 of the Law on Peaceful Settlement of Labour Disputes ("Official Gazette of Montenegro", No. 16/ /15). 13 Collective labour dispute shall be a dispute that arose in the process of concluding, as well as amendments to the collective agreement; in cases where the employer to all employees does not apply certain provisions of the collective agreement; in cases where the employer to all employees does not apply certain provisions of its documents; on the occasion of exercising the right to trade union organization, operation and determining the representativeness of trade union rights; in exercising their right to strike and on the occasion of other disputes between unions and employers in connection with the exercise of the rights from labour and on the basis of labour - Article 2 of the Law on Peaceful Settlement of Labour Disputes ("Official Gazette of Montenegro", No. 16/ /15). 14 Official Gazette of the Republic of Montenegro, No. 30/05 and Official Gazette of Montenegro, No. 29/ Official Gazette of Montenegro, No. 51/ Labour dispute: dispute for the violation of the rights and obligations of the employment relationship between the employee and the employer. 17 The Law on Civil Servants and State Employees ("Official Gazette of Montenegro", No. 039/11 dated 4 August 2011, 050/11 dated 21 October 2011, 066/12 dated 31 December 2012, 034/14 dated 8 August 2014, 053/14 dated 19 December 2014)

109 A civil servant or state employee shall be entitled to four forms of protection of his/her rights and obligations, including: administrative, judicial, arbitration and trade union protection. Administrative protection is achieved through the right to appeal the decision or when the head of a state body decides on the rights and obligations of the civil servants and state employees and through inspection. Judicial protection is achieved through the right to conduct an administrative dispute against the final decisions on the rights and obligations of civil servants. Trade union protection is achieved through the possibility that in the process of exercising the labour and labour-based rights, a civil servant or state employee shall be entitled to protection from the trade union. Arbitration shall mediate and provide assistance in resolving a labour dispute The course of the procedure Civil servant, or a state employee, if considered a damaged party, can address the body in which he is employed with a lawsuit. The lawsuit shall be a proper indication of a dispute over the management of the institution. The institutions should in such cases conduct an assessment of its procedures and, if it is determined that the institution made irregularities, it should be tried to peacefully resolve the dispute. Civil proceedings is initiated by a lawsuit. 18 The Law on Civil Procedure, Article 279 provides that after receiving a lawsuit with the annexes, the defendant shall, not later than 30 days, deliver to the Court a written response to the lawsuit. When submitting the lawsuit to the defendant, the court shall instruct the defendant of the obligation under paragraph 1 of this Article, on the content of the answer to the lawsuit and notify him of the consequences of failure to reply to the lawsuit within a specified period. In response to the lawsuit 19 the defendant will highlight the possible procedural objections and declare whether it admits or disputes the claim filed and specify other information that must be contained in any other submission (Article 103). If the defendant contests the claim, the answer to the lawsuit must also contain the facts on which the defendant grounded its allegations and evidence to prove that facts. If the defendant, within the period referred to in Article 279, Paragraph 1 of this Law, does not respond to the lawsuit, the court issues a verdict which acknowledges the claim (judgment for failure to act), if the following conditions are met: 1) if the defendant duly submitted a lawsuit to the response; 2) if it is not the request which the parties may not dispose of (Article 4, paragraph 3); 3) if the grounds for the claim result from the facts that are listed in the lawsuit; 4) if the facts on which the lawsuit is based are not contrary to the evidence submitted by the prosecutor himself or facts that are generally known. Passing a judgment for failure to act shall be postponed if necessary to obtain prior notice on the circumstances referred to in paragraph 1 of this Article. During the civil proceedings, the Protector shall submit the lawsuit to the institution responsible for giving statements on the allegations in order to obtain evidence for the Defence. Appointed legal unit of the responsible institution shall contact the responsible agencies to prepare submissions and obtain supporting documents for the Defence in the court case. The management of the institution shall be notified of a court proceeding through official correspondence with the Protector of property interests but also on the basis of consultations with the organizational units where the dispute arose and the responsible lawyers of this authority who cooperate with the Ombudsman. On the basis of analysis and the evidences gathered, the Ombudsman and defendant institution take into account the possible outcome of the judicial proceeding, and consequently propose a peaceful resolution of the dispute through the mediation process or the conclusion of a court settlement. Legal Department of a State Authority, then, performs an analyses of the initialized or lost litigation and subsequently prepares a report with a proposal of corrective measures. If the irregularities are established, the institutions should promptly take appropriate corrective measure to prevent future repetition of the same mistakes. When there were identified the omissions and incorrect working 18 Article 186 of the Law on Civil Procedure ("Official Gazette of the Republic of Montenegro, No. 22/04..76/06 and Official Gazette of Montenegro, No. 47/15 and 48/15). 19 Article 280 of the Law on Civil Procedure ("Official Gazette of the Republic of Montenegro, No. 22/04..76/06 and Official Gazette of Montenegro, No. 47/15 and 48/15)

110 practices, corrective measures are aimed at amending regulations governing the labour practices. When there were established the irregularities of responsible persons, there shall be taken the appropriate measures such as warnings, trainings, reorganization and disciplinary proceedings. After the trial procedure is completed and the court judgment issued, the Ombudsman, in agreement with the respondent institution, makes a decision about investing in ordinary and extraordinary remedies (appeal against the first instance judgment, revision of the second-instance court verdict). An appeal against the first instance verdict shall postpone the enforcement of a judgment, while a revision of the second-instance verdict shall not postpone its execution Legislative framework Labour Law 20 regulates the rights and obligations of employees based on the work, as well as the manner and procedure of their realization. This Law shall also apply to employees in state bodies, state administration bodies, local authorities and public services, unless otherwise specified, Law on Civil Servants and State Employees 21 regulates the rights, obligations, responsibilities and other issues relating to the status of state employees. In addition to the Labour Law, collective bargaining agreement or employment contract, the employee's rights from and on the basis of employment shall be determined by an additional series of laws and by-laws, namely: the Law on salaries of civil servants and state employees 22, the Law on the prohibition of abuse at work 23 ; The law on health and safety at work 24 ; Anti-Discrimination Law 25, Regulation on charges related to civil servants and state employees 26 ; Regulation on detailed conditions, manner of realization and amount of salary and other benefits of persons serving in the Armed Forces of Montenegro 27, etc. Each activity of the judicial system causes material costs which should provide adequate funds. Therefore, lost court cases for the budgets of the defendant spending units, except for the principal debt, cause additional costs of the proceedings including litigation costs 28 and expenses of the execution procedure 29. Accordingly, lawyers tariff 30 shall be determined on remuneration and reimbursement of expenses for lawyers. Remuneration and reimbursement of expenses of a lawyer shall belong to the acts done by the power of attorney, court decision or other competent authority, through oral or written order of the party 31. Failure of the respondent authority and the Ministry of Finance to act upon the submitted court decisions shall lead to the growth of expenditures for litigations for the amount of interest and the costs of hiring bailiffs, who shall carry out the enforcement procedure (foreclosure of the receivables). Bailiffs, according to the Law on Bailiffs 32, for their work shall be entitled to remuneration and reimbursement of expenses according to current Tariff CONCLUSIONS After completion of the audit procedure and factual findings established, there have been established the areas which are to be further improved in order to achieve an efficient system of management and control over expenditures for litigations. Improvement is needed in the following areas: 20 Labour Law ("Off. Gazette of Montenegro", No. 49/08; 26/09; 88/09; 26/10; 59/11; 66/12 and 31/14). 21 Law on Civil Servants ("Off. Gazette of Montenegro", No. 39/11, 50/11, 66/12 and 34/14). 22 Official Gazette of Montenegro, No.14/ Official Gazette of Montenegro, No. 30/ Official Gazette of Montenegro, No. 34/ Official Gazette of Montenegro. 46/ / Official Gazette of Montenegro, No. 26/ Official Gazette of Montenegro, No. 28/ Lawsuit costs include expenses incurred in the course or due to a process and those include remuneration for the work of lawyers and other persons who are entitled to remuneration. Costs include the costs of legal experts, witnesses, interpreters, professional staff, going out of the court on the site, the costs of court fees paid. The advanced expenses shall be made advance by a party that proposes the presentation of evidence, and are finally borne by the party that loses the case. Costs are measured depending on the success achieved in dispute and are governed by the provisions of the Code of Civil Procedure ("Official Gazette of Montenegro", No. 22/ /06 and "Official Gazette of Montenegro", No. 47/15 and 48/15), Article The costs of execution include the costs incurred in the process of defining and implementing execution and paid by the judgment debtor. These include remuneration for attorneys' work (composition of proposal for execution), the costs of any expert opinion in the process of execution and costs for the work of bailiffs (remuneration for preparing the case, making decisions, completion, delivery of documents and awards for successful enforcement). 30 "Official Gazette of the Republic of Montenegro", No. 12/05, "Official Gazette of Montenegro", No. 45/08, 11/ Article 1, paragraph 3 of the Bar tariff ("Official Gazette of Montenegro", No. 12/05, "Official. Gazette of Montenegro", No. 45/08, 11/15). 32 Official Gazette of Montenegro", No. 61/ Regulation on the Tariff of Bailiffs ("Official Gazette of Montenegro", No. 2/13 and 14/14)

111 Keeping accounting records and disclosure of expenditures by the Ministry of Finance; Planning of expenses for litigations; Obligations to execute final court decision; Cooperation of institutions for the resolution of disputes before the courts and other relevant institutions; Alternative dispute resolution Accounting records of the Ministry of Finance Expenses for litigation are recorded in accordance with the Regulation on Classification for the State Budget. Extra-Budgetary Funds and Municipal Budgets and included in the category 46-repayment of debts, the group 463, synthetics of Payment of liabilities from the previous period. Expenditures are recorded on the same synthetic account in the quarterly and annual reports. In addition to expenses for litigations, there are being collectively recorded and disclosed on the foregoing account the other liabilities of spending units from the prior period. In 2014, in addition to expenses for litigations, there were recorded the payments to domestic creditors, repayment of liabilities arising from issuance of treasury bills, repayment of local government bonds, bonds to the Investment-Development Fund, liabilities to foreign creditors and institutions (IBRD International Bank for Reconstruction and Development; IFC - International Finance Corporation; PC- Paris Club of creditors; EIB - European investment Bank; KfW - German Bank for Reconstruction, EBRD - European Bank for Reconstruction and Development, etc.), the funds paid under domestic guarantees, the repayment of debt on old foreign currency savings, repayment of the outstanding debt of state bodies arising from taxes, contributions and surtax to employees, liabilities to military pensioners and fees on judgments of the European Court of Human rights, etc. 34 This method of recording and disclosure of expenditures, jointly with other liabilities, does not give a clear insight into the actual expenditures incurred for litigations in which the respondent is the State of Montenegro, Also, the existing system of records of the Ministry of Finance does not provide analytical insight into the costs incurred by the principal debt, interest and costs of the procedure and disables control over the execution of this plan and checking the structure of expenditure, Namely, the audit has established that the Ministry of Finance -State Treasury records the funds for the payment on the basis of lost court cases under the item Repayment of liabilities from previous years, based on a copy of executive documents which are delivered by the Central Bank of Montenegro. From such a documents it cannot be identified the subject of a dispute to which the receivable relates, or it can be identified the amount of the principal debt, the interest expenses, the costs of the proceedings and the costs of the enforcement. Analytical disclosure of litigation expenses (principal debt, interest expenses, the costs of the proceedings and the costs of forced execution) would be in line with Article 3 of the Rules on Consistent Accounts' Classification for the State Budget. Extra-Budgetary Funds and Municipal Budgets 35 which provides that the economic classification includes: class, category, group, synthetics, analytics and sub- analytics. Sub- analytics is not limited by the Rules and can be increased in accordance with the needs of the budget, the budgets of extra-budgetary funds and budgets of municipalities. Planning is binding on the class, category, group and synthetics, while the execution of the budget shows the level of analytics and sub- analytics. For the amount of the incurred expenditure, the Ministry of Finance indebted in the accounting records the spending unit that caused it, thus providing of cost per holder. 34 The draft law on the Final Statement of Accounts of Montenegro for 2014; Ministry of Finance; page Official Gazette of the Republic of Montenegro, No. 035/05 dated 10 June 2005, 037/05 dated 22 June 2005, 081/05 dated 29 December 2005, Official Gazette of Montenegro, No. 002/13 dated 4 January

112 2.2. Planning of expenditures for litigation The audit has found that expenditure in 2014 for the position Repayment of liabilities from previous years was incurred for 76 spending units out of which the funds for that purpose were planned by the Ministry of Finance for four spending units (Judiciary, the Ministry of Defence, the Compensation Fund and the Ministry of Finance). For 33 spending units the expenditure was incurred even though the funds have not been allocated in the budget (for 28 spending units 1 was planned, while for 5 spending units 0 ). 36 Chart 4: Planned and actual expenditures at the position Repayment of liabilities from previous years in % 7% Planned 0 and the expenditure incurred 45% 42% Planned 1 and the expenditure incurred Planned 1 and the expenditure not incurred Table 4: Planned and actual expenditures at the position Repayment of liabilities from previous years in 2014 u. Note: the table shows the plan and the total execution on the position 4630 in the framework of which are planned and executed the expenditures for litigations 4630 Repayment of liabilities from previous years Plan Execution 1 President of Montenegro Parliament of Montenegro The State Election Commission 0 1, The Constitutional Court of Montenegro Judiciary 77, ,898, Prosecution 2 92, The General Secretariat of the Government of Montenegro 4 11, Secretariat for Legislation The Commission for Public Procurement Control 0 4, Ministry of Justice 3 1,852, Misdemeanour authorities 2 30, Ministry of Interior 1 4,626, Human Resources Management Authority 0 6, Ministry of Defence 1,315, ,387, Directorate for Protection of Classified Information Ministry of Finance 29,661, ,431, Administration for Prevention of Money Laundering and Terrorist Financing 18 Public Procurement Administration Statistical Office Protector of Property-legal Interests of Montenegro The Ministry of Foreign Affairs and European Integration 1 1, Ministry of Education 0 336, Department of Education Testing Centre The Ministry of Culture 1 16, The National Archives 1 17, The Law on the Final Statement of Accounts of the Budget of Montenegro for

113 27 Montenegrin National Theatre Royal Theatre "Zetski dom" National Library of Montenegro "Đurđe Crnojević" Natural History Museum of Montenegro Montenegrin Cinematheque Music Centre of Montenegro Library for the Blind of Montenegro PI National Museum of Montenegro Maritime Museum of Montenegro Contemporary Art Centre of Montenegro Centre for Conservation and Archaeology of Montenegro Ministry of Economy Bureau of Metrology Intellectual Property Office The Agency for Protection of Competition The Ministry of Transport and Maritime Affairs 5 583, Ministry of Agriculture and Rural Development 6 340, Ministry of Health 1 356, The Ministry for Human and Minority Rights 1 22, Fund for the protection and realization of minority rights Centre for development and preservation of the culture of minorities in Montenegro 48 Ministry of Sustainable Development and Tourism 2 240, Environmental Protection Agency 1 27, National Tourism Organisation of Montenegro Institute for Hydrometeorology and Seismology 1 50, Ministry of Labour and Social Welfare 1 23, The Ministry for Information Society and Telecommunications Ministry of Science The Commission for the Prevention of Conflict of Interests Protector of Human Rights and Freedoms State Audit Institution Montenegrin Academy of Sciences and Arts National Security Agency Agency for protection of personal data and the free access to 1 2, information 61 Agency for peaceful settlement of labour disputes 0, Audit authority Inspection Directorate 1 1, Pension and Disability Insurance Fund 1 491, Health Insurance Fund 1 218, Employment Bureau , Compensation Fund 2,197, ,174, TOTAL: 33,250, ,221, Law on Budget for envisages that the funds for settlement of liabilities arising from court decisions shall be planned with the Ministry of Finance at the position Repayment of liabilities from previous years, and that, during the year, there shall be performed the allocation in favour of the same position of the budget user that caused those costs, to the extent of their achievement. The same legislative solution for this type of expenditure is envisaged by the Budget Law for , Law on Budget for 2016 does not provide a manner of planning and allocating the funds for the payment of obligations based on court decisions, as well as previous years, but the funds for projected court collection were planned in the amount of EUR 18.0 million EUR at the position 4630 in the Ministry of Finance, within the program Budget Management. The audit identified an increase in the percentage of spending units in which the amount of 0 was planned for the position Repayment of liabilities from previous years, while the realized expenditure ranged from 7% in 2014 to 10% in In 2015, expenditure on position Repayment of liabilities from previous years was made in 63 spending units out of which 6 spending units (10%) planned 0 and incurred the expenditure; 26 spending units (41%) planned 1 and incurred the expenditure, 28 spending units (44%) planned 1 and did not incur the expenditure and 3 spending units (5%) had the funds allocated in the budget and incurred the expenditure. 37 Article 12 of the Law. 38 Article 11, paragraph 8 of the Law

114 In its Statement (number /1 dated 30 March 2016) on the SAI preliminary Report, the Ministry of Finance stated: The funds for the settlement of liabilities based on court decisions were planned on the section of the Ministry of Finance with the obligation of allocation to the same position of the user of the budget that caused those costs to the level of realization. However, at the position 4630 of the Ministry of Finance comprises a plan of the funds for expenses for court decisions and other types of expenditures (payment of liabilities on the basis of taxes and contributions on salaries of employees in state administration, payment of old foreign currency savings, payment of liabilities on the basis of the assumed debt...). The total plan of the funds for budget line 4630 in 2014 amounted to million, out of which the amount of 15 million was provided for settlement of the costs on the basis of court decisions, as already mentioned above, of the position of the Ministry of Finance. The execution decision gave the amount of principal debt with the related interest clause, the calculation of which is made by the Central Bank of Montenegro. A daily excerpt of the work of the General Account of the State Treasury comprises individually given amount neither of interest nor of principal, but the debt is expressed by a single digit. In this regard, we note that the State Treasury, which performs the recording of the execution decisions, is unable to perform the recording of executive decisions, is unable to make a separate recording of a principal, interest and other costs as it does not have those data on disposal. As for the planning, the Ministry of Finance is guided by empirical data, for the simple reason that the budget users during the drafting of the Proposal of the Law on the annual budget do not report such liabilities, and there is no other possibility of planning thereof. Table 5: Planned and actual expenditures at the position Repayment of liabilities from previous years in 2015 and planned expenditures in 2016 in Note: the table presents the plan and total realization at the position 4630 in the scope of which the expenditures for litigations were planned and realized

115 4630 Repayment of liabilities from prior years Plan Realization Plan 1 Parliament of Montenegro , The Constitutional Court of Montenegro Judiciary ,727, Prosecutor s Offices , The training centre in the judiciary and prosecutor s office 6 The General Secretariat of the Government of , , Montenegro 7 The Council for Privatization and Capital Projects The Commission for Public Procurement Control , Ministry of Justice ,419, Misdemeanor authorities , Ministry of Interior ,687, Human Resources Administration , Ministry of Defence 800, ,277, , Directorate for Protection of Classified Information Ministry of Finance 30,811, ,351, ,024, Administration for prevention of money laundering and terrorist financing Public Procurement Administration Statistical Office Protector of Property-legal Interests of Montenegro The Ministry of Foreign Affairs and European Integration , Ministry of Education , Department of Education The Ministry of Culture , The National Archives , Montenegrin National Theatre Royal Theatre "Zetski dom" National Library of Montenegro "Đurđe Crnojević" Natural History Museum of Montenegro Montenegrin Cinematheque 1, Music Centre of Montenegro Library for the Blind of Montenegro National Museum of Montenegro Maritime Museum of Montenegro Contemporary Art Centre of Montenegro Centre for Conservation and Archaeology of Montenegro 36 Ministry of Economy , Bureau of Metrology Intellectual Property Office The Agency for Protection of Competition , The Ministry of Transport and Maritime Affairs , Ministry of Agriculture and Rural Development , Ministry of Health , The Ministry for Human and Minority Rights , Fund for the protection and exercise of minority rights 45 Centre for development and preservation of the culture of minorities in Montenegro

116 46 Ministry of Sustainable Development and Tourism ,948, Environmental Protection Agency National Tourism Organisation of Montenegro Institute for Hydrometeorology and Seismology , Ministry of Labour and Social Welfare , Institute for Social and Child Protection The Ministry for Information Society and Telecommunications , The Commission for the Prevention of Conflict of , Interest 54 Protector of Human Rights and Freedoms State Audit Institution Montenegrin Academy of Sciences and Arts National Security Agency Agency for protection of personal data and the free , access to information 59 Agency for peaceful settlement of labour disputes Audit authority Directorate for Inspection Affairs , Agency for Prevention of Corruption Pension and Disability Insurance , Health Insurance Fund ,070, Employment Office , Fund for compensation 2,250, ,249, ,300, Labour Fund TOTAL: 33,861, ,763, ,374, The existing system of expenditures planning implies centralized planning by the Ministry of Finance for all spending units. The spending units, against whom the judicial proceedings are being processed and of the initiation of which the Protector of Property-legal interest informs by delivering a legal act in the request for allocation of budget funds as a special expenditure, do not plan the expenditures for litigations.the Ministry of Finance does not prepare the planning of expenditures in accordance with the actual needs of the spending unit, based on the information on the number and value of legal disputes before the courts and other competent institutions against the respondent authority, but, according to the observations of the Ministry of Finance, the planning is done "in the amount of executed decisions from previous period. 39 In the period , there is an increasing ratio of actual expenditures in relation to the planned at the position Repayment of liabilities from previous years, which is presented in the Table 4. As given in the explanation of the Ministry of Finance, a difference of 31,970, in 2014, when it was achieved the greatest difference between realized and planned expenditure, was provided from the budget. Table 6: Planned and actual expenditures at the position Repayment of liabilities from previous years 40 Expenditure/Year Planned expenditure 44,812, ,709, ,250, ,811, ,374, Actual expenditure 35,738, ,543, ,221, The percentage of expenditure realization 80% 185% 196% - - For spending units to which the Ministry of Finance allocated by the plan the budgetary funds allocated for the position Repayment of liabilities from previous years, it was identified a 39 Letter of the Ministry of Finance No /2 dated 14 January The Proposal of the Law on the Final Statement of Accounts of Montenegro for 2014, the Ministry of Finance; page

117 deviation achieved in relation to the planned expenditure, as presented in Table 5. The greatest discrepancy was found with the Judiciary and the Ministry of Finance. Table 6: Overview of expenditures of the spending units to which, by the plan, the funds were allocated for the position Repayment of liabilities from previous years in 2014 Judiciary The Ministry of The Compensation The Ministry of Defence Fund Finance Planned expenditure 77, ,315, ,197, ,661, Actual expenditure 2,898, ,387, ,174, ,997, The percentage of 3.761% expenditure realization 105% 99% 162% The existing system of planning expenditures in the amount of executed decisions from the previous period does not provide a realistic projection of expenditures that may arise on this basis, has an impact on the budget balance and requires the provision of additional funds for this purpose. A more efficient approach to the planning of expenditures for legal proceedings would imply planning based on the real needs of spending units, according to data on the number and value of litigations against public bodies. In particular, given the fact that the state authorities are informed on the initiation of the dispute before the court or other competent authority by the Protector of Propertylegal interests upon instituting the proceedings The obligation of the execution of a final court decision Enforcement proceeding shall be initiated with the aim of achieving a subjective right of the creditor (receivables) under the direct or indirect coercion against the debtor who has not acted in accordance with a final court decision or other act. So, to be able to talk about the implementation of the procedure of execution of court decisions, there must be met two basic criteria: - There must be a final court decision (one that cannot be contested by ordinary legal remedies) - That is passed a certain period of time provided for voluntary fulfilment of the obligation, or the realization of a subjective right of the creditor on the basis of a final court decision. The process of execution of court decision is the final stage in the process for the realization of subjective civil rights. Pursuant to Art. 6 of the European Convention on Human Rights and Fundamental Freedoms, the execution of court decisions in civil matters is an integral part of the right to a fair trial, or its components, which refers to a trial within a reasonable time frame. This view is contained in the relevant judgments of the European Court of Human Rights, as well as the Council of Europe Recommendation R(2003)171, which provides that an inefficient system of enforcement of judgments in civil matters may have a negative impact on the credibility of the judicial system and public trust in the institutions of the judicial system. Referring to the Resolution, 3 on general principles and mechanisms for achieving efficiency in the execution of court decisions in 2001, the Council of Europe Recommendation R(2003)17 is of the view that effective and efficient enforcement of court decisions is of capital importance for all member states of the Council of Europe in terms of creation, developing and strengthening their judicial systems. In addition to this recommendation, which predominantly applies to civil cases, the Council of Europe adopted the Recommendation R(2003)16 concerning the enforcement of judicial and administrative decisions in administrative matters. It is therefore necessary, in accordance with Article 12 of the Law on Budget 41, that the Ministry of Finance performs reallocation in favour of the same position of budget users that caused those costs, so that a commitment is settled within the statutory deadline. Pursuant to the subject audit, the state auditor found that, contrary to the Article 12 of the Budget Law for 2014, the Ministry of Finance has not made allocation in favour of the 41 The provision is set forth in the Law on Budget for 2014 and the Law on Budget for

118 position Repayment of liabilities from previous years, which did not create a possibility for acting upon final court decisions, decisions of the Agency for peaceful settlement of labour disputes and other acts of competent institutions. Protector of property-legal interests, as a legal representative of the respondent authority, is obliged to, upon completion of judicial proceeding, deliver a final court decision on treatment within the legal deadline. However, the state authorities, in the period , did not make payments on the basis of appeals against the respondent authority in accordance with the time frames specified in the legally binding court decisions and other documents of relevant institutions, which caused the additional increase of the costs for litigations by the costs for the enforcement procedure. Pursuant to the subject audit, the state auditor found that all expenditures for litigations (disputes arising from employment relations and other types of disputes), which were paid from public funds, were collected by force on the basis of executive title. In 2012, the total amount of expenses for legal disputes totalled 13,199,732, in ,578,203 and 15,476,495 in Acting upon final decisions of the competent courts, pursuant to the decisions of the Agency for peaceful settlement of labour disputes and other acts which in the enforcement procedure may pose a credible executive document, besides being a legal obligation of an impact on the reduction of the total expenditure for disputes and rational use of available resources. This is particularly important given the fact that the emergence of expenditure according to these documents is probable for a spending unit Institutional organization and cooperation of the bodies The audit has identified a high risk in the area of cooperation between the Protector of propertylegal interests and the ministries, i.e. other bodies and public services that, in accordance with the law, are represented by the Protector before the courts and other state bodies. In most government bodies that were covered by the audit process, there were systematized the organizational units and jobs in whose jurisdiction there were the jobs that included a communication with the Protector of property-legal interests (submission of information on its request, documents, statements, opinions), the Agency for peaceful settlement of labour disputes and other authorities before whom the proceedings were being conducted. Rules on internal organization and systematization of jobs in the Ministry of Interior within the Department for legal, human resources and financial affairs of the Bureau of Personnel and Legal Affairs, in which there were systematized the jobs responsible for information, documents, statements, opinions and other information, relating to proceedings before the courts, the Agency for peaceful settlement of labour disputes in which the Protector of property-legal interests represented the Ministry. The total number of 7 systematized jobs were responsible for cooperation with the Ombudsman in the proceedings pending before the court and Agency for peaceful settlement of labour disputes, including the Chief of the Bureau of Personnel and Legal Affairs. In accordance with the Rules on internal organization and systematization of jobs in the Ministry of Defence, as part of the Directorate for Human Resources, there operates the Department for Legal and Housing Affairs, which among other things deals with the submission of documents to the Protector of property-legal interests of Montenegro. The total number of systematized within the department numbered 7. Activities related to litigations and disputes before the Agency for peaceful settlement of labour disputes at the Institute for execution of criminal sanctions are performed by two persons who are, pursuant to the act on internal organization and jobs systematization of the Ministry of Justice, assigned to the Department of Legal, Personnel and office affairs. Yet, in the audit procedure, it was determined the lack of cooperation of state bodies, Protector of property-legal interests and the Agency for peaceful settlement of labour disputes which had influence on the course, outcome and the costs of a proceeding, which were conducted before the competent authorities by the Ombudsman

119 For the performance of professional services of the Protector of property-legal interests, there were formed three organizational units i.e. the Office in Podgorica, Office in Bijelo Polje and the Office in Kotor, and the Rules 42 defined their scope. In addition to the Ombudsman and ten deputy Ombudsman, there were systematized 28 jobs for civil servants and state employees. Agency for peaceful settlement of labour disputes has established two organizational units: Department for peaceful settlement of labour disputes and the Service for general and financial affairs. For the execution of tasks within the scope of the Agency, there have been established clerical jobs for 19 employees. 43 As at 31 December 2015, the Agency had 12 employees. Regulations on internal organization and job classification of the Mediation Centre established jobs within three organizational units: Headquarters - Podgorica, regional unit in Bijelo Polje and regional unit in Kotor, and systematized five official positions. As of 31 December 2015, the Centre has employed 5 persons as prescribed in the Rules, three people in the Headquarters and one in regional office in Kotor and one in Bijelo Polje. Examples of lack of cooperation between institutions: Case number: PZ 679/12. Defendant: Ministry of Justice-Institute for Execution of Criminal Sanctions The subject matter of the dispute: pecuniary damages arising from employment According to the Law on State Property 44, and the carrying amount for damage compensation receivables in the amount of EUR 72,420.78, the Protector of property-legal interests of Montenegro addressed the Ministry of Finance 45 with a request to consider the possibilities for achieving settlement in the matter, since the Protector of property-legal interests, pursuant to the mentioned statutory provision, was obliged to abide by the position of the Government of Montenegro. Also, regarding the above, the Protector of property-legal interests of Montenegro addressed the Ministry of Justice 46 as the competent ministry of the Institute for Execution of Criminal Sanctions. In this particular case, the Ministry of Finance or the Ministry of Justice has neither gave their opinion, nor submitted a declaration to the Protector of property-legal interests on the occasion on the addressing, after which the Protector of property-legal interests sent an urgency note to the Ministry of Finance and the Ministry of Justice 47, for a treatment and taking measures within their jurisdiction. However, even after sending the urgency notes by the Ombudsman, the competent ministries did not give their opinion, so that in the present dispute no conclusion on the agreement on peaceful settlement was reached in the related matter. Case Number: PZ 1811/12. Defendant: Ministry of Finance Real Estate Administration The subject matter of the dispute: pecuniary damages based on employment "flier supplement" After the lawsuit 48 submitted by the Basic Court to the Protector of property-legal interests, the Protector did not submit a lawsuit to inform the defendant authority for his consideration, plea to the claim and submission of documentation available. However, it answered the lawsuit 49 in due time with the remark that there were not any authentic material and legal evidence attached to the merits of the claim. Although the Ombudsman's received an invitation for the preliminary hearing 50 (which was scheduled for 21 February 2013) on 10 January 2013, it only on the date of the preliminary hearing send the appeal to the defendant authority 51 in order to inform it and state, and it did not came to the hearing. 42 Rules on internal organization and jobs systematization of the Technical Service of the Protector of property-legal interests, Zu. No. 189/13 dated 18 June Rules on internal organization and jobs systematization of the Agency for peaceful settlement of labour disputes, May Official Gazette of Montenegro, No. 21/09 and 40/ Pz. No. 1331/14, dated 11 September Pz. No. 1331/14, dated 11 September Pz. No. 1331/14, dated 7 October P 4082/12, dated 8 November Pz. No. 1811/12, dated 6 December Pz. No. 1811/12, dated 6 December PZ No. 1811/12, dated 21 February

120 Effective cooperation between the Ombudsman and the ministry involves timely communication and enough information from a legal standpoint, i.e. the quality of legal advice (opinion regarding the findings of the expert, forwarding the necessary evidence, legal interpretation, matching the existing cases, analysis of case law and legal views of the Supreme Court). During the subject audit, the state auditor identified that there was a regular communication, timely and complete forwarding of the necessary documentation, consultation on action in connection with the common issues and quality consulting with the Ombudsman. In the analysed cases, the Ombudsman timely familiarized the national authorities with a claim (except in one case, but it has timely responded to the lawsuit, while did not come out to the hearing), and during the proceedings, it timely asked for submissions on the lawsuit and statement on the expert report. The audit has identified the urgency note (two of those) of the Protector for delay of a submission regarding the expert report and supporting documentation. That is, it was found that national authorities mainly prepared untimely submissions and documentary evidence Alternative Labour Dispute Resolution Alternative dispute resolution includes various methods of resolving disputes that take place out of court, i.e. it is an alternative to a regular court proceedings, which, in our conditions, is still the most common way of resolving disputes. The methods of alternative dispute resolution is most often carried out with the assistance of a third neutral party, which, depending on the type of procedure, can have different roles and different levels of impact on the resolution of the dispute. The best known and most widely used models are mediation and arbitration. In countries with a longer tradition of alternative dispute resolution, the term has gradually ceased to be used, because such actions are entered a regular use, while the parties are increasingly using a pre-trial proceedings, and those are referred to as regular and adequate procedures to resolve disputes. These countries have managed to develop a new culture of resolving disputes in which the parties consider of great importance the fast and effective access to justice. 52 Mediation is a method of alternative dispute resolution 53, in which the parties wish to settle their dispute through one or more intermediaries - mediators who, through consultation and negotiation, assist the parties to reach a common solution and come to an agreement which will resolve their contentious relations and be acceptable for both sides. The mediation procedure involves a series of activities which, in certain situations, may provide a priority over the conduct of the proceeding before a court. 54 Differences between the judicial process and the process of mediation - intermediation 55 Court proceeding Mediation - intermediation The judicial process is formal, while a form is Mediation process is informal and the rules of provided by law procedure shall be laid down by the parties themselves A court presents the evidences through the Mediator facilitates the parties themselves to presentation of evidences come up with a solution Court proceeding sometimes takes a long Mediation shall be finalized in accordance with 52 Alternative dispute resolution - mediation and arbitration; Aleksandar Zivanovic, Executive Director of the Association of Mediators and Obren Bužanin, a judge of the Supreme Court of the Republic of Serbia; Sarajevo, 2009; page There are several methods of alternative dispute resolution: arbitration; mediation; early neutral rating; early expert evaluation; Mini Trial; private judge; Sunday for settlement; Mediation - Arbitration; Protector of Human Rights; Mediation - intermediary. 54 Until now, in the field of mediation, the Council of Europe issued 4 recommendations, as binding sources: 1) Recommendation Rec(98)1 dated 21 January 1998 on family mediation which proposes to Member States to promote family mediation and strengthen existing system. The Recommendation sets down the basic principles of mediation and recommends the states to control mechanisms for the selection and training of family mediators; 2) Recommendation Rec(99)19 dated 15 September 1999 on the application of mediation in criminal cases which recommends mediation, as well as the active involvement of the victim and the defendant in criminal proceedings at all stages of this process. It provides a warning to the right of the injured to be apologized by the perpetrator of the damage. And this recommendation draws attention to certain standards and ethical rules, to the control over the selection and training of mediators; 3) Recommendation Rec(2001)9 dated 5 September 2001 about the possibilities of ARC between the administrative authorities and individuals which recommends the states to encourage ARC procedures in administrative disputes, where possible. There is given a possibility to prescribe the ARC as a procedural prerequisite. 4) Recommendation Rec(2002)10 dated 18 September 2002 on mediation in civil disputes which recommends Member States to provide ADC in civil disputes where possible (where the civil disputes are considered to be commercial disputes, consumer disputes and labour disputes as well). This recommendation also requires a state to ensure the standards of selection, accountability, training of mediators, as well as the obligation to inform citizens about the possibility of ARC and the expenses - Manual for Training the Mediators Intermediary parties; page Manual for Intermediaries training; Zoran Pažin, Dragana Đuranović, Marina Lutovac, Ranka Božović, Nikola Martinović; Mediation Centre of Montenegro; Podgorica 2009; Page

121 period of time The judgment often leads to a complete divergence of parties and interrupts their communication Court proceeding usually solves one dispute It requires high costs of the proceedings the Law on mediation within 60 days, or by the Family Law within 90 days Mediation usually establishes achievement of interpersonal relations and keeps them in the future Several disputes can be resolved at once Relief for the budget The institutional and legal framework of Montenegro allows the state authorities which are the parties to the proceedings to resolve disputes by peaceful means with the assistance of a neutral third party. Such a way of keeping procedures, in certain situations, has a number of advantages over the traditional way of conduct of proceedings before the competent courts. When a dispute is certain and when the management of the state authority has information about the existence of the dispute, the most effective and cheapest way of solving a dispute is to resolve the dispute amicably. The analysis of selected court cases found that only in one 56 of eight analysed cases, which were a part of numerous court cases that occur on the same basis (lawsuits for payment of differences in salaries and benefits) had suggested the possibility of a peaceful resolution of the dispute. The Law on Civil Procedure 57 provides that the parties may conclude a settlement of the matter in dispute throughout the proceedings (court settlement). The settlement may refer to the whole lawsuit or a part thereof. The settlement cannot be concluded before the court with regard to requests which the parties may not dispose. When the court issues a decision not to permit the settlement of the parties, the procedure will be ceased until the decision becomes final. Court settlement is concluded, as a rule, before the first instance court, Court settlement can be concluded at second instance court when the second instance court held the trial. The second instance court shall determine that the first instance verdict has no legal effect, if the parties concluded a court settlement during the proceedings on appeal 58. If the court finds that the dispute could be successfully resolved through mediation, the proceeding shall be ceased and the parties shall be instructed to a mediation OPINION AND RECOMMENDATIONS Based on the conducted audit, determined factual findings and consideration of the comments given in the statements of audited entities, in accordance with Article 44 of the Law on State Audit Institutions and Article 45 of the Rules of Procedure of the State Audit Institution, the competent Board of SAI comprising the following members: Mr Branislav Radulović, PhD (member of the Senate - Head of the Auditing Board) and Mr Nikola Kovačević (member of the Senate - member of the Auditing Board), at a session of the Auditing Board of SAI held on 31 March 2016 adopted the: FINAL REPORT on the performance audit Expenditures from the Budget of Montenegro for litigations based on labour relations OPINION In the process of performance audit Expenditures from the budget of Montenegro for litigations on the basis of labour relations, based on an analysis of court cases arising from labour relations and 56 Case Number 679/12, sued the Ministry of Justice-Institute for Execution of Criminal Sanctions. 57 Article 22 and Article 4 of the Code of Civil Procedure ("Official Gazette of the Republic of Montenegro", No. 022/ /06, Official Gazette of Montenegro", no. 073/ /15). 58 Article 324 of the Code of Civil Procedure ("Official Gazette of the Republic of Montenegro", No. 022/ /06, Official Gazette of Montenegro", no. 073/ /15). 59 Article 329 and Article 4 of the Code of Civil Procedure ("Official Gazette of the Republic of Montenegro", No. 022/ /06, Official Gazette of Montenegro", no. 073/ /15)

122 expenditure management system for court cases, the State Audit Institution has found that the measures and activities carried out by the defendant authorities, the Protector of property-legal rights and the Ministry of Finance do not prevent the incurrence of expenses for litigations and/or influence their reduction. The existing centralized system of planning expenses for litigations on the basis of implemented solutions from the previous period does not provide a realistic projection of expenditures that may arise on this basis thereof and requires the additional provision of funds for this purpose. The records on expenses for litigations of the Ministry of Finance do not provide analytical insight into the structure of expenditures arising from the principal debt, interest and costs. Expenses for legal proceedings that have been paid from the budget of Montenegro in the period , in the total amount of 50,254,430, were collected by the Central Bank, from the main account of the State Treasury by force on the basis of executive documents, by which the expenses for litigations were additionally increased by the costs for enforcement procedure. Costs of legal proceedings in 8 analysed cases make up even 46.22% of the total funds disbursed. Cooperation between the Protector of property-legal interests of the state bodies and public services in accordance which are, in accordance with the law, represented by the Protector before the courts, is not at a level that enables cost-effective management of expenses for litigations. There is neither regular communication nor timely or complete forwarding of necessary documentation or consultations on action taking in relation to the common issues nor a quality consulting with the Protector. The respondent authorities, upon being notified on the possibility of a dispute arising with an employee, do not undertake actions and activities to resolve the contentious situation arising from employment without the procedure before any competent authority. Only one of eight cases analysed suggested the possibility of a peaceful resolution of the dispute. In the proceedings that took place before the Agency for peaceful settlement of labour disputes in 2014, in 185 proposals or 26.05% of the total number of procedures in which one party to the dispute was the state of Montenegro, no agreement was reached because the state authority, as a party to the dispute, did not accept the process of peaceful settlement or did not make a statement in the legally prescribed and subsequently set deadline. The existing system of recording of disputes led by the Protector of property-legal interests, does not provide an effective investigations, so there is a risk that a person who has already exercised the right before the competent court does the same before the Agency for peaceful settlement of labour disputes, or vice versa. The existing system of records of court cases in state bodies, which were included in the audit process, is not exhaustive, does not allow for the successful management of expenses for legal disputes arising from employment relations and does not reduce to an acceptable level the risk that, on the same basis, one right is collected twice or more. The respondent authorities who were subjects of the audit do not carry out a detailed analysis of court cases that would enable the identification of causes of disputes and taking measures and actions to reduce or eliminate the possibility of disputes on the same basis. Based on the established factual findings, the competent Board of SAI holds an opinion in the given audit that the management of expenditures for litigations based on labour relations that are paid from the budget of Montenegro was not economical

123 RECOMMENDATIONS In order to improve cost-effectiveness of the management of the expenses for litigations on the basis of labour relations, it is necessary that the Ministry of Finance, the Protector of property-legal interests and public authorities covered by the auditing process conduct a series of activities, among other issues, related to the establishment of records that will enable better expenditure control system and analyses on the basis of which it is necessary to implement corrective actions to achieve influence on the cause of the dispute and prevent the recurrence of disputes on the same basis. Implementation of the recommendations will reduce the risk that, upon the same right exercised two or more times, the expenditure incurs from the allocated budget funds. Better cooperation between institutions involved in the process of litigation will reduce the risks that could have an impact on the course, outcome and costs of litigation. Finally, acting in accordance with the legally binding court decisions and documents of other bodies before which the disputes are led and the Alternative Dispute Resolution will likely lead to lower costs for litigations. Ministry of Finance: 1. Should provide the accounting records of expenditures for litigations that will provide a clear overview of the expenditures with the analytical and sub-analytical classification of the incurred expenditures (principal debt, default interest, the costs of the proceedings, and the costs of enforcement). 2. Should carry out the planning of expenditures for litigations based on realistic projections, according to the records of spending units on the proceedings conducted against them. The planning system based on the real needs of spending units would further contribute to the achievement of budget balance and ensure sufficient funds for costs that will necessarily arise. The funds for the payment of expenses for litigations should be planned in the budgets of spending units so that they could be able to make payments under final decisions within the legal deadline. The Protector of Property-legal Interests: 1. Should provide an electronic system records so as to eliminate the possibility of processing litigation before two competent institutions and thus exercising the same right two or more times on the same basis. The records should be accurate, up to date and timely and contain all the key information about the dispute (the respondent authority, the value of the dispute, the status of the case, the phase of the dispute, the person responsible for the conduct of proceeding, etc.). 2. Should carry out an analysis of disputes in which it represents the state of Montenegro, its authorities and public services established by the state and, on the basis thereof, propose the Ministry of Finance the measures and activities aimed at improving the efficiency of the Ombudsman and the reduction of expenditures arising from the proceedings (e.g. acting upon the disputes of a low value). 3. Should in all cases timely inform the respondent authorities and provide them with the necessary documentation in statutory deadline, in order to reduce the potential impact on the current course, outcome and costs of the proceedings due to a delay or failure to submit the documents

124 4. Should propose and implement measures of alternative dispute resolution in accordance with existing institutional and legal framework before the Mediation Centre and the Agency for peaceful settlement of labour disputes, in all cases where the nature of dispute allows so. This would increase the number of cases that are resolved by peaceful means in relation to the number of cases pending before the competent courts. Using the methods of alternative dispute resolution should, in addition to a number of other advantages relating to the current process, contribute to a reduction of expenditures on litigations for the amount of court costs. Ministry of Interior, Defence, Justice, Finance and other budget users against whom the proceedings are processed before the courts and/or other competent authorities: 1. Should act under final and executive decisions of the competent courts and other bodies and thus avoid uneconomical spending of budget funds in the process of forced debt collection. 2. Should determine the method of keeping records of the proceedings conducted against them before the courts and/or other competent authorities, which should enable them to have on disposal the accurate and timely information on the value of the dispute, the status of the case, the stage of the dispute, the person in charge, etc. It is necessary to update the records in a timely manner, in accordance with the documents in the course of action submitted to them by the Protector of property-legal interests. 3. The budget users which, within their organizational units, have not appointed the persons responsible for cooperation with the Protector of property-legal interests and other authorities, before whom the disputes are processed, should make an appointment thereof. 4. Should promptly provide the Protector, upon his request, the requested information and documents to all proceedings against them before the competent institutions. 5. Should carry out the analysis of the causes of disputes and, on the basis of the analysis, carry out the measures and activities that should reduce or eliminate the possibility of repeating the dispute on the same basis. 6. Should take action to resolve the initiated disputes in direct relation between the respondent authority and the employee, where possible, i.e. to use alternative dispute resolution methods in order to reduce the number of cases pending before the competent courts in comparison to the number of cases processed before the Centre for Mediation and the Agency for peaceful settlement of labour disputes. The audit entities shall, in accordance with Article 15 of the Law on State Audit Institution, within 6 months from the date of receipt of the Final Audit report inform the SAI on the actions taken by the prepared and submitted recommendations

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126 EXCERPT FROM THE FOLLOW UP AUDIT REPORT ON REGISTER ON CONCESSION CONTRACTS AND REVENUES OF THE BUDGET OF MONTENEGRO FROM CONCLUDED CONCESSION CONTRACTS FOR THE USAGE OF NATURAL RESOURCES Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board Members: Recommendations implementation audit follow up audit Government of Montenegro - Commission for Concessions, Ministry of Finance, Ministry of Economy, Ministry of Agriculture and Rural Development, Ministry of Transport and Maritime Affairs, Directorate for Waters, Port Authority, Real Estate Administration, Property Administration, Tax Administration and the Directorate for Inspection Affairs, Control of implementation of recommendations contained in the Final Report on the audit of the budget revenues of Montenegro on the basis of concluded contracts on concessions for use of natural resources (number /34 dated 29 May 2014) and the Final report on the audit of the register of concession contracts (number /65 dated 26 May 2015). 90 auditing days Mr Branislav Radulović, PhD, member of Senate - Head of Auditing Board Mr Nikola N. Kovačević, Member of Senate - member of Auditing Board

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128 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing follow up audit of Register of Concessions and Revenues of the Budget of Montenegro on the basis of concluded contracts on concessions for use of natural resources "is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan, dated 22 December 2015 (No ) and Decision on Conducting Audit passed by the Auditing Board composed of Mr Branislav Radulovic, PhD (Head of the Auditing Board) and Mr Nikola Kovacevic (member of the Auditing Board) dated 4 January 2016 (No: ). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. AUDITED ENTITIES The audited entities are: Commission for Concessions, Ministry of Finance, Ministry of Economy, Ministry of Transport and Maritime Affairs, Directorate for Waters, Port Authority, Real Estate Administration, Property Administration, Tax Administration and the Directorate for Inspection Affairs. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution has performed the audit of the implementation of recommendationsfollow up audit. Monitoring of implementation of recommendations is part of the audit process, which aims to strengthen the impact of the audit and improve the future work of the audited entities. Monitoring of implementation of recommendations is a procedure that determines the adequacy, effectiveness and timeliness of actions taken by management of the audited entity in order to eliminate the identified deficiencies. The main reason for monitoring the implementation of the recommendations is to increase the likelihood that the recommendations will be implemented. The subject-matter of the audit is the control of implementation of the recommendations contained in the Final report on audit of the budget revenues of Montenegro on the basis of concluded contracts on concessions for use of natural resources (number /34 dated 29 May 2014) and the Final report on the audit of the register of concessions contracts (No /65 dated 26 May 2015). Control of implementation of recommendations pertaining to the Ministry of Agriculture and Rural Development - Directorate for Forests will be the subject of a separate audit procedure. The objective of the audit is to verify the accuracy of statements of audited entities on the implemented actions in order to implement recommendations and to identify the extent to which the recommendations have been implemented and most of all to determine whether the identified irregularities have been corrected

129 The audit covered the activities of audited entities in the period from 1 June 2014 through 31 March TIME OF THE AUDIT PERFORMANCE The audit was carried out in the period from January 4 through 31 March FINAL CONCLUSIONS Based on the conducted follow up audit and established factual findings, in accordance with Article 12 of the Law on State Audit Institution (SAI) and Article 45 of the Rules of Procedure of the State Audit Institution, the competent Auditing Board of SAI in its composition of the following members: Mr Branislav Radulović, PhD, (member of the Senate - Head of the Auditing Board) and Mr Nikola N. Kovačević (member of the Senate - a member of the Auditing Board), at the session of the Auditing Board held on 5 December 2016, adopted the: FINAL REPORT ON FOLLOW UP AUDIT OF REGISTER ON CONCESSION CONTRACTS AND REVENUES OF THE BUDGET OF MONTENEGRO FROM CONCLUDED CONCESSION CONTRACTS FOR THE USAGE OF NATURAL RESOURCES Register on Concession Contracts Contracts, annexes to the agreements and terminations of the contract, for which the previous audit found that they were not enrolled in the Registry of concession contracts, were submitted to the Commission for Concessions by the grantors and entered in the Register. The Registry has enrolled 49 contracts of concession and corrected the misstated data recorded in the Register. Since December 2015, the internet site of the Commission for Concessions has been active and there is published the Register of concession contracts and other documents which, in the opinion of the Commission, may be important for interested parties (Reports of the Commission, the laws and bylaws, the composition of the Commission). Annual Report of the Commission for 2014 was made and submitted to the competent entities - the Parliament, the Government and local self-governments. The report was submitted to the Government on 13 January 2016, through the Ministry of Economy. Annual Report of the Commission for 2015 was submitted to the competent authorities within the legally stipulated period. The Ministry of Economy has made amendment to the Rules on the content and manner of keeping the Register of concession agreements 1, which stipulates the obligation of keeping the Register of concession contracts in electronic form as well. Budget revenues of Montenegro from concluded concession contracts for the use of natural resources 2 Due to the failure of execution of the contractual obligations by the concessionaire, or bankruptcy proceedings initiated, during 2015, the Ministry of Economy has three terminated concession contracts. To obtain the collaterals for contractual obligations, the Ministry of Economy concluded annexes to the contracts with four concessionaires who have submitted a bank guarantee. Contracts on concessions (four contracts) concluded in the period from June 1, 2014 to March 18, 2016, as a means of securing the performance of contractual obligations, stipulated the obligation of providing bank guarantees, especially for the acquired right to detailed researches and for obtained right to exploit, creating a prerequisite for securing the performance of contractual obligations in the phase of detailed geological researches and exploitation phase, which was not specified in previous 1 Official Gazette of Montenegro, No dated 26 June Note: Control of implementation of recommendations pertaining to the Ministry of Agriculture and Rural Development - Directorate for Forests is the subject to special control audit of SAI

130 agreements. Also, the contracts stipulate that the parties agree that a control of the amount of excavated mineral resources can be made once a year by an institution designated by the Commission or by the administrative authority, which provided the possibility to perform external audits. The Ministry of Economy submitted for the contracts that have not been provided with the means of securing (found by the previous audit) to the state auditor to inspect bank guarantees and documents on the basis of which it can be determined that the procedure of registration of the mortgage was initialized. After the control of the amount of excavated mineral raw materials, which was carried out for 38 reservoirs, the Ministry of Economy submitted to the Tax Administration a decision on the changeable part of the concession fee based on production realized to a higher extent in comparison to the shown one, allowing, in the implementation of the recommendations of SAI, the realization of the revenue budget of Montenegro in the amount of 1,291, The Ministry of Economy has significantly improved records of receivables arising from concession fees. In 2015, the Water Administration concluded two concession contracts, in accordance with prescribed procedures. Concession contracts are secured by a bank guarantee for fulfilment of obligations committed to under the contract. It was realized the improvement in cooperation of the Water Administration, Tax Administration and Directorate for Inspection. Tax administration transmits on a monthly basis the data on collection of all receivables of the concessionaires and the Directorate for Inspection Affairs, at the request of the Water Administration, instructs an inspector for water to a control. The Ministry of Agriculture and Rural Development, in 2013, by the amendments to the act on systematization of the Water Administration, has increased the number of employees to 13 (earlier act set that number at 7). In 2016, the Water Administration, in line with the recommendation of DRI, adopted decisions on temporary calculation of concession fees for the material extracted from watercourses. The Tax Administration regularly submits to the relevant state authorities the monthly reports on the collection of concession fees for each individual concessionary, information on the state debt on the basis of concession fees for each individual concessionaire, as well as information on collection measures. Tax Administration performs quarterly and annual reconciliation status on individual analytical accounts of taxpayers with state authorities who make decisions on the amount of the concession fee. 6. FINAL ASSESSMENT By the activities taken by the audited entities in order to implement recommendations of SAI, it was achieved a progress in the area of granting, billing, collecting and control of concessions for use of natural resources. The Register on Concession Contracts still does not provide a full picture of active contracts on concessions which is a result of failure to provide a notification on the expiration of the duration of concession contracts. There are still remaining the problems relating to the timely submission of concession contracts and the changes that accompany those by the grantors. As for the calculation of concession fees: - Follow up audit has found that the Directorate for Water Administration, in 2015, during the accounting period did not adopt the decisions on the provisional calculation of the concession fee for the material extracted from watercourses (gravel and sand), until the 20th of the month for the previous month, but calculation of the concession fee for the

131 material extracted from watercourses were carried out upon expiry of the current accounting period and brought the decision of the final balance of the concession fee for the material extracted from watercourses. Management of water in 2016, in line with the recommendation of SAI, made decisions on provisional calculation of concession fees for the material extracted from watercourses. - Water Administration, given the fact that there is no Agreement of concession for the spring "Čeoče" and that there is no information on production, did not carry out the calculation of the concession fee for 2015 for the source of mineral water "Čeoče" (mineral water Rada ), although it is certain that the exploitation during the same year was performed. - For the production increased that the disclosed one by 119,138 m3 of c.s.m. determined by a control of quantities of excavated mineral raw materials for the ledge "Midova kosa" - Budoš, municipality of Niksic, Ministry of Economy did not issue a decision on the changeable part of the concession fee because "there were no legal options to calculated the concession fee, as there is no legal basis for the calculation thereof, which should be a valid concession contract, whereby the exploitation was carried out without the knowledge of the Ministry of Economy." Administration of Water did not provide a constant supervision of exploitation of material from water streams (gravel and sand) in Responsible Auditing Board of SAI draws attention to situations of exploitation without calculating the concession fee (location "Midova kosa" and "ČeoČe"). The competent authorities should act in accordance with the principles of good governance and overcome the shortcomings of the legal and institutional framework. Shortcomings in the area of concession are insufficient definition and applicability of the legal regime. In addition to general law (Law on Concessions), there are special laws (Forest Law, the Law on games of chance) governing the issue of concessions, but there is a problem of mutual relations of these laws. It is vital to adopt a law on public-private partnership which is in draft form and which, among other matters, regulates and governs the area of concessions and provides for better control in this area. With the established irregularities and deficiencies in the implementation of the recommendations, especially on situations of exploitation with no calculation of concession fee, SAI will, through the Final Audit Report, introduce the Parliament of Montenegro and the Government of Montenegro. Audited entities that did not implement or partially implemented recommendations of SAI, which was noted in the follow up audit, shall finalize the activities on implementation of the given recommendations so as to eliminate the irregularities in the field of concessions and inform the SAI thereof within 6 months

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133 EXCERPT FROM THE FOLLOW UP AUDIT REPORT REVENUES OF THE BUDGET OF MONETENGRO FROM CONCLUDED CONCESSION CONTRACTS FOR THE USE OF FORESTS Type of the audit: Audited entity: Subject of the audit: Audit duration: Composition of the Auditing Board: Recommendations Implementation Audit follow up audit Ministry of Agriculture and Rural Development - Department of Forest and Tax Administration Follow up on implementation of recommendations contained in the Final Report on the audit of the budget revenues of Montenegro from concluded concessions contracts for the usage of natural resources (number /34 dated 29 May 2014) 90 auditing days Mr Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr Nikola N. Kovačević, member of the Senate Member of the Auditing Board

134 1. LEGAL BASIS FOR PERFORMING THE AUDIT

135 The legal basis for performance of follow up audit "Budget revenues of Montenegro on the basis of concluded contracts on concessions for the use of forests" is comprised in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan, dated 22 December 2015 (No ) and Decision on performing the audit of the Auditing Board comprised of the members: Mr Branislav Radulovic, PhD (Head of the Auditing Board) and Mr Nikola Kovačević (Member of the Auditing Board) dated 4 January 2016 (No ). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. AUDITED ENTITIES Audited entities are: the Ministry of Agriculture and Rural Development Forest Administration (granting concessions, calculation of concession fees and supervision of implementation of obligations under concession contracts) and the Tax Administration (collection of fees from concessions). Ministry of Agriculture and Rural Development shall perform the administrative affairs related to: determining proposals of current and development policy, measures of agricultural policy and rural development policy; proposing and constituting systematic solutions in agriculture and undertaking measures for their implementation; protection, utilization and improvement of agricultural land; plant production; livestock; organic production; phytosanitary issues; veterinary; food safety; beekeeping; freshwater and marine fisheries and mariculture; strengthening the competitiveness of food; sustainable management of agricultural resources; improving the quality of life and diversification of economic activities in rural areas; the application of modern technology in agriculture; balance of basic agricultural products; proposing measures and analysing their impact on the economic situation and the conditions of economic entities in the field of agriculture and agro-industry; development policy in the field of forestry; system solutions for the management of forests and forest lands and their protection; conservation, economic use and improvement of forests; monitoring of forest management planning; licensing of professional jobs in forestry; manufacturing of wood and wood products; development policy in the field of hunting; system solutions for holding and management of wildlife and hunting; providing use of hunting grounds and making hunting development program; development policy in water management; system solutions for the provision and use of water, water land and water-springs for water supply, protection of water from pollution, development of waters and watercourses and protection from harmful effects of water; system and other incentives for improving these areas; keeping proper records; International cooperation in the areas for which the Ministry is established; harmonization of national legislation within its competence with the legal order of the European Union; administrative supervision in the areas for which the Ministry is established; as well as other activities within its jurisdiction. Bodies within the Ministry of Agriculture and Rural Development are the Directorate of food safety, veterinary and phytosanitary matters, Forest Administration, Water Administration and the Agency for tobacco

136 In the period of the audit performance the Minister of Agriculture and Rural Development was Prof, Petar Ivanovic, PhD. The headquarters of the Ministry of Agriculture and Rural Development is in Podgorica, at Rimski trg 46. Forest Administration is the state administration body for the area of forestry, established by the Regulation on the establishment 1, the operation of which and its core competencies are defined by the Regulation on the organization and manner of functioning of public administration 2, Forest Administration, in accordance with the Law on Forests 3, performs administrative and related professional tasks related to: forest management; measures and actions on care, renewal, growing and amelioration of forests, protection of forests and forest lands from encroachment and exploitation, fires, etc.; forest management planning, which are realized through the development of programs and forest management plans, implementation projects and programs and plans of afforestation; giving state forests to be used by contract in accordance with the law; monitoring of implemented measures on forest management, professional supervision and quality control of works and other activities within its jurisdiction, Forest Administration prepares and proposes to the Government the granting of concessions in forestry, performs administrative supervision and care of how to execute contracts of concessions. Granting concessions for the use of forests is governed by the following regulations: 1) Law on Forests ( Official Gazette of the Republic of Montenegro, No. 55/00 and 74/10) until 25 December 2010; 2) Law on Private Sector Participation in Delivery of Public Services ( Official Gazette of Montenegro, No. 30/02 and 08/09); - Chapter IV and VII of concessions till 12 February 2009; 3) Law on Concessions ( Official Gazette of Montenegro, No. 08/09) from 12 February 2009; and 4) The Law on Forests ( Official Gazette of Montenegro, No. 74/10, 40/11 and 47/15) until 25 December The director of the Forest Administration in the period since 2008 until September 2015 was Mr Radoš Šućur. In the period from September 2015 to May 2016, the director of the Forest Administration was Mr Mirsad Nurković. Since May 2016, the director of the Forest Administration is Mr Nusret Kalač. The headquarters of the Forest Administration is located in Pljevlja, St, Milos Tošić bb. According to Article 49, paragraph 4 of the Law on Concessions, the collection of concession fees shall be carried out by the competent authorities for the collection of public revenues. Tax Administration, according to the Regulation on the organization and functioning of public administration 4, among other matters, performs the tasks related to the regular and enforced collection of tax and secondary tax duties and, therefore, concession fees, The headquarters of the Tax Administration is in Podgorica, Bulevar Šarla de Gola, No. 2. Director of the Tax Administration is Mr Miomir M, Mugoša. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution has performed the audit of the implementation of recommendationsfollow up audit. Monitoring of implementation of recommendations is part of the audit process, which aims to strengthen the impact of the audit and improve future audit work. Monitoring of implementation of recommendations is a procedure that determines the adequacy, effectiveness and timeliness of 1 "Official Gazette of the Republic of Montenegro", No. 43/01 2 Official Gazette of Montenegro, No. 05/12; 25/12 and 80/15 3 Official Gazette of Montenegro No. 27/07, 73/10, 32/11, 47/11 and 47/15 4 " Official Gazette of Montenegro ", No. 005/12 dated 23 January 2012, 025/12 dated 11 May 2002, 044/12 dated 9 August 2012, 061/12 dated 7 December 2012, 020/13 of 26 April 2013, 017/14 dated 4 April 2014, 006/15 dated 10 February 2015, 080/15 dated 31 December

137 actions taken by management of the audited entity in order to eliminate the identified deficiencies. The main reason for monitoring the implementation of the recommendations is to increase the likelihood that the recommendations will be implemented. Subject-matter of the audit is to control the implementation of recommendations contained in the Final Report on the audit of the budget revenues of Montenegro on the basis of concluded contracts on concessions for use of natural resources (number /34 dated 29 May 2014). Control of implementation of recommendations refers to the Ministry of Agriculture and Rural Development Forest Administration and the collection performed by the Tax Administration. The objective of the audit is to check the accuracy of the statements of the audited entity on the actions carried out in order to implement recommendations and to identify the extent to which the recommendations have been implemented and most of all to determine whether the identified irregularities have been corrected. The audit covered the activities of audited entities in the period from June 1, 2014 through 31 March TIME OF THE AUDIT PERFORMANCE The audit was carried out in the period from January 4 through April 30, FINAL CONCLUSIONS Based on the performed follow up audit, established facts and the submissions of the statements of the audited entities (Ministry of Agriculture and Rural Development, the Forest Administration and the Directorate for Inspection Affairs), in accordance with Article 12 of the Law on State Audit Institution (SAI) and Article 45 of the Rules of Procedure of the State Audit Institution, the competent Auditing Board comprised of Mr Branislav Radulović, PhD (Member of the Senate - Head of the Auditing Board) and Mr Nikola N. Kovačević (Member of the Senate - Member of the Auditing Board) at its meeting held on June 30, 2016, the Auditing Board adopted the following: FINAL REPORT on Follow up audit OF THE REVENUES OF THE BUDGET OF MONTENEGRO FROM THE CONCLUDED CONTRACTS OF CONCESSIONS FOR USE OF FOREST The Ministry of Agriculture and Rural Development has announced the public calls for giving forests to be used in Public calls requested documentation and set criteria against which it can evaluate and determine the suitability of the bidder. Ministry of Agriculture and Rural Development initiated in 2015 an amendment to the Forest Law which aimed at strengthening the powers of the forestry inspection and passed the Rules on remittance of trees for felling, the method of receiving and marking of wood assortments and certificate of origin of wood assortments 5 and the Rules on fees for carrying out marking of the trees, measurement and stamping of wood assortments and making construction project 6, which stipulates that, from December 2015, the state shall be paid a compensation for measurement and stamping of wood assortments for export from 20 to 30 euro per m3, depending on the class. Ministry of Agriculture and Rural Development has intensified surveillance of the work of Forest Administration, and among other issued, established a Commission 7 which, in 2014, conducted a control of legality of work of the Forest Administration in the period from 2008 to The 5 "Official Gazette of Montenegro", No. 55/ "Official Gazette of Montenegro", No. 039/14 and 066/15 7 Decision No /14-1 dated 18 February

138 Commission's report 8 on the control of legality and procedures of the Forest Administration in performing forest management, in the period from 2008 to 2014 indicated that it was identified the continuous non-compliance of certain provisions of the legislation. Forest Administration has launched the procedures for obtaining warranty in a manner that, as at 2 March 2016, it requested the concessionaires to provide the bank guarantees. Forest Administration began to issue decisions on calculated special charges and initialized court procedures against the concessionaires which did not pay the special fees in accordance with the provided decisions. Several concession contracts were terminated, as directed by the Forest Administration. The contracts have been terminated due to non-fulfilment of obligations by the concessionaire, and certain cases are still pending, and if a solution is not found, those will be terminated as well. List of terminated contracts is submitted to the Commission on concessions and the line ministry. It was achieved the coordination of the Forest Administration and the Tax Administration. Tax administrations monthly deliver the data to the Forest Administration on collected concession fee and the debt for the concession fee. Tax Administration regularly submitted to the relevant state authorities monthly reports on the collection of concession fees for each individual concessionaires, information on the state debt on the basis of concession fees for each individual concessionaire, as well as information on collection measures. Tax administration is performed quarterly and annual reconciliation status on individual analytical accounts of taxpayers with state authorities who make decisions on the amount of the concession fees. According to data from the Tax Administration, in 2015, on the basis of the fees for utilization of forest, it was collected an amount of 3,778,359.00, which is by 1,041, more than the calculated fee for the use of forests for year 2015 (according to the decisions submitted to the Tax Administration, it was calculated the amount of 2,736, for the utilization fees). Debt arising from utilization fees as of 31 December 2015 amounted to 5,945,810.51, which is about 15% less than the debt balance as of 12 December FINAL ASSESSMENT Activities taken by the audited entities in order to implement recommendations of SAI achieved a certain progress in the area of administration, billing, collection and control in the area of giving forests to be used, in this area, but there is still a large number of irregularities which directly affect the realization of budget revenues of giving forests to be used, in particular: Forest Administration has not (until the completion of the audit procedure as at 28 June 2016) provided bank guarantees (collateral for the performance of contractual obligations) of all the concessionaries. In the Forest Administration, the state auditor was not provided for a review the documentation on the basis of which he could satisfy himself that concessionaires who signed contracts on the privatization of the forest-wood processing companies realized the investment and social programs in enterprises that are privatized, although in the Government states in its Conclusion that the correction of special fee from the Contract for concession use of forest was conditioned by the positive report of the Agency 9 for Economic Restructuring and Foreign investments on realized investments and social programs. Decrease in the concession fee at the request of the concessionaire was carried out by the Forest Administration without engaging forestry inspector, who in accordance with Art Report dated 9 April Pursuant to the Law on the Termination of the Law on Agency of Montenegro for Restructuring the Economy and Foreign Investments ("Official Gazette of Montenegro", No. 83/09), the operations carried out by the Agency took over the state administration body competent for the economy (Ministry)

139 of the Law on Forests has the jurisdiction to establish the facts concerning the request of the concessionaire. Commission of the Ministry of Agriculture and Rural Development has found that the way in which certain contracts are concluded, their treatment by the services of the Forest Administration, as well as actions of the Forest Administration as a grantor in cases where contracts were not followed, are very controversial in terms of legality. Forest Administration, did not perform a review of the validity of the concession contracts on forest utilization, although the letter of the Forest Administration stated that certain provisions of the concession agreements are vague and leaves space for abuse. Analytical records maintained by the Forest Administration is unreliable and does not provide reliable data for the needs of internal and external controls. In 2014, it was exported 104, m3, and in , m3 of raw timber. The export of unprocessed wood was increased in 2015 compared to 2012 ( m³) by about 246%. Cooperation between the Ministry of Agriculture and Rural Development and the Directorate for Inspection is not at a level that can provide quality and efficient monitoring and control in the area of concessions for the use of forests. Out of the total of eight recommendations issued by SAI that have been the subject-matter of the follow-up audit, the audited entities: implemented one recommendation; partially implemented four recommendations; three recommendations were not implemented. Audited entities which did not implement or partially implemented recommendations should complete the activities on the implementation of recommendations so as to eliminate the irregularities in the area of concessions for the use of forests, and report SAI thereof within 6 months. SAI will, through introducing the Final audit report, inform the Government and the competent committee of the Parliament of the identified irregularities and deficiencies in the implementation of the recommendations

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141 EXCERPT FROM THE AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE NATIONAL SECURITY AGENCY Type of the audit: Audited entity: Subject of the audit: Audit duration: Composition of the Auditing Board: Financial Audit and regularity Audit Agency for National Security Annual Financial Statement for 2015 and the regularity of the business operations of the Agency for National Security 90 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

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143 I GENERAL PART 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the National Security Agency (hereinafter Agency of Audited entity ) is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan issued by the Senate, dated 22 December 2015 (No ); and Decision on Conducting Audit passed by the Auditing Board composed of: Mr Branislav Radulović, PhD (Head of the Auditing Board) and Mr Dragiša Pešić (Member of the Auditing Board) Number dated 4 January Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. GENERAL DATA ON THE AUDITED ENTITY Activity, organization and financing of the audited entity are determined by the following: Law on the National Security Agency ( Official Gazette of the Republic of Montenegro, No. 028/05, Official Gazette of Montenegro, No. 086/09, 020/11, 008/15); Law on Budget of Montenegro for 2015 ( Official Gazette of Montenegro, No. 059/14 dated 30 December 2014) and the Law on Amendments to the Law on Budget of Montenegro for 2015 ( Official Gazette of Montenegro, No. 047/15 dated 18 August 2015; and Law on Budget and Fiscal Responsibility ( Official Gazette of Montenegro, No. 020/14, 056/14 dated 24 December 2014) Activity of the Agency for National Security Law on the National Security Agency ( Official Gazette of Montenegro, No. 28/05 dated 5 May 2005) was established by the National Security Agency as a separate state body which, acting as a legal successor, took over the officers, objects, archives, equipment and assets of the former State security service of the Ministry of interior affairs of Montenegro. According to the Law, the Agency shall collect, record, analyse, assess, use, exchange, maintain and protect data: 1) on activities directed against the independence, sovereignty, territorial integrity, security and constitutional order of Montenegro; 2) 3) on ; terrorist activities and other activities of organized crime; 4) on serious crimes against humanity and other values protected by the international law; 5) on activities of combating intelligence services of officers of other states; 6) on combating potential threats to economic well-being of Montenegro; 7) on combating threats to international security; 8) on combating other possible threats against national security

144 The Agency shall be responsible for the counterintelligence protection of the Parliament, the Government of Montenegro, the President of Montenegro and other state authorities, ministries and state administration bodies, including the activities of importance for the security of specific persons and working places in these institutions, as well as facilities, equipment and premises used by them, The Agency shall perform security checks, as well as other tasks of significance for national security, subject to the law, The Agency is a security-intelligence service that forms an integral part of the security system of Montenegro. The Agency shall perform tasks and duties within its competence subject to the Constitution and the law. The Agency shall be politically and ideologically neutral in performing its activities. The Agency shall cooperate with state authorities, organizations and services of other countries and international organizations, in pursuance to the guidelines of the Government of Montenegro. The control of the work of the Agency shall be conducted through both the parliamentary and internal controls. The State Audit Institution (SAI) has conducted an audit in 2012 of the financial statement of the NSA for 2011, as well as the regularity audit. The competent Auditing Board of SAI expressed an unqualified opinion on the financial statements and qualified opinion on the compliance with the regulations and made 10 recommendations that were implemented by the audited entity The organization and systematization of jobs The head of the authority in the course of 2015 was the director Dejan Peruničić. The Government has dismissed the Head of the Agency's Director 1 Mr Boro Vucinic as at 25 December The coordinator of the Agency was Dejan Peruničić until having been appointed as Acting Director 2 as at 3 March He was appointed for the Director 3 of the Agency as at 20 August The headquarters of the ANS are in Podgorica, at Bulevar Revolucije No. 1. Goranka Serhatlić was appointed for the Inspector General of the Agency 4. The Inspector General adopts the Work Program, which shall be reviewed and approved by the Government. The Report 5 on activities performance for 2014 of the Inspector General of the Agency, in accordance with article 41 paragraph 3 of the Law on Agency was submitted to the Parliamentary Committee for Security and Defence. The Work Program shall be submitted to the competent working body of the Parliament in the report on the activities performance of the Agency. The Work Program of the Inspector General for the year 2015, which was to be reviewed and approved by the Government, did not plan a review of the activities legality of the Agency in the field of financial transactions. The Work Program of the Inspector General, adopted by the Government 6, planned that the legality of the Agency in the field of financial transactions should be subject to a review in the third quarter of the current year. Person responsible for the management of accounting and preparation of financial statements is Vanja Stijepović. The approved budget is on disposal of the persons authorized to validly sign and use the seal, Dejan Peruničić and Vesna Ivanović are in their capacity of officers for approval, while Vanja Stijepović of officer for verifying. This is confirmed by the specimen signature card of authorized person of the State Treasury. The Agency has an open foreign currency account with Crnogorska komercijalna banka, account number Decision on Dismissal of the director of the Agency for National Security, Number /3 dated 25 December The decision on the appointment of the Acting Director of the National Security Agency, No /3 dated 12 March The decision on the appointment of the Director of the National Security Agency, No /5 dated 20 August The decision on the appointment, No /3 dated 21 February Report on the work of the Inspector General for the year 2014 "T" number: 250/ , dated 30 March Act "T" number 01-35/2, dated 17 February

145 After examining the analytical card of CKB with a party , turnover in 2015 amounted to , Payments were made to foreign remittances. At year-end, the account balance was zero. The internal organization and the conditions for obtaining the title of Officer of the Agency are defined by the Government Decree 7 on the types of internal organizational units and titles of officials of the Agency for National Security. According to the Decree, the internal organizational units of the Agency are: In the headquarters - sector, department, section, cabinet and group; In the regional units - centre, sub-centre, operational department and operational group. Rules on internal organization and systematization of civil servants 8 was adopted by the Director of the Agency. The Government, by a Conclusion 9, approved the act on systematization, Rules on internal organization and job systematization of the Agency have a degree of secrecy: "SECRET", which according to Article 11, paragraph 2 of the Law of confidentiality of data 10 shall be assigned to data "the unveiling of which could cause serious harmful consequences for the security and interests of Montenegro". Act of systematization is harmonized with the Regulation on the types of internal organizational units and ranks of the officers of the Agency for National Security Accounting System Accounting of the audited entity is organized on a modified cash basis, which means that revenues and expenditures are recorded on a cash basis, i.e. at the time of settlement or collection in cash, while the liabilities and assets are recorded on an accrual basis, i.e. for the period to which those relate. ANS uses the SAP system (the system of recording in the General Ledger of the Treasury). Budget accounting is kept at the level of functional, organizational, economic and program classification. The accounting system of the public sector involves the collection, processing, delivery and use of accounting information to make decisions regarding the management of public funds and is based on the records in the General Ledger of the Treasury, which is kept in the Ministry of Finance and the accounting departments of the spending units. Spending units, based on their records of receipts and expenditures at the end of the year, financially compile an annual report and submit it to the Ministry of Finance - State Treasury by the end of February of the current year for the previous year. The Agency owns bookkeeping programs for keeping the cash in hand, fixed assets, outstanding liabilities and payroll that are connected to the General Ledger. Responsible person for the management of accounting and preparation of financial statements in the period of the audit concerned was Vanja Stijepović. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution (SAI) has performed a financial audit and regularity audit. Subject-matter of the audit was the annual financial statement for 2015 and the regularity of the business operations of the Agency for National Security. Pursuant to the Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments 11, the ANS, as a spending unit, is obliged to deliver to the Ministry of Finance the annual financial statements on Forms 4 and 5 as follows: Cash Flow Statement III, and 7 Regulation Official Gazette of Montenegro, No. 047/12 and 031/13 dated 5 July Rules on internal organization and systematization of jobs of civil servants, no. "T" 250/ /2 dated 2 July Conclusion No. 01/5/3 dated 1 July Law on Confidentiality of Data Official Gazette of Montenegro, No. 018/14 dated 11 April 2014, 048/15 dated 21 August 2015). 11 Official Gazette of Montenegro No. 23/

146 Report on arrears. For the unspent funds in the accounts, which were recorded in the Treasury's General Ledger as an expenditure, ANS is bound to accompany the annual financial report with a Statement on the manner of expenditure of funds after the end of the fiscal year on the Form 8. For the spent funds from the current budget reserve, the spending units shall submit the annual financial statement and Report on the manner of expenditure of funds from the current budget reserve on Form 9. The objective of the audit is to express the opinions on whether: 1. the financial statements fairly inform about the financial structure and financial position; 2. the transactions to be reported are in accordance with the laws and regulations (audit criteria), and 3. the system of financial management and control is in accordance with the law and other acts. The criteria on the basis of which shall be assessed the objectivity and truthfulness of the financial statements are an adequate accounting legislation, accounting principles and standards for the public sector and adopted accounting policies of the audited entity. The criteria on the basis of which it shall be assessed the financial management and control are the Law and other regulations governing the system of internal financial controls in the public sector of Montenegro and those establish the methodology and standards and other issues of importance for the establishment, development and implementation of internal financial control of the public sector. The audit covered the expenditures of the National Security Agency for AUDIT CRITERIA The regularity audit is an independent external evaluation of the extent to which the subject of the audit is in compliance with the laws, regulations, policies, procedures, or authorizations, which have been identified as the audit criteria. Criteria for regularity audit were: Subject-matter of Criteria the audit Financial operations and the use of allocated funds Employees The Law on Budget and Fiscal Responsibility, The Law on Budget for 2015, Instructions on the State Treasury Operations, Rules on unified classification of accounts for the budget of Montenegro, budgets of extra-budgetary funds and budgets of municipalities, Rules on the method of preparation and presentation of financial statements of the budget, state funds and local selfgovernments, the Rules on the Report of Arrears of the Agency for National Security, Rules on the cash operations of the Agency for National Security, the Law on the Agency for National Security, the Rules for preparing the request for budgetary funds of the Agency for National Security. The Labour Law, the Law on Civil Servants and State Employees, the Rules on wages and wage supplements to officials of the Agency for National Security, the General Collective Agreement, the Rules on the types of internal organizational units and ranks of officers of the Agency for National Security, Rules on internal organization and systematization of civil servants jobs, Rules of procedure of employment in the National Security Agency without public announcement, the Rules on the method of preparing the data for the calculation and payment of salaries to employees of the Agency for National Security, the Law on mandatory social insurance, Guide to the calculation of

147 Assets Public procurement The system of internal controls gross earnings, Guide for calculation of gross earnings, the Regulation on reimbursement of costs of civil servants and state employees. Law on State Property, the Regulation on keeping records of movable and immovable property and a list of objects in state ownership, the Regulation on conditions and manner of use of official buildings and business premises owned by Montenegro, the Regulation on conditions and manner of use of transport assets owned by Montenegro, the Regulation on the sale and lease of objects in state property, the Regulation on conditions and manner of use of the object of artistic and cultural value in ownership of Montenegro, Rules on classification of fixed assets by groups and methods for determination of depreciation of budgetary and extra-budgetary users, Instruction on detailed procedure for the counting of movable and immovable property. Public Procurement Law, the Law on Data Confidentiality, Regulation on the procedure for labelling of data confidentiality, the Rules of Procedure of confidential procurements in the implementation of the Agency for National Security, Rulebook on the content and manner of conducting public procurement in electronic form, the Rules on Forms of public procurement procedure, Rulebook on records of public procurement procedures, Other subordinate legislation in the field of public procurement. The Law on internal financial controls in the public sector, the Regulation on the establishment of internal audit in the public sector, the Bylaws of the Agency adopted in accordance with the Law on internal financial controls in the public sector (Book of Procedures). 5. TIME OF AUDIT PERFORMANCE The audit of the National Security Agency was carried out in the period from January 4 till April 20,

148 II OPINION AND RECOMMENDATIONS Based on the conducted audit, determined factual findings and Statement of the audited entity (No. 250/ dated 25 May 2016), and in accordance with Article 12 of the Law on State Audit Institution (SAI) and Article 45 of the Rules of Procedure of the State Audit Institution, the competent Board of SAI composed of Mr Branislav Radulovic, PhD (member of the Senate - Head of the Auditing Board) and Mr Dragisa Pesic (a member of the Senate - Member of the Auditing Board) at the meeting of the Auditing Board held on 30 May 2015 adopted the following: The responsibility of the audited entity FINAL AUDIT REPORT of the National Security Agency Chief Finance Officer of the Agency is responsible for execution of the budget. The management of the audited entity is responsible for the preparation and presentation of financial statements in accordance with generally accepted financial reporting framework, as well as compliance with legal and other relevant regulations. The responsibility of the State Audit Institution The responsibility of the State Audit Institution (SAI) is to, based on the audit, express an opinion on whether the financial report of the National Security Agency for the year 2015, in all material respects, are prepared and presented in accordance with the applicable financial reporting framework. In addition to responsibility for expressing an opinion on the financial statement, the SAI bears the responsibility of expressing an opinion on whether the financial and other operations of the audited entity, in all material respects, are prepared with the laws, regulations and other documents that have been identified as criteria for the given audit. The audit was conducted in accordance with International Standards of Supreme Audit Institutions (ISSAI - Level III). The State Audit Institution has complied with ethical requirements, planned and carried out the audit in a manner which has provided reasonable assurance on whether the financial statements of the National Security Agency were prepared and presented, in all material respects, in accordance with the applicable financial reporting framework and whether the business performance of the audited entity was in compliance with applicable laws and regulations. The audit provided a performing of procedures so to obtain sufficient appropriate evidence on which to ground the expressed opinion. Completed procedures depended on the professional judgment of the Auditor, including assessing the risk of material non-compliance. OPINION By the Financial audit of the Annual Financial Statement of the National Security Agency (NSA) for 2015, the competent Auditing Board of SAI has gained reasonable assurance that the financial statement, in all material respects, gives a true and fair view of the recorded revenues and expenditures in accordance with generally accepted financial reporting framework. For the audit of the financial statements of the Agency for National Security, the materiality level was set at the amount of 92, The audit of the regularity of the National Security Agency did not identify any material noncompliance of its business performance with established criteria for the regularity audit. Based on the above, the competent Auditing Board of SAI expressed an unqualified opinion on the Annual Financial Statement of the National Security Agency for 2015 and an unqualified opinion on the compliance of the regulations with an emphasis of matter on specific identified irregularities

149 RECOMMENDATIONS 1. The Agency in 2015 purchased eleven vehicles. The vehicles were purchased through a leasing (the total value of leasing contracts amounted to 349,334.00, and the repayment period was 48 months), with the consent of the Government. Purchased vehicles were not recorded as fixed assets in the accounting records kept by the audited entity. The audited entity should, in accordance with international accounting standards for the public sector 12, record the purchased vehicles as fixed assets and calculate depreciation over the lease period and record the lease liability. The audited entity should inform in the notes to the financial statements 13 the Ministry of Finance on the state liabilities under the lease contract. 2. The total value of public procurements in 2015 realized by the audited entity by applying direct agreement amounted to 43,665.26, which represents 10.84% of execution of public procurement in the reporting year. Article 30, paragraph 3 of the Law on Public Procurement stipulates that the annual total value of public procurements realized by applying direct agreement may not exceed 9% of the executed budget for procurement of the contracting authority in the previous year, if the budget for procurement amounts from 200, to 500, The total contracted value of public procurement of the ANS in 2015 amounted to 402, During the implementation of the public procurement procedure by direct agreement the audited entity should ensure that the total annual amount of purchases made with direct agreement does not exceed the limits prescribed in Article 30 of the Law on Public Procurement. 3. Law on Public Procurement in Section 116b, which refers to the exemptions, stipulates that the Law does not apply to "procurement for the purposes of intelligence activities", Law on the National Security Agency stipulates that the Agency is security intelligence service as an integral part of the security system of Montenegro. Article 48 of the same Law stipulates that the acquisition, maintenance and servicing of special equipment, and a service of weapons used in the Agency are not stipulated by the rules on public procurement. The manner and procedure of procurement referred to in paragraph 1 of this Article shall be regulated by an act of the Agency Director. Through the procedure of confidential procurement process, the Agency procured the following: a) vehicles with the consent of the Government (on the basis of leasing contracts whose value is 349,334.00), whose technical characteristics, equipment, etc. are in accordance with standard passenger motor vehicles of high-middle class; b) computer equipment of the value of 57, (desktop and laptop computers, printers). The foregoing equipment, pursuant to the Regulations on the special equipment used in the work of the Agency, does not constitute i.e. is not determined as special equipment. Also, the Rules on conditions and manner of use of means of transport within the Agency, the Article 19 stipulates: "The acquisition of means of transportation and fuel for the Agency shall be carried out pursuant to the provisions of the Law on Public Procurement." Audited entity should purchase the equipment that is not purchased for the purposes of intelligence activities, i.e. that has the features of no special equipment according to the 12 IRS-JS Number Art. 2 Law on Budget and Fiscal Responsibility stipulates: "the outstanding liabilities from the previous period are the budgetary commitments that are not paid on the due date of payment and obligations which arose under the law and in accordance with the law and the contract." In accordance with the previous, in the Statement of arrears reports on due and unpaid liabilities

150 Regulations on the special equipment used in the work of the Agency in accordance with the Law on Public Procurement. In a Statement of the audited entity to the preliminary report of SAI, the audited entity (ANS) stated that the vehicles and computer equipment were purchased as "confidential or special equipment, in accordance with their purpose". "Taking into account the recommendation of the SAI", after receiving the preliminary findings, the audited entity made amendments to the Rules on conditions and manner of use of means of transport in the NSA and the Regulations on the special equipment used in the work of ANS, in order to ensure the legality of operations and implementation of recommendations issued by SAI. 4. The Internal Audit Unit has not conducted audits provided for by the Work Plan for 2015 because the Charter of Internal Audit was not signed. The Head of the Agency shall be responsible for providing conditions for the functioning of the internal audit, pursuant to Article 19 point 2 (signing of the Charter of Internal Audit) and Point 4 (approval of strategic and annual internal audit plans) of the Law of the system of internal financial controls in the public sector. Not signing the Charter 14, the internal audit was not able to implement activities in the implementation of the Annual Work Plan. The head of the audited entity (Director of the Agency) should provide all legally defined conditions for the functioning of the internal audit, especially in the full and timely implementation of Articles 13 and 19 item 2 of the Law on internal financial controls in the public sector (the signing of an Internal Audit Charter). Internal audit unit is obliged to carry out the audits envisaged by the plan, after signing the Charter. In the statement on the preliminary report of SAI, the audited entity stated: "Appreciating the recommendation of SAI, in the course of the audit procedure, the Director of the Agency approved the amendments to the Strategic Plan of internal audit for the period and signed the revised Internal Audit Charter (as at 24 May 2016). Department of Internal Audit shall, in accordance with the planned schedule, approach the implementation of the approved plan." Audited entity shall, in accordance with Article 15 of the Law on State Audit Institution, within 6 months from inform the SAI on the actions taken by the prepared and submitted recommendations. 14 Internal Audit Charter is an internal act signed by the Head of Internal Audit and the head of the entity, which stated the purpose, authority and responsibilities of internal audit and the head of the entity in terms of internal audit (Article 4, paragraph 8 of the Law on internal financial controls in the public sector)

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152 EXCERPT FROM THE AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE ENVIRONMENTAL PROTECTION AGENCY Type of the audit: Audited entity: Subject-matter of the audit: Audit duration: Composition of the Auditing Board: Financial Audit and Regularity Audit Agency for Environmental Protection Annual Financial Statement for 2015 and the regularity of business operations of the Agency for Environmental Protection 60 auditing days Mr Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr Nikola N Kovačević, member of the Senate Member of the Auditing Board

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154 I GENERAL PART Annual Report of the State Audit Institution for the Period October 2015 October LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the Agency for Environmental Protection (hereinafter the Agency or the Audited entity) is comprised in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan issued by the Senate, dated 22 December 2015 (No ) and Decision on Conducting Audit passed by the Auditing Board composed of: Mr Branislav Radulović, PhD (Head of the Auditing Board) and Mr Nikola N. Kovačević (Member of the Auditing Board) No dated 18 January Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. GENERAL DATA ON THE AUDITED ENTITY Audited entity is a body of the state administration - Agency. The head of the body is the Director, Mr Ervin Spahic. The Agency is headquartered in Podgorica. The Agency for Environmental Protection was established in 2008 by the Law on Environment ( Official Gazette of Montenegro, No. 48/10, 40/10 and 40/11). The specimen signature card and the funds in the account are managed by the Director, Mr Ervin Spahic, in his capacity of an authorizing officer, and Nikola Golubović as verifying officer. A person responsible for management of accounting and preparation of financial statements is Mladen Đuranović The activities of the Agency for Environmental Protection Pursuant to Article 46 of the Regulation on the Organization and Functioning of Public Administration 1, the Agency for Environmental Protection performs tasks related to: organizing, planning and participating in environmental monitoring, including proposing a national list of environmental indicators; participation in the monitoring of waste collection from ships; analysis of the environmental state, phenomena and events that may threaten the environment and proposing and taking measures for their prevention and elimination; reporting and coordination of reporting on the state of the environment, as well as the phenomena and events of importance to the quality of the environment in accordance with the regulations; implementation of strategies and programs in the field of environmental protection; ensuring the application and enforcement of regulations on environmental protection; implementation of international treaties within the competence of this authority; preparing expert basis for drafting legislation in the field of environmental protection; cooperation, communication and coordination with national and international organizations and institutions; maintenance of the information system in the field of the environment; keeping a register of polluters; conducting first instance administrative procedure 1 Official Gazette of Montenegro, No. 05/ /

155 in the fields of air protection from pollution, climate change, ozone layer protection, protection against ionizing radiation and security of radioactive sources, protection from non-ionizing radiation, chemicals, noise protection, genetically modified organisms, protection from accidents involving dangerous substances, waste management, environmental impact assessment and strategic assessment of environmental impact; issuance of the integrated permits for the plant for which, pursuant to the special regulation, must have an integrated permit; issuing permits for the collection, use, breeding, keeping and movement of wild animals; issuing permits for picking, collection, use, breeding, keeping and movement of wild plants and mushrooms; issuing permits for scientific education research on protected natural resources, permits for operations and activities at a caving facility; issuing permits for trade and use of radioactive materials and sources of ionizing radiation; issuing licenses for import and export of substances that deplete the ozone layer; issuing permits for trans boundary movement of waste; issuance of permits for installations for waste collection in ports; environmental protection; proposing measures of state bodies and holders of protected objects in relation to the protection of natural objects; preparation of studies of protection of natural resources; project preparation for works on conservation and restoration of protected buildings; direct professional supervision of works on conservation and restoration of protected facilities and of the implementation of technical and other protective measures for the special protection of protected objects; provide assistance to holders of protected objects in their maintenance and protection, particularly by providing expert opinions, pointing out the need for their conservation and the performance of expertise in order to determine the measures to reflect the protected object; development of plans and programs for protection and improvement of protected objects; maintenance of the Central register of protected objects on the territory of Montenegro; improving the protection of nature in Montenegro; giving expert opinions on investment-technical documentation and spatial planning documents on nature protection measures that these acts should contain; professional development of personnel working on nature conservation; preparing and issuing professional publications dealing with issues of nature conservation and publication of the results of their work; and other activities that are within its jurisdiction. Art. 10 of the Environment Law stipulated that the Agency for Environmental Protection performs professional and related administrative tasks in the field of environmental protection, namely: issues licenses, monitors, make analyses and reports, performs inspection and communicates with the relevant national and international bodies and organizations, and the public, and perform other tasks stipulated by this Law and other regulations. The Agency shall cooperate with international bodies and organizations of other countries involved in the protection of the environment, especially with the European Environment Agency, the International Atomic Energy Agency, participates in the work of professional networks within the EU, as well as with similar agencies in other countries. Pursuant to section 66 of the Environmental Law and Article 51 of the Regulation on the organization and functioning of public administration, the supervision over the legality and effectiveness of the Agency for the Environment shall be done by the Ministry of Sustainable Development and Tourism, which simultaneously supervises the implementation of the Law on Environmental Protection (Art. 66 of the Law). The same article stipulates that the inspection of the implementation of this Law shall be conducted by the Agency The organization and systematization of jobs During 2015, the Agency applied the two Regulations on internal organization and systematization, Regulations on organization and systematization of jobs 2 that was applied until October 2015, envisaged 88 jobs of civil servants and state employees and 7 organizational units. The new 2 No. 05-D-1543/2 dated 20 May

156 Regulations foreseen jobs for 90 officers 3, while, for carrying out the activities of the Agency, there were established 6 organizational units 4, as follows: 1) Department of nature protection, monitoring, analysis and reporting; 2) Division of Licensing; 3) Division of Information System Management in the field of the environment; 4) Department of Radiological and Nuclear safety and security and protection from ionizing and non-ionizing radiation; 5) Department for management of chemicals; and 6) Service for general, legal and financial affairs. According to the list submitted by the Agency as of 31 December 2015, the Agency had 87 employees Accounting System Accounting tasks of the Agency shall be carried out within the Department for General, Legal and Financial Affairs, which employs 22 perpetrators for an indefinite period, which amounts to 25.29% of the total number of employees. A person responsible for the management of accounting and preparation of financial statements is Mladen Đuranović. Accounting of the audited entity is organized on a modified cash basis, which means that revenues and expenditures are recorded on a cash basis, i.e. at the time of settlement or collection in cash, and liabilities and assets are recorded on an accrual basis, i.e. for the period to which those relate. The Agency is connected to SAP (the system of records in the General Ledger of the Treasury), and all cash transactions are conducted through the Treasury Consolidated Account. The Budget accounting shall be kept at the level of functional, organizational, economic and program classification. The accounting system of the public sector involves the collection, processing, delivery and use of accounting information to make decisions regarding the management of public funds and is based on the records in the General Ledger of the Treasury, which is kept in the Ministry of Finance and the accounting departments of the spending units. Spending units, based on their records of receipts and expenditures, at the end of the year, shall prepare a financial annual report and submit it to the Ministry of Finance - State Treasury by the end of February of the current year for the previous year. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution (SAI) has performed a financial audit and regularity audit. Subject-matter of the audit was the annual financial statement for 2015 and the regularity of the Agency for Environmental Protection. The Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments 5, the Agency as a spending unit in the Ministry of Finance required to submit annual financial statements on Forms 3 and 5, as follows: Cash Flow Statement III, and Report on Arrears. For the unspent funds in the accounts, which were recorded in the Treasury's General Ledger as an expenditure, ANS is bound to accompany the annual financial report with a Statement on the manner of expenditure of funds after the end of the fiscal year on the Form 8. 3 Increase in the number of jobs of civil servants and state employees was conditioned by the Regulation on the Organization and Functioning of the State Administration, Law on liability for damages in the environment and the Law on the Protection of non-ionizing radiation. 4 It was cancelled the Department for application and monitoring of the Arhus Convention Arhus Centre of Podgorica 5 Official Gazette of Montenegro No. 23/

157 For the spent funds from the current budget reserve, the spending units shall submit the annual financial statement and Report on the manner of expenditure of funds from the current budget reserve on Form 9. The objective of the audit is to express an opinion on whether: 1. the financial statements fairly inform about the financial structure and financial position; 2. the transactions to be reported are in accordance with the laws and regulations (audit criteria), and 3. the system of financial management and control is in accordance with the law and other acts. The criteria on the basis of which shall be assessed the objectivity and truthfulness of the financial statements are an adequate accounting legislation, accounting principles and standards for the public sector and adopted accounting policies of the audited entity. For the audit of the financial statements of the Agency for Environmental Protection, the materiality was set at the amount of 24, The criteria on the basis of which it shall be assessed the financial management and control are the Law and other regulations governing the system of internal financial controls in the public sector of Montenegro and those establish the methodology and standards and other issues of importance for the establishment, development and implementation of internal financial control of the public sector. The audit covered the expenditures of the Agency for Environmental Protection for AUDIT CRITERIA The regularity audit is an independent external evaluation of the extent to which the subject of the audit is in compliance with the laws, regulations, policies, procedures, or authorizations, which have been identified as the audit criteria. Criteria for regularity audit were: Subject-matter of the audit Financial operations and use of allocated funds Criteria Budget Law, the Law on Budget and Fiscal Responsibility, the Law on the Budget for 2015, the Law on Environmental Protection, Law on Assessment of the Impact on the Environment, Law on Chemicals Management, the Law on Protection against Ionizing Radiation, Law on Inspection control, Instructions on the state Treasury, the Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments, Rules on unified classification of accounts for the budget of Montenegro, budgets of extra-budgetary funds and budgets of municipalities, Regulation on fees, the method of calculation and payment of the fees due to pollution of the environment, the Regulation on the criteria, amount and manner of payment of special fees for waste management, the Decision on the method of preparation and content of the program budget

158 Employees Assets Public Procurement Internal control system Law on Civil Servants, Law on Internal Affairs, Rules on organization and systematization of jobs and tasks, the Law on Personal Income Tax, Law on Mandatory Social Insurance, Law on wages and other incomes of state and public officials, Law on salaries of civil servants and state employees, Instructions for the calculation of gross earnings, the Regulation on reimbursement of costs of civil servants and state employees, Decision on criteria for determining the variable portion of salaries of civil servants and state employees, Decision on salary increase for civil servants and state employees to perform certain tasks, the Decision on the amount of severance payment to civil servants and state employees, the Rules on salaries and allowances of police liaison officers. Law on State Property, the Regulation on keeping records of movable and immovable property and on the list of objects in state ownership, Instructions on detailed procedure for the inventory of movable and immovable property, Regulation of the sale and lease of objects in state property, the Rules on the classification of material and intangible assets by groups and methods for determination of depreciation of budgetary and extra-budgetary users, the Regulation on the conditions and manner of use of official buildings and business premises owned by Montenegro, the Regulation on conditions and manner of use of transport assets owned by Montenegro, the Regulation on conditions and manner of use of works of art and cultural values in ownership of Montenegro. Public Procurement Law on Public Procurement, Rulebook on the content and manner of conducting public procurement in electronic form, the Rules on records of public procurement procedures, the Rules on forms in public procurement procedures; Rules on methodology of expressing sub criteria into an appropriate number of points, the method of evaluation and comparison; Rulebook on forms in public procurement procedures; Rules on the method of keeping and content of records on violation of anticorruption policies; Regulation on the procedure of public procurement procedures; Concluded contracts with the selected bidders. The Law on internal financial controls in the public sector, the Regulation on the establishment of internal audit in the public sector, Regulations on the procedure for establishing and implementing financial management and control; Rules on the manner and procedure of work of internal audit; Instruction on the content of the annual report on implementation of planned activities on the establishment and development of financial management and control and the annual report on the work of internal audit; Handbook of Financial Management and Control; Guidelines for Financial Management and Control and the Guidelines for the description of internal rules and procedures. 5. TIME OF AUDIT PERFORMANCE The audit of the Agency for Environmental Protection was performed in the period from January 4 through 20 April II OPINION AND RECOMMENDATIONS Based on the conducted audit, determined facts and Statement of the audited entity (No. 05-D- 1932/1 dated 11 July 2015), in accordance with Article 12 and 44 of the Law on State Audit

159 Institution (SAI) and Article 45 of the Rules of Procedure of the State Audit institution, the competent Board of SAI composed of Mr Branislav Radulovic, PhD (member of the Senate - Head of the Auditing Board) and Mr Nikola N. Kovačević (member of the Senate - Member of the Auditing Board), at the meeting held on the Auditing Board of SAI dated 21 July 2015, adopted the following: The responsibility of the audited entity FINAL AUDIT REPORT of the Annual Financial Statement of the Agency for Environmental Protection for 2015 Chief Finance Officer of the Agency (Director) is responsible for execution of the budget. The management of the audited entity is responsible for the preparation and presentation of financial statements in accordance with generally accepted financial reporting framework, as well as compliance with legal and other relevant regulations. The responsibility of the State Audit Institution The responsibility of the State Audit Institution (SAI) is to, based on the audit, express an opinion on whether the financial report of the Agency for Environmental Protection for the year 2015, in all material respects, are prepared and presented in accordance with the applicable financial reporting framework. In addition to responsibility for expressing an opinion on the financial report, SAI bears the responsibility of expressing an opinion on whether the financial and other operations of the audited entity, in all material respects, are prepared with the laws, regulations and other documents that have been identified as criteria for the particular audit. The audit was conducted in accordance with International Standards of Supreme Audit Institutions (ISSAI - Level III). The State Audit Institution has complied with ethical requirements, planned and carried out the audit in a manner which has provided reasonable assurance on whether the financial statements of the National Security Agency were prepared and presented, in all material respects, in accordance with the applicable financial reporting framework and whether the business performance of the audited entity was in compliance with applicable laws and regulations. The audit provided a performing of procedures so to obtain sufficient appropriate evidence on which to ground the expressed opinion. Completed procedures depended on the professional judgment of the Auditor, including assessing the risk of substantial non-compliance. OPINION By the Financial audit of the Annual Financial Statement of the Agency for Environmental Protection for 2015, the competent Auditing Board of SAI has gained reasonable assurance that the Statement, for the major part, give a true and fair view of the recorded revenues and expenditures in accordance with generally accepted financial reporting framework, except that in the statement of cash flows III, the misstatements were identified in significant material degree, four positions: Other personal income, Expenses for services, Current maintenance and Other expenses in a total amount of 172, The audit of the regularity of the Agency for Environmental Protection identified discrepancies and non-compliance with the Law on Budget and Fiscal Responsibility, the Law on Budget for 2015, the Instruction for the State Treasury and the Regulation on unified classification of the Budget of Montenegro, Extra-Budgetary Funds and Municipal Budgets. Based on the above, the competent Board of SAI expresses qualified opinion on the financial statement of the Agency for Environmental Protection for 2015 and qualified opinion on the compliance of the regulations

160 RECOMMENDATIONS 1. Audited entity is, in the statement of cash flows III, position "Other personal income", disclosed the expenditures for fees paid to external experts in the amount of 83, Those costs should, in accordance with the Regulation on Classification for Montenegrin budget, extra budgetary funds and budgets of municipalities, be disclosed in the statement of cash flows within the item "Other expenses". In the statement of cash flows III at the account of "Expenses for services", there are stated the expenditures for the purchase of spare parts and maintenance of equipment in the amount of 76,312.82, expenditures for employee compensation in the amount of 8,170.00, expenditure for the purchase of materials in the amount of 1, and expenses for the purchase of equipment in the amount of 2, Those costs should, in accordance with the Regulation on Classification for Montenegrin budget, Extra-Budgetary Funds and Municipal Budgets, in the statement of cash flows III appear in positions "Regular maintenance", "Other personal income", "Expenses for materials" and 2.4, "Capital expenditures". Audited entity shall, in accordance with the Instructions on State Treasury (item, 25, sub clause e), at the payment request, enter the appropriate account of the records of expenditure by economic classification, in accordance with the Regulation on Classification for Montenegrin budget, Extra-Budgetary Funds and Municipal Budgets, which serves record in the General Ledger (which is the basis for drawing up the Statement of cash flows) the performed payment as expenditure from the budget. 2. In 2015, the audited entity paid expenses in a manner which is not in accordance with Art. 18 of the Budget Law for 2015, whereby the resources of the Budget were allocated to the spending units and expenditures by economic classification, as follows: external experts fees were paid in the amount of 83, from the funds allocated to the account of expenditures Other fees, Rules on Consistent Accounts' Classification for the State Budget, extra budgetary users and budgets of municipalities stipulates that the accounts of the group Other personal income, in the gross amount of other personal record of employee benefits which the employer pays for the employee in addition to earning, and payments related to: winter allowance, housing and family separation compensation, transportation, fees to MPs, academic allowances, jubilee awards, retirement and other benefits. Fees to external experts should have been paid from the funds allocated to the account of expenditures Expenditures for payment upon service contracts. by the funds allocated to the account administrative materials, the payments were made in the amount of 2, relating to the procurement of services of printing, Expenditures for printing services had to be paid from the funds allocated to the group of accounts Expenses for services, or from the account Other Services, by the funds allocated to the account of expenditures Consulting, projects and studies, the payments were made for the acquisition of spare parts and maintenance of equipment in the amount of 76, The expenditures for the purchase of spare parts and maintenance of equipment had to be paid from the funds allocated to the account of expenditures Current maintenance of equipment. Customs Administration was paid, from the funds allocated for the account Consulting, projects and studies, the amount of 2, in the name of the customs debt. This expenditure should have been paid from the funds allocated to the account of expenditure Other Services. The employees of the Agency, on behalf of participation in realization of projects from donations, were paid from the funds allocated to the group of accounts Expenses for services, an amount of 8, The expenditure for employee compensation should have been paid from the account of the group Other personal income and make calculation in accordance with Art. 3a of the Law on Mandatory Social Insurance, which provides that

161 the basis for the calculation and payment of contributions is the gross amount both at the payment of wages and payments of increased salaries, compensations and other personal earnings that are subject to income tax. From the funds allocated to the account Consulting, projects and studies, the expenditure was paid in the amount of 5, for: the purchase of tweezers, scalpels, scissors for tubes ( 1,964.45), the purchase of microscopes ( 2,550.84) and procurement of 5 air tickets ( 1,398.08). Those expenses should have been paid from the funds allocated in the accounts of expenditure: 4133 material for a special purpose, expenditure on equipment and official travel. Audited entity should ensure the effective implementation of the Instructions on the State Treasury (in particular points 25 and 26 relating to the verification and approval of the payment by the spending organizations), in order to ensure that the spending of budget funds is carried out in accordance with the Law on Budget. 3. Article 56 of the Environmental Protection Law stipulates that the procedure for designation of protected natural resource shall be launched by a request for elaboration preparation - protection study. The request shall be submitted by the Ministry or competent authority of local self-government Agency. Study Protection shall be drafted by the Agency, while the funds for drafting shall be provided in the state budget or the budget of local self-government unit. In cases where the Agency was, according to the concluded agreement, required to prepare and submit to the local unit of self-government the study of protection, it was not a grant, as recorded by the Agency, because the donation is the transfer free of charge or no-encumbrance transfer of certain tangible and intangible assets, movable or immovable property, and in this case the local government units shall pay the funds to the Agency, in accordance with the contract. Revenues that the Agency generates on the basis of preparation of the protection studies represent income from activities carried out and for which the Agency is competent, and as such, those should be planned and recorded. 4. Article 21 of the Law on Environmental Impact Assessment stipulates that "the Commission to assess the impact shall be formed of the employees of the competent authority and other experts". The audit has found that the Commissions for impact assessment, as a rule, was comprised of the members being the external experts while the president of the Commission are appointed the employees of the Agency. Fees totalling 83, were paid only to external experts. Regulations on internal organization and job classification of the Agency determined that in the framework of the Department of Licensing (18 employees) there shall be carried out, among other matters, the implementation of procedures and tasks of impact assessment of projects on the environment. The Agency is recommended to appoint the external experts in the Commission for assessment of the impact exceptionally appointed when the employees of the Department for the issuance of permits are not able to carry out the process of determining the scope and content of studies and evaluation studies, and not a rule, as is the current practice. Agency should adopt a procedure which will govern the way of selection and engagement of external experts for the Commission to assess and concludes with the same service contract. Audited entity shall, in accordance with Article 15 of the Law on State Audit Institution, within 6 months report to SAI on the activities undertaken in respect of prepared and submitted recommendations

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163 EXCERPT FROM THE AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE MINISTRY OF SCIENCE Type of the audit: Audited entity: Subject-matter of the audit: Audit duration: Composition of the Auditing Board: Financial Audit and Regularity Audit The Ministry of Science Annual Financial Statement for 2015 and regularity of business operations of the Ministry of Science 90 auditing days Mr Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, the President of the Senate Member of the Auditing Board

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165 I GENERAL PART Annual Report of the State Audit Institution for the Period October 2015 October LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the Ministry of Science (hereinafter: the Ministry or the Audited entity) is comprised in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan issued by the Senate, dated 22 December 2015 (No ); and Decision on Conducting Audit passed by the Auditing Board composed of: Mr Branislav Radulović, PhD (Head of the Auditing Board) and Mr Dragiša Pešić (Member of the Auditing Board) dated 22 January 2016 (Number: ). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. GENERAL DATA ON THE AUDITED ENTITY Audited entity is a body of the state administration - the Ministry. The head of the body is the Minister Mrs Sanja Vlahovic, PhD, Director General is Mr Darko Petrusic, and the Secretary is Mrs Smiljana Prelevic. The Minister is the authorizing officer. Verifying officer is Mrs Smiljana Prelevic, the Secretary. Persons authorized to take over the cash are the treasurer - Snežana Jovanović and Milena Ivanovic- Independent Advisor III. The Ministry of Science was established by the Regulation on the organization and functioning of public administration 1 and started work on 1 March The strategic objectives of the Ministry are developing the scientific research community in Montenegro, the strengthening of bilateral and multilateral cooperation and cooperation between the scientific research community and the economy. Achieving the goals are being provided by use of budget funds, grants, IPA funds and loans from the World Bank Activities of the Ministry of Science The Ministry of Science performs administrative tasks relating to: the implementation of programs of public interest which include the scientific and research institutions and researchers in the European research area and international scientific programs; training and mobility of Montenegrin researchers with the aim of facilitating their work in research centres and institutes in Montenegro and abroad; regional cooperation and integration into the research infrastructure; the implementation of national and international research projects; Centre of Efficacy; improvement of the infrastructure necessary for realization of the research; encouraging scientific productivity; stimulation of publishing activities and organization of scientific congresses; involvement of the scientific diaspora in the scientific research activity in Montenegro; the inclusion of internationally recognized scientists from other countries in scientific research programs and projects in Montenegro; programs of national significance that have interdisciplinary character and are being 1 Official Gazette of Montenegro, No. 7/

166 realized with the participation of several ministries; development of plans and programs of scientific research; making scientific policy and strategy; preparation of draft laws, other regulations and general acts in the field of science; harmonization of national legislation within its competence with the legal order of the European Union; preparation of documents on scientific and technological cooperation between Montenegro and other countries (memoranda, agreements, contracts, protocols, programs); Montenegro's participation in multilateral and bilateral programs and projects related to science, research and development; implementation of projects in the field of science financed from pre-accession funds of the European Union - IPA projects; scientific and technological cooperation between Montenegro and other countries; organization and coordination of national contact points (NCP); monitoring the implementation of the strategy of scientific-research activities in Montenegro; determine the program and financial criteria for financing programs of general interest from the budget; analysing the necessary resources for the realization of scientific research; licensing of research institutions; planning and programming, implementation and coordination of international scientific cooperation between Montenegro and other countries, regional associations and international organizations; providing for the implementation of programs within the competence of the bodies financed from the budget of Montenegro; collecting, processing and distributing proposals and adequate data, information and programs in the areas of international scientific cooperation; keeping proper records; administrative supervision in the areas for which the Ministry is established; as well as other activities within its jurisdiction The organization and systematization of jobs Internal organizational units within the framework of tasks related to the Ministry of Science are: a) Division of Scientific Research Activity: 1. Department for national programs 2. Department for International Programs and European Integration b) The Cabinet of the Minister c) Department of Personnel, General Affairs and Finance The new Rules on the internal organization and systematization of the Ministry of Science was adopted in March 2015, which systematized 24 jobs with the same number of employees, a position of a senior internal auditor was abolished. Systematization included the following positions: Minister, Secretary and Director General, which are optional. Number of employees at the Ministry of Science in 2015 ranged from 21 to 23. Out of the total number, the number of employees at a definite period of time in 2015 were 4 i.e. 6 people, while on indefinite period of time, 14 persons were employed. In February 2013, the government adopted the Decision on establishing the Council for Scientific research activity, which is appointed for a period of 4 years and has 11 members. Council members are appointed by the Government and four members from among the representatives of the state administration responsible for: science, higher education, economy and finance, and seven members from among prominent experts who contribute to the development and application of scientific research to be appointed on the proposal of the Minister of Science The compensation for the members of the Council and members of its bodies or commissions shall be determined by the Minister of Science, pursuant to a special act in accordance with the Government regulation establishing the amount of the fee for the work of members of such bodies or any other form of work. The funds needed for the work of the Council are planned and provided in the budget of the Ministry of Science Accounting System Accounting of the audited entity is organized on a modified cash basis, which means that revenues and expenditures are recorded on a cash basis, i.e. at the time of settlement or collection in cash, while the liabilities and assets are recorded on an accrual basis, i.e. for the period to which those relate

167 The Ministry uses the SAP system (the system of recording in the General Ledger of the Treasury). Budget accounting is kept at the level of functional, organizational, economic and program classification, The accounting system of the public sector involves the collection, processing, delivery and use of accounting information to make decisions regarding the management of public funds and is based on the records in the General Ledger of the Treasury, which is kept in the Ministry of Finance and the accounting departments of the spending units, Spending units, based on their records of receipts and expenditures at the end of the year, financially compile an annual report and submit it to the Ministry of Finance - State Treasury by the end of February of the current year for the previous year. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution (SAI) has performed a financial audit and regularity audit. Subject-matter of the audit was the annual financial statement for 2015 and the regularity of the business operations of the Ministry of Science. Pursuant to the Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments 2, the Ministry, as a spending unit, is obliged to deliver to the Ministry of Finance the annual financial statements on Forms 3 and 5 as follows: Cash Flow Statement III, and Report on arrears. For the unspent funds in the accounts, which were recorded in the Treasury's General Ledger as expenditure, the Ministry is bound to accompany the annual financial report with a Statement on the manner of expenditure of funds after the end of the fiscal year on the Form 8. For the spent funds from the current budget reserve, the spending units shall submit the annual financial statement and Report on the manner of expenditure of funds from the current budget reserve on Form 9. The objective of the audit is to express the opinions on whether: 1. the financial statements fairly inform about the financial structure and financial position; 2. the transactions to be reported are in accordance with the laws and regulations (audit criteria); and 3. the system of financial management and control is in accordance with the law and other acts. The criteria on the basis of which shall be assessed the objectivity and truthfulness of the financial statements are an adequate accounting legislation, accounting principles and standards for the public sector and adopted accounting policies of the audited entity. The criteria on the basis of which it shall be assessed the financial management and control are the Law and other regulations governing the system of internal financial controls in the public sector of Montenegro and those establish the methodology and standards and other issues of importance for the establishment, development and implementation of internal financial control of the public sector. The audit covered the expenditures of the Ministry of Science for AUDIT CRITERIA The regularity audit is an independent external evaluation of the extent to which the subject of the audit is in compliance with the laws, regulations, policies, procedures, or authorizations, which have been identified as the audit criteria. 2 Official Gazette of Montenegro No. 23/

168 Criteria for regularity audit were: Subject-matter of the audit Financial operations and use of allocated funds Employees Assets Public Procurement Internal control system Criteria Budget Law, the Law on Budget and Fiscal Responsibility, the Law on the Budget for 2015, Instructions on the state Treasury, the Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments, Rules on unified classification of accounts for the budget of Montenegro, budgets of extra-budgetary funds and budgets of municipalities, the Decision on the method of preparation and content of the program budget. The Law on Civil Servants and State Employees, the Regulations on organization and systematization of jobs and tasks, the Law on personal income tax, the Law on Mandatory Social Insurance, Law on wages and other income of state and public officials, Law on salaries of civil servants and state employees, Instructions for calculating gross earnings, the Regulation on reimbursement of costs of civil servants and state employees, Decision on criteria and method of determining the variable portion of salaries of civil servants and state employees, Decision on salary increase for civil servants and state employees to perform certain tasks, decision on the amount of civil servants and state employees. Law on State Property, the Regulation on keeping records of movable and immovable property and on the list of objects in state ownership, Instructions on detailed procedure for the inventory of movable and immovable property, Regulation of the sale and lease of objects in state property, the Rules on the classification of material and intangible assets by groups and methods for determination of depreciation of budgetary and extra-budgetary users, the Regulation on the conditions and manner of use of official buildings and business premises owned by Montenegro, the Regulation on conditions and manner of use of transport assets owned by Montenegro, the Regulation on conditions and manner of use of works of art and cultural values in ownership of Montenegro. Public Procurement Law on Public Procurement, Rulebook on the content and manner of conducting public procurement in electronic form, the Rules on records of public procurement procedures, the Rules on forms in public procurement procedures; Rules on methodology of expressing sub criteria into an appropriate number of points, the method of evaluation and comparison; Rulebook on forms in public procurement procedures; Rules on the method of keeping and content of records on violation of anticorruption policies; Regulation on the procedure of public procurement procedures; Concluded contracts with the selected bidders. The Law on internal financial controls in the public sector, the Regulation on the establishment of internal audit in the public sector, Regulations on the procedure for establishing and implementing financial management and control; Rules on the manner and procedure of work of internal audit; Instruction on the content of the annual report on implementation of planned activities on the establishment and development of financial management and control and the annual report on the work of internal audit; Handbook of Financial Management and Control; Guidelines for Financial Management and Control and the Guidelines for the description of internal rules and procedures

169 As criteria for the regularity audit, there will be used the internal rules and procedures as well, the contracts and other legal documents. In the process of conducting the regularity audit the state auditors should determine the level of compliance of the audited entity with the set criteria. 5. TIME OF AUDIT PERFORMANCE The audit of the Ministry of Science was carried out in the period from April 25 to July 25, II OPINION AND RECOMMENDATIONS Based on the conducted audit, determined facts and Statement of the audited entity (No /3 dated 25 July 2016), and in accordance with Articles 12 and 44 of the Law on State Audit Institution (SAI) and Art. 45 of the Rules of SAI, the Auditing Board of SAI composed of Mr Branislav Radulović, PhD, (member of the Senate - Head of the Auditing Board) and Mr Milan Dabović, PhD, (President of the Senate - Member of the Auditing Board), at its meeting held on 26 July 2015 adopted the: The responsibility of the audited entity FINAL AUDIT REPORT OF THE ANNUAL FINANCIAL STATEMENT OF MINISTRY OF SCIENCE FOR 2015 Chief Finance Officer of the Ministry of Science is responsible for execution of the budget. The management of the audited entity is responsible for the preparation and presentation of financial statements in accordance with generally accepted financial reporting framework, as well as compliance with legal and other relevant regulations. The responsibility of the State Audit Institution The responsibility of the State Audit Institution (SAI) is to, based on the audit, express an opinion on whether the financial report of the Ministry of Science for the year 2015, in all material respects, are prepared and presented in accordance with the applicable financial reporting framework. In addition to responsibility for expressing an opinion on the financial report, SAI bears the responsibility of expressing an opinion on whether the financial and other operations of the audited entity, in all material respects, are prepared with the laws, regulations and other documents that have been identified as criteria for the given audit. The audit was conducted in accordance with International Standards of Supreme Audit Institutions (ISSAI - Level III). The State Audit Institution has complied with ethical requirements, planned and carried out the audit in a manner which has provided reasonable assurance on whether the financial statements of the Ministry of Science were prepared and presented, in all material respects, in accordance with the applicable financial reporting framework and whether the business performance of the audited entity was in compliance with applicable laws and regulations. The audit provided a performing of procedures so to obtain sufficient appropriate evidence on which to ground the expressed opinion. Completed procedures depended on the professional judgment of the Auditor, including assessing the risk of material non-compliance. OPINION By the Financial audit of the Annual Financial Statement of the Ministry of Science for 2015, the competent Auditing Board of SAI has gained reasonable assurance that the Statement, in all

170 material respects, gives a true and fair view of the recorded revenues and expenditures in accordance with generally accepted financial reporting framework. For the audit of the financial statements of the Ministry of Science, the materiality level was set at the amount of ,92. Regularity audit of Ministry of Science identified discrepancies and non-compliance with the Law on Budget and Fiscal Responsibility, the Law on Budget for 2015, the Instruction for the State Treasury, the Regulation on uniform classification of the Budget of Montenegro, Extra-Budgetary Funds and Municipal Budgets, the Law of professional rehabilitation and employment of persons with disabilities, the Law on Public Procurement. Based on the above, the competent Auditing Board of SAI expressed an unqualified opinion on the Annual Financial Statement of the Ministry of Science for 2015 and a qualified opinion on the compliance with the regulations (irregularities stated in the recommendations 2-7). RECOMMENDATIONS 1. In the position Expenses for services, in the Statement of Cash Flows III, there are presented the expenditures for contribution in the amount of 7, and expenses for the payment of financial assistance in the amount of 4,041.67, which is not in accordance with the Regulation on Classification for the Budget of Montenegro, Extra-Budgetary funds and Municipal budgets, Expenses for the contribution shall be disclosed in the Report in the position Other expenditures. The expenditure relating to the financial assistance should have been presented in the Statement of cash flows III at a position 2.3. Transfers to institutions, individuals, NGO and public sector, because those are expenses related to transactions between participants in public spending, public spending holders, NGOs and individuals, who have no commercial character. Audited entity shall, in accordance with the Instructions on State Treasury (item 25, sub clause e), on the payment request enter the appropriate account for recording the expenditure by economic classification, in accordance with the Regulation on Classification for the budget of Montenegro, Extra-Budgetary funds and municipal budgets, which serves to record the payment in the general ledger (which is the basis for drawing up the Statement of cash flows) as expenditure from the budget. 2. The Ministry of Science, based on the Conclusion of the Government dated 2 October 2010, announced a competition as at 3 October 2011 on co-financing of national scientific and research projects, in accordance with the Strategy of scientific research activities ( ), starting from 2012, with the total amount of funds of 5,000,000 in the three study years, 2012, 2013 and 2014, The competition stipulated that the responsibility of financing the project shall be borne by: Ministry of Science ( 3,000,000.00), Ministry of Agriculture and Rural Development ( 600,000.00), Ministry of Health ( 500,000.00), the Ministry for Information Society and Telecommunications ( 300,000.00), the Ministry of sustainable development and tourism ( 300,000.00) Ministry of Education and Sports ( 150,000.00) and the Ministry of culture ( 150,000.00). Those Ministries, except for the Ministry of Culture, did not fully paid the funds for co-financing the projects (explanation given was that they were not allocated the funds by the Law on Budget for this purpose), so the Ministry of Science took over their liabilities of cofinancing of projects. Audited entity does not keep records of liabilities in the accounts of class 2 - Liabilities. In accordance with Article 2 of the Law on Budget and Fiscal Responsibility, outstanding debts from the previous period shall be considered the budgetary commitments that are not paid on due date of payment and liabilities which arose under the law and in accordance with the law and the contract. In accordance with point 20 of the Instructions on the State Treasury, the outstanding liabilities represent the expenditures that were planned by the annual Budget Law, and were not paid within the due date. Repayment

171 of arrears may only be used for those liabilities that were previously recorded as outstanding, as previously stated. Audited entity should record the liabilities in the accounts of class 2 because of the Instructions for filling in the Report on outstanding debts, which were, with the Form 5, an integral part of the Rules on the method of preparation and presentation of financial statements of the budget, state funds and local government units, provided that the Report on outstanding debts entered data are recorded on the accounts of class 2 - Liabilities. It is necessary to ensure that the expenditures of the contracted multi-year commitments from the period of the scientific research projects duration, which are related to the financing thereof, are planned by the annual budget laws. 3. The audited entity paid in 2015 the expenses in a manner which is not in accordance with Art. 18 of the Budget Law for 2015, by which the resources of the Budget were allocated to the spending units and expenditures by economic classification, as follows: - From the funds allocated to the account 4147 Consulting services, projects and studies, there were made the payments in the amount of 7, relating to expenditures for the contribution, Expenses for the contribution had to be paid from the funds allocated to the account Contributions for membership in national and international organizations. - From the funds allocated to the account Services of professional training, payments were made on behalf of financial aid in the amount of 1, Expenditure on financial assistance to individuals should have been paid from the funds allocated to the account Other transfers to individuals. - From the funds allocated to the account Other services, payments were made on behalf of financial aid to individuals and legal entities in the amount of 2, and catering services in the amount of Those expenses had to be paid from the funds allocated to the accounts of group 43 -Transfers to institutions, individuals, NGO and public sector, and from the account 4142 Entertainment. Audited entity should ensure the effective implementation of the Instructions on the State Treasury (in particular points 25 and 26 relating to the verification and approval of the payment by the spending organizations), in order to ensure that the spending of budget funds is carried out in accordance with the Law on Annual Budget. 4. The Ministry of Science has no supporting documents (except for documents relating to expenditure for salaries) on the basis of which it can carry out control of expenditures for which, pursuant to the Requests for payment, the funds are transferred to the account of DOO Technopolis, which is not in accordance with the Instructions on the work of State Treasury, Ministry of Science should in the current financial year make the payments after performing control of expenditure, in accordance with items 25 and 26 of the Instructions on the State Treasury, Ministry of Science should be in the next budget year, terminate the program called "Tehnopolis" and in cooperation with the Ministry of Finance define the appropriate name of the program and plan in a lawful manner the resources to carry out its activities, 5. For January, the Ministry of Science submitted to the Ministry of Finance a list of employees with the necessary data, When calculating the salaries, for the part of the wages earned, the Ministry of Finance has increased the past years of service for one year to all employees, The Ministry of Science then submitted to the Ministry of Finance the Employee List for February with an increased past years of service (data from the calculation of salaries for January). The

172 Ministry of Finance then, in calculating earnings for February, again increased past years of service for one year. Data for calculation of earnings relating to the salary increase based on past service were not in accordance with the data on the length of service which can be determined on the basis of documents from the personal files of employees, The data for calculation of salary increase based on years of service should be harmonized with the actual balance and Article 22 of the General Collective Agreement. The Ministry of Science should establish and ensure the effective implementation of procedures for payroll, ensure the accuracy of the input data used for the calculation of earnings, 6. Control of expenditures included in the sample identified that all expenditures for purchase of goods and services 3 were not stated in the Report on Public Procurement. The total value of public procurement realized through direct agreement implemented in 2015 was not in accordance with Article 30 of the Law on Public Procurement, as it is higher than the prescribed limit by 10% of the executed budget for procurement, because the budget for the procurement of the entity amounted to 200, Ministry of Science should ensure keeping accurate records of implemented public procurement procedures (especially procurement implemented by direct agreement), in accordance with Art. 117 of the Law on Public Procurement 4 and the Rules on the records of public procurement procedures 5, so that the report on conducted public procurement procedures contains information on all completed public procurements. The Ministry of Science should establish procedures for the implementation of public procurement procedures that will among other matters provide that the annual value of public procurements realized by applying direct agreement does not exceed the limit prescribed by law. 7. Pursuant to the Agreement between Montenegro and the European Union (signed on 1 July 2014 in Brussels) on the participation of Montenegro in the European Union Program - 'Horizon 2020' - the Framework Programme for Research and Innovation ( ), in 2015 it was paid the amount of 1,139, on behalf of the annual rate contributions for participation in the Program, European Commission from IPA funds refunded Montenegro 50% of annual instalment paid for the duration of the program, in accordance with paragraph 3 of the Agreement and Clause 3 of the Annex II of the Agreement. The funds refunded by the European Union shall be paid into the consolidated account of the State Treasury. Reimbursement of 50% of paid annual instalment for 2015, in respect of contributions for participation in the program until the completion of the audit, has not been realized and it should have been up to the end of In its letter 6 dated 22 July 2015, the Ministry addressed the Ministry of Foreign Affairs and European Integration with the request to enter into the procedure of reimbursement of part of the financial contributions for the participation of Montenegro in the "Horizon 2020", i.e. to start the procedure of refunding 50% of the funds paid. The amount of funds to refund amounted to 569, The Ministry of Foreign Affairs and European Integration - General Directorate for Coordination of EU assistance programs, despite the notice of the Ministry that the instalments were paid on debt notes (letter dated 22 July 2015), has not initiated the procedure for refund. The Ministry of Foreign Affairs and European Integration is recommended to, in accordance with the procedure for the refund, provide the Ministry of Science with an 3 Expenditures paid to suppliers: Maestro doo, Goodwill Corporation and other. 4 Official Gazette of Montenegro, No. 42/11, 57/14 and 28/15. 5 Official Gazette of Montenegro, No. 63/11. 6 A letter of the Ministry, Number /3 dated 22 July

173 Agreement for the refund of for signing and verifying, and then submit it to the EU Delegation in Montenegro, in order to execute the reimbursement of the financial contribution of Montenegro to participate in the "Horizon 2020". The audited entity shall, in accordance with Article 15 of the Law on State Audit Institution, within 6 months report to SAI on the actions taken by the prepared and submitted recommendations

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175 EXCERPT FROM THE PERFORMANCE AUDIT REPORT EFFICIENCY OF COLLECTION OF TAX LIABILITIES FROM THE PROPERTY OF THE TAXPAYER Type of the audit: Audited entity: Subject-matter of the audit: Audit duration: Composition of the Auditing Board: Performance Audit Ministry of Finance, Tax Administration, Real Estate and Property Administration Activities carried out by the Ministry of Finance, Tax Administration, Management property and real estate, in order to effectively manage the process of collection of property tax liabilities of a taxpayer in accordance with the Regulation on the collection of tax receivables from the property of the taxpayers 120 auditing days Mr Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr Nikola N. Kovačević, member of the Senate Member of the Auditing Board

176

177 I GENERAL PART 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the efficiency of collection of the tax liabilities from the property of a taxpayer is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan issued by the Senate, dated 22 December 2015 (No ); and Decision on Conducting Audit passed by the Auditing Board composed of Mr Branislav Radulovic, PhD (Member of the Senate - Head of the Auditing Board) and Mr Nikola Kovacevic, (Member of the Senate - Member of the Auditing Board). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Performance Audit Methodology; and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. AUDITED ENTITIES Audited entities were: Ministry of Finance, Tax Administration, Real Estate Administration and Property Administration, The Tax Administration and Real Estate Administration are the authorities in the Ministry of Finance, but in the audit process will be considered as separate entities, in relation to their roles and responsibilities in the process of collection of tax receivables from the property of the taxpayer, Property Administration was also in the audited period the body within the Ministry of Finance. In this part it was given an overview of the institutions and their organizational units which are responsible for dealing with the subject matter. Pursuant to Article 37 paragraph 2 of the Law on State Administration, Regulations on the organization and functioning of public administration, the Regulation on the criteria for internal organization and systematization of jobs in the state administration, the Rules on internal organization and systematization of the Ministry of Finance, which establishes internal organization of the Ministry of Finance and authority within the Ministry, which among others consists of Tax administration and Real estate Administration The Ministry of Finance The Ministry of Finance (MF) performs the administrative functions among others related to: preparation of the proposal of the current economic policy of Montenegro and monitoring its implementation; preparation, planning, preparation and execution of the budget of Montenegro; fiscal impact; Monitoring the realization of revenues and expenditures from the budget of Montenegro; testing and assessing the impact of economic and development measures and institutional changes; preparation of regular financial reports for the Government of Montenegro, public revenues (customs duties, taxes, contributions, fees, etc.) to finance public expenditures at the state level and at the level of local governments; preparation and implementation of regulations in the field of property-legal relations, state property, land survey and real estate cadastre, land expropriation, liens on the property, the second instance administrative procedure in the area of

178 property rights and first instance restitution procedures; ensuring the collection of internal debt, which make claims of the Government through regular, bankruptcy and court proceedings and activation of mortgages on this basis, to make proposals regarding the management and disposal of state assets, and other activities that are defined. Within the MF, it is organized a Directorate for Property and Legal Affairs and within it the Directorate for State Property and legislative affairs and the Directorate for inspection of state assets, The Directorate for Property and Legal Affairs performs the activities related to: the implementation of the Law on Property Relations, the Law on State Property, the Law on State Survey and Cadastre, the Public Procurement Law, the Law on Expropriation, the Law on Restitution of Property Rights and Compensation, the Law on administering temporarily and permanently seized assets in criminal and other proceedings or activities in connection with: disposing of property, using the property, supervision and management of state property of Montenegro; restitution of property rights and other property rights and compensation to former owners of confiscated property and rights; conduct second instance administrative procedure in the area of property rights and land; improving the management of state property and property rights; planning transactions with state property (sale, privatization, conversions, and other fiduciaries, and instruments for the provision of loan); resolving property relations in investment and development projects of importance for Montenegro; drafting of regulations in the area of ownership rights; drafting legislation in the field of public procurement; preparing and participating in drafting regulations in cooperation with other sectors; preparation of general acts of the Ministry, treaties and agreements that the Ministry concluded with other agencies, organizations and others; preparation of legal opinions on the information and suggestions when it comes to capturing the views and opinions of the legal jurisdiction of the Sector and the pursuit of business and taking appropriate legal actions relating to the settlement of alimony claims of Montenegrin citizens abroad Tax Administration Tax Administration performs tasks related to: registration of taxpayers and keeping uniform register of taxpayers; establishing individual tax liabilities for all physical and legal entities; tax control; regular and enforced collection of taxes and ancillary tax levies; developing of uniform tax information system in cooperation with the government authority competent for the information structure; keeping tax accounting; application of international conventions and treaties on avoidance of double taxation; prevention and detection of criminal offenses against payment transactions and business operations; keeping a central register of taxpayers and the insured entities; keeping a register of business entities for taxation purposes; reception and processing of financial statements of legal entities; reception and processing of all tax returns of taxpayers; reception and processing of reports on paid withholding tax; keeping records on incomes of legal and physical entities; provision of data for social security funds on the basis of which the insured entities exercise their rights to social insurance; as well as other activities within its competency, The Tax Administration's operating authority within the Ministry of Finance, In its work, it follows the guidelines and policies of the Government of Montenegro, and conducts business assessment, collection and audit of taxes introduced by Montenegro, As part of the Tax Administration, there are formed six departments (6), eight regional units (8) and thirteen branches (13). The Tax Administration is headquartered in Podgorica, Tax Administration is managed by the Director of the Tax Administration in cooperation with five assistants and one Advisor, There have been formed at the headquarters of the Tax Administration of Montenegro the following: Department for services and registration, Department for processing of tax returns and payments, Department for Plan and Analysis, Department for monitoring of tax regulations and audits, Department for tax police and Department for information technology in the field of tax system. The Department for processing of tax returns and payments carries out the tasks relating to: the registration and processing of tax returns and tax accounting; conducting of collection that includes: identification and actions to collect the tax debt; identification of persons who have not filed a tax

179 return and procedures of ensuring thereof; adoption of annual, quarterly and monthly work programs and reports; development of procedures for office and field activities of collection; providing advice and guidance to regional units; preparation of reports necessary for determining the execution plan of collection of delinquent debt; analysis of the work of regional units; activities on risk assessment for the purposes of collection; processing and analysis of data in order to ensure compliance with tax policy, legal regulations and procedures; ensuring the measures and activities for full collection of budget revenues that are the responsibility of the Tax Administration. Organization chart of the Tax Administration The Tax Administration has systemized 611 jobs for state employees and civil servants and 68 jobs for state employees and civil servants who perform administrative duties at the Ministry of Finance, out of which 532 jobs were occupied as of 31 December Real Property Administration Real Property Administration shall perform affairs related to: initiating arrangement of propertylegal relations over the real estate; preparation of standards of geodetic works in the field of surveying, cadastre of real estate and underground installations; conducting administrative proceedings in the field of property-legal relations and cadastre and ensuring application and enforcement of law and property regulations in Montenegro; assessing the value of real estate; planning, design, analysis and evaluation of the accuracy of the mapping survey, real estate cadastre and mapmaking; photogrammetric aerial survey, research and publishing activity and other geodetic surveys and preparation of originals and replicas of plans and maps; creation and maintenance of geodetic networks of all ranks; creation, renewal, amendment and control of the state survey, real estate cadastre and registration of property rights; execution and supervision of the construction and maintenance of water cadastre and underground facilities; cadastral classification and land quality evaluation; proposing establishing of bases for assessment of tax on agricultural activities; geodetic and agronomic activities on land consolidation; production, maintenance and development of Geographical Information Systems (GIS) in cooperation with the competent government authority for the information society; National Spatial Data Infrastructure (NSDI); maintenance and development of software for preparation of digital geodesic plans and alpha-numerical data of the cadastral documentation and control of these operations; monitoring and determining the changes in the area, and the implementation of identified changes in plans and the cadastre; registration of

180 changes in the law on real estate; keeping archives of technical documentation of state terrain surveying, plans, maps and other technical documentation; issuing licenses for carrying out geodetic works and producing of technical documentation; and other activities that are within its jurisdiction Property Administration Pursuant to Article 33c of the Regulation, Property Administration is an independent body that performs tasks related to: keeping unique record of state property in accordance with international accounting standards; keeping the register of state property; ensuring the purposeful use of state property; care of the property, which by law become state property; management of confiscated assets, which include: ensuring the execution of provisional measures, in accordance with the law governing the confiscation of proceeds derived from criminal activity, or the law governing criminal procedure; execute decisions on temporary seizure of movable property and Confiscation of property gained through criminal activity; executing decisions on confiscation of proceeds of crime, the object of the offense and objects temporarily seized in criminal and misdemeanour proceedings and decisions on the assets given as pledge; estimate the value of confiscated assets for the purpose of managing material gain; leasing of confiscated assets or entrusting the management, in accordance with the law governing the confiscation of proceeds derived from criminal activity; Giving confiscated assets for use free of charge; preservation, storage, sale and return of confiscated assets; disposal of seized funds and funds obtained from the sale of confiscated assets, in accordance with the law; destruction of confiscated assets, in accordance with the law; keeping records on the seized material gain and judicial proceedings in which it is seized, as well as the temporary security measures; investment and current maintenance of the buildings of state bodies, representative buildings of state authorities and the diplomatic - consular missions of Montenegro abroad; application and monitoring tasks registry entries relating to subdivision, demarcation and exchange of state property; preparation of draft contracts and monitoring their implementation; performing lease payment; providing conditions for the protection of state property; harmonization of data from its records with data from the real estate cadastre; inventory of property of former socio-political organizations and ensuring its registration in the real estate; aging on registration of property owned by Montenegro in the real estate; keeping records of concluded contracts on acquisition and disposal of immovable and movable property and other goods of greater value in state ownership; submission of reports to the state administration in charge of Finance in electronic form within the time limits prescribed by law; performing auxiliary tasks necessary for the functioning and work of state bodies; and other activities that are within its jurisdiction. The Directorate for Property is organized a Sector to manage and protect state property within which are the following departments: Department of management, protection and proper use of state property, management of business premises and official apartments; Department for management of seized and confiscated assets, the Department for the preparation of the contracts, payment of the lease, keeping records of concluded contracts on acquisition and disposal of immovable and movable property and other goods of greater value in state property and registration of assets owned by the Government of Montenegro in the real estate cadastre. The Department for control and protection of state property shall carry out activities related to: the management and protection of state property; care of the property, which by law become state property; ensuring the purposeful use of state property; investment and current maintenance of the buildings of state bodies, representative buildings of state authorities and of diplomatic and consular missions of Montenegro abroad; assessment of the value of confiscated property, storage, preservation, recovery and sale of seized property; depositing funds obtained from the sale of seized property; recording the resulting changes to update and adequately record keeping of state property; legal and economic management and use of business premises registered as the state property; maintenance of official housing registered as the state property; equipping service apartments; performing lease payment; maintenance and equipping of housing funds from the quota of official apartments Montenegro

181 In the Department for the preparation of the contracts, collection of the lease, keeping records of concluded contracts on acquisition and disposal of immovable and movable property and other goods of greater value in state property and registration of assets owned by the Government of Montenegro in the real estate cadastre the activities related to the following are being carried out: keeping records of concluded contracts on acquisition and disposal of immovable and movable property and other goods of greater value in state property, and the fixed and movable assets whose individual value exceeds 3,000; performing lease payments; providing technical assistance to authorities in terms of preparing the conclusion of contracts on acquisition and disposal of immovable and movable property and other goods of greater value in state property and other tasks related to the implementation of these contracts, as well as tasks related to the registration of assets owned by the Government of Montenegro in the real estate cadastre. 3. AUDIT TYPE, SUBJECT-MATTER AND OBJECTIVE The State Audit Institution (SAI) conducted the performance audit. Subject-matter of the audit focused on the activities carried out by the Ministry of Finance, Tax Administration, Property Administration and Real Estate Administration, in order to effectively manage the process of collection of property tax liabilities of the taxpayers in accordance with the Regulation on the collection of property tax receivables from the taxpayers. Subject of the audit includes all decisions, actions, and rules for the administration, accounting and development of financial and material resources. An audit includes information and activities of the Ministry of Finance and the Tax Administration, as well as cooperation with other bodies (Real Property Administration and Property Administration) in the process of collection of tax receivables from the property of the taxpayer. Stages in the process of collection of tax debt from the property of the taxpayer were observed over a period of three years, but have not been analysed reasons for the emergence of debt of the taxpayers. In the process of the audit, there was reviewed the documentation at the disposal of the Tax Administration, Ministry of Finance, Property Administration and Real Estate Administration, referring to the implementation of the tax debt collection from the property of the taxpayer, as well as handling the properties, within a period of three years. In addition, there were inspected the individual analytical accounts of taxpayers who have concluded contracts in accordance with the Regulation on the procedure of collection of tax receivables from the property of the taxpayers. 4. OBJECTIVE OF THE AUDIT The audit objective was the assessment of whether the competent authority shall take the necessary actions that should ensure efficient collection of tax liabilities from the property of the taxpayer, and assessment of existing institutional and normative framework. In order to achieve the set objective of the audit, it was necessary to give an answer to the main question of the audit: Did the Ministry of Finance, Tax Administration and Property Administration undertake the necessary activities for the efficient collection of tax receivables from the property of the taxpayer? The sub-questions that have been developed through the matrix of the audit enabled the conclusion whether through the established institutional and regulatory framework can be implemented an efficient collection and whether the acquired assets can be appropriately utilized

182 5. TIME OF PERFORMANCE OF AUDIT The relate audit was carried out in the period from January 18 through July 25 of METHODS OF THE AUDIT For the purposes of the audit, the following methods were used: Examination of studies, which were performed by expert institutions; Study of relevant documents necessary for the subject of the audit, professional literature, strategic and master plans, reports, available statistics; Examination of international studies and practices. In order to obtain answers to audit questions (in addition to the above methods), during the audit were used the following methods and techniques: assessment based on insight into 100% of concluded contracts, documentation analysis, statistical methods, descriptive methods, conducting interviews, and the combination of some methodological approaches. 7. AUDIT CRITERIA As criteria for the evaluation of the implementation process of debt collection from the property of the taxpayer, there was used the Regulation on the procedure of collection of tax receivables from the property of the taxpayer, the Law on State Property, by-laws which regulate the area of state property, contracts of the Ministry of Finance and taxpayers, requirements, decisions, decrees and other acts that are necessary to allow the right to inscribe the registration of the acquired real estate in the register of state property at the Property Administration. In assessing the ways of managing the acquired assets, there were used the planning documents, contracts with the taxpayers and good practices in the field of asset management, which is owned by the state -Public Asset Management. 8. INFORMATION SOURCES The primary source of information during the audit was the documentation to the Tax Administration and the Ministry of Finance - Directorate for property and legal affairs, as well as documentation of the Real Estate and Property Administration relating to the subject matter. For additional information, there were used the reports of international institutions (IMF, World Bank and European Commission) on the state of the tax system and the Tax Administration of Montenegro (the project TADAT), technical literature, as well as good practice in the management of state assets (Public Asset Management) positive practice of OECD countries in the reform of the tax system and laws and subordinate legislation

183 II CONCLUSION Appreciating the economic situation and the lack of liquidity in Montenegro, in order to avoid account suspension and allow business performance of the taxpayers, and to achieve a more efficient collection of taxes which are a significant part of budget revenues, in 2013 the decision was based on Article 15 of the Budget Law for 2013, the Regulation on the procedure of collection of tax debt from the property of the taxpayers. In this way, conditions are created thus that taxpayers in a neater manner settle future tax liabilities and to relieve them from the tax debt, which stops the basis for the calculation of interest due to previous tax arrears. The intention of the Ministry of Finance was to use the acquired assets for the accommodation of state authorities, which will have an effect in the form of budget savings, given that in some cases enormously high rental costs are being paid. Ministry of Finance - Directorate for Property Affairs has not analysed the assessment of the impact of the related Regulation (RIA). Based on the conducted audit, it was found that the activities conducted by the competent authorities are not fully in line with the Regulation on the procedure of collection of tax debt from the property of the taxpayers. Application of Article 15 of the Budget Law for 2013 and the Regulation on the procedure of collection of tax receivables from the property of the taxpayers did not give expected results. In order to achieve an efficient system of the management of the process of collection of tax debt from the property of the taxpayer, in accordance with the Regulation, it is necessary to further improve the following areas: a) accounting records of tax receivables; b) conducting the collection of tax receivables from the property of taxpayers; c) records of state property acquired by the collection of the tax receivables; d) records of the state property acquired by the collection of tax receivables. a) Accounting records of tax receivables Article 2 of the Regulation provides that the tax debt is considered to be liabilities as at the date of application for payment of the tax debt from the property, Article 4 of the Regulation provides that the Tax Administration determines the status of the tax debt of the taxpayer. TA, in the letters sent to the Ministry of Finance, stated that the balance of the debt stated as of 31 December 2012, and noted that the data on the debt was established on the basis of data available from the IT sector. The audit has shown (by checking the individual analytical accounts of taxpayers subject) that the said debt relates to the period up to completion of the final tax return, and in certain cases even thereafter. b) Conducting the collection of tax receivables from the property of taxpayers The audit of the contracts and insight into the chronology of the real estate transactions concluded that the 5 properties that were the subject of the contract were bought by the taxpayers for and amount decreased by 894, in comparison to the amount defined in the related contracts. There were found the irregularities in the valuation of land and buildings, and office space. It was noted an inconsistency in the assessment report with data from immovable property (calculation of non-residential space as well as residential, within the estimate that included the land and although it was in the property list clearly stated that the present taxpayer did not own the land, the area was estimated with its furniture and the like,). In this connection, SAI refers to the use of national standards of assessment. The audit identified a violation of Article 1 of Regulation ("tax receivables that were past due by 31 December 2012 may be paid from the property of the taxpayer according to the procedure laid down in this Regulation"), because it was determined that the contracts with individual taxpayers

184 were entered a provision that the parties agree that the difference between the estimated value of business premises and land of the determined debt used for determination of the debt payment of future tax liabilities. Although the application of the Regulation should ensure that the acquired assets are used for the accommodation of state authorities which means that in terms of quality offices, the audit found that the taken over areas were suitable for retail and catering facilities, basement rooms, garages, unfinished spaces, spaces that do not have a use permit. It was found that, among other matters, it was taken over the object for which the Property Administration, after the conclusion of the contract, concluded that it is in very poor condition and on the verge of devastation, noting that it is very likely that the most economical would be its demolition. The Ministry of Finance (Department of Property and Legal Affairs) was obliged to check the fulfilment of all applicable elements specified by the Regulation, prior to submission to the Commission for the collection of tax receivables from the property of the taxpayer, which has not been adequately done in all cases (referred to the higher amount of tax long before the letter noted the Tax administration). The Ministry of Finance has concluded a contract in the amount greater than the one approved by the Conclusion of the Government, and within the same imprecisely stated the pieces of real estate that were the subject of the contract. c) The records of state property acquired by collection of tax receivables Assets acquired through collection of tax receivables were not recorded in the register of state property with the Property Administration. Property Administration does not possess all contracts for the payment of tax debt from the property of taxpayers. Agreements for the collection of tax receivables from the property of the taxpayers are not registered with the Administration s accounting records. The contracts that were submitted in 2013, 2014 and 2015 must have been accounted by the Property Administration and calculated depreciation in accordance with International Accounting Standard (IAS) 16 and the Regulations on the classification of fixed assets by groups and methods for determination of depreciation. Property Administration did not make bookkeeping entries of the assets acquired in collection of the tax debt from the property of the taxpayer. The Administration stated that an untimely delivery of contracts signed by the competent authority (Decision of the Ministry of Finance) resulted in the omission of inserting those assets in books and records. Some of the properties were booked at the Ministry of Finance, which is contrary to the Law on State Property. When drafting decisions of the Real Estate Administration, there were carried out the changes of registration of rights to real estate in the cadastral being registered as property rights on the real estate of the Government - Ministry of Finance, although Article 6 of the Law on state property stipulates that the Government making the property rights and powers of state assets which Montenegro has, decides on the terms of granting the use of real estate used for insurance activities of state bodies (Article 25 of the Act) in the manner and procedure prescribed by this Law, but such a use shall not be entered in the real estate cadastre. Having examined the minutes of the meeting of the Commission for the collection of tax receivables from the property of the taxpayer, it was identified that the Commission held 11 meetings in 2013 and 2 in The Minutes of Commission meetings are not verified, they do not contain the serial number, the name of the Chairman, the names of persons who participated in the work of the Commission and are very deficient in details. d) Management of property acquired by the collection of tax receivables Pursuant to a Conclusion, the Government has commissioned the Ministry of Finance to prepare a plan for the sale of assets that the state takes from collection of the tax debt, define deadlines and

185 specific agreement provide that if the property is sold at a price lower than estimated, the price difference is the liability of the taxpayer. Directorate for Property Affairs has not implemented the above conclusion; the managing person was not familiar with the above conclusion. Management of the property during the period of performing field audits has no information whether the property acquired on the basis of signed thirteen contracts with taxpayers are given for use, or whether the real estate is leased or sold. Records of business premises that are currently unused (empty), maintained by the Property Administration, does not contain information for business premises taken upon collection of the tax claims, which are not given for use of bodies. For real estate acquired by the six contract, it was not required an opinion of the Property Administration whether the offered real estate were adequate for accommodation of state authorities, or for which purpose they can be utilized. The Ministry of Finance (Directorate for Property Affairs and the Property Administration) did not adequately monitor the implementation of the concluded contracts and does not have the information whether the taxpayers who contracted to bring the unfinished real estate to a purpose within a specified period or the contract will be otherwise deemed terminated the contract, implemented a contractual obligation. During 2013 and 2014, the Directorate for inspection of state property has not carried out inspections within its jurisdiction, while in 2015 control was executed in only one case. The control plan was not performed annually and neither the report on the work of the Directorate for inspection at the Directorate for Property Affairs. The audit has found that the Commission for Housing Affairs of Montenegro on the basis of the Decision on exchange of apartments authorized the Management Board for the property to conclude a contract on exchange of real estate from two individuals. Two apartments were ceded (to civil servants) to a value that is lower than the value ( 234,300.00) which is determined by appraisal when paying from the property, for an amount of 134, Disposal of state property that is not registered in the registry, or property for which have not been fully collected the legal, physical, financial and economic data, is an example of inefficient asset management. Only when they set out the defining features of each type of assets and their related liabilities, it may be decided on what can and should be done with state assets and obligations associated therewith. Despite the differences, most countries have been identified as general prerequisites for the effective management of state assets, which are: establishment of a register of state property, classification of state property, recognition and Measurement of state property, formation of a portfolio of state property, institutionalization and professional management of state property, and administration costs and results (effects). III OPINION AND RECOMMENDATIONS Based on the conducted audit, established facts and the submissions of the statements of the audited entities, in accordance with Article 44 of the Law on State Audit Institutions and Article 45 of the Rules of Procedure of the State Audit Institution, the competent Board of SAI with its members: Mr Branislav Radulovic, PhD (member of the Senate - Head of the Auditing Board) and Mr Nikola N.Kovačević (member of the Senate - Member of the Auditing Board) at its meeting held on October 17, 2016 adopted the following:

186 FINAL REPORT on the performance audit of the efficiency of collection of tax liabilities from the property of the taxpayer OPINION The State Audit Institution (SAI) is in the process of performance audit of the "The efficiency of collection of tax liabilities from the property of the taxpayer", based on the analysis of concluded contracts on payment of part of property tax debt of the taxpayer and the competent authorities with respect thereto, found that the measures and activities that are conducted by the Ministry of Finance, Tax administration and the Property Administration did not, sufficiently, provide that the application of the Regulation on the procedure of collection of tax receivables from the property of taxpayers result in the expected effects. The application of the Regulation on the procedure of collection of tax receivables from the property of the taxpayers: Did not to a significant extent contribute to more efficient tax collection and reducing tax debt; Did not significantly affect the budget savings in terms of reducing costs of leasing premises for the needs of state bodies, Did not, in all cases, provide that taxpayers who have paid from the property the tax debt to neater settle the tax liability and to reduce the tax debt. The country has in a number of cases received basement, garages, unfinished business premises and facilities in poor condition. The Regulation was adopted to avoid account suspension and allow business taxpayers to perform their business, while the result of the application of the same is that the taxpayers (in four cases) before concluding the contract, were buying the real estate and then at a higher price one offered those to the stated. Taxpayers in these cases had the funds on disposal, so that the enforced collection through the blocked account would not prevent their business. Also, there have been concluded contracts with legal entities which are large tax payers and were solvent during the period of application for payment of the tax debt from the property. The present performance audit was found that: collection practices were not fully implemented in accordance with the Regulation on the collection of tax receivables from the property of taxpayers; property acquired through collection of tax receivables is not fully utilized (utilization of business premises on the day of completion of the field audit is 51.02%); giving for use the property acquired in collection of tax receivables, costs for rental of premises for the needs of government agencies were reduced by 113, or 3.17% compared to the cost of the lease for 2015; the total amount of tax due from entities with which there were concluded the contracts on collection of tax debts of the property amounted to 23,356,885.87, which represents 3.98% of the tax debt that amounted as of 31 December 2015 to 587,688,851.18; the application of the Regulation resulted in collection of the tax debt from taxpayers and legal entities that were not owned by the state, for a total of 10,128, out of 10 legal entities with which an agreement was concluded on the payment of the tax debt from the property, 5 were blacklisted by the Tax Administration from July 2016, with a total tax debt of 6,112,

187 RECOMMENDATIONS Pursuant to the conducted audit, it was found that there is a potential of improvements in all areas that are audited, and in order to improve those, SAI provides the following recommendations: The Government of Montenegro 1. Bearing in mind that the law has already established mechanisms for the collection of property tax debt of the taxpayer as well as the unsatisfactory effects of the application of Article 15 of the Law on Budget of Montenegro and the Regulation on the procedure of collection of tax receivables from the property of the taxpayers, SAI recommends the Government to consider the viability of this decision. Ministry of Finance 1. The Ministry of Finance should adopt the Rulebook on the manner and conditions for payment of the tax liability by compensation. 2. It is necessary to carry out a timely analysis of the expected impact of new and modified existing laws before they are adopted, in order to avoid diversion of law in practice and significantly improve the assessment of the economic impact of regulations - RIA. 3. It is necessary to bring the asset management plan which is part of the responsibility of the Ministry of Finance as well as a plan to sell assets that the state takes on the basis of a contract pursuant to which the collection of tax debt will be performed from the property of the taxpayer. 4. It is necessary that the Directorate for Property and Legal Affairs and Property Administration implement control of the implementation of all the contractual provisions of the concluded contracts with the timeliness of adapting unfinished business premises. 5. The Ministry of Finance shall carry out the activities envisaged by the Action Plan for the establishment of a single register of state property, the Government adopted a conclusion number /4 dated 06 March It is necessary, in all cases, to ask the Property Administration for information if there is a demand for real estate offered by the taxpayer, seek the opinion of the said from the Administration, and if it is determined that it is appropriate, carry out an analysis which would define to which organ the real estate would be handed over, how much would be saved from the budget, how much funds need to be allocated for the property to put it to its purpose and along with the Information on collection of tax receivables submit it to the Government for approval. 7. It is necessary after the conclusion of the contract with the taxpayer to deliver it to the Property Administration and, if the contract with the taxpayer provided that it should take certain contractual obligations, inform the Administration about the existence of a contractual obligation of the taxpayer. After the deadline for implementation of contractual obligations, the Management Board shall inform the Ministry of Finance of the same, and in the case of non-compliance with contractual obligations within the agreed period, to terminate the contract with the taxpayer and deliver a notice of termination

188 8. It is necessary that the minutes of the meetings of the Commission for the collection of tax debt from the property of the taxpayer are properly made and verified (to contain the number of the session, the Chairman s name, the names of persons who upon call participated in the work of the Commission, the management and preservation of the minutes shall be done by a person who is thereof assigned by a decision). 9. It is necessary to take all necessary actions so that the Directorate for inspection supervision over state assets could perform duties within its jurisdiction, enacts the control plans and makes an annual report on the controls carried out. Tax Administration 1. Tax Administration should, in accordance with Article 2 of the Regulation, submit to the Ministry of Finance the balance of the tax debt of taxpayers as of the date of submission of the request for payment of the tax debt from the property. Real Property Administration 1. When making the decision to execute the change of registration of rights to real estate in the cadastral in some cases there are wrongly registered the property rights, and it is necessary to bring new decision for the real estate which is charged a tax debt, according to Art. 4 and 29 of the Law on State Property, or to enter Montenegro as the holder of property rights (to the extent the rights of 1/1, Corporate ID ), and as a holder of the right to dispose the Government of Montenegro (Corporate ID ). 2. It is necessary that the Real Property Administration and Property Administration establish cooperation in taking of data from the IT system of the Real Estate Administration for importing the data on immovable property which are owned by Montenegro in the ARS system of the Property Administration (the register of state property). 3. It is necessary to make corrections of the property lists which do not comply with the law not only in the base of the right but also in the part of inscription of the holder of the right and demarcation of state and local government property, all in accordance with Articles 29, 66 and 71 of the Law on State Property. Property Administration 1. It is necessary to take actions in order to accurately and comprehensively identify all real estate owned by the state and timely register these assets in the real estate cadastre with titleholder having ownership rights and authorizations in accordance with the law. 2. It is necessary to raise the legal, physical, financial and economic data on state property, and then classify it, to measure the state property, form a portfolio of state property. 3. It is necessary to create a database of state bodies, local authorities and public services established by Montenegro or municipality, which according to the Law on State Property required submitting data on movable and immovable property, Based on the created base, there should follow the submission of data and in cases of failure to take legal measures to ensure the same. 4. It is necessary to draft a plan for training of ARS application users, in order to implement the same in a short period of time and thereby establish the record keeping of movable

189 and immovable property by applying the ARS application. Data on the fixed and movable assets shall be recorded (imported) the ARS to determine the exact condition of the property which is owned by the State. 5. It is necessary to adjust internal rules and procedures to the Instructions for preparing and description of internal rules and procedures issued by the Ministry of Finance, and develop an internal policy/procedure on the treatment of employees after a delivery of contracts (of any kind) to the Administration and to introduce the employees therewith. 6. It is necessary to record all the contracts for collection of tax receivables from the property of taxpayers in the accounting system in accordance with International Accounting Standards and applicable legal regulations. 7. It is necessary, after the receipt of the contract on the collection of tax receivables from the property of the taxpayers in all cases, submit to the REA application for registration of property rights and make the taxpayers record of the transfer of the property. 8. If the property is transferred to a use purpose, the user should make a record of the handover of the property or if the property is given to the use of a body without the participation of the Property Administration, to make a record of the condition of the property. 9. The property that is transferred into the state ownership pursuant to the collection of tax receivables from the property of the taxpayers shall be registered in the Register of Real Estate (ARS). 10. It is necessary to maintain accurate and timely records of business premises that are not used, make analyses and assess whether they can be used for the accommodation of a body which pays the rental costs. 11. It is necessary to prepare and submit to the Government a Strategy for management and disposal of assets, and the annual plan of asset management. Audited entities shall, in accordance with Article 15 of the Law on State Audit Institution, within 6 months from the date of receipt of the final audit report of SAI submit a report on the actions taken by the prepared and submitted recommendations. SAI will, upon the final audit report, introduce the Government and the competent committee of the Parliament with the irregularities identified

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191 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE MINISTRY OF SUSTAINABLE DEVELOPMENT AND TOURISM Type of audit: Audited entity: Subject- matter of the audit: Duration of audit: Financial audit and regularity audit Ministry of Sustainable Development and Tourism Annual Financial Statement for 2015 and regularity of the business operations of the Ministry of sustainable development and tourism 145 auditing days Composition of the Auditing Board: Mr Branislav Radulović, PhD, Member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate Member of the Auditing Board

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193 I GENERAL PART 1. LEGAL BASIS FOR PERFORMING AUDIT Legal basis for performing the audit of the Ministry of Sustainable Development and Tourism (MoSDT) is contained in: Constitution of Montenegro, Article 144 (Official Gazette of Montenegro, No. 01/07 and 38/13); Law on State Audit Institution (Official Gazette of RMN, No. 28/04, 27/06, 78/06 and Official Gazette of Montenegro, No. 17/07, 73/10, 40/11 and 31/14); Annual Audit Plan of the State Audit Institution, adopted by the Senate on 22 December 2015 (No ); Decision on performing the audit of the SAI Auditing Board composed of: Branislav Radulović, PhD (Head of the Auditing Board) and Milan Dabović, PhD (Member of the Auditing Board) of 22 January 2016 (number: ). The audit was performed in accordance with: Rules of Procedure of the State Audit Institution ( Official Gazette of the Republic of Montenegro No. 03/15); Instruction methodology for conducting financial and regularity audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. BASIC DATA ON THE AUDITED ENTITY The audited entity is the state administration authority - the Ministry. Head of the authority is Minister Branimir Gvozdenović. Address of the Ministry is: IV proleterske brigade 19, Podgorica. Based on the specimen signature card 1 funds approved by the Budget, in the reporting period, are disposed of by persons authorized for valid signing with the use of the seal are, in the capacity of Approving Officer: Branimir Gvozdenović, Zoran Tomić and Žarko Živković and in the capacity of Authorising Officer: Veljko Vrbica and Slobodan Vuković Activities of the Ministry of Sustainable Development and Tourism In accordance with the Decree on the Organization and Manner of Work of Public Administration 2 the Ministry of Sustainable Development and Tourism performs administrative tasks related to: integral planning, management and evaluation of space; sustainable development; implementation of programs and projects for sustainable development under the competence of this Ministry; providing technical, organizational and administrative support to the work of the National Council for Sustainable Development; strategic spatial planning and the environment; development of national planning documents; giving opinions and approvals on local planning documents; coastal zone; preparation and adoption of plans for temporary facilities in the coastal zone and national parks; keeping documentation base on space for the purpose of monitoring the situation in the area and development of planning documents; preparing reports on the status of spatial development; 1 Card with deposited signatures, Ministry of Sustainable Development and Tourism ; Number of account: Official Gazette of Montenegro, no. 005/12 of 23 January 2012, 025/12 of 11 May 2012, 044/12 of 09 August 2012, 061/12 of 07 December 2012, 020/13 of 26 April 2013, 017/14 of 04 April 2014, 006/15 of 10 February 2015, 080/15 of 31 December

194 drafting of spatial planning programs; the establishment and management of information system on space in cooperation with the competent government authority for the information society; drafting reprints and issuing urban-technical conditions; issuing construction permits; the issuance of usage permits; issuing authorization and urban-technical conditions for the installation of temporary facilities; license for performing activities of development of planning documents, technical documentation and construction of facilities; managing development and strategic policies in the field of construction; energy efficiency through the system of planning and construction of facilities; development of tourism, catering, tourism supply, economic conditions in tourism, selective forms of tourism; linking coastal and inland tourism; development of the private sector in tourism; formation of tourist sites and areas; categorization and classification of tourist facilities; tourist flows on domestic and foreign markets; cooperation with tourist associations in Montenegro and abroad; sustainable valorisation of potentials and ecological advantages of national parks and protected natural areas in terms of tourism development; realization of the investment programs of interest for sustainable tourism development; monitoring infrastructure projects in the function of tourism development; monitoring and promotion of investment in the tourism sector; coordination of activities for the preparation and monitoring of tourist seasons; organization, mediation, supply of tourist areas and tourist consumption structure; keeping records on the number of tourists, accommodating capacities, financial effects and results of operations in tourism; organizing tourist informative propaganda activities; promotion of cooperation between the tourism sector and complementary sectors; cooperation with the National Tourism Organization and organizing tourist representative offices in other countries; condominium; system of housing relations; management and maintenance of housing stock; conversion of special and common parts of the building in the business premises; housing cooperatives; policies to improve the housing stock; public-private partnership in the field of housing; integrated system of environmental protection and sustainable use of natural resources; area of impact assessment and strategic assessment of environmental impact, integrated pollution prevention and control; environmental protection; air quality; climate change and the approval and monitoring of projects implemented to mitigate the effects of climate change; protection of the ozone layer; noise and vibration protection; chemicals; radiation protection (radioactive substances and ionizing radiation); non-ionizing radiation; protection of land from pollution; integrated coastal zone management; integrated marine protection against pollution; industrial pollution control and risk management; application of new technologies and cleaner production; waste management and wastewater management; system of municipal activities; coordination of regional water supply systems; genetically modified organisms under the competence of this Ministry; hydrographic activity; developing standards for environmental protection; environmental monitoring; monitoring of investments in the field of ministry; cooperation with international financial institutions and EU funds in the implementation of projects in the field of environmental protection and municipal services; cooperation with non-governmental organizations; proposing measures of current and development policy and analysing their impact on the economic status of business entities and entrepreneurs; promotional activities within the competence of the Ministry; International cooperation and international agreements within the competence of the Ministry; harmonization of national legislation within its competence with the legislation of the European Union; administrative supervision in the areas for which the Ministry is established; as well as other activities within its jurisdiction. Administrative authority within the Ministry of Sustainable Development and Tourism is the Directorate of Public Works, The Directorate of Public Works performs tasks related to: preliminary and preparatory works, studies, research works and investment programs, making professional evaluation of documents for making investment decisions, obtaining decisions on location and urban and technical conditions for individual facilities, in connection with the construction of and reconstruction of primary technical infrastructure, facilities of state authorities, health, education, culture and sport complexes and buildings in attractive tourist locations and other facilities which are of public interest and whose construction is financed by the state; drafting and technical control of technical documentation, obtaining approvals and permits for construction; public advertising and conducting the procedure of awarding works; concluding the contracts; conducting professional

195 supervision and quality control of performed works of built-in materials and equipment; technical inspection, acceptance of performed works, obtaining approval for use of the facility; record, payment and control of financial expenditure; as well as other activities within its jurisdiction. The Decree stipulates that the Ministry performs the supervision over the legality and effectiveness of work and legality of administrative acts of: - Institute for Hydrometeorology and Seismology; - Directorate of Public Works; - Agency for Environmental Protection The organization and systematization of work positions The Rulebook on internal organization and systematization of work positions of the Ministry of Sustainable Development and Tourism 3 systematized 207 civil servants and employees jobs (Ministry - 169, Directorate of Public Works - 38). The Government of Montenegro established by the Conclusion 4, in April 2015, the Rulebook on internal organization and systematization of work positions of the Ministry of Sustainable Development and Tourism 5, which determined the internal organizational units, their scope and content of groups of activities, jobs and employment of trainees, By the subject Rulebook, in the Ministry and the Directorate of Public Works, authorities within the Ministry, working positions for the performance of tasks within the scope of competence are established for civil servants and employees vacancies for 212 persons of which 173 is related to the Ministry and 39 to the Directorate (Minister and the two State Secretaries are not included). Increase of 5 work positions (4 work positions in the Ministry and one position in the Directorate) refers to two General Directors of the newly formed Directorates in the Ministry, the Directorate General for EU Integration and International Cooperation and the Directorate General for Climate Change and two new work positions for mentioned Directorates, as well as Assistant Director of the newly formed Department for Preparation of Investment Projects. Article 30 of the Rulebook specifies that the deployment of officials and employees shall be carried out within 30 days from the date of its entry into force, and on the eighth day after its publication of the notice board of the Ministry, and after the adoption by the Government of Montenegro, The Government of Montenegro adopted this Rulebook by its Conclusion 6 on 16 April According to obtained data, on 31 December 2015 out of the systematized 173 work positions in the Ministry 32 positions were vacant, and in the Directorate out of 39 systematized positions, 12 vacant positions. During 2015, 15 officers were employed, while for the 12 officers the employment was terminated. In the revised period, 15 persons were employed in the Ministry, while for the 12 servants the employment was terminated in After examining the documentation it was found that the deployment of servants and employees in accordance with the Rulebook on the Systematization was performed on 28 August 2015, which is not in accordance with Article 30 of the Rulebook. 3 No: /3 of 5 July No of 16 April No /10 of 5 July Number

196 2.3. Accounting system Accounting of the public sector in Montenegro is organized on a modified cash basis, which means that revenues and expenditures are recorded on a cash basis, i.e. at the time of disbursement or collection in cash, and liabilities and assets are recorded on an accrual basis, i.e. for the period to which it relates. Budget accounting is kept at the level of functional, organizational, economic and program classification in accordance with GFS classification (classification of IMF for the needs of financial reporting of the public sector). The accounting system of the public sector involves the collection, processing, delivery and use of accounting information to make decisions regarding the management of public funds. Budget beneficiaries use the SAP system (the system records in the Treasury's General Ledger). Accounting system of the Budget of Montenegro is organized in accordance with the provisions of Art. 64 of the Law on Budget and Fiscal Responsibility, in accordance with the Rulebook on the method of preparation and submission of financial statements of the budget, state funds and local governments and the Instructions on the work of State Treasury. Accounting system is based on the records in the General Ledger of the Treasury, which is kept in the Ministry of Finance and the accounting of spending units. Spending units based on their records of receipts and expenditures prepare at the end of the year the Annual Financial Statement and submit it to the Ministry of Finance - State Treasury by the end of February of the current year for the previous year. General Ledger of the State Treasury and the financial statements of spending units represent document basis for drafting the Final Account. Ministry of Sustainable Development and Tourism is using the SAP system. Within the Ministry the Ledger of spending units is not kept. Within the petty cash, the petty cash journal is kept. Calculation of earnings is performed in the Ministry of Finance on the basis of information (monthly reports on actual working hours) provided by the Ministry of Sustainable Development and Tourism. 3. TYPE, SUBJECT-MATTER, OBJECTIVE AND SCOPE OF AUDIT The State Audit Institution (SAI) performed the financial audit and regularity audit. The subject/matter of audit was the Annual Financial Statement for 2015 and regularity of operations of the Ministry of Sustainable Development and Tourism. Rulebook on the method of preparation and presentation of financial statements of the budget, state funds and local self-government units 7, the Ministry as a spending unit is obliged to submit to the Ministry of Finance the Annual Financial Statements on forms 3 and 5 as follows: Statement of Cash Flows III, and Report on outstanding debts. For the unspent funds in the accounts, which are recorded in the Treasury's General Ledger as an expenditure, the Ministry is obliged to submit with the Annual Financial Statement also the Statement on the manner of spending funds after the end of the fiscal year on the Form 8. Spending units for the spent funds from the current budget reserve submit with the Annual Financial Statement also the Report on the manner of spending funds from the current budget reserve, on the Form 9. The objective of the audit is to express opinions on: 7 Official Gazette of Montenegro, no. 23/

197 1. whether the financial statements objectively and truthfully inform about the financial structure and financial position; 2. whether the transactions which are the subject of reporting are in accordance with the laws and other regulations (audit criteria), and 3. whether the system of financial management and control is in accordance with the law and other acts. The criteria on the basis of which the objectivity and truthfulness of the financial statements is judged are the adequate accounting regulations, accounting principles and standards for the public sector and adopted accounting policies of the audited entity. The criteria on the basis of which the assessment of the financial management and control are the law and regulations governing the system of internal financial controls in the public sector of Montenegro and establish the methodology and standards and other issues of importance for the establishment, development and implementation of the system of internal financial control in the public sector. The audit covered expenditure of the Ministry of Sustainable Development and Tourism for AUDIT CRITERIA The regularity audit is an independent external evaluation of the extent to which the subject of the audit is in accordance with the laws, regulations, policies, procedures, or authorizations, which have been identified as audit criteria. Key criteria for regularity audit were: Subject-matter of the audit Financial operations and use of allocated funds Employees Assets Criteria The Budget Law, the Law on Budget and Fiscal Responsibility, The Budget Law for 2015, Instructions on the work of State Treasury, Rulebook on the Method of Preparation and Submission of Financial Statements of the Budget, State Funds and Local Governments, Regulation on Uniform Classification of Accounts for the Budget of Montenegro, Extra-budgetary Funds and Budgets of Municipalities, Decision on manner of development and Content of Program Budget. Law on Civil Servants and Employees, Rulebook on Systematization and Organization of Jobs, Law on Personal Income Tax, Law on Contributions for Obligatory Social Insurance, Law on Salaries and Other Incomes of State and Public Officials, Law on Salaries of Civil Servants and Employees, Instructions for the Calculation of Gross Earnings, Decree on Reimbursement of Costs to Civil Servants and Employees, Decision on Criteria and Manner of Determining the Variable Portion of Salaries of Civil Servants and Employees, Decision on Increase of Salaries of Civil Servants and Employees for Performing Specific Tasks, Decisions on the Amount of Severance Pay for Civil Servants and Employees. Law on State Property, Decree on Manner of Keeping Records of Movable and Immovable Property and on the List of Things in State Property, Instructions on Detailed Procedure for the Inventory of Movable and Immovable Property, Decree on the Sale and Lease of Things in State Property, Rulebook on Classification Tangible and Intangible Assets by Groups and Methods for Determination of Depreciation of Budgetary and Extra-Budgetary Users, Decree on Conditions and Manner of Use of Official Buildings and Business Premises Owned by Montenegro, Decree on Conditions and Manner of Use of Means of Transportation Owned by Montenegro, Decree on Conditions and Manner of Use of Objects of Artistic and

198 Cultural Value Owned by Montenegro. Public procurement System of internal controls Law on Public Procurement, Rulebook on the Content and Manner of Conducting Public Procurement in Electronic Form, Rulebook on Records of Public Procurement Procedures, Rulebook on Forms in Public Procurement Procedures, Rulebook on methodology of expressing sub criteria into an appropriate number of points, the method of evaluation and comparison, Rulebook on Forms in Public Procurement Procedures, Rulebook on the Manner of Maintaining Records on Violation of Anti-Corruption Rules, Rulebook on Records of Public Procurement Procedures, Concluded Contracts with the Selected Bidders. Law on the System of Internal Financial Controls in the Public Sector, Decree on Establishment of Internal Audit in the Public Sector, Rulebook on manner and procedure for establishing and implementing financial management and control, Rulebook on Manner and Procedure of Work of Internal Audit, Instruction on the content of annual reports on the implementation of activities planned on the establishment and development of system of financial management and controls and Annual report on the work of internal audit, Manual for Financial Management and Control, Guidelines for Financial Management and Control and Instructions for the preparation and description of internal rules and procedures. Internal rulebooks and procedures, contracts and other acts were used as criteria for regularity audit. 5. TIME OF PERFORMANCE OF THE AUDIT Audit of the Ministry of Sustainable Development and Tourism was performed in the period from 20 April July II OPINION AND RECOMMENDATIONS Based on the conducted audit and established facts, upon the consideration of the audited entity s statements, and pursuant to Article 12 and 44 of the Law on State Audit Institution (SAI) and Article 45 of the Rules of Procedure of the State Audit Institution, the Auditing Board of the SAI, consisting of Mr Branislav Radulović, PhD (member of the Senate Head of the Auditing Board) and Mr Milan Dabović, PhD (President of the Senate member of the Auditing Board), at the session of the SAI Auditing Board held on 24 October 2016 adopted: FINAL AUDIT REPORT of the Annual Financial Statement of the MINISTRY OF SUSTAINABLE DEVELOPMENT AND TOURISM for 2015 Responsibility of the Audited Entities Subject to Audit Chief Finance Officer of the Ministry of Sustainable Development and Tourism (Minister) is responsible for implementing the budget. The management of the audited entity is responsible for the preparation and presentation of financial statements in accordance with generally accepted financial reporting framework, as well as for compliance of the operations with legal and other relevant regulations

199 Responsibility of the State Audit Institution Responsibility of the State Audit Institution is to express its opinion based on the performed audit, on whether the Financial Statement of the Ministry of Sustainable Development and Tourism for 2015 in all material aspects is prepared and presented in accordance with the applicable financial reporting framework. In addition to responsibility for expressing an opinion on the financial statement, the responsibility of the SAI is expressing an opinion whether the financial and other operations of the audited entity, in all material respects comply with the laws, other regulations and acts that were identified as criteria for the particular audit. The audit was performed in line with the relevant International Standards of Supreme Audit Institutions (ISSAI-level III). The State Audit Institution complied with the requirements of ethics. it planned and performed the audit in the way that provided reasonable assurances whether the financial statements of the Ministry of Sustainable Development and Tourism are prepared and presented, in all materially important issues, in accordance with the applicable financial reporting framework and whether the operations of the audited entity was in accordance with the applicable legal and other regulations. The audit has provided the performance of procedures to obtain sufficient appropriate evidence on which is based the opinion expressed. Completed procedures depended on the professional assessment of the State Auditor, including assessing the risk of material non-compliance. OPINION Financial audit of the Annual Financial Statement of the Ministry of Sustainable Development and Tourism for 2015, has found that the competent Auditing Board of SAI has gained reasonable assurance that it gives, in all material respects, a true and fair presentation of recorded receipts and expenditure in accordance with the accepted financial reporting framework. Audit reports of the Ministry of Sustainable Development and Tourism determined the materiality in the amount of 126, Regularity audit of the operations of the Ministry of Sustainable Development and Tourism established the non-compliance with the Budget Law and the Law on Budget and Fiscal Responsibility, the Budget Law for 2015, the Instructions on the work of the State Treasury, the Regulation on Uniform Classification of the Budget of Montenegro, Extra-Budgetary Funds and Municipal Budgets, the Labour Law, the Law on Civil Servants and Employees, Law on State Property, the Law on Public Procurement. Based on the above, the competent Auditing Board of SAI expresses an unqualified opinion with emphasis of matter to the financial statement of the Ministry of Sustainable Development and Tourism for 2015 and a qualified opinion on the compliance of operations with the regulations. Not modifying the expressed opinion on the financial statement, the Auditing Board of SAI emphasized matters referred to in recommendations 1, 2 and 3. RECOMMENDATIONS 1. The position Expenditures for services, in the Statement of cash flows III, shows the expenditures for the maintenance of the building in which the radioactive waste is stored in the amount of 42,879.78, expenditures for salaries of employees engaged in public work "Keep it clean" in the amount of 7, and expenditures for preparing and setting up tourist signs in the amount of 49,822.65, which is not in accordance with the Regulation on Uniform Classification of Accounts for the Budget of Montenegro, Extra Budgetary Funds and Budgets of Municipalities. The expenditure for maintenance of the building is in the report should be shown in the position Current maintenance. Expenditure for salaries of workers engaged

200 in public works "Keep It Clean" who were paid to utility companies, should have been displayed in the Statement of cash flows III in the position 2.3. Transfers to institutions, individuals, NGO and public sector, because they are expenses related to transactions between participants in public spending, holders of public spending, NGOs and individuals, that do not have commercial character. The expenditure for preparing and setting up tourist signs should have been shown in the financial statement in the position Expenditures for materials. The audited entity should, in accordance with the Instructions on the Work of the State Treasury (item, 25, sub-item e), enter on the request for payment the appropriate account for records of expenditures by economic classification, in accordance with the Regulation on Uniform Classification of the Accounts for the Budget of Montenegro, Budgetary Funds and Municipal Budgets, which is used to record the performed payment in the General Ledger of the Treasury (which is the basis for drawing up the Statement of cash flows) as the expenditure from the budget. 2. The Ministry does not record and reports liabilities in the accounts of class 2, for which reason the State Auditor could not assure that the outstanding liabilities shown in the Statement of outstanding liabilities, complies with the actual situation of outstanding liabilities. The Ministry should record, on the accounts of class 2-liabilities, requests for payment and all payments related to current expenditures, transfers for social protection, transfers to institutions, individuals, NGO and public sector, capital expenditures, loans and securities, repayment loans, guarantees and commitments from the reserves, so that those show the state of outstanding liabilities. 3. In the Statement on the manner of expenditure of funds after the end of the fiscal year, which was prepared by the Ministry, were not entered the following data: - on the balance on the account for international payments at the end of the fiscal year, according to economic classification, as recorded in the General Ledger of the Treasury for on the payments that were made from the account for the payment of international liabilities in January 2016, and which related to 2015 and which were shown in the General Ledger of the Treasury as expenditure in the total amount of 87, Ministry should enter in the Statement on the manner of spending funds after the end of the fiscal year, data on the status of funds in the accounts of payments of international liabilities as well as data on funds spent in the period from the end of the fiscal year to 31 January next year, in accordance with the Instruction on completing the Statement on the manner of spending funds after the end of the fiscal year. 4. In the position 4147-Consulting services, the exceeding of the approved expenditure occurred in the amount of 10, which is not in accordance with the Budget Law for Ministry of Sustainable Development and Tourism is required to perform the implementation of expenditure under the programs and positions in accordance with the Annual Budget Law. 5. From the funds allocated to the account 4147-Consulting services, projects and studies payments were carried out related to the cost of maintaining the facility where radioactive waste is stored in the amount of 42,879.78, expenditures for salaries of employees engaged in public works "Keep it Clean" in the amount of 7, and expenses for preparing and setting up tourist signs in the amount of 49,822.65, which is not in accordance with Art. 18 of the Budget Law for 2015, which allocated the Budget resources by the spending units and expenditures by economic classification. The expenditure for maintenance of the facility should

201 have been paid from the funds allocated to the account Current maintenance of buildings. Expenditure for salaries of workers engaged in public works "Keep It Clean" that were paid to utility companies, should have been paid from the funds allocated to the account 4319-Other transfers to institutions, because they are expenses related to transactions between participants in public spending, holders of public spending, that have no commercial character. The expenditure for preparing and setting up tourist signs should have been paid from the funds allocated to the account-4133 Material for special purposes. The audited entity should ensure the effective implementation of the Instruction on the Work of the State Treasury (in particular items 25 and 26 relating to the verification and approval of payment by the spending organizations), in order to ensure that the spending of budget funds is carried out in accordance with the Law on Annual Budget. 6. Payments in the amount of 41,909.16, were carried out with credit cards (two payment cards), and the expenses incurred in respect of official traveling and representation were paid. Business payment cards were not used in accordance with item 141 of Instructions on the Work of State Treasury because they were used by several employed persons without written permission of the Head of the authority). The Ministry should adopt internal procedures with which it will prescribe the method of using the business payment cards and documenting the expenditures paid with cards (in accordance with items of the Instructions on the Work of the State Treasury and the Decree on expenditures reimbursement for employees in the public sector 8 ). The Ministry of Sustainable Development and Tourism adopted on 12 October 2016 the internal rule on the method of using business payment cards (number /1). 7. In the Ministry, during 2015, the initial state and changes in accounts with banks were not recorded in terms of book-keeping. Balance on the accounts with banks, on 31 December 2015, is not stated in the Annual Report on the Inventory of the Ministry. The Ministry of Sustainable Development and Tourism is recommended to keep records, on the accounts of class 1 9, of all of the money transactions that occurred by the activity of the spending unit. The Ministry should, at the end of the fiscal year (with the balance on 31 December), to conduct listing of cash, balances of funds in accounts with commercial banks and reconcile actual and book value and include it in the Annual Report on the Inventory. 8. The audit found in the calculation of earnings related to the increase on the basis of years of service the irregularities that referred mainly to errors at the Ministry of Finance (correctly entered coefficient of the past service on the payroll for the payment of salaries, which MoSDT sends to the Ministry of Finance while the pay slips that MF returns to the MoSDT coefficients altered in a way that, for example, for certain employees ratio was increased by 2% during the year, while for others it was decreased). To a smaller extent the irregularities are contained in the data that are sent to the Ministry of Finance by the MoSDT (wrongly calculated coefficient of the past service). Nine-month-salary of one employee was calculated at the greater coefficient for the calculation of earnings than the coefficient determined by the Decision on the fixed part of the salary, while in another case in the Decision on the Fixed Part of the Salary a higher coefficient for the calculation of earnings was determined than it was established by the Decision on Appointment. 8 "Official Gazette of Montenegro", no. 040/16 9 In accordance with the Regulation on Uniform Classification of Accounts for the Budget of Montenegro, Extra budgetary funds and budgets of municipalities appropriate accounts Class 1 include transactions in all currencies and account balance at any time shows the cash balance

202 The mentioned irregularities are a result of lack of effective internal controls in MoSDT. The Ministry adopted an internal procedure (Rulebook on the Method of preparing the calculation of salaries in the Ministry) which did not provided for the execution of control of the accounting slips after their delivery by the Ministry of Finance. It is needed that the Ministry develops in more detail the existing procedure by introducing additional controls and ensures the efficiency of the officially established procedures, and the accuracy of the input data used for the calculation of earnings. The input data for the calculation of salary increase based on years of service should be aligned with the actual situation and Article 22 of the General Collective Agreement. The Ministry of Sustainable Development and Tourism adopted on 12 October 2016 the internal rule on the manner preparation of calculation of salaries (number /1). 9. The audit found that the audited entity had not submitted the ROCPTC (report on calculated and paid taxes and contributions) forms to the competent tax authority by the 15th of the month for the previous accounting period (month), which is not in accordance with Article 5 of the Rulebook on the form, content, manner of filling in and submitting the uniform form of the report on calculated and paid tax on personal income and contributions for mandatory social insurance 10. The audited entity is obliged to submit the Report on calculated and paid tax on personal income and contributions for mandatory social insurance (ROCPTC forms) to the competent tax authority by the 15th of each month for the previous month, as required by the applicable Rulebook. 10. The audit found that the employees of the Ministry, were paid out the variable part of the salary quarterly in 2015, and that on that basis it was paid the total of 111, Payment for I, II and III quarter was performed based on the Decisions of the Minister and the Decision of the Minister of Finance, while for the fourth quarter, there is a decision of the Minister but no decision of the Minister of Finance. The audit has shown that the Heads of organizational units were not preparing monthly reports on the exceptional results and quality of work of civil servants of the related organizational units, which is not in accordance with Article 3 of the Rulebook. The subject reports are essential and documentational basis for the adoption of the Decision on fulfilment of conditions for the realization of the variable part of the salary and on the amount of the variable part of the salary. The Ministry should make reports, in accordance with Article 3 of the Rulebook, about exceptional results and quality of work of civil servants in accordance with defined criteria and to submit those to the Collegium of the Ministry. 11. The Ministry does not have an internal written document which determines who of the employees has the right to use the funds for the representation. The Ministry should adopt the internal written procedure/ instructions that will determine who has the right to use the funds for representation, in which amount and other issues related to representation. Ministry of Sustainable Development and Tourism adopted, on 12 October 2016, internal rules on exercising the right of representation (number /1). 10 "Official Gazette of Montenegro, no. 76/10 2/

203 12. After examining the contracts concluded for consulting services, projects and studies and other services, it has been found that the those in most cases, contain a clause on advance payment to the supplier, which is not in accordance with the Instructions on the Work of the State Treasury 11, which provides that the certification of payments by the spending organizations is carried out after it has been determined that a natural or legal person has provided a service or delivered the goods. Ministry of Sustainable Development should make all payments in accordance with the Instructions on the Work of the State Treasury, Payment Requests, which are certified by the authorizing officer, after it is determined that a natural or legal person has provided a service or delivered the goods. If the Ministry has a need for specific procurement, the audited entity is recommended to agree upon the manner of procurement, in cooperation with the Ministry of Finance that require advance payment and if necessary launch an initiative for amending the point 25 of the Instructions on the Work of the State Treasury. 13. Legal basis for the conclusion of the contracts on occasional and temporary jobs is Labour Law (Article 163), which provides that the employer for performance of certain tasks that do not require special knowledge and expertise, and that do not last for more than 120 working days in a calendar year, may conclude a special contract with a particular person that is registered with the Employment Agency or the Agency for Mediation. Contracts on occasional and temporary jobs, which were concluded by the Ministry of Sustainable Development and the Department of Public Works are not in accordance with the provisions of Article 163 of the Labour Law and the Law on Civil Servants and Employees, because they engaged persons to perform jobs on systematized positions based on contract on occasional and temporary jobs. The audited entity should conclude contracts on occasional and temporary jobs solely for performance of tasks laid down in the provisions of Article 163 of the Labour Law. Also, if there is the need of engaging individuals to perform the duties and tasks from the act on systematization, it should adopt decisions on the deployment for definite or indefinite period of time, through a public announcement, with the designated officer, in accordance with the Law on Civil Servants and Employees. 14. The audit has found that a large number of the invoices is not accompanied by a written confirmation that the service was provided or the goods delivered, which is not in accordance with item 23 of the Instructions on the Work of the State Treasury and the internal Rulebook on manner of recording and paying incoming invoices and preparation of financial statements for outstanding due obligations. It is necessary that the audited entity applies in all cases the prescribed procedure, which should ensure that invoices are accompanied by a written confirmation certifying that the goods are delivered, services provided or works performed works. Ministry of Sustainable Development and Tourism adopted, on 12 October 2016, internal rule on the manner of recording and paying incoming invoices and preparation of financial statements for outstanding due obligations (number /1). 15. The Ministry does not keep records of state property in accordance with international accounting standards, which is not in accordance with Art. 41 of the Law on State Property, Property records are not kept in the accounts of class 0, as prescribed by the Rulebook on Uniform Classification of the Accounts for the State Budget, Extra-Budgetary Funds and Municipal Budgets. 11 Official Gazette of Montenegro, no. 080/ /14 of 4 March

204 Internal rules on the registration of state property, issued by the Ministry are not in accordance with the Law on State Property and regulations governing this area. The Ministry should provide a record of the property in accordance with International Accounting Standards, and in accordance with: - Law on State Property; - Law on Budget and Fiscal Responsibility; - Decree on the Manner of Keeping Records of Movable and Immovable Property and a List of Things in State Ownership; - Instructions on Detailed Procedure for the Inventory of Movable and Immovable Property; - Rulebook on Uniform Classification of the Accounts for the State Budget, Extra- Budgetary Funds and Municipal Budgets; - Rulebook on Classification of Material and Non-material Property by Groups and Methods for Determination of Depreciation of Budgetary and Extra-Budgetary Users. The Ministry should establish internal rules on the registration of state property, which will prescribe the procedures concerning the records of state property, in accordance with legal regulations and specific needs (activities) of the Ministry itself. The Ministry of Sustainable Development and Tourism adopted, on 12 October 2016, internal rules on the registration of state property (number /1). 16. The Commission for inventory has conducted listing of petty cash, but no cash listing was performed at the accounts with banks (account for the payment of foreign liabilities). The Commission has not been given the task to make a list of the obligations of the Ministry with the balance as at 31 December The Commission has not prepared a report on the performed inventory, and therefore the Head of the authority could not make a decision on accepting the report on the inventory, as well as on the proposal to write off. The Ministry does not keep the subsidiary ledger of fixed assets, nor keeps records of assets on accounts of class zero, in accordance with the Rulebook on Uniform Classification of Accounts for Montenegrin Budget, Extra Budgetary Funds and Budgets of Municipalities, for which reason the State General could not be persuaded that the state property, expressed in the inventory lists, reflects the actual state of property held by the Ministry. The alignment of bookkeeping balance (special record) with the actual situation has not been performed. The Ministry has not issued guidance on the inventory, which would clearly define the tasks of the inventory commission (working plan, preparatory activities, etc.), as well as time limits in which to make a list of certain groups of fixed assets. The Commission has not been given the task to make a list of investments in progress, and what has been established by Art. 4 of the Instructions on detailed procedure for the inventory of movable and immovable property 13, which prescribed that the list of immovable property includes the investment in progress. The Instructions (Article 10) stipulates that the list of construction in progress is done on the basis of inspection on the spot and review of documentation relating to the investment, based on which the bookkeeping entries in the accounts of the authority were performed. Commission enters into the report on the inventory data on the stage of completion of the investment. The report on the implementation of the capital budget of the Ministry (Directorate of Public Works) for 2015, presented that the Ministry on the day of 31 December 2015 had investments in progress. 12 In the Report on outstanding liabilities the fact is presented that the Ministry, on the day of 31 December 2015, had outstanding liabilities in the mount of 51, "Official Gazette of Montenegro", no. 047/

205 The Ministry is recommended to conduct listing of cash and liabilities as well as to align the bookkeeping balance with the actual balance. The Commission for inventory should, in accordance with Article 13 of the Instructions on detailed procedure for the inventory of movable and immovable property, after the conducted inventory prepare Report and the Ministry should maintain bookkeeping of capital assets, in accordance with international accounting standards for the public sector and with regulations, to enable the alignment of the bookkeeping balance of the specific records with the actual balance. The Ministry should ensure that the inventory of assets is performed in accordance with the Instructions on detailed procedure for the inventory of movable and immovable property. Ministry of Sustainable Development and Tourism adopted, on 12 October 2016, Internal rules on the manner of performing inventory of movable and immovable property (number /1). 17. The Ministry is not performing book-keeping of the depreciation calculations, on the appropriate accounts, in accordance with the Rulebook on Unified Classification of Accounts for the State Budget, Extra-Budgetary Funds and Municipal Budgets. For assets acquired in 2015, there was no depreciation calculation. The Ministry should adopt procedures (and implement them) for depreciation calculation of material and non-material assets, in accordance with the legislative regulations. The Ministry of Sustainable Development and Tourism adopted, on 12 October 2016, Internal rules on the registration of state property (number /1), which among other things defines the procedure for the calculation of depreciation. 18. The Ministry did not adopt, within the legal deadline (until 31 January 2015) the Public Procurement Plan. The mentioned Plan was adopted on 6 March 2015, when it was published on the Portal of the Public Procurement Administration. In the Procurement plan for 2015, the Ministry did not plan allocation of procurement by direct agreement and the Report on awarded public procurement (Form C) has shown the fact that the Ministry, by means of the direct agreement, awarded the public procurement in the amount of 479, The Public Procurement Law (Art. 37), provides that the Contracting Authority can initiate a procurement procedure if funds were provided for that purchase by budget funding or otherwise in accordance with the law and if the procurement had been provided for in the Public Procurement Plan of the Contracting Authority. The Ministry should provide for procurement which will be realized by direct agreement in the Public Procurement Plan and adopt the Plan within the prescribe timeframe. 19. Tender documentation No /6 of 1 April 2015 stipulates that the Contracting Authority will negotiate, with bidders whose bids are assessed as correct, the financial part of the offer and that the results of the negotiations will be verified through Minutes of the negotiations. The Auditor was not presented the Minutes of negotiations for which reason the confidence that the Ministry acted in accordance with Article 25 of the Law and the Tender documentation cannot be gained. The Ministry should act in accordance with Article 25 of the Public Procurement Law and Tender documentation during the realization of procurement by implementing

206 negotiating procedure without the previous publication of the public procurement call, negotiate with the bidders on the submitted offers and produce minutes of negotiations. 20. The Ministry made amendments to the Public Procurement Plan for 2015 (Amendments 4), number: /18 of 7 December 2015 and it modified the item 213 Real estate Fair "MIPIM 2016"- renting of space and making of stand. The decision to initiate the procedure of public procurement was adopted on 8 December 2015, which means that the procedure was initiated one day after the publication of Amendment to the plan, which is not in accordance with the Law on Public Procurement (Article 38), which provides that the amendments to the Public Procurement Plan can be made five days before the initiation of the public procurement procedure, except in the case of the rebalance of the budgetary funds. The audited entity should act in accordance with the Article 38 of the Public Procurement Law when amending the Public Procurement Plan. 21. Internal guidelines for the implementation of public procurement prescribed the procedure for procurement by direct agreement. The audit has found that the Ministry during the realization of procurement by applying direct agreement had not implemented the procedures prescribed by the internal guidelines. The Public Procurement Officer should conduct the public procurement by direct agreement in accordance with the prescribed internal procedure. 22. Adopted internal rules and procedures of the Ministry of Sustainable Development and Tourism do not contain all the necessary elements prescribed by the Guidelines for the development and description of internal rules and procedures issued by the Ministry of Finance and are not made on the prescribed form, in accordance with the Guidelines. The audited entity has identified and assessed risks through the description of important business processes - A map of the process, adopted Risk Register and Risk Management Strategy, but not in accordance with the Guidelines for the establishment and implementation of process of risk management in the public sector entities. Identified non-compliance are both of formal and of substantive nature. The Ministry was not performing analysis of existing and it determined the required additional or unnecessary controls, adopted and monitored the implementation of the plan to address deficiencies of internal controls. The audited entity should adopt the prescribed internal guidelines/instructions on the prescribed form, with the elements prescribed in the Guidelines for the development and description of internal rules and procedures. It is necessary to conduct regular assessment of the elements of financial management and control in order to determine the adequacy of existing controls, deficiencies and actions to be taken in order to eliminate deficiencies - Report on self-assessment, which ultimately should result in the Annual report on the implementation of planned activities in the establishment and development of financial management and control system - Self-assessment Questionnaire on FMC. It is necessary to determine the person responsible for coordinating the establishment and implementation of risk management process at the level of the entity and establish the Risk Register at the entity level and at the level of organizational units, and then on the basis of established Registry adopt Risk Management Strategy

207 Capital budget- Directorate of Public Works 23. The implementation of most of the projects within the program 804-Construction and reconstruction of administrative space for the work of state authorities is not completed within the agreed time limit, but it has been extended by annexes. For certain projects, the contracts were signed in 2010 and 2012 (CANU building and facility Eco-building of the Ministry of Tourism and Environmental Protection). Capital Budget planned the funds, but the implementation has not started in 2015, for the following projects: - Reconstruction of the building of the former Belgian Embassy in Cetinje, planned in the amount of 232,500.00; - Project Library for the Blind in Podgorica, planned in the amount of 40,000.00; - Project for the National Institute in Kolasin, planned in the amount of 20,000.00; - Fresh water supply in Tivat, planned in the amount of 20,000.00; - Student home in Niksic, planned in the amount of 95,000.00; - Construction of an artificial lake for Ski Centre "Vučje" is planned in the amount of 250, Capital Budget planned funds but there was no execution in 2015, for the following, already started, projects: - Nursing Home in Podgorica, planned in the amount of 480,000.00; - The stadium in Cetinje, planned amount of 50,000.00; - Sports Hall in Kotor, planned amount of 50,000.00; - The new building of the Assembly, planned amount of 160,000.00; - Cultural Centre in Pljevlja, planned amount of 650,000.00; - The rehabilitation of the existing landfill solid waste "Vasove vode", Berane, planned amount of 41,000.00; - Sewerage network and regulation of water supply in Berane, planned amount of 204,599.90; - Kindergarten in Bar ( 59,000.00); Kindergarten in Ulcinj ( 5,000.00); Kindergarten in Podgorica ( 17,000.00); Kindergarten in Pljevlja ( 15,000.00); - Accommodation facilities for the Police units SAJ and PJP in Danilovgrad and others. The Directorate of Public Works is recommended to perform realistic planning of capital budget funds when nominating specific projects, so that the planned funds per projects would be implemented in the approximate amount in relation to the plan and reduced the number of projects that are not implemented. Taking into account the aggravating circumstances in the realization of projects in which the subject is the performance of works, when planning capital projects it is necessary to require more detailed elaboration of the project, to determine a realistic deadline for the execution and completion of the work, and reduce the possibility of exceeding the set deadlines of execution of the contract. When nominating projects to be funded from the capital budget projects, the priority should be given to projects started in previous years. Before the adoption of the annual budget law, it is necessary to check the reality of the assumptions in planning and nominating of specific projects. Particular attention should be paid to the fact that a number of projects was not implemented due to insufficiently studied assumptions in the part of considering the planning and technical requirements, planning documents and revised project documentation

208 24. The audit has found that the Contract for the construction of a football field with artificial turf in Mojkovac Municipality, concluded for the amount of 146, was not recorded in the Form A of the Report on Awarded Public Procurements in The Procurement Officer is obliged to record and enter into the Report on Awarded Public Procurements all public procurement procedures carried out by direct agreement, in accordance with the powers laid down in Article 58 of the Law. Government of Montenegro 25. By means of conclusions the Government was redirecting funds from the Capital Budget for projects that are not planned by the Budget Law for 2015, in total amount of 3,979, The Government is recommended to perform the redirecting of Capital Budget funds in accordance with the annual Budget Law, or in accordance with Article 9 paragraph 4 of the Law on Budget and Fiscal Responsibility, which determined that the payment of expenditure from the consolidated treasury account is prohibited, unless they are approved by the Law on State Budget for the fiscal year. Unplanned and insufficiently planned expenditures, as well as emergency and unforeseen expenses, in accordance with Art. 43 of the Law on Budget and Fiscal Responsibility should be paid out of the funds of current and permanent reserves. Court costs 26. In position Payment of liabilities from the previous period (court costs) the overspending of budget spending occurred in the amount of 1,948,521.43, which is not in accordance with the Budget Law for Budget Law for 2015 (article 11) stipulates that the funds for the payment of liabilities based on court rulings will be planned with the Ministry of Finance, in the position 4630-Payment of liabilities from previous years, and during the year redirecting shall be performed in favour of the same position of the budget beneficiary that caused those costs, to the extent of their achievement. According to the data from Treasury General Ledger, redirecting of funds to the favour of the position 463, for the spending unit Ministry of Sustainable Development and Tourism, was not performed, and at the expense of it expenditure on the basis of court decisions were realized in the amount of 1,948, Ministry of Sustainable Development and Tourism has no documentation (Requests for payments with annexes), based on which the payment was made from the position disputes, but it is located at the Ministry of Finance. The Ministry of Finance should, in accordance with the Budget Law for 2015, redirect the funds for the payment of liabilities based on court decisions to the budget beneficiary that has caused this expenditure (Ministry of Sustainable Development Management and Tourism). The Ministry of Finance is obliged to ensure full implementation of the Annual Budget Law. Ministry of Sustainable Development and Tourism should act under final and executive decisions of the competent courts and other bodies and thus avoid uneconomical spending of budgetary funds in the process of forced debt collection

209 Ministry of Sustainable Development and Tourism should determine the manner of keeping records of the proceedings conducted against them before the courts and/or other competent authorities, which should enable accurate and timely information on the value of the dispute, the status of the case, the phase in which the dispute is, responsible person, etc. The records need to be updated in a timely manner, in accordance with the documents on the course of action that they are submitted by the Protector of Property and Legal Interests. Ministry of Sustainable Development and Tourism, in the Statement in response to the preliminary report of SAI (No /1 of 20 October 2016) states: "The court costs are, for the most part, related to the judgment, which was issued after a dispute that had been initiated in 1997 against the Directorate of Public Works." The audited entity is obliged to notify the SAI, in accordance with Article 15 of the Law on State Audit Institution, within six months on the undertaken actions in respect of prepared and submitted recommendations

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212 EXCERPT FROM THE FOLLOW UP AUDIT REPORT ON EFFICACY OF THE TAX ADMINISTRATION IN IMPLEMENTING MEASURES FOR TAX DEBT COLLECTION Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board Members: Audit of recommendations implementation Follow up audit Tax Administration Follow up on the implementation of recommendations contained in the Final Report on the audit of The Efficacy of the Tax Administration in Implementing Measures for Tax Debt Collection (number /18 dated 9 June 2015) 30 auditing days Mr Branislav Radulović, PhD, member of Senate - Head of Auditing Board Mr Milan Dabović, PhD, President of the Senate - member of Auditing Board

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214 I BASIC ELEMENTS 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing follow up audit of The efficacy of the Tax Administration in implementing measures for tax debt collection is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); and The State Audit Institution Annual Audit Plan, dated 22 December 2015 (No ). Decision on Conducting Audit passed by the Auditing Board composed of Mr Branislav Radulovic, PhD (Head of the Auditing Board) and Mr Milan Dabovic, PhD, (member of the Auditing Board) dated 26 July 2016 (No: 40116/ ). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); and International Standards for Supreme Audit Institutions (ISSAI-level III). 2. AUDITED ENTITY Audited entity was the Tax Administration, On the basis of the Art. 37, Paragraph 2 of the Law on State Administration 1, the Regulation on the organization and the manner of work of state administration 2, the Regulation on criteria for internal organization and systematization of jobs in the state administration bodies 3, it was adopted the Rulebook on internal organization and systematization of the Ministry of Finance, which determined the internal organization of the Ministry of Finance and administration bodies within the Ministry, which, among others, is the Tax administration. Tax Administration performs tasks related to: registration of taxpayers and keeping uniform register of taxpayers; establishing individual tax liabilities for all physical and legal entities; tax control; regular and enforced collection of taxes and ancillary tax levies; developing of uniform tax information system in cooperation with the government authority competent for the information structure; keeping tax accounting; application of international conventions and treaties on avoidance of double taxation; prevention and detection of criminal offenses against payment transactions and business operations; keeping a central register of taxpayers and the insured entities; keeping a register of business entities for taxation purposes; reception and processing of financial statements of legal entities; reception and processing of all tax returns of taxpayers; reception and processing of reports on paid withholding tax; keeping records on incomes of legal and physical entities; provision of data for social security funds on the basis of which the insured entities exercise their rights to social insurance; as well as other activities within its competency. The Tax Administration's operating authority within the Ministry of Finance, As part of the Tax Administration, there are formed six departments (6), eight regional units (8) and thirteen branches (13). Tax Administration is managed by the Director of the Tax Administration. 1 Official Gazette of the Republic of Montenegro, No. 38/03, 22/08 and 42/11) 2 "Official Gazette of Montenegro", No. 05/12, 25/12, 61/12,20/13, 17/14, 06/15, 80/15) 3 Official Gazette of Montenegro, No: 07/13)

215 There have been formed at the headquarters of the Tax Administration of Montenegro the following: Department for services and registration Department for processing of tax returns and payments Department for Plan and Analysis Department for monitoring of tax regulations and audits Department for tax police Department for information technology in the field of tax system The Department for processing of tax returns and payments carries out the tasks relating to: the registration and processing of tax returns and tax accounting; conducting of collection that includes: identification and actions to collect the tax debt; identification of persons who have not filed a tax return and procedures of ensuring thereof; adoption of annual, quarterly and monthly work programs and reports; development of procedures for office and field activities of collection; providing advice and guidance to regional units; preparation of reports necessary for determining the execution plan of collection of delinquent debt; analysis of the work of regional units; activities on risk assessment for the purposes of collection; processing and analysis of data in order to ensure compliance with tax policy, legal regulations and procedures; ensuring the measures and activities for full collection of budget revenues that are the responsibility of the Tax Administration. Organization chart of the Tax Administration The Tax Administration has systemized 611 jobs for state employees and civil servants and 68 jobs for state employees and civil servants who perform administrative duties at the Ministry of Finance, out of which 532 jobs were occupied as of 31 December 2015, According to the Article 44 of the foregoing Rulebook, there were defined the organizational units and their scope of the Tax Administration, within which operates the Department for processing of

216 tax returns and payments in which are being carrying out the activities related to: the collection of reported tax payables; preparation and updating of procedures of internal procedures stipulating the collection of tax accounts (accounts of tax debtors) in the regional units; preparation of procedures and programs for activities of office and field collection; providing advices and guidance to regional units for collection of the tax debt; providing necessary professional training, preparation and updating of forms and notifications used in the procedures of tax debt collection, monitoring the proper implementation of the work plan; activity of phone notification and interviewing of taxpayers in order to identify data relevant for collection, and informing the regional units of the results of achieved contacts, preparation and updating of the forms and notifications used in providing the not submitted tax returns and statements in the organizational units; preparation of the annual collection plan and program for risk assessment, monitoring the effects of implementation of collection in the regional units. The regional units of the Police Directorate conduct the analysis of analytical records of the taxpayers and determine the tax liabilities, after which is made a decision on forced collection or conclusion of ensuring the tax receivable and monitors the execution thereof until the finalization of the procedure of the tax debt collection. The cases relating to the measures of enforced collection conduced with the taxpayers are archived in regional units. Regional units shall inform the Department for Collection on the implemented measures of collection of tax receivables in a form of a report. 3. AUDIT TYPE, SUBJECT-MATTER AND OBJECTIVE The State Audit Institution has performed the audit of the implementation of recommendations - follow up audit. Monitoring of recommendations implementation is a part of the audit process, which aims to strengthen the impact of the audit and improve future audit work. Monitoring of recommendations implementation is a procedure that determines the adequacy, effectiveness and timeliness of actions taken by management of the audited entity in order to eliminate the identified deficiencies. The main reason for monitoring the recommendations implementation is to increase the likelihood that the recommendations will be implemented. The subject-matter of the audit is a control of implementation of recommendations contained in the Final Report of Performance Audit of The efficacy of the Tax Administration in implementing measures for debt collection, (Number /18 dated 9 June 2015). The objective of the audit is control of the accuracy of the audited entity s report on the implemented actions in order to implement the recommendations, to determine the extent to which the recommendations are implemented, as well as whether the identified irregularities have been removed. The audit covered the activities of the audited entity in the period from June 9, 2015 through 30 September The audit was conducted by the audit team of the State Audit Institution composed of: Mr Blazo Savkovic, State Auditor - Head of the Sector II, and Jadranka Delibasic, State Auditor. 4. SCOPE OF AUDIT Public finances in 2015 were characterized by high allocations in the capital budget, which caused the level of the budget deficit and public debt having exceeded the limits defined by the Maastricht criteria. The first quarter of 2016, compared to the plan and the same quarter of the prior year, was characterized by the revenue growth, primarily due to better collection of VAT, while the expenditures increased due to the application of newly adopted and amendments to existing legal regulations. In the past period, the efforts in translation of illegal activities into the legal economy (grey economy) and increase in fiscal discipline were intensified. The application of the Regulation

217 on collection of tax debts through the property of taxpayers and the Law on write-off of interest on tax and customs duties have not resulted in the desired effect, so that the tax debt still remains high. In order to reduce it, it was adopted the Regulation on conditions for postponing the collection of tax and non-tax receivables. 4 In the first quarter of 2016, public revenues amounted to mil, euro or 8.5% of estimated GDP (3,762.2 mil euro). Compared to the same quarter of 2015, revenues increased by 25.9 mil euro or 8.9%, mainly as a result of increasing tax revenue by 21.6 mil euro, or 12.0%. In this category, the revenues mostly increased in the following areas: VAT by 7.8 mil euro, the personal income tax by 6.3 mil euro and the corporate income tax by 5.5 mil euro. In addition, the contributions significantly increased by 6.3 mil euro. Compared to the plan, the revenues increased by 16.3 mil euro or 5.4%. 5 As of 20 July 2016, the tax debt amounted to 777,607, euro and referred to the debt of the payers who have stated debit balances on the analytical accounts. This amount of debt comprised also the interest for late payment in the amount of EUR 146,582, euro. However, the stated amount of debt included a recorded debt that did not actually exist, or the one that is not reasonably collectible. Recorded debt that does not actually exist referred to the state authorities. It is a debt arising from taxes and contributions on salaries that were once reported to the Tax Administration by individual state authorities and, at the time of their reporting, it was not paid. Later, the liabilities for taxes and contributions were transferred to another state authority. For this reason, some state authorities currently have recorded debt of 106,001, euro, and, on the other hand, it was recorded nearly the same overpaid amount of the other authorities. This is a debt that does not actually exist, but it should be accounting harmonized and recorded debts compensated with overpayments. The debt of local self-governments is stated in a high amount, but it was rescheduled for a long period, therefore, substantial collection cannot be expected this year. Since the rescheduling period is 20 years, deferred debt in the amount of 68,316, euro does not constitute a due debt at the moment. A certain amount of the debt will be reduced in a short period of time, and it is a tax credit recognized to certain taxpayers, which will be used for payment of other due tax liabilities, and it now has the status as unrealized redirects, which must be conducted in the amount of 5,000, Excluding the above categories of taxpayers, the debt is reduced by the following amounts: 1. Debt of government authorities...106,001,805.17; 2. Rescheduling for municipalities...68,316,617.33; 3. Unrealized redirects... 5,000,669.48; 4. Deferred payments...1,145,200.16; Decrease in the determined debt as of 20 July 2016 in the amount of 777,607, euro by the foregoing categories of debt shall result in a debt amounting to 596,430, euro. The following table presents a review of tax debt movement by years starting from 31 December 2012 until 20 July In this case, it was given the dynamics of debt that was determined by the previously described criteria, i.e. the recorded debt, excluding the debt of state authorities, local self-governments and unrealized redirects. 4 Spring analysis of macroeconomic developments and structural reforms , Ministry of Finance, June Analyses of public finances I quarter of 2016, The Ministry of Finance

218 Table 1: The structure of the tax debt: TYPE OF REVENUE 31 DEC DEC DEC DEC JULY 2016 PERSONAL INCOME TAX AND CONTRIBUTIONS 263,954, ,850, ,749, ,604, ,417, PROFIT 19,380, ,461, ,909, ,827, ,912, REAL ESTATE TRANSACTIONS 33,335, ,730, ,787, ,253, ,199, EXCISES 20,857, ,889, ,869, No records about debt position No records about debt position VAT 84,170, ,118, ,776, ,148, ,410, CONCESSIONS 14,874, ,930, ,592, ,359, ,954, OTHER 5,424, ,193, ,239, ,459, ,535, TOTAL 441,997, ,173, ,925, ,688, ,430, The above mentioned debt did not include the debt of excise that, as of 31 December 2015 amounted to 20,869, euro. Given that, according to the Article 62, Paragraph 1, of the Law on Excise 1, the control of calculation and payment of excise is conducted by the customs body in accordance with this Law and the law governing the customs procedure 2. SAI has asked the Customs Administration for information on the debt arising from excises as at 31 December The Customs Administration has stated in the Statement 3 that it keeps the evidence of all receivables of excise taxpayers, on the basis of excise returns, as well as the control of the inflow and proper distribution thereof. General Ledger and final accounts are completely new activities imposed to the Customs Administration upon taking over of the Excise System. The Customs Administration does not have in its records a derived balance of excise debt as of 31 December From the date of takeover i.e. 15 February 2015, we have not identified new debts after excise returns that we received after that date. Therefore, if included the debt amount arising from the excise, total tax debt as of 20 July 2016 amounted to EUR 798,476, Also, the recoverable debt can be considered neither the debt of payers in bankruptcy nor the debt of payers the registration of which ceased. For these reasons, the registered debt was excluded certain debt, i.e. as follows: 1. Debt of the taxpayers in bankruptcy ,968,211.49; 2. Debt of legal entities with ceased registration 35,760,507.09; 3. Debt of physical entities with ceased registration. 60,284,557.26; 4. Total ,013, Decrease in the debt amount of 596 million by the foregoing amount results in the debt amounting to 396,417, euro. However, the above amount of debt should be decreased also by a debt arising from the tax on sale and purchase of real estate, which amounted to 49,201, euro as of 20 July This debt is specific in a way that it mostly refers to individuals who are not continuous taxpayers; great number of taxpayers is non-resident individuals who are not available to the tax authority. A great portion of this debt was incurred in the period more than five years ago. The problem of collection and determination of tax was particularly present before the introduction of notarial practice, and objectively there is a problem of collecting a debt, especially debt older than five years. Out of this amount, the interest amounts to 18,189, euro. These facts indicate that the problem of debt collection on this basis must be considered separately. It remains, of course, a justified criticism for the tax authorities which tolerated the tax debt in these categories during the past years given that such a debt resulted in enormous debt that nowadays is not collectible. 1 ("Official Gazette of the Republic of Montenegro", No. 065/01, 012/02, 076/05, Official Gazette of Montenegro", No. 076/08, 050/09, 078/10, 040/11, 061/11, 028/12, 038/13, 045/14, 008/15). 2 The Article 62, Paragraph 2, of the Law on Excise Duties provides that, if an excise payer fails to submit excise return or submits it in an incomplete form, or if the customs authority determines that the excise liability was not properly calculated, there shall be applied the law stipulating the tax procedure. 3 No. D-11294/5, dated 13 September 2016.

219 Decrease in the stated debt for this amount results in a stated debt amounting to 347,216, euro, but even this amount is for a certain portion difficult to collect. Realistically collectible debt is a determined debt of taxpayers engaged in business activities, but, among those, there is a great number of taxpayers who have debt from previous years, but they actually do not perform any activity. Such a category of taxpayers does not have active status, generate no income, have no assets and realistically cannot be expected to pay the tax, except for some sporadic situations. It is, therefore, exempt the debt of payers in passive status, for whom such criteria is determined based on the facts on how they report and settle their tax liabilities. Taxpayers who have not filed any tax return and did not make a single payment for any kind of tax in the past twelve months have been awarded the status of a passive taxpayer. The debt of payers having active status was determined in the amount of 236,551, euro, and this amount can be considered realistically collectible debt in the opinion of the Tax Administration. The list of payers in active status applies only to taxpayers who conduct business activity, with exclusion of the following categories of taxpayers: - Taxpayers who have registered neither any tax liability in the past twelve months, nor any payment for the same period (taxpayers in a passive status) - Taxpayers in bankruptcy proceedings, - Taxpayers with expired registration. Thus, according to the Tax Administration opinion, the amount of 236,551, euro can be considered a tax debt for which it is appropriate to take measures of collection. Amendments to the Law on Tax Administration 4 made a convenient step towards improving the revenue collection and increase in fiscal discipline. 4 Official Gazette of the Republic of Montenegro, No. 65/01, 80/04, 29/05, Official Gazette of Montenegro, No. 73/10, 20/11, 28/12, 08/

220 II IDENTIFIED FACTUAL FINDINGS After the conducted procedure of the audit of "The efficacy of the tax administration in implementation of measures of tax debt collection", (Number /18 dated 9 June 2015), the State Audit Institution (SAI) has determined that the Head Office of the Tax Administration has not created the necessary conditions for effective implementation of measures of collection of tax receivables by the regional units, and, with the existing model of the tax debt collection and available human resources, it is not able to ensure the efficient collection of the tax debt. Competent Auditing Board has compiled an overview of basic identified irregularities and deficiencies and made recommendations to correct those. Through the related audit, it was performed a control of implementation of recommendations given in the Final Report of performance audit of "The efficacy of the tax administration in implementing measures for tax debt collection", (Number /18 dated 9 June 2015). In order to improve the efficacy of implementation of measures of tax debt collection, concerned audited entity was given eight recommendations. Within the statutory deadline, in accordance with the Article 15, Paragraph 3, of the Law on State Audit Institution 5, with a letter No. 03/ /1-15, dated 1 December 2015, and the supplement to the statement No. 03/ /2-15, dated 31 May 2016 and No. 03/ /2-16, dated 5 September 2016, Tax Administration informed the SAI on conducted activities on implementation of those recommendations. After the follow up audit conducted, SAI has identified the following: Recommendation No. 1 Central Unit of the Tax administration is to develop internal procedures governing the tax accounts receivables in line with the adopted Rulebook on Internal Organization and Systematization of Posts. Drafting procedures should allow unique approach in the process of tax claims collection for the regional units, monitoring the work results and performance quantification. The procedures shall, among other things, specify the following: - timeframe in which officers should make a telephone contact with the taxpayer after established tax liability; - timeframe between the phone call and issuing a decision on enforced collection; - required timeframe between the failure in enforced collection against financial assets, and initiating procedure of placing a lien on property of the taxpayer. Identified factual findings for the Recommendation No.1: The audit has found that the Procedures of the work of Department for processing of tax returns and payments were prepared and adopted pursuant to the Decision issued by the Director of Tax Administration as at 24 November 2015 and provided to all regional units for further action. Thus it was made possible to all employees engaged in the collection activities a unique approach to the process of collection of tax receivables. All branch units of the Tax Administration were delivered the order to proceed, which required strict compliance with procedures of work of the branches in processing of tax returns and tax payments, with special emphasis on taking preventive measures of collection, timeliness in part of taking measures of collection, timely issuance of decisions on determined tax liabilities. 6 5 Official Gazette of Montenegro, No. 28/04, 27/06 and 78/06 and "Official Gazette of Montenegro", No. 17/07, 73/10, 40/11 and 31/14 6 (Proceeding Order, Number 03/1-9611/1-16, dated 6 June 2016)

221 Officials of the Department for processing of tax returns and tax payments carried out a control of work procedures compliance by the branches referring to the processing of tax returns and tax payments in all Branch Offices of the Tax Administration, upon which the reports were prepared. The work procedures, which relate to the field of collection, were adopted and implemented in all branch offices. Upon the follow up audit, it was identified that the Recommendation No. 1 was fully implemented by the audited entity. Recommendation No. 2 Tax Administration is to develop and implement procedures (controls) and improve information system in order to ensure: - unique, systematic and updated records on liabilities arising from tax debt; - timely enforced collection procedure, after the expiration of the time limit established by a decision on tax liability, a conclusion on enforced collection or a decision on deferral; - recognition of the total tax debt amount of a taxpayer in the conclusion on enforced collection according to the analytical records, and not just a part of it, as used to be the case in practice. Identified factual findings for the Recommendation No. 2: At the initiative of the Tax Administration, the Ministry of Finance has established an interinstitutional Working Team, the members of which are the professors of Electrical Engineering and the Faculty of Sciences, University of Montenegro, representatives of the Ministry for Information Society, the Ministry of Finance and the Tax Administration. The Working Team has prepared an action plan and a framework in which should be defined the future directions of the project Unique, up-to-date and systematic information system of the Tax Administration. Tax Administration has been intensively working on the preparation of the document SP04-ANALIZA I STRATEGIJA IS PU , which shows the current state of the system and provides guidelines for future development and maintenance. It is aligned with the Business Strategy, new circumstances and the recommendations of the European Commission (DGTAXUD). In order to improve the existing IT systems, the following activities were implemented 8 : - Improved, modified and optimized subsystems referring to Collection and Debt balance ( old system ), - Optimization and correction of procedures for calculation and correction of interest. It was performed the re-processing of production data for accurate calculation and correction of the interest, as well as the correction of opening balance, - Activities to improve the performances of analytical records of the taxpayers and the insured - New functionality of Electronic card for natural person, - Module for inspection production as at 18 July 2016, and - IT subsystem for Risk Analysis production as at 1 August In order to improve the work of branch offices for inspection and the Department of Large Taxpayers, there were implemented the activities to adapt and improve the software solution The Audit. The Agreement on the participation of Montenegro in the Fiscalis 2020 Programme 9 was concluded. 7 Adopted by a Decision of the Director as at 14 September Pursuant to a letter Number: 03/ /2-15 dated 31 May Report of the European Commission on Montenegro for 2015,Brussels, November 10,

222 Follow up audit identified the following: - The officials for collection were made more difficult the process of determining the tax debt, because in addition to access to the report (individual analytical account of the taxpayer) of the debt from the IT system, in determining the correct balance of the debt, it is necessary to carry out additional checks In addition, there is no possibility to produce from the IT system a report on taxpayers whose total amount of debt (e.g.) exceeds 1, euro. This significantly slows down the process of collection. The report TADAT also emphasized that there were identified significant weaknesses that are still present in the most important areas of tax administration, and that there were the clear evidences that information technologies do not support adequately the business processes. The complexity of information system of the Tax Administration caused a detailed analysis thereof. In addition, there was also carried out an audit control of the VAT refund. Tax Administration, in the Statement 11 to the preliminary report of SAI, noted the following: The IT system has an application solution Report on the balances at the analytical accounts with the possibility of setting a criteria of > = or <= than a certain given amount, which means that you can get a report on the taxpayers whose total debt amount is above or below a certain amount. During the audit, it was presented a segment of debt balance with all existing functionalities, newly occurred changes and improvements that are available to end users of the Tax Administration. The report can be obtained for a number of different parameters. A good system for managing tax debt should have indicators to categorize the total unsettled liabilities for the various components, which give the amount of net collectible liabilities. Therefore, debt management involves automated system to manage and classify the debt on various parameters, in order to perceive the true balance of due and unpaid tax liabilities, because of an accurate assessment of collectability of the tax debt. Bearing in mind the importance of the accuracy of information on disposal to the Tax Administration, it was carried out an audit of the information system. For the purpose of an adequate perception of IT system of the TA, the following were used: The report of the Working Group for an independent audit of the IT system of the Tax Administration 12. Analysis and strategy of the information system of the Tax Administration , TADAT report of the IMF, the report of DG TAXUD EC Mission and Reports on work of the IT department for 2013, 2014 and A detailed description of the conditions of the information system of the Tax Administration is attached in Annex II. Art. 10, Item 4, of the Law on Budget for 2015 stipulated that, in 2015, the Government should sign a loan agreement with the World Bank for the project Improvement of tax administration, amounting to 20,000, euro. It is planned that this project shall include the analysis of introduction of integrated revenue management software, which would completely replace the existing IT systems in the Tax Administration, Information related to the related project can be found in Annex III. During the follow up audit, there were identified the irregularities in the evidences of the tax receivables for which the TA determines the liability and is responsible for the collection thereof, which represent the receipts of the state budget, as shown in the Annex I, and, in this regard, SAI makes an additional recommendation to the audited entity: The Ministry of Finance shall amend the Rulebook on tax bookkeeping 13 with a reference to a more precise scaling and arrangement of supporting records for all taxpayers; 10 The foregoing refers to the taxpayers who have the decisions on postponed payments or unrealized decisions on funds redirection 11 No. 03/ /2-16 dated 19 October No. 03/ / , dated 22 March "Official Gazette of the Republic of Montenegro", No. 081/06 dated 29 December

223 It is necessary to amend the Law on Budget and Fiscal Responsibility (Article 68, Item 9) so as to delete the words under Article 12 of this Law coming after the words in the Article 9 the report on all tax and non-tax receivables The follow up audit identified that the Recommendation No. 2 was partially implemented by the audited entity. Recommendation No. 3 Central unit of the Tax administration is to initiate activities on introducing a model of risk analysis in collection procedures in line with a positive practice of tax bodies and experience of the Tax administration in collection of tax duties and update it in accordance with the changing tax environment. The introduction of risk analysis system should contribute to better use of limited resources. Identified factual findings for the Recommendation No. 3: Tax Administration prepared and, in January 2016, submitted to the Ministry of Finance the Rulebook on internal organization and systematization of the Tax Administration, which provided for the establishment of the Department of Risk Management, the objective of which is to achieve a greater degree of tax discipline, higher collection of tax liabilities and continuous establishment of the risk management system. The main task of this Department will be to assess the existing risks and identify the sources of risk in the payment of taxes. The main recognized sources of risk are the following: 1. Avoiding tax registration and VAT registration, 2. Failure to submit the tax returns, 3. Filing of false tax returns, and 4. Risk of tax receivables collection. These activities are aimed at the settlement of liabilities, improvement of tax compliance of taxpayers and ensuring a collection of tax receivables in a regular procedure. Department of Risk Management will, as the main task, have an analysis of undisciplined taxpayers and their selection for an inspection. Until the adoption of the Rulebook, it was determined a number of the most experienced officers of the Tax Administration to perform these tasks and they are actively working on the analyses of risk in all business processes in order to improve the collection efficacy. In this regard, there were prepared the operational work plans in the pre-season and season in coastal municipalities, in which are already engaged the tax inspectors in inspections of taxpayers who have been identified as risky ones. It was completed the tender procedure for provision of services to upgrade the existing IT system for risk analysis, so that it could be put into production as soon as possible, which will create conditions for risk analysis of a better quality. During June and July 2016, intensive efforts were made to the software solution Risk Analysis. During this period, necessary activities were taken to adapt the program to current tax regulations and improve the system for the identification and analysis of risks aligned with the needs of the Tax Administration. The new model of risk analysis will enable the Tax Administration to segment the taxpayers through prioritization in control of the taxpayers. Follow up audit identified the following: - After the testing performed, the foregoing program Risk Analysis is in the production work. In the context of the related program, 98 combining criteria may be used, out of which 88 criteria are functional. - The related program has no networked data of the Customs Administration, which prevents the high-quality determination of risk in the control of VAT

224 The follow up audit identified that the Recommendation No. 3 was implemented by the audited entity. Tax Administration, in the Statement to the preliminary report of SAI, noted the following: The Risk Analysis included the criteria that are closely linked with customs declarations and VAT information. It was submitted the test dataset for three months, which served for testing the software functionalities, and it is in due course the re-preparation of data from the Customs Administration. A new set of data has been modified in comparison to the initial one, and will refer to a longer period of time. The employees of the Tax Administration have available the segment of Customs Administration s application, which allows it an access to the individual data of taxpayers. Recommendation No. 4 Central Unit of the Tax administration is to ensure permanent control over the work of the regional units and monitor continuously their activities and achieved results. The introduction of work control should provide the Central unit with updated information on the functioning of tax debt collection system. Identified factual findings for the Recommendation No. 4: At the end of 2015 and the first quarter of 2016, the Tax Administration carried out the controls of work of all branch units. It was found that the last control of work of the branch unit Podgorica was made in March 2010 and there were no controls performed afterwards. The adoption of the new Rulebook on the internal organization and systematization of the Tax Administration is planned to establish the Department for internal control and integrity, to address also the control of work of all organizational units, as well as all officers of the Tax Administration. The audit identified the following: - The officers of the Tax Administration conducted a supervision over the work of branch offices, and the minutes were made thereof - reports on the conducted controls of the work of branch offices and compliance with the prescribed work procedures. - Branch offices of the Tax Administration, continuously and in specific timeframes (weekly/monthly), provide the Head Office of the Tax Administration with the reports on taken collection measures and the results achieved, on the basis of which to monitor the activity of branch offices and provide guidelines for more efficient work. The follow up audit identified that the Recommendation No. 4 was implemented by the audited entity. Follow up audit covered also the control of the calculation and refund of VAT, which is presented in Annex IV to the Report. Bearing in mind that the follow up audit of the control and calculation of VAT showed that the Tax Administration did not have on disposal sufficient high-quality external and internal information necessary for high-quality control of VAT, even though it began with taking certain activities, and to improve the quality of VAT controls, SAI provides the following additional recommendations: It is necessary to prepare an additional analysis of planning and execution of VAT controls, and, on basis thereof, define the steps too quickly and easily access needed information from other state authorities, financial and other institutions

225 to introduce an additional process of evaluation of VAT controls in order to improve the efficacy and effectiveness of reporting. to carry out an audit of documentation (minutes on conducted inspection and other supporting documents) on the basis of which there were adopted the decisions on justification of a request for VAT refund/redirect since it is necessary to adopt and implement a training program for control and calculation of VAT, so as to improve knowledge and skills of employees and consider possibilities for establishment of a department of tax fraud. Recommendation No. 5 The SAI recommends the audited entity-subject to audit consider (in terms of legal restrictions, system of monitoring activities in collection, etc.) the possibility to use the institution of public bailiffs in the collection of taxes, which should enable Tax Administration to compensate for the limitations in human resources, as well as to fully exercise the authorizations in the procedure of identifying the objects for enforced collection prescribed by the Law on Tax Administration, particularly taking into account that this would not involve any additional budget funds. Identified factual findings for the Recommendation No. 5: The audit has shown that the Tax Administration established cooperation with the President of the Association of Bailiffs, and, at the proposal of the Ministry of Justice, included with the proposals for amendments to the Law on Enforcement and Security 14. In this regard, activities have been undertaken to provide an initiative for amendments to the Law, relating to the amendment to the Article 18, Paragraph 1, Item 3, which, in the above norm, stipulated only the agreed mortgage, with a proposal to add the legal mortgage prescribed by the Law on Tax Administration. However, the initiative of the Tax Administration to amend the Law on Enforcement and Security, which referred to the amendment to the Article 18, Paragraph 1, Item 3, which, in the above norm, stipulated only the agreed mortgage, with a proposal to add the legal mortgage prescribed by the Law on Tax Administration, did not pass the legal procedure. Given the above, the SAI considered necessary that the Tax Administration should appoint the tax executors and conduct legally prescribed proceeding of seizure. The rules of the Law on Tax Administration relating to forced collection 15 are lex specialis in relation to the Law on Enforcement and Security, and the application of latest law is subsidiary in tax matters - if certain issues in the field of tax enforcement are not specifically regulated in the LTA, i.e. if the LTA makes a reference to the Law on Enforcement and Security (as in the case of settlement of issues and rights per legem exempt from the forced collection). 16 There are also subsidiary the rules of the Law on General Administrative Procedure, governing the matter of execution. In the special operating clause of conclusion, the Tax Administration will choose cases and means of forced collection, without going into individual determination. Namely, the doctrine attitude is that the conclusion (decision) on the execution does not need to contain explicit provisions on individually determined cases to be included in the execution: the objects found in possession of the tax debtor shall be inventory by an officer - tax executor, who shall directly carry out the specific activities of execution. Starting a forced collection procedure shall result in a collection of taxes and secondary benefits from entire property of a tax debtor, except for property and income exempt from execution pursuant to the Law on Enforcement and Security. 14 Official Gazette of Montenegro No. 36/11, 28/14 and 20/15 15 Forced collection procedure - Chapter X of the LTA 16 If certain issues are not defined by the LTA, i.e. if the LTA make a reference to the LES

226 A detailed manner of the sale of property is prescribed by the Rulebook on sale of property of a taxpayer in the forced collection procedure. 17 In terms of exemption, the procedure of security, the inventory list of property and other issues related to forced collection, which are not specifically regulated by this law, the provisions of law regulating the execution and security are duly effective. Annex V is more closely presenting the procedure of forced collection by the means of property. The follow up audit identified that the Recommendation No. 5 was implemented by the audited entity. The follow up audit additionally identified the following: - certain taxpayers are approved simultaneous settlement of tax liabilities in instalments and concluded the contracts on settlement of a portion of tax debt by the means of property; - certain taxpayers, who have been approved a postponed payment of taxes, did not comply with the established payment schedule; - on average, only half of the due debts arising from postponed payment of taxes is collected (more details provided in Annex VI). Annex VI provides an overview of the taken measures of collection of tax debt and an overview of postponed payment of the tax debt. In order to further upgrade the procedure of the audited entity, SAI gives the following additional recommendations: The Ministry of Finance shall amend the following rulebooks, and harmonize those with the new Law on Tax Administration: - Rulebook on the manner of sale of the property of a taxpayer in the process of forced collection 18, - Rulebook on closer content of records on seized property and minutes of the property takeover 19, and - Regulation on the amount of costs of forced collection of the tax payers. 20 The Ministry of Finance shall prepare and announce the Rulebook on the method of determining the initial value of seized immovable property of a taxpayer (the initial value of the seized immovable property not registered in the appropriate register, in the process of forced collection of the tax liability form that immovable property of the taxpayer). It is necessary that the Tax Administration shall: - use all means of collection of the tax debt that are made available to it in accordance with the effective regulations (pledge, seizure and sale of seized movable and immovable property); - if the taxpayer is approved a postponed tax liabilities settlement, but it did not comply with the determined payment schedule, revoke the decision and take measures of forced collection; - ensure the storage facilities in which it would preserve the seized property; - prepare analysis that would include all relevant information to identify weak points (causes) with proposals for improvements 21 in order to provide timely information to the management, so that it could adequately and timely made decisions, - consider the need to adopt procedures of dealing with seized property. 17 "Official Gazette of the Republic of Montenegro", No. 036/05, 073/05 and 033/06 18 " Official Gazette of the Republic of Montenegro", No. 036/05, 073/05, 033/06 19 Official Gazette of Montenegro, No. 62/ Official Gazette of the Republic of Montenegro, No. 24/05; 21 To use the methodology - RISK ANALYSIS IN TAX DEBT MANAGEMENT (IOTA)

227 Recommendation No. 6 Tax Administration should establish a model which will define criteria for identifying uncollectible tax debt and manner of classification and records in cooperation with the Ministry of Finance and in line with the law, accounting principles and positive practice. Identified factual findings for the Recommendation No. 6: The audit identified that the Ministry of Finance, at the initiative of the Tax Administration, established the Commission 22 for preparation of a model for determining the criteria and procedures for identification, method of classification and evidences of non-performing tax debt. The task of the Commission is reviewing the legislation and the possibilities for preparation of a model for identification of non-performing tax debt and write-off of non-performing tax receivables. The Ministry of Finance submitted 23 to the Tax Administration an interpretation of legislation for identification of irrecoverable tax debt, on the basis of which it was prepared an Order for treatment to all branch units, with instructions on the manner of work and criteria for determining the irrecoverable tax debt. Tax Administration has launched an initiative for determining the collectible tax debt, as well as the measures for its efficient collection. There were given the details on the activities that should be taken by the Tax Administration in the coming period to collect the amount of the tax. At the request of the Tax Administration, in the period from September 14 to September 27, 2016, in the context of providing a support from the funds of Multiuser IPA, the Tax Administration was visited by the consultants of IMF with the task of providing expert assistance on the issue of tax debt management. The Ministry of Finance was sent an initiative 24 for adoption of the Strategy of Tax Debt Management - a strategic document, which would achieve a transparency of the Plan of tax debt collection, the realization of necessary dynamics of receipts into the state budget, predictability of specific collaterals and payment methods, providing the necessary organizational logistics and training, providing performance indicators and monitoring the entire process, ensuring accurate and timely reporting. Follow up audit identified that the Recommendation No. 6 was partially implemented by the audited entity in the field of its competence. However, it has not been fully implemented by the Ministry of Finance, so that there have been no expected substantial effects. Recommendation No. 7 Tax administration is to carry out a write-off of uncollectible tax receivables in line with adopted model and this should be performed periodically, in accordance with the accounting principles. Identified factual findings for the Recommendation No. 7: Write-off is a way of termination of a tax liability in case it has not been collected. There shall be written off an unpaid tax liability (except for contributions for pension and disability insurance) of a taxpayer - legal entity, the bankruptcy proceeding against which was, pursuant to a final decision, concluded with a bankruptcy, unless: for the purpose of its collection, the lien was inscribed neither in the public records nor registers, or its settlement is a responsibility of another entity. The audit identified that the Tax Administration: 22 No /1, dated 9 November As at 29 November No. 03/ /1-16, dated 22 August

228 - did not precisely determine the amount of uncollectible debts that should be writtenoff, i.e. transferred to a separate evidence, (which shall be used in case of eventually created opportunities for collection of a certain amount). - did not write-off the obsolete determined tax receivables. SAI points to the legal opinion of the Supreme Court related to the statute of limitations to submit an application shall require the interpretation of the Article 103 of the Law on Tax Administration and not the Article 101, Paragraph 3, thereunder, thus taking into account the moment of the tax liability occurrence. In fact, it should be noted that the occurrence of absolute statute of limitations in terms of the cited Article 103 shall not be affected by the fact that, within this period, it was once or several times interrupted by the actions of the tax authority. 25 SAI believes that it is necessary to make amendments to the Law on Tax Administration in terms of the powers of the tax authority to conduct tax write-off. Pursuant to an adopted decision, the Tax Administration shall write off the debt arising from the taxes and secondary tax benefits when the conditions required by law are met. Follow up audit has found that the Tax Administration has taken a number of actions in order to implement the respective recommendations, but it still did not write-off of the obsolete tax receivables described in the Annex VI. Under the follow up audit, the SAI also carried out a further research on the causes of the increase of tax debt of business entities in bankruptcy, as presented in the Annex VII. Follow up audit identified that the Recommendation No. 7 has not been implemented by the audited entity. In the statement to the preliminary report, the Tax Administration noted: Tax Administration has no legal basis to carry out a write-off of obsolete determined tax receivables, because it is not prescribed by the Law on Tax Administration. Namely, the Article 6 of the foregoing Law, which prescribed the powers of the tax authority, has not stated the power to write off the tax debt." Recommendation No. 8 Tax Administration is to intensify activities in introducing preventive measures which should have an impact on incurrence of tax debt in line with positive practice of tax bodies and continue with activities which should be focused on taxpayers' needs and promote professional approach and nonselective treatment of tax payers and transparency. Identified factual findings for the Recommendation No. 8: The audit has shown that the Tax Administration started with implementation of preventive measures, by the means of which it affects the taxpayers to duly settle their liabilities. During November 2015, several activities were conducted to strengthen the measures of tax debt collection. in the terms of which it was prepared the analysis of the tax debt of large taxpayers, lawyers, public bailiffs and the notaries, so that, after these measures, the specified taxpayers paid certain amounts of tax debt. Also, during the visits to the branch offices, the Director of the Tax Administration, held working meetings with the mayors of the Capital and Royal Capital and the presidents of all municipalities in Montenegro, upon which he pointed out the importance of regular payment of tax and other liabilities of local self-governments, especially municipalities that have concluded agreements on tax debt rescheduling with the Ministry of Finance. Pursuant to an order of the Director of Tax Administration, it was performed an analysis of the established pledges on immovable property, so as to start the procedure of forced collection of the tax debt from the mortgaged property. It is in due course the process of notifying on the maturity of 25 Supreme Court of Montenegro, Uvp. No. 223/

229 liability and the beginning of debt collection. In the process of notifying the taxpayers who have the mortgages placed, a certain number thereof requested to voluntarily pay the tax debt. Also, the Tax Administration has intensified the activities on introduction of preventive measures, in a way that is organized a Tax Caravan aimed to familiarize with the amendments to tax legislation and education of taxpayers and two-way communication, with the aim of encouraging voluntary compliance with the regulations by taxpayers and improving the level of tax discipline for a long-term period. During the previous period, the Tax Administration has established the cooperation with a number of state authorities (Directorate for Inspection, Real Property Directorate, etc.), local self-governments, the Chamber of Commerce of Montenegro, Union of Employers, as well as a number of associations in order to find out the possibilities for exchange of information and improvement of future cooperation. In the Report on Assessment of Performances of the IMF Expert Team 26, the most important conclusion of which was that there will be required a professional, dedicated management for preparation and implementation of a comprehensive program of reform of the Tax Administration, as well as that the first strategic objective must be a correction of deficiencies in the basic functions of tax administration, including an information system, the Tax administration has defined priorities in the reform and improvement of the work of a Commissions formed for such a purpose: - Commission for analysis of large and medium taxpayers, - Commission for analysis and classification of the key shortcomings of the registration base of the Central register of the payers and the insured, - Commission for cross-data exchange, - Commission for Development of Communication Strategy, - Commission for preparation of a system for measurement of performance of the Tax Administration employees, - The inter-ministerial working team for analyses of the IT systems of the Tax Administration, - Commission for the preparation of Code of Ethics of civil servants and state employees of the Tax Administration. In early 2016, it was continued the co-operation of IMF and the Tax Administration, in order to strengthen the administrative capacities. There were, in particular, highlighted the fields that require a technical assistance from the IMF in the coming period, namely: debt management, risk analysis, large taxpayers, plan of compliance with tax liabilities and e-reporting, with particular reference to VAT. Tax Administration performs its core business, i.e. the collection of state revenues, with its 600 employees, To perform their job in the best possible way, in the past period it was executed an analysis of the presence at work of employees of the Tax Administration for the nine-month period in 2015, and it was determined that a disturbingly high number of employees was on a sick leave for a longer period of time. The analysis showed that the Branch unit Podgorica, which achieved 54.37% of total state revenue, 39.61% of the total number of employees was on a sick leave; Branch Unit Niksic, which achieved 9.67% of total state revenue, 33,90% of the total number of employees was on a sick leave; Branch Unit Budva, which achieved 7.44% of total state revenue, of the total number of employees was on a sick leave; and the Branch Unit Bar, which achieved 4.18% of total state revenue, 18.42% of the total number of employees was on a sick leave. After this analysis performed, letters were sent to the Minister of Health, directors of health centres Podgorica and Budva, having required an examination of the merits of the reports on temporary inability to work issued to the employees of the Tax Administration by doctors of those health centres in 2015, and having requested the submission of feedback thereon. 26 The IMF team visited the Tax Administration during the period from October 26 to November 10,

230 The data are required so that the Tax Administration could inform the Health Insurance Fund of Montenegro of the need to take measures in accordance with the Article 30 of the Law on Health Insurance 27, which provides that in case of a longer duration of temporary disability caused by illness or injury, and no later than the expiration of 10 months of continuous inability to work, or after 12 months during which there were a total of 10 months inability to work with interruptions, the Fund is required to instruct the employee with the necessary medical documentation to the competent authority for the assessment of work ability or disability, according to the regulations on pension and disability insurance. The Ministry of Finance has adopted an Action plan for implementation of the Strategy of Tax Administration , for In January 2016, the Tax Administration submitted to the Ministry of Finance a proposal of the Rulebook on internal organization and jobs systematization for further consideration, and it has still not been adopted. The Rulebook provides for the establishment of nine new organizational units as follows: - Human Resources Department - Department of Internal Control and Integrity - Risk Management Department - Department of development of tax system - Department of International Cooperation - Department of electronic tax returns - Branch Office Kotor with branch in Tivat - Branch office Petnjica and - Branch office Gusinje. In addition to the order for performance of the branch units in part of taking preventive measures of collection (sending notifications, telephone contact, direct field contact) and continuous monitoring of the achieved results after the measures taken, in the second half of August, the Tax Administration began with a pilot project CALL centre of collection, which is located in the Department of processing tax returns and tax payments. The taxpayers who do not file the tax returns will be called therefrom, as well as the taxpayers who have a debt on their analytical records. Taking preventive measures of collection - telephone contact from the Department for processing of tax returns and tax payments, will be carried out for taxpayers from all branch units. The Follow up audit identified that the Recommendation No. 8 was implemented by the audited entity. 27 "Official Gazette of the Republic of Montenegro", No. 39/04 29/05 and " Official Gazette of Montenegro", No. 12/07 36/13)

231 III FINAL CONCLUSIONS Based on the conducted follow up audit, established facts and upon the consideration of the audited entity's statements (i.e. of the Tax Administration), pursuant to the Article 12 of the Law on State Audit Institution and the Article 45 of the Rules of Procedure of the on State Audit Institution, the competent Auditing Board of the SAI, consisting of Mr Branislav Radulovic, PhD, (member of the Senate - Head of Auditing Board) and Mr Milan Dabovic, PhD, (President of the Senate - member of the Auditing Board), at its session held on June 9, 2016 adopted the following: FINAL REPORT on Follow up audit EFFICACY OF THE TAX ADMINISTRATION IN IMPLEMENTING TAX DEBT COLLECTION FINAL ASSESSMENT Considering the activities taken by the audited entity in order to implement the recommendations of the SAI, it can be concluded that there were taken the serious and comprehensive measures that have begun to produce positive results, so the progress is evident, but it is necessary to undertake additional activities that will directly affect a better realization of budget revenues. In order to improve the efficacy of implementation of measures of tax debt collection, the concerned audited entity was given by the SAI eight recommendations, one of which the audited entity: - implemented: five recommendations; - partially implemented: two recommendations; - did not implement: one recommendation, During the performance of the follow up audit, SAI has given a set of additional recommendations, It is necessary that the Tax Administration finalize the activities on implementation of recommendation that was not implemented, i.e. the recommendations that were partially implemented, as well as additional recommendations given in the framework of the follow up audit and submit a report thereof to the SAI within six months. SAI took it expedient that the Government should consider the question of future organizational and institutional positioning of the Tax Administration in the system of public administration in Montenegro (Item 1.1, of the Annex I). With the identified irregularities and deficiencies in the implementation of the recommendations, the SAI will prepare a Final audit report to introduce the Government and the competent committee of the Parliament of Montenegro

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233 EXCERPT FROM AUDIT REPORT ON 2014 ANNUAL FINANCIAL STATEMENT OF THE COMPENSATION FUND Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial audit and regularity audit Compensation fund Annual Financial Statement and the regularity of the business operations for 2014 of the Compensation Fund 90 auditing days Mr Branislav Radulović, PhD, Member of Senate Head of the Auditing Board Mr Dragiša Pešić, Member of Senate Member of the Auditing Board

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235 I BASIC ELEMENTS 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the Compensation Fund for 2014 is contained in the following: Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan for 2015 (No , dated 27 December 2014); Decision on Conducting Audit for the Auditing Board of the State Audit Institution Number dated 13 February Audit of the annual financial statement of the Compensation fund has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15) and International Standards for Supreme Audit Institutions (ISSAI). 2. AUDITED ENTITY The Compensation Fund was established on the basis of Article 44 of the Law on Restitution of Property Rights and Compensation ("Official Gazette of the Republic of Montenegro", No. 21/04, 49/07, 60/07 and "Off. Gazette of Montenegro" No. 12/07 and 73/10) pursuant to a Government s Decision on the establishment of the Compensation Fund ("Official Gazette of the Republic of Montenegro", No. 57/04). The Fund was formed with the purpose of providing funds for compensation to former owners for rights expropriated in favour of national, state, social or cooperative ownership. The bodies of the Fund are: Managing Board and Director. The Management Board shall have three members, The Management Board and Director of the Fund shall be appointed by the Government of Montenegro, at the proposal of the Minister of Finance, The mandate of the Board of Directors and Director of the Fund is four years and they may be reappointed. The Steering Committee consists of representative: Ministry of Finance, Ministry of Justice and the Union of Municipalities, The members of the Board of Directors shall be proposed by the Minister of Finance in cooperation with the Ministry of Justice and the Union of Municipalities, The amount of remuneration for the members of the Board of Directors shall be determined by the Government. Member of the Management Board may not be a person who is the holder of the rights under the Law on Restitution of Property Rights and Compensation, nor his successor. With respect to matters within its competences, the Governing Board shall decide by majority vote of all the members of the Board. The Government of Montenegro, pursuant to the Decision on the establishment of the Compensation Fund, Decision number /3 dated 3 November 2011 appointed for a member of the Board of Directors Mrs Natasa Kovacevic, Assistant Minister of Finance, pursuant to the Decision No /5, Mirjana Puric, the Head of Financial Services at the Ministry of Justice, and pursuant to the Decision No /4, Mladen Perisic, Vice President of the Municipality of Niksic, Nataša Kovačević, Deputy Minister of Finance, at the session of the Board of Directors was elected president of the Board of Directors. Pursuant to the Decision of the Government of Montenegro No /3 dated 6 February 2014, Đorđina Lakic was appointed Director of the Compensation Fund

236 Member of the Board of Directors of the Fund and the Fund Manager may be dismissed before the expiration of the mandate, if he is negligently performing the function, permanently incapable of performing his functions, he was sentenced to an unconditional prison term or convicted of a crime that makes him unworthy of the position and upon a personal request. The Articles of Association of the Fund shall regulate the organization and operation of the Fund, Approval to the Articles of Association and other general acts of the Fund shall be made by the Government. The audit noted that the approval of the Articles of Association of the Fund was done by the Government s Decision No dated 3 March Professional and administrative services for the Fund shall be carried out by the professional service. For employees in the expert services of the Fund shall be applied the regulations on civil servants and state employees. The Fund may, so as to ensure effective and efficient operations, perform certain tasks, and use the services of specialized ministries and government agencies. Funds for the work of the Fund shall be provided from the Budget of Montenegro. Control of the operation and performance of the Fund shall be conducted by the Ministry of Finance. 3. ORGANISATION AND PERSONNEL RECORDS Rules on internal organization and job classification of the Compensation Fund were adopted by the Board at its meeting held on 07 March Pursuant to the Rules on systematization on which the Government gave its consent by a Conclusion No /4 dated 4 July 2013, the Fund has 10 systematized jobs. It was concluded by examining the documents that the Compensation Fund has 6 employees. The audit of the organization and personnel records identified: that the sub-legal acts required by Article 46 of the Law were adopted, and the appointment of the Board of Directors and Director of the Fund carried out with respect for deadlines established in the Law, and that the act on organization and systematization was adopted in accordance with the established procedure. All employees were employed through advertisements via the Human Resources Administration. Other jobs envisaged by the Rules are not occupied. 4. TYPE OF AUDIT The State Audit Institution conducted in the Compensation Fund a financial audit and regularity audit. 5. SUBJECT-MATTER OF THE AUDIT The subject-matter of the Audit was the Annual Financial State ment of the Compensation Fund for 2014 and the compliance with the law and other regulations. 6. OBJECTIVE OF THE AUDIT The objective of the financial audit is the expression of an opinion on whether the financial statements for the year 2014, in all material respects, are prepared in accordance with accepted financial reporting framework. Financial audit included verification of purposeful use of the funds and the accuracy and truthfulness of the financial statements of the Fund for The objective of the regularity audit is the expressing of an opinion on whether the financial and other operations of the audited entity, in all material respects, comply with the laws, other regulations and acts that have been identified as criteria for a given audit. The regularity audit mainly entailed the assessment of the execution of the law and other regulations of the obligations

237 established in the provision of resources of the Fund, which is subject to the Audited entity and the taxpayers of the Law on Restitution of Property Rights and Compensation. The regularity audit concerned the fulfilment of the legal obligations of providing resources to the Compensation Fund from the part of state property, the sale of shares of public funds and funds from the privatization of the company, as well as other legal provisions relating to this issue and treat the entire period since the enactment of the Law, i.e. the period of 10 years. 7. METHODS OF THE AUDIT Financial audit included examining of the evidences, on a test sample, supporting the amounts and disclosures in the financial statements. The budget of the Fund amounted to 2,272,927.33, out of which 2,174, was spent on compensation to former owners. Funds for the work of the Fund amounted to 98, Bearing in mind that this is a spending unit with a small amount of funds spent in 2014 relating to the operations of the Fund ( 98,480.26) and a small number of employees, we set the materiality and the sample size by the application of professional judgment. As chosen starting point, materiality shall be assessed at the level of 1% of the total expenditure effected and the financial report as a whole. 8. ANALYTICAL PROCEDURES Analytical procedures, at the planning stage of the audit, were carried out with the aim of better understanding of the operations of the audited entity and to determine areas of potential risk. By comparing the position of expenditures from financial reports and plan, there is not given an assessment of the accuracy and reliability of financial statements, but it is aimed to detect certain rules that need to focus their attention on certain areas of the auditor or the audit to focus on individual positions and areas of higher risk. 9. ACCOUNTING SYSTEM The accounting system of the audited entity is based on a cash basis and records in the General Ledger of the Treasury. The audit especially verified the record of the Fund of the revenues collected on the basis of the Law (Article 44), given that the parties obliged by the Law execute their financial liabilities through a transfer of ownership of the shares and bonds of the Fund as well. The audit needed to evaluate the records of financial assets owned by the Fund in the form of shares obtained from the state funds, on the basis of their obligation of paying 10% of the value of sold shares, and whether the Fund has movable or immovable property owned and whether they were offered as compensation to former owners (Article 6 paragraph 22 of the Law); The audit was necessary to check whether the Compensation Fund keeps records of assets and liabilities in its additional records and whether the internal acts stipulate the organization and operation of financial and accounting services, as well as records of income earned by the Fund pursuant to the Law, the nature of these funds (earmarked assets) and whether those are recorded as deposit assets. The audit concluded that the accounting system is based on a cash basis and all transactions are conducted through consolidated treasury account. The Fund did not achieve its own revenues. The Fund has appointed the finance officers, namely: authorizing officer Đorđina Lakic and verifying officer Radojka Đaletić. Specimen of civil servants deployed in position of financial officer was duly submitted to the State Treasury

238 The audit noted that the Fund carried out the separation of the authorizing officer and the verifying officer. An additional person was appointed to perform accounting tasks, but also to perform the tasks of a cashier. 10. ANALYSIS OF THE SUBJECT OF AUDIT In the preparation of the respective audit, it was provides enough relevant information and data on the subject of the audit and business, Information about the audited entity were collected from different sources available, namely: laws and regulations governing the operations of the audited entity, from the internal audit reports, minutes of meetings, discussions with management and staff of the Fund, the financial statements of the Fund and the fulfilment of obligations towards other subjects pursuant to a legal obligation. 11. INTERNAL CONTROLS In accordance with the Law on Public Internal Financial Control (Official Gazette of MNE, No. 73/08) and the Decree on the establishment of internal audit in the public sector (Official Gazette of MNE, No. 23/09), the Fund for compensation as at 15 July 2011 concluded the Agreement on delegation of internal audit to the Ministry of Finance. During the audited financial years, it was not performed the audit by the internal audit of the Ministry of Finance. The audit noted that the Fund has the following internal documents on the implementation of internal financial controls: Rules on the method of recording and payment of incoming invoices, Regulations on the preparation of salary calculation, the Rules on the use of official cars. II OPINION AND RECOMMENDATIONS The State Audit Institution, pursuant to Art. 4 of the Law on State Audit Institution and the Decision on the conduct of the audit (No dated 13 February 2015), conducted a financial audit and regularity audit of the financial annual statement of the Compensation Fund for The audit was performed in accordance with the Rules of Procedure SAI and International Standards (ISSAI). Based on the conducted audit, established facts and the Statement of the audited entity, the Auditing Board of SAI, composed of Branislav Radulovic, PhD (Head of the Auditing Board) and Dragisa Pesic (Member of the Auditing Board) at its meeting held on 25 December 2015 adopted: FINAL REPORT OF THE AUDIT OF THE FINANCIAL ANNUAL STATEMENT OF THE COMPENSATION FUND FOR 2014 The responsibility of the audited entity for financial statements The Management Board of the Fund decides and is responsible for the operations of the Fund, the decisions made on the use of Fund resources, financial statements and final accounts of the Fund and compliance with laws and regulations which regulate the operations of the Fund. Chief Finance Officer is responsible for budget execution and preparation of financial reports and Final Statements of Accounts of the Fund. The responsibility of the State Audit Institution The State Audit Institution (SAI) is responsible for the established factual findings, the audit findings, conclusions adopted and their corroboration by the audit evidence and for an opinion on the management of budget funds, property and economic activities of the audited entity

239 OPINION Financial audit of the annual financial statement of the Compensation Fund for 2014 has established that there are no material errors or deviations from the official financial reports. Financing transactions are reported in accordance with the annual budget law, those are recorded in the General Ledger of the Treasury, and payments are registered under the Consolidated Account of the State Treasury, and based on that, the Auditing Board of SAI responsible for the respective Audit expressed an unqualified opinion. Regularity audit found that, in the period from 2005 to 2014, it was not ensured the consistent and full implementation of the Law on Restitution of Property Rights and Compensation, and accordingly, the competent Board of SAI expressed a qualified opinion on the compliance of the procedure of compensation with the Law on Restitution of Property Rights and Compensation for that period. The audit found that the Compensation Fund in its annual financial statements for 2014 did not show the means for compensation that are paid from accounts at commercial banks. Ministry of Finance, in accordance with Art. 44 of the Law on Restitution of Property Rights and Compensation and Art. 32 of the Budget Law (applicable in the audit period), should, to the Special Account of the Fund, since the beginning of implementation of the Law in 2005, out of the total revenues from the sale of state assets in the amount of 308,946, pay the amount of 10% ( 30,890,604.93). Annual laws on budget in the period from 2005 to 2014 planned a payment on this account the amount of 23,228, Out of the planned amount of funds for compensation in the reporting period, the Compensation Fund has been approved from the budget the payment of the amount of 17,904, Compensation Fund, in its statement on the preliminary report of SAI stated that "the Ministry of Finance, according to conclusions and decisions of the Government of Montenegro, repurchased the bonds of the Fund, repurchase of receivables and the sale of assets for the bonds of the Fund and, on that basis, decreased the liability of the Fund to the former owners by 57,053, " The audit has found that nine out of ten samples of observed local government units and the Department of Employment, as of 31 December 2014, did not fully settle their liabilities to the Compensation Fund. RECOMMENDATIONS 1. Law on Restitution of Property Rights and Compensation determined the sources of funding for compensation. Namely, in accordance with Art. 44 para. 4 of the Law on Restitution of Property Rights and compensation of the funds of the Compensation Fund shall be provided from: the campaign earmarked for compensation to former owners, the bonds of Montenegro, from the sale of state assets (10%), selling shares of state funds (10%), funds generated from privatization companies (7%) and other sources. The audit has found that the Ministry of Finance in accordance with Art. 44 of the Law on Restitution of Property Rights and Compensation Fund paid to a special in full the amount of 10% of the funds earmarked for compensation from the sale of state property. Nine out of ten surveyed local governments and the Department of Employment, as of 31 December 2104 did not fully settle their liabilities to the Compensation Fund. The Ministry of Finance, local self-governments and state funds should act in accordance with Art. 44 of the Law on Restitution of Property Rights and Compensation by making from the income from the sale of state assets in a timely manner an amount to be paid to the Compensation Fund to the account number

240 2. Compensation Fund is registered as a shareholder (registration number , and Personal ID account number Excerpt of the Central Depository Agency,) The audit has found that the Fund has securities in the amount of 37,040,982,87, but not recorded in the Report of the inventory list, Share are registered with CDA: JABD, OZVS, POEX, ULRI, ZEIN, ZICG, ZPCG, which the Fund received after termination of the Development Fund, The decision on the sale of shares shall be enacted, according to the Decision of the Government, by the Privatization Council, and the funds from the sale thereof shall be paid into the account of the Fund, which is maintained by the Central Bank, or at the expense of the central Budget, In 2014, there were no transaction on these shares, The records of movable and immovable property owned by the state, and their list is prescribed by the Regulation on record keeping ("Official Gazette of Montenegro" No. 13/10), Art. 4, para. 3 of the Regulation provides that special records of securities (shares) owned by Montenegro shall be maintained by the public services in whose portfolio those are listed. Estimating the value of securities of public services will be done according to the procedure established by the Ministry of Finance. Fund should state in the Report on the inventory list, as its intangible assets, the securities in the portfolio (per excerpt from CDA) at nominal value as of 31 December The audit has found that the Compensation Fund did not submit to the Government the Annual Report of Work and Statement of the collected funds, available shares and bonds issued. The Fund's report on the collected funds and available shares and bonds issued submitted monthly to the Ministry of Finance. The Fund submitted to the Ministry of Finance as at 19 November 2015 the report on the work of the Fund for 2014, to introduce it to the Government of Montenegro. The Government of Montenegro, until the completion of the respective audit, did not consider the report of the Fund. The Fund shall (in accordance with Art. 45 of the Law on Restitution of seized property Rights and Compensation and Art. 9 and 14 of the Articles of Association) timely submit to the Government an annual report on its work and report on the collected funds, available shares and bonds issued. 4. Compensation Fund initiated disputes against several debtors on the basis of Art. 44 of the Law for the payment of compensation before the basic courts in Kotor, Cetinje, H, Novi, Bar, Danilovgrad, Kolasin and Rozaje. Fund is obliged to initiate the collection of earmarked revenues and refer to all debtors the warnings before action for non-compliance with the regulations. 5. Art. 25 of the Law (par. 2 and 5) stipulated the right that the Fund may request from the Commission for Restitution to submit reports on estimated approximate value of the property whose restitution is requested, with the aim of more realistic planning of the necessary funds for the settlement of liabilities of the State towards the former owners on a long term basis. The Fund has informed the Commission that the SAI reports do not state valuation of the assets the restitution of which was sought, and it is not able to even accurately assess the amount of the required funds. During the audit it was noted that only the Commission in Bijelo Polje, at the request of the Fund submitted a report on estimated approximate value of the property the restitution of which was sought. Fund should require the Commissions for Restitution and Compensation to, as soon as possible, carry out the assessment of the value of the property the restitution of which is requested so as to determine the state's liabilities towards the holders of the right to restitution and compensation

241 6. The audit determined that the Ministry of Finance did not exercise effective control over the work of the Fund and the application of the Law on Restitution of Property Rights and Compensation. The Ministry of Finance shall supervise the operation and performance of the Fund in accordance with Art. 12 of the Decision of the Government on the establishment of the Compensation Fund

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243 EXCERPT FROM AUDIT REPORT ON 2014 ANNUAL FINANCIAL STATEMENT OF THE HEALTH INSURANCE FUND OF MONTENEGRO Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial audit and regularity audit Health Insurance Fund of Montenegro Annual Financial Statement for 2014 of the Health Insurance Fund of Montenegro 180 auditing days Mr Milan Dabović, PhD, President of the Senate Head of the Auditing Board Mr Nikola N. Kovačević, Member of Senate Member of the Auditing Board

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245 I BASIC ELEMENTS 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing the audit of the Annual Financial Statement of the Health Insurance Fund of Montenegro for 2014 is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan for 2015, dated 25 December 2014, No ; Decision on Conducting Audit passed by the Auditing Board composed of: Mr Milan Dabović, PhD President of the Senate and the Head of the Auditing Board, and Mr Nikola Kovačević, Member of Senate and the Member of the Auditing Board, Number dated 20 February Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI-level III). 2. TYPE, SUBJECT-MATTER AND OBJECTIVE OF THE AUDIT The State Audit Institution (SAI) has performed a financial audit and regularity audit. Subject-matter of the audit were the financial statements of the Health Insurance Fund of Montenegro for 2014 and compliance with legal regulations. Selected areas that were subject of the audit were determined based on the economic classification of expenditures for programs planned by the Budget Law for 2014, namely: program: Health Insurance Fund program: Health care institutions program: Institute of Public Health The objective of the audit is to express an opinion on the truthfulness and credibility of the annual financial statement and regularity (legality) of business, that is: The objective of the financial audit is expressing an opinion on whether the financial statements are, in all material respects, prepared in accordance with the applicable financial reporting framework and whether in all material respects, are presented in a fair and objective manner in accordance with the given framework. The objective of the regularity audit is expressing an opinion on whether the financial and other operations of the audited entity, in all material respects, comply with the laws, regulations and acts that have been identified as criteria for a given audit, given authorizations for planned purposes. 3. METHODS OF THE AUDIT The audit was planned and carried out in accordance with International Standards on Auditing ISSAI, in a way that allows it to obtain reasonable assurance whether the financial statements of the audited entity are free from material misstatement. An audit involves performing audit methods and techniques to obtain audit evidence about the amounts and disclosures in the financial statements. The audit was conducted on the basis of sample checks, using analytical procedures and interviews, which we checked the amounts and disclosures in the financial statements

246 Determination of risk and materiality was carried out using the Methodological instruction of the State Audit Institution of Montenegro, and sampling was conducted using the audit program IDEA. Materiality, or assessment of the extent to which it can be tolerated a misstatement in the financial statements, and not significantly affecting its veracity and objectivity, was estimated at 1.83, Established sample of 81.90% covered the expenses and expenditures of the audited entity. We believe that the evidence obtained is sufficient, appropriate to provide a valid basis for our audit opinion. II OPINION AND RECOMMENDATIONS The State Audit Institution of Montenegro, pursuant to Article 9 of the Law on State Audit Institution and the Decision of the Auditing Board of the State Audit Institution, composed of President of the Senate, Milan Dabović, PhD, Head of the Auditing Board and Member of Senate, Nikola N. Kovačević, Member of the Auditing Board, carried out the financial audit of the Annual Financial Statement of Health Insurance Fund of Montenegro for 2014, which includes the Statement of cash flows, consolidated report of the spending unit consisted of institutions that generate their own income. Statement of outstanding liabilities as of 31 December 2014 and the regularity audit of the activities of financial transactions with laws and by-laws. Management's Responsibility for Financial Statements In accordance with Article 2, item 31 of the Law on Budget and Fiscal Responsibility, the budget executor is the entity responsible for the execution of the budget of the spending unit, i.e. an entity authorized by the budget executor for the management and disposition of state money, as well as for the preparation and presentation of financial statements in accordance with Rules on the method of preparation and presentation of financial statements of the budget, state funds and local governments. According to Article 40, paragraph 4 of the Law on Budget and Fiscal Responsibility, the legal use of funds approved to a spending unit shall be the responsibility of the budget executors. Pursuant to Article 22 of the Statute of the Fund, the Head is responsible for the legality of the Fund. The responsibility includes correct and accurate accounting, design, and implementation, ensuring internal control relevant to contractual obligations, costs, preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. The responsibility of the State Audit Institution The responsibility of the State Audit Institution is, based on the performed audit, to express an opinion on the annual financial report of the Fund for 2014, and to express an opinion on whether the activities, financial transactions and information provided in the financial statements, in all material respects, are in accordance with applicable regulations that regulate those. The audit was conducted in accordance with Article 4 and 9 of the Law on State Audit Institution, the relevant International Standards for Supreme Audit Institutions (ISSAI-level III), which require compliance with the ethical requirements, and plan and perform the audit in a way that enables reasonable assurance that reports comprise no material misstatement on the basis of the annual audit plan of the State Audit Institution for 2015, No dated 25 December The given audit also included performing of procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. During the risk assessment, there are considered the internal control relevant to the preparation and presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal controls. The given audit also includes evaluating the overall presentation of the financial statements,

247 We believe that, the audit evidence obtained during the audit are sufficient and appropriate to provide a basis for an audit opinion. OPINION Financial audit of the Annual Financial Statement of the Health Insurance Fund of Montenegro for 2014, was found that the statements of the Fund for 2014, in all material respects, are prepared in accordance with prescribed financial reporting framework and do not contain the essential material errors and, accordingly, the competent Auditing Board expressed an unqualified opinion with the emphasis of matter. The regularity audit of the Annual Financial Statement of the Health Insurance Fund of Montenegro for 2014 found that in some material respects, the business activities are not aligned with legal regulations that govern the budget business in Montenegro, and accordingly the competent Auditing Board expresses a qualified opinion. The basis for expressing the qualified opinion: RECOMMENDATIONS 1. The Management Board of the Fund has, at its meeting held on 29 December 2015, pursuant to Article 91 of the Health Insurance Law and Article 12 of the Statute of the Fund, adopted a report on the activities of the Health Insurance Fund of Montenegro for The Government of Montenegro, pursuant to the Conclusion No: dated 16 April 2015, adopted a report on the work of the Ministry of Health and the state of the administrative areas in 2014 with the Report of the Health Insurance Fund of Montenegro in In Form 3 - Cash Flow Statement III, the Fund has not stated the expenditures by the structure in all programs, as required by the model. Specifically, the Fund, in the statement of cash flows III, presented the structure of expenditures by the required form only for the program Health Insurance Fund, while expenditures for programs Health Institutions and the program Institute of Public Health, reported on a consolidated position Transfers institutions, individuals, NGO and public sector in the amount of 143,207,720, and were executed in the amount of 143,135,707, although the Law on budget for 2014, funds allocated to position 431 Transfers to institutions, individuals, NGO and public sector planned for the program for healthcare institutions and only in the amount of 61,980,000, i.e. after allocation, in the amount of 59,945,581. It is necessary to, in the Form 3 - Cash Flow Statement III, in an unified manner present the expenditures by the structure of all three programs, as outlined in the proposal of the Law on Budget of the Final Statement of Accounts for 2014 (Explanation). In fact, all three programs were, by the Budget Law within the Health Insurance Fund, planned by economic and functional classification. Cash payments during the year must be recorded on the relevant classes of expenditure by purpose as consumed from budgetary positions. After the final calculation, there shall be determined the deviations as a basis for more realistic plans preparation. 2. In the Form 6 - Consolidated report of the spending unit, which is composed of public institutions at a position 2.3 Transfers to institutions, individuals, NGO and public sector, for the execution of the budget, presented the amount of 3,530,296, which relates to transfers of the Fund to dental clinics, as stated in the notes to the financial statements of the Fund. Rules on unified Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets, do not foresee a position of planning and records of health care in private dental offices. The State Audit Institution recommends that the Fund shall initiate with the Ministry of Finance an amendment of the Regulations on the Classification for the State Budget, Extra- Budgetary Funds and Municipal Budgets in the records of the contracted services at health

248 care in private dental offices, to ensure that resources are planned, implemented and reported in according to the actual purposes. 3. Outstanding liabilities of the Fund and public health institutions (31 PHI excluding Montefarm) as of 31 December 2014 amounted to 52,081,276, out of which the liabilities of the Fund amounted to 33,152,653, while total liabilities of PHI 18,928,623. Arrears of public health institutions are not specifically included in the process of auditing and analysing of documents and materials submitted by the audited entity. The Fund has prepared the Information on arrears for 2014 and information on the status of outstanding liabilities of the Health Insurance Fund in the period , however, the Decision on the inventory list, and the Committee for counting of assets and liabilities of the Fund, has not appointed a special commission to inventory of the liabilities. Due to the significant amount of outstanding liabilities of the Fund as of 31 December 2014 and a large number of suppliers according to which the Fund has outstanding obligations, and whose status is displayed and unquestionably confirmed through the minutes on the harmonization of liabilities and receivables, it was necessary also to, by a Decision on inventory and formation of the Commission of preparation of inventory list of assets and liabilities of the Health Insurance Fund of Montenegro, appoint a commission to prepare a list of liabilities as well. 4. The Government of Montenegro, pursuant to the appropriate conclusions in the period , paid the outstanding liabilities of the Fund, in the amount of 61.5 million, as follows: in 2010 in the amount of 14.8 million, in 2011 in the amount of about 10.7 million, and in 2015 in the amount of 36 million. Outstanding liabilities of the Fund as of 31 December 2014 mainly referred to outstanding liabilities to Montefarm for the procurement of drugs and medical devices, in the amount of 18,486,223, to health institutions in Serbia in accordance with the concluded agreements, in the amount of 2,749,483, to medical institutions outside the system of public health, the amount of 2,604,858, for orthopaedic and other devices and supplies in the amount of 696,647 and for compensation for sick leave over 60 days in the amount of 8,210,694. Due to a long-term stating of the high level of arrears, it is required to prepare a more realistic plan and approve the Fund the funds allocated in the budget on an annual basis, particularly in terms of funds for the purchase of medicines and medical assets and liabilities arising from sick leave over 60 days. It is necessary to carry out the analysis and control of the acquisition and consumption of drugs by health care institutions and prescription of medicines, financed from the budget of the Health Insurance Fund on that basis, with the obligation of Montefarm and PHI to quarterly submit the data on inventories of medicines and medical devices with PHI and Montefarm and data on executed write-off of drugs within the fiscal year. 5. Comparing data on the status of cash at the beginning and end of the period reported in the statement of cash flows IV - Forms 4 in 33 public health institutions, the data in the ledgers of PHI, certificates of funds with commercial banks, there were established certain discrepancies. In some PHI there were identified deviations due to non-inclusion of the cash balance in INT form, which are shown in the business books, i.e. not including the balance of the funds of the Treasury, the amount of the balance of funds in the interim accounts, failure to show part of the cash deposit in the initial balance and balance of the funds at the end of the year, and not including short-term securities that are stated in the initial balance or not included in INT form. According to available data, the effect of discrepancies identified in the audit, as the difference of funds in the business records of PHI and receipts from commercial banks, in relation to the information presented in the INT - Forms 4, at the beginning of the year amounted to 339,298, less stated balance at the end of the year in the amount of 450,

249 An additional difference in the Consolidated Statement of spending unit that consists of public institutions - Form 6, compared 4 INT-form exists for an amount of 3,871, due to lower balances with the present state of Health Facility the Pharmacies of Montenegro "Montefarm". Materially significant deviations of the cash funds shown in the business books of the Public health institutions compared to data reported in the INT - Forms 4, were established with the Health Facility the Pharmacy of Montenegro "Montefarm" due to non-inclusion of part of the cash deposits in cash balance at the beginning and end of the period in the amount of 350,000 and with PHI Special Hospital Brezovik due to non-inclusion of short-term securities in the cash balance at the end of period, in the amount of 104,612, which were included at the beginning of the period. The cash flow statement of "Montefarm" at the end of 2013 and 2014 included a deposit in the amount of 200,000, while deposits in the amount of 350,000 were not included, a Special hospital Brezovik at the end of 2013 shown in short-term securities the amount of 96,102, and the same in the amount of 104,612 as of 31 December 2014 were not included in the cash balance. In the future it is necessary that the health institutes in the Statements of cash flows IV - Forms 4, stated cash balance aligned with the business records and confirmed balances so that the cash in the consolidated statement of spending unit, which is composed of public institutions - Form 6 is accurately stated. 6. In the process of audit it was found that the Public Health Institutions performed their operations through several commercial banks, in which they have several opened accounts. According to the proposal of the Fund, PHI have opened a special account just for funds from the budget, through which the flows are monitored by the Fund and the realization of the planned expenditures for purposes planned by the Budget. It is necessary that the public health institutions conduct their business through a maximum of two commercial banks, including special accounts for budget funds (earmarked revenues, income and expenses). 7. The Law on Budget of Montenegro for 2014, Budget of the Health Insurance Fund was planned in the amount of 168,434,988. During the year, there were made the reallocation of funding in the amount of 4,348,113, out of which within the Fund the amount of 2,651,113, and a transfer of funds from other spending units in the amount of 1,697,000 by which there were increased the total assets of the Fund. After reallocation, the current budget of the Fund amounted to 170,131,988, and realized funds 170,035,869, or 99.94% of the planned funds. The budget of the Health Insurance Fund of Montenegro includes: The Health Insurance Fund for the current budget in the amount of 26,924,268, execution in the amount of 26,900,163, Program Medical Institutions for the current budget in the amount of 140,700,523, execution in the amount of 140,628,523 and Program Institute of public health for the current budget in the amount of 2,507,197 the execution in the amount of 2,507,184. By reallocating, there were ensured the missing funds in the framework of the Program Health Insurance Fund for the following purposes: treatment outside of Montenegro in the amount of 715,169, orthopaedic devices and supplies in the amount of 130,000 and Reimbursement of travel costs of the insured in the amount of 965,000. Within the program Health institutions, the missing funds were provided in positions of gross salaries, contributions paid by employers and municipal surtax in the amount of 1,850,495, while at the same positions reduction was made in the amount of 398,379 with a reduction of positions Transfers for health protection made in the amount of 2,034,419, in accordance with the law. The Law on Budget limited the resources for health care, and the rights of beneficiaries under the Health Insurance Law, the Health Protection Law and other laws in the field of health. Also, the Law on Budget and Fiscal Responsibility, article 40 provides that contractual obligations must be in line with planned and approved funds of the annual Law on State Budget, and that the new

250 commitments, which will be implemented in the next fiscal year, can be taken on the condition that such expenditure in the current budget is defined as a multi-year expenditure, with previous consent of the Ministry of Finance. For this reason, it is necessary to comprehensively plan the necessary resources for the health care of insured in all respects, with the aim of achieving the guaranteed rights completely, without limitation, within the planned funds by the Budget Law annually. In the process of budget planning, taking into account the significant amount of cumulated arrears to the Fund for the period , which were, pursuant to the Conclusions of the Government of Montenegro, assumed and paid in the amount of 61.5 million, it is necessary that the Fund, in cooperation with Ministry of health and Ministry of Finance make plans more realistically for funding for health care in the Budget Law for the current year, on the basis of realized expenses in the previous period and estimates the necessary budget funds for the next period. Ministry of Finance at the end shall close the budget execution in favour and at the expense of the fiscal year in order to show the real contributions that belong to the Fund. Due to the significant amount of arrears over a longer period, which at 31 December 2014 for the Fund amounted to 33,152,653, and (health care institutions - 31) without Montefarm 18,928,623, it is necessary to consider the possibility of providing additional sources of funding for health care. 8. Pursuant to the Law on Health Insurance, the Rulebook on criteria for concluding contracts for the provision of health services, the Decision on the network of health care institutions and the Statute of the Health Insurance Fund of Montenegro, Health Insurance Fund of Montenegro concluded agreements on the provision of health services with health care providers. Pursuant to the provisions of the contract, there shall be harmonized the obligations between the Fund and health institutions quarterly and annually. Pursuant to the provisions of the contract, the amount of invoices issued to the Fund for the provided health care that is exceeding the amount of proceeds received, the Fund will recognize the invoices to the amount of transferred funds. Exceptionally, due to the provision of affordable, accessible health care, the Fund may recognize to the health care provider an additional billing invoice provided that the provider of health care services provided the agreed scope of services, up to the amount of allocated funds. If the amount of invoices issued to the Fund for health care provided is less than the amount of funds transferred, the provider of health services shall transfer the increased amount of resources to an advance to reimburse the invoices in the coming year. Records on the harmonization of liabilities and receivables, between the Fund and the Health Centre of Podgorica and the Fund and the Clinical Centre of Montenegro, signed in November 2015 Minutes with the Institute for Blood Transfusion was signed in October, and other Minutes were signed in September For 2014, the Fund has not signed the Contract Annex for the provision of health care services with the Clinical Centre of Montenegro. Between the Health Insurance Fund of Montenegro and the Health Centre Podgorica, the Minutes were made on 18 November 2015 on the harmonization of mutual liabilities and receivables as of 31 December 2014 after the final calculation for 2014 and the final accounts of the previous period. The Minutes established that the opening balance on 1 January 2014 amounted to 1,906,778 and includes the balance as of 31 December 2012 and 31 December 2013 as a result of a conflicting balance of the final calculation for 2012 and In 2014, Health Centre Podgorica invoiced more services in relation to the amounts paid to the Fund amounting to 1,208,710. For services billed of the PHI Health Centre Podgorica in relation to the amounts paid to the Fund for 2012, 2013 and 2014, totalling 3,115,488, will be settled through arbitration, which will be requested by the Fund pursuant to Article 33 of the

251 Underlying Contract No: dated 23 July 2012, as stated in the Minutes No: /2 dated 26 November According to the existing method of calculation and alignment of mutual rights and obligations between the Fund and the health institutions on the basis of invoices issued and paid funds, there was not reached a satisfactory level of harmonization between the Fund and health institutions, in order to minimize the difference between the amount of invoiced services and paid amounts. Due to significant differences in the amounts of invoiced services by public health institutions and funds paid to the Fund, it is necessary to determine the manner and procedure of calculation, in order to ensure a greater degree of harmonization between the Fund and health institutions and decrease in a difference in the amounts of invoiced services and funds paid to public health institutions. 9. For some medicines and medical supplies to be provided by Montefarm to public health institutions, there shall not be concluded the agreements between Montefarm and public health institutions, and mutual receivables and liabilities between the Fund, Montefarm and Public health institutions were closed by the cession agreement, pursuant to Article 7 of the Contract, which refers to the supply of the insured drugs and medical devices that are prescribed and dispensed by prescription, signed by the "Montefarm" and the Fund, and the provisions of the Contract on the provision of health care at the primary, secondary and tertiary levels concluded between the Health Insurance Fund and public health institutions. At the end of the year between the Montefarm and public health institutions shall be signed the Minutes on the harmonization of balance of mutual receivables and liabilities. Montefarm performs activities of public interest in supplying of public health institutions by drugs and medical devices. Due to the absence of contractual relations between public health institutions and "Montefarm", it is necessary to provide for enhanced control over the Fund's consumption of drugs in public health institutions. It is necessary to harmonize with the minutes the balance of mutual receivables and liabilities between Montefarm and public health institutions, in addition to the amount of the balance on accounts of receivables and payables, and show the total amount invoiced for medicines and medical supplies, and funds paid on that basis in the current year. 10. The payment of funds to the supplier of services of imports, forwarding and transport of medical devices was conducted in accordance with the Contract from the previous period for the provision of services of imports, freight forwarding, warehousing and transport of medical supplies to be provided at the expense of the Republican Health Insurance Fund and the agreements concluded in the current year between the Fund, health institutions, suppliers selected in accordance with the conducted public procurement procedures and the said supplier as importers and freight forwarders. The Fund should in the future engage suppliers for services imports, freight forwarding, storage and transportation of drugs and medical devices in accordance with the provisions of the Law on Public Procurement and Newly concluded contracts, but not as far in accordance with the contract from the previous period. 11. The Department for control of the Health Insurance Fund performs the controls of the payroll system by a particular methodology of sample while the control of monthly accrued wages is conducted by the Ministry of Finance. The audit has found that all officers and employees of the Health Insurance Fund in 2014 were paid a variable part of the salary, which is contrary to Article 2 of the Decision on criteria for determining the variable portion of salaries of civil servants and state employees. The said decision to pay a variable part of the salary was signed by a director of the Fund for health insurance. On the basis of that decision, Ministry of Finance performed the payment of the

252 variable part of the salary without having adopted the decision of the Minister of Finance on the payment of the variable part of the salary. The Fund should, in accordance with Article 2 of the Decision on criteria for determining the variable portion of salaries of civil servants and state employees, establish variable part of the salary. In accordance with Article 15, paragraph 3 of the Law on salaries of civil servants and state employees, it is required that a decision on the variable part of the salary for civil servants, or state employees is issued by the Minister of Finance, based on the decision of the head of the body of fulfilment of conditions for the variable part of the salary. 12. Report on calculated and paid taxes and contributions - Form IOPPD, PHI individually deliver to the Tax Administration by . The audit has found that up to 21 April 2015, the Clinical Centre of Montenegro, submitted the last report on calculated and paid taxes and contributions for June 2013, while all other public health institutions submitted IOPPD forms for December It is necessary for public health institutions to submit IOPPD Form in accordance with the provisions of the Law on Unified Registration and Reporting System on Calculation and payment of taxes and contributions. Failure to submit the IOPPD Form shall affect the unrealistic balance of final tax return, as it records the payment of taxes and contributions, and not submitting the forms causes not charging the payables, which leads to the balance of prepayment of taxes and contributions. 13. The audit performance identified engagement of individuals pursuant to the service contracts for activities and tasks required by the Regulations on internal organization and systematization, which is not in accordance with the provisions of the Labour Law and the Law on Civil Servants and State Employees. The person s engagement for jobs of ordinary jurisdiction of the Fund need to be carried out in accordance with the Labour Law. 14. From the position of 4199, there were realized the expenditure on compensation for work in the medical commissions, compensation to members of the commission for opening and evaluation of bids, fees to Board of Directors, fees based on the execution of court decisions and others. Audit of the fees paid to the members of the Commission for opening and evaluation of bids found that there is a different number of members in the decisions on the appointment of the Commission and the solutions that are used for payment of funds to the committee members. For the payment of compensation for members of the committee, agreed solutions are needed on the appointment and payment of funds to the members of the Commission, in terms of the number of members of the committee. Fees for work in the working groups and committees of the Fund employees and compensation to members of the Board of Directors, should be planned and implemented from a position Other personal income. Fees for enforcement of court decisions shall be executed from the respective positions depending on the basis of execution, or by redirecting resources to position 463 Repayment of liabilities from the previous period. 15. In 2014, within account 424 Other rights in the field of health care, the budget position treatment outside of Montenegro realized the funds in the amount of 15,215,135, for treatment abroad, medical treatment in medical institutions in Serbia, as well as in health

253 institutions in Montenegro that are not in the public health system, with which the Fund concluded contracts. Rules on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets, Account 424 Other rights in the field of health care refers to regular and one-off compensation received by individuals on the basis of law, which shall be borne by the Fund, and in the context of this account there is determined only position and treatment outside of Montenegro, which relates to the provision of health care to resident persons outside of Montenegro inpatient, outpatient or otherwise. Accordingly, the expenses for treatment in medical institutions in Montenegro that are not in the public health system, with which the Fund has concluded contracts, it is necessary, in cooperation with the Ministry of Finance to look at the possibility of amendments to the Rules on Classification for the State Budget, Extra-Budgetary Funds and municipal budgets, so as to plan the financial funds and implement in accordance with the accounts established by the amended Regulations. 16. The audit has found that the Department for control of the Health Insurance Fund, carried out checks in accordance with the Regulations on the method, procedure, content and control of measures for health care providers and the fact that, Clinical Centre of Montenegro and special hospitals are not fully integrated into the Integral Health information system makes it difficult for a system of effective planning, management and control. For 2014, the Supervision Department has prepared the act - Correspondence relating to the check the public health institutions for 2014, while the annual performance report has not been prepared. To achieve more efficient planning, management and control, it is needed to fully integrate in an integrated health information system the Clinical Centre of Montenegro and special hospitals. Pursuant to Section 5 of the Rules on internal organization and systematization, it is necessary that the Control Department prepare an annual report on the work. 17. In the current method of financing the consumption through the Health Insurance Fund (PHI and other users), the Fund has no direct insight into the actual state of expenditures incurred, except when the control is performed by officers of the Fund, In existing decisions, the Fund officials that examine the spending of budget funds do not have the authority to prosecute any irregularities in spending units financed through the Fund. Due to the significant amount of funds to be implemented on the basis of law in the field of health care and health insurance, of which in 2014, other rights in the field of health care were realized in the amount of 15,215,135. Other health insurance rights were realized in the amount of 8,089,340, while transfers to institutions, individuals, NGO and public sector realized in the amount of 59,945,581. It is necessary that the Control Department fill the vacant positions, particularly bearing in mind that the Department for control of contract implementation and the realization of the rights of health care insurance for the systematized positions planned 14 employees, who examine the implementation of the contract in 33 health institutions and contracts and accounts for the realization of other rights in the field of health care, remaining rights to health insurance, as well as contracts with private dental practices. It is necessary to bring the Fund's internal procedures on how to execute the budget funds to public health institutions. According to the existing decisions in PHI, the budgetary spending is controlled by the Steering Committees. 18. In 2015, the Plan to establish financial management and control for 2015, No dated 7 April 2015, the activities were planned for the organizational arrangements and the

254 establishment of financial management and control, while for 2013 and 2014, there was not adopted the Plan on establishing financial management and control. It is necessary to plan the implementation of activities provided for the establishment of financial management and control for 2015 and ensure monitoring, evaluation and updating of financial management and control pursuant to Article 11 and 13 of the Law on internal financial controls in the public sector. 19. The Department for Internal Audit systematized 3 jobs, out of which 2 are occupied. In 2014, it was not carried out evaluation of the adequacy of the financial management and control. It is necessary in the Department of Internal Audit to fill the vacancies, as provided by the act on systematization of jobs and the Law on internal financial controls. It is necessary to carry out the assessment of the adequacy of the financial management and control and report thereof. The Auditing Board responsible for the relevant audit indicates that the subject of the audit shall within six months notify the State Audit Institution on actions in relation to the given to the recommendations

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256 EXCERPT FROM INDIVIDUAL AUDIT REPORTS ON ANNUAL FINANCIAL STATEMENTS OF POLITICAL PARTIES FOR 2014 which were not included in previous Annual Audit Report of the State Audit Institution Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial Audit Political parties: the Albanian Alternative; Democratic Force (FORCA); Montenegrin Democratic Union; Democratic Party; Democratic Alliance; The Democratic Union of Albanians; Novska list and NGO "Choice" Herceg Novi Annual Financial Statements of political parties for auditing days Mr Nikola N. Kovačević, Member of Senate Head of the Auditing Board Mr Branislav Radulović, PhD, Member of Senate Member of the Auditing Board

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258 I. GENERAL INFORMATION 1. LEGAL BASIS Legal basis for performing the audit of the annual financial statement and operations of the political parties is contained in the following: Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); Law on Financing of Political Parties and Electoral Campaigns ("Off. Gazette of Montenegro", No. 052/14 and 076/15); The State Audit Institution Annual Audit Plan issued by the Senate, dated 22 December 2015 (No ); Decisions of the Auditing Board authorized for conducting the audits. Audit has been conducted in line with the following: International Accounting Standards and International Standards on Auditing Public Sector (INTOSAI standards); Instruction on Methodology of State Audit Institution; Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15). 2. THE OBJECTIVES OF THE AUDIT The objectives of the audit were to verify the following: 1. Accuracy and fairness of the financial statements, 2. Adherence to laws and other regulations related to the organization and financial and accounting operations, 3. Regularity of income generation, 4. Regularity of the execution of expenditures, i.e. verification whether the funds were used solely for meeting the objectives set in the program and the statute of a political party, 5. Regularity of the execution of other transactions. 3. SUBJECT-MATTER OF THE AUDIT Subject-matter of the audit is the Annual Financial Statements of Political Parties for 2014 and compliance of their operations with regulations. 4. TYPE OF AUDIT Financial audit and compliance audit with the legislation. 5. METHODOLOGY OF PERFORMING THE AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. Following the analytical procedures, assessment and analysis of collected documentary evidence, detailed audit techniques and methods are decided upon and implemented (e.g.: development of questionnaires, conducting discussions and interviews, review of documents, testing ledgers and bookkeeping records that serve as proof of the occurrence of business events, verification of computational accuracy of financial transactions pertaining to recorded revenues and expenses, etc.). Materiality was determined at 1% - 2% of the expenditures of the audited entities

259 1. ALBANIAN ALTERNATIVE 1.1. Revenues In 2014, the Party generated total revenues of 29, The generated revenues related to revenues from the budget of Montenegro (according to the coalition agreement) in the amount of 21,261.26, revenues from local government budgets-budget of the Capital City in the amount of 6, and other income in the amount of 1, The party's financial plan for 2014 planned total revenues in the amount of 26,200.00, and the same was realized in the amount of 29, which is 11.83% more than the planned. The Party Statute established the obligation to pay membership fees, however, the audit concluded that, Audited entity has not made a decision on the amount of membership fees for 2014, which it was obliged to by the provisions of Article 8, paragraph 3 of the valid Law on financing of political parties, and, on this based the Party in 2014 did not generate the revenues. The table below presents a comparative overview of generated revenues of AA in 2013 and No. Type of revenue 2013 Share (%) 2014 Share (%) 1 State budget revenues 14, % 21, % 2 Municipal budget revenues 6, % 6, % 3 Other revenues % 1, % Total 20, % 29, % Graphic presentation of the generated revenues in 2014 Revenues from the budget of Montenegro (according to the coalition agreement) Income from local government budgets-budget of the Capital City Financial revenues Other revenues In accordance with the presented tabular and graphical overview of realized revenues of the Party in 2014, the largest share of its revenues are the revenues from the budget of Montenegro in the total amount of 73%, revenues from the budgets of local self-governments with 23%, and other revenues 4% Expenditures In its business books, the party reported the expenditures for 2014 in the amount of 28, and the same refer to: the cost of materials in the amount of 3,607.61, fuel costs in the amount of 3,050.00, costs, benefits in the amount of 9,197.00, the cost of scholarships and grants in the amount of 6,535.00, the cost of leasing office space in the amount of 2,400.00, the cost of advertising in the amount of , the cost of accounting services in the amount of , entertainment costs in the amount of 2, and other costs in the amount of (payment transaction costs in the amount of , the cost of fixed telephony in the amount from and the cost of mobile telephony in the amount of )

260 The following table provides a comparative overview of the expenditures in 2013 and 2014 by the same structure and participation in the total expenditures of AA. No. Type of Expenditure 2013 (in EUR) share (%) 2014 (in EUR) share (%) 1 Expenses of office materials 1, % 3, % 2 Fuel expenses 1, % 3, % 3 Fees expenses 7, % 9, % 4 Expenses of scholarship and donations 6, % 6, % 5 Expenses of business premises rent 1, % 2, % 6 Advertisement and propaganda in the country % % 7 Services expenses % % 8 Entertainment % 2, % 9 Other non-material expenses 1, % Other expenses % % TOTAL 21, % 28, % The chart below shows a breakdown of expenditures per structure and participation in the total expenditures of AA. Expenses of office materials Fuel expenses Fees expenses Expenses of scholarship and donations Expenses of business premises rent Advertisement and propaganda in the country Services expenses Entertainment Other non-material expenses 1.3. Implementation of recommendations from previous years The audit of Annual Financial Statement for 2013 has established certain irregularities relating to the calculation and payment of tax liabilities, costs and documenting the recording of assets and receivables and those are given the recommendations for eliminating. The audit of Annual Financial Statement for 2014 established that the audited entity did not implement the recommendations because in 2014 it did not conduct the calculation and payment of tax on the fees paid, did not document all costs and did not provide records of fixed assets and receivables from local government Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of the performance of the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and the audit of the regularity of the Albanian Alternative which includes compliance with legal and other relevant regulations

261 Based on the conducted audit, determined facts and Statement of the audited entity (dated 27 October 2015) on the preliminary report of SAI (No /152), the competent Board comprised of: Member of Senate Nikola N. Kovačević, Head of the Auditing Board and Member of Senate, Mr Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 5 November 2015 adopted the FINAL REPORT on the audit of ANNUAL FINANCIAL STATEMENT OF ALBANIAN ALTERNATIVE for the year 2014 Financial audit has established that, Annual Financial Statement of the Albanian Alternative for the year 2014 in all material respects was not prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and refers to the content of the report under item 10, Financial Statements, Section Inventory and recording of assets, and accordingly the competent Board expressed a qualified opinion. Regularity audit found that the audited entity did not reconcile all financial and other activities in all material respects with the laws and regulations that have been identified as criteria for a given audit, where the non-compliance referred to the stated matters in the Report under Section 8. The system of internal control, point 10, Financial statements, Section List of assets, item 10.1,2, Receivables, Section 10.1,4, Treasury operations, Section Expenses, and accordingly the competent Board expressed a qualified opinion. The following irregularities affected the above opinion: 1. The audit entity did not calculate and pay the tax liabilities on the fees paid to individuals in the amount of 11,527.00, which is not in accordance with the provisions of the Law on Personal Income Tax. In accordance with the provisions of Article 46 of the Law on Personal Income Tax, an entity is required to, upon the payment of fees to individuals, calculate, withhold and pay the tax. 2. The audit entity, with incomplete documentation, was justifying expenses in the amount of 7,057.80, and the same applies to costs of scholarships in the amount of 5,665.00, the costs of assistance to individuals in the amount of , the cost of mobile telephony in the amount of 42.80, the costs paid to observers at the polling stations in the amount of and a cashpayments in the amount of The audited entity was required to justify all expenses with adequate and full documentation. 3. The audit entity did not make Annual Financial Report pursuant to the Regulations on the form of the Annual Report on income, assets and expenditures of political parties ("Official Gazette of Montenegro", No. 17/12), because it did present in the balance sheet the information for the previous year. Statement of changes in net assets is not completed and did not provide the Statement of cash flows - form INT. The audit entity should prepare the Annual Financial Report according to the Rules on the form of the Annual Report on income, assets and expenditures of political parties and to communicate it to the SAI on the prescribed forms. 4. The audit entity did not prepare an inventory list of assets and liabilities in accordance with the Rules on the method and terms of the inventory and harmonization of the carrying amount with

262 the actual balance, and provided neither in the business books a record of fixed assets, nor a record of receivables on local governments. The audit entity is required to prepare annual inventory list of assets and liabilities according to the Rules on the method and terms of the inventory performance and harmonization of the carrying amount with the actual balance, as well as provide in business books a record of fixed assets and receivables from local self-governments. 5. The audited entity did not determine with an internal act the limits for fuel consumption, telephone, entertainment, etc. In order to establish an effective system of internal controls, the audited entity is recommended to, by an internal act, establish the limits on certain costs (fuel, telephone, entertainment, etc.)

263 2. NEW DEMOCRATIC FORCE (FORCA) 2.1. Revenues Revenue reported in the business books of the party in the amount of 70, referred to revenues from the budget of Montenegro in the amount 55,269.83, income from local government budgets in the amount of 11, and other income in the amount of 3, The following table provides a comparative overview of revenues for 2013 and 2014 NO. Types of revenue 2013 (in EUR) share (%) 2014 (in EUR) share (%) 1 State budget revenues 42, % 55, % 2 Municipal budget revenues 22, % 11, % 3 Other income 4, % 3, % TOTAL 69, % 70, % The following report shows a graphical presentation of the revenues from the regular operations of the Party for 2014 by the structure and participation thereof in total revenues. 17% 4% 79% State budget revenues Municipal budget revenues Other income Based on the presented tabular and graphical overview, it is noted that the largest share in the total revenues refers to the revenues from the state budget of Montenegro (79%), revenues from local self-governments (17%) and other income (4%) Expenditures In its business books, the Party reported expenditures for 2014 totalling 76, The reported expenditures relate to the costs of office and other supplies in the amount of 2,061.90, the cost of fuel and energy in the amount of , the cost of gross wages and fees of the service contracts 11,100.00, per diem expenses for business trips in the amount of 9,778.00, scholarship costs in the amount of 2,400.00, telephone costs in the amount of 2,908.90, rental expenses in the amount of 5,945.00, the cost of advertising in the amount of 7,188.87, utility costs and other service 3,335.40, costs of previous campaigns , campaign expenses as at 26 January

264 in the amount 14, Blue campaign costs 1,000.00, the depreciation expenses in the amount of 1,962.28, entertainment costs in the amount of 6,046.82, the cost of bank fees in the amount of , the cost of the tax on lease and the cost of assistance, donations and other intangible costs in the amount of 2, The following table provides a comparative overview of the realized expenditures in 2014 and No. Type of expenditure Amount % Amount % 1 Expenses of office, other material and professional % 1, % literature 2 Fuel and electricity 1, % % 3 Gross salaries and service contracts 23, % 11, % 4 Per diems at official trips 41, % 9, % 5 Sponsorships 2, % 6 Telephone expenses 2, % 2, % 1 Rent 8, % 5, % 8 Advertisement and propaganda 1, % 7, % 9 Utilities and other services 2, % 3, % 10 Election campaigns 19, % 13 Amortization expenses 1, % 1, % 14 Entertainment 3, % 6, % 15 Bank commissions % % 16 Property tax % % 17 Financial support, donations and other non-material 15, % 2, % expenses Total 102, % 76, % Below is the graphic presentation of the expenditures realized from the regular operations of the Party for 2014 according to the structure and participation in the total expenditures. Based on the presented tabular and graphical overview, it is noted that the largest share of the total expenditures refers to the costs of the campaign with 19.39%, the costs of the gross salaries and fees for service contracts with 14.49%, per diem expenses from official trip in the amount of 12.76%, the cost of advertising and propaganda with 9.38%, and the cost of leasing with 7.76% and etc

265 The audit has found that out of a total amount of the costs in the amount of 76,601.31, the cash amount was paid from the cashier of 24, (for regular operations and election campaigns), accounting for 32% of total costs Implementation of recommendations from previous years The audit of Annual Financial Statement for 2013 identified irregularities and the recommendations are given concerning the establishment of a more efficient system of internal controls, ensuring records receivables from local self-government, the payment of business trip expenses in accordance with the applicable regulation and reducing cash payments. The audit of Annual Financial Statement for 2014 showed that the Party has not implemented the recommendation relating to the providing of records of receivables from local self-government and it did not determine by the Articles of Association an obligation to adopt a financial plan, while the recommendation relating to the justification of travel expenses and reducing cash payments was partially implemented Opinion with recommendations On the basis of Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board on conducting the audit (number dated 31 March 2015), the State Audit Institution conducted a financial audit of the Annual Financial Statement and the regularity audit of the New Democratic Forces (FORCA), which includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 230/15 dated 25 October 2015) on the preliminary report of SAI (No /156), the competent Auditing Board comprised of: Member of Senate, Nikola N. Kovačević, Head of the Auditing Board and Member of Senate Branislav Radulović, PhD, Member of the Auditing Board, at its meeting held on November 5, 2015 adopted the FINAL REPORT on the audit of the Annual Financial Statement of the New Democratic Force (Forca) for the year 2014 Financial audit established that the Annual Financial Statement of the New Democratic Force (Forca) for 2014 was in all material aspects prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework other than that specified in Section Prepayments and Section Liabilities, and, accordingly, the competent Auditing Board expressed an unqualified opinion with the emphasis of matter. Regularity audit identified that the audited entity did not reconcile its financial and other actions, in all material respects, with the laws and regulations that have been identified as criteria for a given audit, where the non-compliance referred to the disclosures of the given under Section Cash, Section Accounts Receivable, Section Liabilities and Section Expenses, and accordingly, the competent Auditing Board expressed the qualified opinion. The above opinion was influenced by the following irregularities: 1. The audit identified that the audited entity, due to error in recording, overstated the liabilities for net earnings and prepayments by the amount of 8, It is necessary that the audited entity perform corrective booking on the account of liabilities for net earnings and account of prepayments

266 2. Pursuant to the Service contract, the audited entity paid the fees in the amount of 2, After examining the presented Contract, it has been found that it does not contain any legal basis and that the nature and type of work engaged the suspected perpetrator of the job for which it should execute the work. Also, based on the documentation presented, it could not be determined whether the person engaged was employed with another employer or registered with the Employment Service, which has an impact on the method of calculation of tax liabilities. The audited entity shall conclude Labour Contract in accordance with the Labour Law with the perpetrators who carry out administrative and auxiliary tasks. 3. The audit has found that the audited entity from the main account of the Party has made the transfer of funds to finance the election campaign in the amount of 1, on the bank account OO Plav, which were not documented and that the revenues in the amount of paid to the account of the mentioned municipal Board was not recorded in the business books. The audited entity should record all transactions in the business books and justify those with the adequate documentation. 4. The audited entity did not provide in its business books the records of the receivables from local governments, but in the course of the audit it obtained the confirmation (No /15 dated 15 September 2015) which confirmed that the Municipality of Ulcinj has the liabilities towards FORCA in the amount of 8, as of 31 December The audited entity in the business books should record receivables from local selfgovernments on the basis of certified and compliant documentation. 5. The audit has found that there were neither prepared nor submitted to the Tax Administration IOPPD forms, which is not in accordance with the provisions of the Article 47 of the Law on Personal Income Tax. The audited entity, in accordance with Article 47 of the Law on personal income is obliged to submit to the competent tax authority a report on calculated and paid taxes (IOPPD form)

267 3. MONTENEGRIN DEMOCRATIC UNION 3.1. Revenues In 2014 the Party reported total revenues in the amount of 36, Realized revenues related to: revenues from contributions of physical persons in the amount of 34,562.31, income from membership fees in the amount of 2, and other income in the amount of The following table provides an overview of the reported revenues of the Party for 2014: No. Type of revenue 2014 (EUR) Share (%) 1 Revenues from contributions from physical persons 34, % 2 Membership fee revenue 2, % 3 Foreign exchange gains % 4 Financial income % Total 36, % Below is a graphical presentation of the revenues of the Party in 2014, according to data reported in the general ledger and financial statement: 2014 Revenues from contributions made by natural persons Local self-governments budgets revenues Revenues for funding MP club Interest income 3.2. Expenditures In its business books the party disclosed the expenditures in the amount of 36, and those referred to: the costs of materials in the amount of , the cost of fuel and energy in the amount of , the cost of compensation to party activists in the amount of 9,880.00, the cost of the phone in the amount of , the cost of maintenance in the amount of 51.40, the cost of rent in the amount of 6,000.00, advertising expenses in the amount of 6,105.90, depreciation in the amount of 50.00, the costs of non-production services in the amount of 9,150.50, entertainment costs in the amount of , costs of payment transactions in the amount of , the cost of a duties in the amount of , and other expense in the amount of 3,

268 The following table provides an overview of the expenditures of the Party for 2014: Account Type of expenditure Amount Share (%) 511 Costs of materials % 513 Costs of fuel and energy % 529 Reimbursements of party activities 9, % 531 Telephone and transportation costs % 532 Maintenance expenses % 533 Rental expenses 6, % 535 Advertisement and propaganda expenses 6, % 540 Depreciation costs % 550 Costs of non-production services 9, % 551 Entertainment expenses % 553 Payment system charges % 554 Membership expenses % 559 Other non-material expenses 3, % Total 36, % Below is a graph showing the expenditures of the 2014 per structure and the percentage of participation in the total expenditures: Costs of materials Costs of fuel and energy Reimbursements of party activities Telephone and transportation costs Maintenance expenses Rental expenses Advertisement and propaganda expenses Depreciation costs Costs of non-production services Entertainment expenses Payment system charges Membership expenses Other non-material expenses The largest share of the total expenditures refers to compensation expenses of 27%, the cost of services of 25%, the cost of advertising of 17%, the cost of leasing with 16% and etc Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board on performance of the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and the regularity audit of the Montenegrin Democratic Union which includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (dated 27 October 2015) on the Preliminary report of SAI (No /152), the competent Auditing Board comprised of: Member of Senate Nikola N. Kovačević, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 22 December 2015, adopted the following

269 FINAL REPORT on the audit of the Annual Financial Statement of Montenegrin Democratic Union for 2014 Financial audit identified that the Annual Financial Statement of the Montenegrin Democratic Union for 2014 was not, in all material respects, prepared and presented in a fair and objective manner in accordance with the applicable financial framework of reporting. The identified irregularities referred to the non-recording or inadequate documentation of expenditures, failing to state the revenues for election campaign and the failure to show taxes on the fees paid to individuals and those have the character of materially significant misstatement in relation to the established materiality of (2% of the expenditures), and accordingly the competent Auditing Board expressed an adverse opinion. Regularity audit identified that the audited entity did not align its financial and other activities in all material respects with the laws and regulations that have been identified as criteria for a given audit, because it did not consistently apply the provisions of the Law on Financing of Political Parties and electoral campaigns, the Law on Personal income tax, Law of Obligations, the Labour Law and the Law on Accounting and Auditing, and accordingly, the competent Auditing Board expressed an adverse opinion. The following irregularities and inconsistent application of laws and regulations affected the expression of this audit opinion: 1. The audited entity did not provide the Annual Financial Report for 2014 to SAI within the deadline prescribed by the Law (31 March 2015, it was delivered as at 12 June 2015). The audited entity, pursuant to the provisions of Article 37 of the Law on Financing of Political Parties and electoral campaigns, was required to deliver to SAI the Annual Financial Report by the set deadline. 2. The audit identified that the audited entity paid costs totalling 9, which were not documented or those were justified with inadequate documentation. Undocumented expenses in the amount of 4, referred to the costs of the election campaign ( 2,000.00), other non-material costs ( 2,182.60) and per diems costs ( ), while inadequately documented expenses in the amount of 4, referred to the charges related to premises branding ( 2,000.00) upon the presented proforma invoice, rental costs ( 2,400.00) documented only with the receipt of cash and related expenses ( ) documented with non-fiscal bills, which represents materially significant error in relation to the materiality determined in the amount of The audited entity is required to perform the record and payment of all expenses on the basis of adequate and complete documentation. 3. The audit has found that the audited entity paid fees to individuals on the basis of employment in the Party, the provision of intellectual services, and rental of office space in the amount of 12,800.00, which was not, according to the provisions of Article 46 of the Law on personal income tax, calculated and paid the related tax liabilities. An audited entity is required to calculate and pay tax liabilities on the fees paid to individuals in accordance with the provisions of Article 46 of the Law on Personal Income Tax. 4. The audit has found that, as contribution from physical persons from abroad, it was made a payment to the foreign currency account of the Party in the amount of $4, i.e. 3,914.76, which is not in accordance with Article 13 of the Law on Financing of Political Parties and

270 Election campaign, which established the limit for contribution from individuals in the amount of 2, The audited entity is obliged to generate the revenues from contributions of physical persons in the manner and amount as determined in the Law on Financing Political Parties and electoral campaigns. 5. The audit has found that the audited entity pursuant to a decision of the Presidency of the Party pays compensation to individuals on the basis of engagement (the President and person for administrative and technical affairs) and the provision of intellectual services of 6, without concluded contracts which should specify the period of engagement, jobs for which they are engaged and the amount of compensation. The audited entity with the persons engaged to perform administrative and technical tasks shall conclude contracts in accordance with the Labour Law, and with individuals to provide intellectual services conclude contracts in accordance with the Law on Obligations. 6. The audited entity did not separate in its business records the revenues and expenses related to regular operations and election campaigns, therefore, the stated data could not have been determined precisely In order to achieve a more accurate reporting in the business records, there must be separated the records of income and expenses related to regular operations and election campaigns. 7. The audited entity does not provide analytical records of fixed assets by type, quantity, inventory number, amortization rate etc. The audited entity should provide analytical records of fixed assets in a manner that provides the information about the inventory number, type, quantity, amortized rate, cost, written-off and current value. 8. The audit has found that the audited entity, out of the total costs in the amount of 36,609.85, paid in cash from the cashier the costs in the amount of 32,491.00, which makes 88.75% of total costs. In order to reduce cash payments from the cash register, the audited entity shall perform the payment of the costs through bank accounts. 9. The audited entity did not in the business books show the income from the Municipality of Herceg Novi on the basis of election campaign financing in the amount of (20% of the corresponding funds that are received by all applicants of the confirmed electoral lists). All income and expenses whether related to the regular operations or campaign must be recorded in the ledgers and reported in the consolidated annual financial report. 10. The audit has shown that the Applicant of the electoral list "Cdu-Herceg Novi, Montenegro" did not, as required by the Article 18 of the Law on Financing of Political Parties and Electoral Campaigns, for the purposes of the election campaign open a separate bank account, but the funds to finance the election campaign were paid in cash for the regular operations of the Party and the payment of costs thereof. The electoral list applicant was, in accordance with Article 18 of the Law on Financing Political Parties and electoral campaigns, required to open a separate bank account for the

271 purposes of the election campaign and appoint a person responsible for managing the funds in that account. Also, according to the aforementioned article of the Law, the funds to finance the election campaign shall be paid into the account opened for this purpose and therefrom make the payments on the basis of the cost of the election campaign 11. The audit has shown that the audited entity in 2014 conducted financial operations through two accounts opened with Komercijalna banka a.d. Budva and Hipotekarna Banka (foreign exchange and account for transactions in the country). In accordance with the data presented in the general ledger, deposits in the accounts as at 31 December 2014 amounted to The carrying amount of the deposit was not documented by the bank statement as at 31 December 2014, but the latest presented statements were dated from October and November 2014, so that it could not be determine whether the accounts recorded any changes after the above date. It is necessary to document with the bank statements all the registered deposits as of December 31 and in case of any differences, perform a balance confirmation with the commercial banks

272 4. DEMOCRATIC PARTY 4.1. Revenues In 2014, the Party disclosed total income for regular operations in the amount of 88,631.39, Realized revenues related to: revenues from the state budget in the amount of 81,756.24, revenue from local government budgets in the amount of 6,390.88, income of the Club of delegates in the amount of and the financial income in the amount of The following table provided a comparative overview of reported income of the Party for 2013 and 2014: No. Type of revenue Revenues in 2013 (in EUR) Share (%) Revenues in 2014 (in EUR) Share (%) 1 State budget revenues 49, % 81, % 2 Municipal budget revenues 8, % 6, % 3 Revenues for funding MP club 4, % % 4 Interest income % % Total 61, % 88, % Below is a graphical representation of income of the Party in 2014, according to data reported in the general ledger and financial statement: 2014 State budget revenues Municipal budget revenues Revenues for funding MP club Interest income 4.2. Expenditures The Party has in the business books disclosed costs in the amount of 84,580.41, and those referred to the cost of office supplies in the amount of 1,739.10, fuel costs in the amount of 2,040.00, the cost of wages and salaries in the amount of 14,081.10, travel expenses in the amount of , the cost of maintenance of fixed assets in the amount of , the cost of rent in the amount of 3,873.52, depreciation costs in the amount of 1,350.00, entertainment costs in the amount of 1,248.80, interest costs and transactions payment in the amount of 1,405.97, the cost of aid and donations in the amount of 12,119.70, the cost of transferring funds to the coalition partners in the amount of 46,

273 The following table provides a comparative overview of the costs of the Party for 2013 and 2014: No. Type of Expenditure 2013 Share (%) 2014 Share (%) 1 Pre-election campaigns costs % 2 Office materials expenses 1, % 3 Fuel expenses 6, % 2, % 4 Staff expenses 3, % 14, % 5 Business travel expenses % % 6 Telephone and other expenses 2, % 7 Services expenses of maintenance of fixed assets % % 8 Other rental costs 3, % 9 Marketing costs 1, % 10 Amortization expenses 1, % 11 Entertainment in the country 9, % % 12 Expenses of domestic interest and bank charges 1, % 14 Humanitarian support 7, % 12, % 15 Agreements with AA expenses 18, % 16 Expenses from agreements with DG in Montenegro 27, % 17 Other expenses 2, % Total 44, % 84, % The following report is a graph showing the costs for 2014 by structure and the percentage of participation in the total costs: COSTS in 2014 Office materials expenses Fuel expenses Staff expenses Business travel expenses (per diems &transportation) Services expenses of maintenance of fixed assets Other rental costs Amortization expenses Entertainment in the country Expenses of domestic interest and bank charges Humanitarian support Agreements with AA expenses Expenses from agreements with DG in Montenegro The largest share of costs after the transfer of funds to coalition partners (32.40% and 22.23%) belongs to the costs of wages and salaries, with a share of 16.65%, the costs of paid aid with 14.33%, the cost of rent 4.58% and alike Implementation of recommendations from previous years The audit of Annual Financial Statement for 2013 established certain irregularities and recommendations concerning the chronological record of the taken cash, documentation of all costs, providing records for receivables from local government, performing annual inventory of assets and liabilities, recording the total fixed assets in its books, reducing cash payments from the cash register. The audit of Annual Financial Statement for 2014 established that the audited entity did not implement the recommendations relating to inventory and record the total fixed assets, partially implemented the recommendation concerning the registration of receivables and has implemented the recommendations relating to the chronological recording of treasury transactions, documentation supporting the costs, passing the financial plan and reducing cash payments

274 4.4. Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of the conduct of the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and regularity audit of the Democratic Party that includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (dated 10 November 2015) on the Preliminary report of SAI (No /176), the competent Auditing Board comprised of Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 22 December 2015 adopted the FINAL REPORT on Audit Annual Financial Statement of Democratic Party for 2014 Financial audit identified that the Annual Financial Statement of the Democratic Party in 2014 does not present fairly, in all material respects, the financial condition of the assets, income and expenses in accordance with generally accepted financial reporting framework because the audited entity did not give true data from previous year, which affected the presentation of data in the financial report for 2014 in particular of the balance sheet items (receivables, payables and cash on current accounts) and, therefore, the competent Auditing Board expressed an adverse opinion. Regularity audit determined that the audited entity did not align all financial or other actions with laws and regulations that have been identified as criteria for the relevant audit, because it has not consistently applied the provisions of the Law on Personal Income Tax, Law of Obligations, Law on Financing of Political subjects and election campaigns and the Law on Accounting and Auditing, and accordingly, the competent Auditing Board expressed an adverse opinion. The following irregularities and non-compliances affected the expression of the above opinion: 1. The Party did not, within the deadline set by the Law, submit Annual Financial Statement for the year 2014 to the State Audit Institution (the same was delivered on 9 April 2015). In accordance with Article 37 of the Law on Financing of Political Parties and Electoral Campaigns, the audited entity shall submit the Annual Financial Statement to the SAI within the set deadline. 2. The audit of the Annual Financial Statement in 2014 determined that the reported amounts of most of the balance sheet items for the previous year did not correspond to amounts that were reported in the annual financial statement of the Party in 2013, which were determined upon the audit for the previous year. Non-compliance of the data for the previous year was found in the following balance sheet items (accounts receivable, fixed assets, cash and cash equivalents and payables), as well as at the items of the Income Statement (revenues and expenditures), and it is stated that the audited entity did not correctly disclose the data from the previous year in the annual financial report for 2014, which affected the disclosure of data for the year 2014 in particular on the balance sheet items (receivables, payables and cash on current accounts). The audited entity was required to disclose in the Annual financial Statement for 2014 in column (previous year) the data that were presented in the official annual financial statement for 2013 which was submitted to the State Audit Institution

275 3. The audited entity, after the State Audit Institution completed an audit of the Annual Financial Statement for 2013, performed a reclassification of certain positions and recording of new accounting documents, which were in the audit for 2013 not presented to SAI, which was confirmed by the responsible person i.e. the President of the Party in the statement in response to the preliminary report on the audit for The implementation of the actions mentioned above was not in accordance with the Law on Accounting and Auditing, IAS and accounting principles. After the closing of business books, preparation of the Annual Financial Statement and its submission to the relevant institutions, there cannot be made reclassifications and subsequent posting for that year, or modifying the book values of balance sheet items compared to the officially presented annual reports without an order of the authorized institution. 4. The audited entity has in the business books and the Annual financial statement for 2014 stated revenues and expenses in a higher amount by 46, Revenues were shown after the payment of funds from the budget of Montenegro to the bank account of the Democratic Party, which, in accordance with Coalition Agreement (No. 131/12 dated 17 September 2012) were transferred to the accounts of members of the Coalition (the Democratic Alliance in Montenegro and Albanian Alternatives) while expenditures were presented on the basis of the transfer of funds to coalition members. The audited entity in the business books and annual financial statements shall report only part of its income, while the transfer of funds to coalition members need not be reported as an expense, because it is not generated from operations of the Party. 5. The audit identified that the audited entity in the business records did not record the assets the net book value of which as at 31 December 2013 amounted to 1,207.00, and those were neither stated in the report on the inventory for 2014 nor in the annual financial report for The audited entity is obliged to make an inventory of the total fixed assets, recorded in the business books and disclose those in the Annual financial report. 6. The audited entity, in 2014, paid the remunerations to individuals on the basis of service contracts and lease agreements in the amount of 13, on which it calculated the tax liabilities but made no payments thereof, It was also established that the audited entity did not drafted and submitted to the competent tax authority the reports on calculated and paid tax liabilities (IOPPD forms) which is not in accordance with the Law and the applicable Rules. The audited entity should pay the tax liabilities to fees paid to individuals in accordance with the provisions of Article 46 of the Law on Personal Income Tax and that pursuant to Article 47 thereof, submit the required reports to the competent tax authority

276 7. From insight in completed contracts and lease agreements, it was concluded that those in their form did not comply with the provisions of the Law on Obligations, because those do not contain a legal basis, i.e. the provisions of the Law under which they were completed, and the service contracts did not precisely define the tasks and time involvement of the perpetrators. The audited entity shall conclude the service contracts and lease agreements in accordance with the provisions of the Law on Obligations. 8. The audit identified that the audited entity recorded the receivables from local governments on the basis of payments and it did not on the basis of certified confirmations or other documentation reconciled those with the local government. State Audit Institution recommended the audited entity to reconcile the receivables with the local government and on the basis of certified documents make the recording thereof in the accounts. The competent Auditing Board has agreed that due to the nature of the established irregularities and illegalities presented in the Final Report of SAI under Item 10 - Financial Statements: Inventory and recording of assets; , Receivables, Liabilities and expressed adverse opinion, submit it to the competent prosecutor

277 5. DEMOCRATIC ALLIANCE IN MONTENEGRO 5.1. Revenues The Party reported in the business books the revenues for regular operations for 2014 in the amount of 36, The reported revenues included: revenues from the budget of Montenegro in the amount of 27,400.00, revenues from local government budgets in the amount of 9, and interest revenues in the amount of The following table provided a comparative overview of reported revenues of the Party in 2013 and 2014 year by type. No. Type of revenue 2013 Share (%) 2014 Share (%) 1 State budget revenues 14, % 27, % 2 Municipal budget revenues 9, % 9, % 3 Interest income % % Total 23, % 36, % This is a graph showing the revenues generated for regular operations in Based on the given table and the graphical presentation of the revenues, it has been stated that the largest share in total revenues are the revenues from the budget of Montenegro with 75%, while revenues from local governments accounted for 25% Expenditures The audited entity has in the ledgers expressed the expenditures for 2014 in the amount of 34, and the same referred to: the cost of stationery and other materials in the amount of 2,760.62, electricity costs in the amount of , gross wages and contributions paid by the employer in the amount of 7,821.10, travel expenses in the amount of 6,843.20, the cost of fixed and mobile phones in the amount of 3,143.51, the cost of maintenance in the amount of , the cost of advertising and propaganda in the country in the amount of , the cost of branches of DS in Montenegro in the amount of 3,680.00, event costs and depreciation and amortization in the amount of , costs of accounting and auditing services in the amount of 1,204.00, the costs of representation in the country in the amount of 5,117.18, bank charges in the amount of , and other expenses in the amount of 1, The following table provides an overview of expenditures in 2013 and

278 No Description 2013 Share (%) 2014 Share (%) 1 Expenses of office and other material % 2, % 2 Fuel and energy expenses % % 3 Gross salaries and contributions 7, % 7, % 4 Expenses of business trips 5, % 6, % 5 Postal and telecommunication services and 4, % 3, % transport expenses 6 Maintenance services expenses % % 7 Expenses of advertisement and propaganda in the % % country 8 Branch office expenses 1, % 3, % 9 Depreciation expenses % % 10 Expenses of accounting and audit services % 1, % 11 Entertainment in the country 3, % 5, % 12 Domestic bank charges % % 14 Event expenses % % 15 Other non-material expenses % 1, % Total 30, % 34, % This is a graphical representation of the generated expenditures in Based on the presented tabular and graphical representation, it has been stated that the largest share of total expenditures refers to the costs of gross salaries and contributions paid by the employer with 22.35%, the cost of business trips with 19.56%, the cost of entertainment with 14,80%, the cost of branches offices with 10.52% etc

279 The audit identified discrepancies in the amounts of certain categories of costs recorded in the general ledger and amounts determined by the audit due to incorrect classification of certain costs to the appropriate accounts Implementation of recommendations from previous years The audit of Annual Financial Statement for 2014 determined that the audited entity implemented the recommendation concerning the records of receivables, reducing cash payments from the cash register, but it did not implement the recommendations relating to the provision of analytical records of fixed assets, preparation of the Report on assets and liabilities, classification of costs and recording them to the appropriate accounts, as well as a recommendation that the Party s branches shall this material and financial transactions carry out through bank accounts opened for this purpose and justify all expenses on the basis of adequate documentation. Based on the foregoing, it is noted that the audited entity did not most of the recommendations given in the report for the previous year fully implement Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of conducting the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and the regularity audit of the Democratic Alliance in Montenegro, which includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 208/15 dated 12 December 2015,) on the Preliminary report of SAI (No /179), the competent Auditing Board comprised of: Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 22 December 2015 adopted the FINAL REPORT on Audit of the Annual Financial Statement of the Democratic Alliance in Montenegro for 2014 Financial audit has established that the Annual Financial Statement of the Democratic Alliance in Montenegro for 2014 was not in all aspects prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and accordingly, the competent Auditing Board expresses a qualified opinion. Regularity audit determined that the audited entity did not align the financial and other activities with all laws and regulations that have been identified as criteria for the relevant audit, and accordingly the competent Auditing Board expresses a qualified opinion. The presented irregularities and shortcomings in application of the legal and other regulations affected the expression of the above opinion: 1. The audit has shown that in the name of material costs from the account of the Party were transferred the funds totalling 3, to the accounts of the President of the branches (Krajina amount of 1,100.00, Malesija amount of 1,300.00, Rožaje amount of and Plav the amount of ). The transfer of funds was made on the accounts of those persons because the Party branches have no opened current accounts with commercial banks. It was also found that the branches were, with inadequate documentation, justifying the spending of the part of the transferred funds in the amount of 1, (branch Krajina amount of , Malesia amount of , Rožaje amount of and a branch Plav amount of )

280 The audited entity should ensure that the Party branches conduct their material and financial transactions via bank account or sub-account opened for this purpose and shall justify all expenses on the basis of adequate documentation. 2. The audited entity carried out inventory of fixed assets and inventory lists compiled containing only the amount of fixed assets without value, but did not make a report on the list, It was also found that it did not make a list of receivables, liabilities and cash funds in hand and current accounts. The audited entity should prepare an annual list of permanent and current assets in accordance with the Regulations in the manner and deadlines for inventory and harmonize the carrying amounts with the actual ones. 3. The audited entity recorded in the books the receivables from the Municipality of Ulcinj in the amount of 1, These receivables were not documented by the confirmations certified by the local government so that it could not be determine whether all of the receivables were recorded. Recording of receivables of local governments should be based on certified and compliant documentation. 4. The audit identified that the receivables and liabilities recorded in the General Ledger of the audited entity did not correspond to those reported in the annual financial report (balance sheet) and Final Statement, which indicates that there was no reconciliation of certain balance sheet items. In the annual financial report (balance sheet) and the Final Statement were stated the receivables and liabilities in the amount of 11, while the receivables in the books were stated in the amount of 5, and liabilities in the amount of 5, It is necessary to harmonize the data in the business books before preparation and submission of the Annual Financial Report. 5. In the audit procedures there were established the discrepancies in the amounts of certain categories of costs recorded in the general ledger and amounts determined by the audit due to incorrect classification of certain costs to the appropriate accounts. The audited entity needs to properly classify costs and record those to the appropriate accounts in accordance with the Regulations it applies. 6. After examination of the presented travel orders, there were identified certain irregularities (part of travel orders on the basis of which were paid the fees based on the cost of the use of own vehicle for business purposes does not include information on the distance travelled, the time of departure and arrival from a business trip, in some cases, a single travel order justified the business travel expenses performed in different times and different destinations, also was found to have not been prepared the reports from a business trip, which is not in accordance with the Regulation on reimbursement of costs of civil servants and state employees, given that the subject of the audit did not with an internal act stipulated this area of business. Calculation of business trip expenses and filling of travel orders should be carried out in the manner prescribed by the Regulation on charges related to civil servants and state employees, given that the subject of the audit did not with an internal act stipulated this area of business

281 6. DEMOCRATIC UNION OF ALBANIANS 6.1. Revenues The audited entity is in the business books showed a total income in the amount of 14,923.90, which relate to revenues from the budget of local governments in the amount of 14, and the interest income in the amount of Tabular overview of the revenues generated in 2013 and 2014: No. Type of revenue 2013 Share (%) 2014 Share (%) 1 Municipal budget revenues 23, % 14, % 2 Other income % % Total 23, % 14, % 6.2. Expenditures The audited entity in the business records showed expenditures totalling 24, and those related to the costs of fuel and energy in the amount of , the cost of compensation in the amount of 4,151.55, the cost of aid and donations in the amount of 2,110.00, travel expenses in the amount of 3,424.00, the cost of postal services in the amount of 2,956.46, maintenance costs of fixed assets in the amount of , the cost of the lease in the amount of 2,582,40, costs of advertising in the amount of 3,861.30, depreciation costs in the amount of 2,344.63, the costs of intellectual services in the amount of , the cost of entertainment in the amount of 1, and other costs in the amount of The following table provides an overview of expenditures in 2013 and No. Type of expenditure 2013 Share (%) 2014 Share (%) 1 Fuel and energy expenses 1, % % 2 Fees expenses 4, % 4, % 3 Expenses of support and donations 2, S3% 2, % 4 Expenses of business trips 1, % 3, % 5 Expenses of mobile and fix telephones 3, % 2, % 6 Expenses of maintenance of equipment % % 7 Expenses of rent of business premises 2, % % 8 Expenses of advertisement and propaganda 1, % % 9 Expenses of amortization 1, % 2, % 10 Expenses of intellectual services % % 11 Entertainment 3, % 1, % 12 Other expenses % % Total 24, % 24, % In accordance with the presented data, it is concluded that the largest share of the total costs are compensation expenses with 17.27%, advertising expenses 16.06%, the cost of official travel of 14.24%, the cost of mobile and fixed phones 12.31%, the cost of leasing business space 10.74%, and so on. The following report is a graph of actual costs

282 Fuel and energy expenses Fees expenses Expenses of support and donations Expenses of business trips Expenses of mobile and fix telephones Expenses of maintenance of equipment 6.3. Implementation of recommendations from previous years The audit of the Annual Financial Statement for 2013 of the Democratic Union of Albanians, found irregularities and gave recommendations for their removal and those related to the calculation and payment of tax liabilities on the fees paid, providing keeping analytical records of fixed assets and records of receivables from local governments, reducing cash payments from the cash register, documenting of all costs with adequate and complete documentation and proper classification of costs according to the current Regulations on the Chart of Accounts. The audit of the Annual Financial Statement for 2014, found that the audited entity did not implement recommendations relating to the provision of analytical records of fixed assets and records of receivables from local governments and the recommendation relating to documentation of all costs with adequate and full documentation, and partially implemented the recommendations relating to the calculation and payment of tax liabilities on paid fees to individuals, proper classification of costs and reducing cash payments Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of Conducting the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and regularity audit of the Democratic Union of Albanians which includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (52/15 dated 17 December 2015) on the Preliminary report of SAI (No /181), the competent Board comprised of: Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 21 December 2015 adopted the

283 FINAL REPORT on Audit of the Annual Financial Statement of the Democratic Union of Albanians for 2014 Financial Audit has found that the Annual Financial Statement of the Democratic Union of Albanians in 2014 in all important material respects had been made and presented fairly and objectively in accordance with the applicable financial reporting framework, and accordingly the competent Auditing Board expresses an unqualified opinion with emphasis of matter as stated in the Report under the Item Petty cash transactions of the main Board and Item Entertainment expenses. Regularity audit has found that the audited entity did not align the financial and other activities with all laws and regulations that have been identified as criteria for the relevant audit, because it did not consistently apply the provisions of the Labour Law, Law of Obligations, Law on Accounting as well as Rules on the method and deadlines for inventory, so, accordingly, the competent Auditing Board expresses a qualified opinion. The following irregularities and inconsistent application of laws and regulations has affected the qualified opinion: 1. The audited entity justified the costs in the amount of 1, with incomplete or inadequate documentation. Incomplete documentation justified the expenses of compensation for the activists in the amount of 1, (not documented the taken cash), and inadequate documentation justified by the costs of representation in the amount of (presented invoices for litigation in 2013). The audited entity should document all costs with adequate and complete documentation. 2. The audited entity carried out inventory of fixed assets as of 31 December 2014, and presented information on the type of fixed assets, their quantity and inventory number but no value, but failed to present an evidence that it prepared a list of receivables, liabilities and cash assets on hand and on the bank account. It neither make a report on the list in the manner prescribed by the Regulations on the manner and deadlines for inventory and nor harmonize the carrying values with the actual ones. The audited entity at the end of the financial year should make a list of assets (fixed and current) and liabilities, harmonize the accounting balance with the actual one and prepare a report on the list according to the applicable Regulations. 3. The audited entity, for performance of the systematized position (branch coordinator) in 2014 paid a monthly fee in the amount of according to the service contract (No. 32/2013). The audited entity shall, with the person employed to perform the tasks of a systematized position (coordinator of the branch), conclude the contract in accordance with the provisions of the Labour Law. 4. The audit identified shortcomings with the concluded services contracts i.e.: those do not contain a legal basis, do not precisely define the obligations and the period of engagement of the perpetrator and those have not been signed by the engaged person. Service contract should include a legal basis for the conclusion thereof, precisely defined period of engagement and commitment of the perpetrator and it should be signed by the contracting authority and executor of work. 5. The audited entity was not in its business books separated data on revenues and costs related to the regular operations and the election campaign

284 In order to more accurately report in the business books, the audited entity should separate the records of revenues and expenses related to the regular operations and the election campaign. 6. The audited entity did not adopt the Rules on internal organization and systematization of jobs but the Main Committee, pursuant to the decision No. 04/2012 determined the needed jobs and the amount of compensation for that positions. The audited entity should determine the necessary jobs by the Regulations on internal organization and job classification. 7. The audited entity did not by an internal audit act determine who shall exercise a reimbursement for the use of mobile phones as well as the limit of such reimbursement. We recommend the audited entity to determine by an internal act who shall exercise the right to a reimbursement for use of mobile phones as well as a limit of such reimbursement

285 7. ASSOCIATION OF CITIZENS "NOVSKA LISTA" 7.1. Revenues The audited entity in the Annual financial statement (Income statement) showed revenues of 11,162.25, and those referred to the income from the budget of local self-government of Herceg Novi, in the amount of 10, and income from contributions of physical persons in the amount of Out of these revenues the amount of 8, referred to earnings for regular work and the work of the members club, while revenues in the amount of 2, referred to income for the election campaign (elections held in Herceg Novi as at 14 December 2014). Tabular overview of the revenues generated in 2014 No. Type of revenue Amount % 1 Municipal budget revenues 10, % 1 Revenues from contributions made by natural persons % Total 11, % 7.2. Expenditures On the basis of the presented documents and information disclosed in the Income Statement, audit identified that the audited entity showed costs in the amount of 11, and those referred to the cost of the phone in the amount of 42.16, the cost of pre-election meetings and advertising in the amount of , the cost of print advertising materials in the amount of 3,613.10, the costs of compensation for work in the amount of 3,370.00, the cost of assistance to individuals in the amount of 1, and entertainment expenses in the amount of 1, Out of the total amount of costs, the amount of 5, related to the cost of the election campaign, and the rest of the expenses for regular operations. The following table provides an overview of expenditures in 2014 No. Type of Expenditure Amount Share (%) 1. Telephone expenses % 2. Expenses of pre-election meetings and advertising % 3. Expenses of stamps and advertising materials 3, % 4. Remuneration for work 3, % 6. Support to individuals 1, % 7. Entertainment costs 1,7B % Total 11, % In accordance with the presented data, it is concluded that the largest share of the total costs referred to the costs of printing and advertising materials with 32.37%, the cost of compensation for work with 30.19%, the cost of entertainment with 16.01%, the cost of assistance to individuals with 13.89%, costs of pre-election meetings and advertising with 7.16% etc. Below is a graph of realized expenditures in Telephone expenses Expenses of pre-election meetings and advertising Expenses of stamps and advertising materials Remuneration for work Support to individuals Entertainment costs

286 7.3. Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of Conducting the audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and the regularity audit of the Association of citizens "Novska lista" which included compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (dated 23 December 2015) on the Preliminary report of SAI (No /189), the competent Board comprised of: Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Branislav Radulovic PhD, Member of the Auditing Board, at its meeting held on 25 December 2015 adopted the FINAL REPORT on audit of the Annual Financial Statement of the Association of citizens Novska lista for 2014 Financial audit has established that there are no material errors or significant discrepancies in officially presented Annual Financial Statement of the Association of citizens Novska lista for 2014, and accordingly, the competent Auditing Board expressed an unqualified opinion. Regularity audit has found that the audited entity did not align its financial and other activities with all legal regulations that have been identified as criteria for the subject audit. Non-compliance thereof referred to inconsistent application of the provisions of Article 18 and 37 of the Law on Financing Political Parties and electoral campaigns, so, accordingly, the competent Auditing Board expressed a qualified opinion. The qualified opinion was caused by the following: 1. The audit identified that the Association of citizens "Novska lista" carried its business through an account of a natural person (the person authorized to represent the association,) That bank account was used by the audited entity for regular operations and for the purposes of the election campaign which is not in accordance with Article 18 of the Law on financing of political Parties and electoral campaigns. The applicant of the declared and verified electoral list is required to open a separate account for the purposes of the election campaign in accordance with article 18 of the law on Financing of Political Parties and electoral campaigns. We recommend the Association "Novska lista" to, by acquiring the status of a legal entity, provide the possibility of opening bank account through which to perform all financial transactions from operations. By acquiring the status of a legal entity, it would be enabled the conduct of financial and other actions in accordance with applicable regulations (contracting, payments of taxes, payment of liabilities to suppliers through bank accounts, etc.). 2. The audited entity did not in accordance with article 37 of the Law on Financing of Political Parties and election campaigns provide the accounting records of income, assets and expenditures by the origin, amount and structure of income, assets and expenses. The audited entity prepared the Annual Financial Statement on the basis of the available documentation (invoices, decisions, the bank's statements and the like,). Data shown in the financial statements correspond to the data in he presented documentation

287 The audited entity, pursuant to the Article 37 of the Law, shall provide accounting records of income, assets and expenditures by their origin, the amount and structure in accordance with the regulations of the Ministry of Finance, and, on the basis thereof, prepare the Annual Financial Statement

288 8. NGO IZBOR 8.1. Revenues The audited entity, in the business books and the annual financial statement (income statement) showed revenues of 24, Revenues referred to income from donations of legal and physical entities in the amount of 18, and the revenue from the municipal budget Herceg Novi in the amount of 6, Part of the revenues in the amount of 6, referred to revenues for regular operations of NGOs "IZBOR" and the amount of 18, referred to revenues to finance election campaigns. Based on the disclosed data in the Report on the origin, amount and structure of collected and spent funds for the election campaign (elections held as at 14 December 2014 in Herceg Novi), it was found that revenues for the financing of election campaign amounted to 25, and that those related to income of local self-government of Herceg Novi in the amount of 6,236.74, income from in-kind contributions of legal entities in the amount of 6, and income from contributions of individuals in the amount of 13, Contribution of individuals in the amount of 1, was paid after the end of the election campaign (15 January 2015). Of the total reported income from contributions, the amount of 6, referred to the nonmonetary donations of legal and physical entities (providing media services and the rental of billboards). Revenue of local self-government of Herceg Novi in the amount of 6, was presented on the basis of payment of 20% of the associated facilities that shall be received by the applicants with verified electoral list ( ) and payments of the earned councillor seats in the amount of 5, Contributions from legal entities in the amount of 6, are presented on the basis of in-kind contributions i.e. providing of media services without the obligation to pay those as documented with the agreements on donations. Contributions from individuals in the amount of 13, were presented on the basis of payment in the amount of 12, and in-kind contributions in the amount of Payment of contributions was carried out in the amount of to 2,000.00, corresponding to the amount established by the law. NGO "IZBOR" in its books in the Annual financial report did not disclose the income from in-kind contributions in the amount of 6, (of legal entities 6, and of natural persons ), which, as the applicant of the electoral list "IZBOR - Dusan Radovic - Krušo" realized and stated in the presented Report by the origin, amount and structure of collected and spent funds for the election campaign (local elections in Herceg Novi) Expenditures The audited entity in the General Ledger and the Annual financial statement (Income statement) stated the costs in the amount of 56, and those referred to: the cost of office supplies and small inventory in the amount of , the cost of gross wages and contributions paid by the employer in the amount of 2,714.36, the cost of fees on service contracts in the amount of 1,140.54, other personal expenses in the amount of 2,235.00, transport costs in the amount of 1,664.02, phone expenses in the amount from , the cost of renting office space and equipment in the amount of 28,608.41, the cost of advertising in the amount of 16,660.73, the cost of an intellectual services in the amount of , the cost of entertainment in the amount of 123,80, costs of sponsorship and assistance in the amount of and other expense in the amount of Based on the presented report on the origin, amount and structure of collected and spent funds for the election campaign, it was presented that the total cost of the election campaigns concerns the amount of 27,

289 The following table provides an overview of expenditures in 2014 No. Type of expenditure Amount Share (%) 1 Office material and small inventory costs % 2 Gross salaries and expenses paid by employer 2, % 3 Reimbursement per contract 1, % 4 Other personal expenses 2, % 5 Transportation services 1, % 6 Telephone expenses % 7 Expenses of rent of business premises and equipment 28, % 8 Expenses of advertisement and propaganda 16, % 9 Other intellectual services % 10 Entertainment % 11 Sponsorship and assistance % 12 Other non-material expenses % 13 Total 56, % In accordance with the presented data it is concluded that the largest share of the total costs are the costs of leasing with 50.69%, the cost of advertising with 29.52%, and so on. Below is a graphical presentation of realized expenditures. Office material and small inventory costs Gross salaries and expenses paid by employer Reimbursement per contract Other personal expenses Transportation services costs 8.3. Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of Conducting of the Audit (number dated 31 March 2015) conducted a financial audit of the Annual Financial Statement and regularity audit of the NGO IZBOR, Herceg Novi, which included compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (55/15 dated 25 December 2015) on the Preliminary report of SAI (No /192), the competent Auditing Board comprised of: Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on 25 December 2015 adopted the

290 FINAL REPORT ON THE AUDIT OF ANNUAL FINANCIAL REPORT OF NGO IZBOR HERCEG NOVI FOR 2014 Financial audit has found that the Annual Financial Statement of the NGO "IZBOR" Herceg Novi for 2014 was prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and accordingly the competent Auditing Board expressed an unqualified opinion with the emphasis of matter with regards to the Report under item Revenues. Regularity audit has found that the audited entity did not align its financial or other activities with the legal regulations that have been identified as criteria for a given audit. Inconsistency refers to the inconsistent application of the provisions of Article 37 of the Law on Financing of Political Parties and electoral campaigns, because the annual consolidated financial report has not shown income from in-kind contributions that were received for financing election campaigns, and accordingly the competent Auditing Board expressed a qualified opinion. Review of established irregularities and given recommendations 1. NGO "IZBOR" did not in its business books and the annual financial statement show the revenues from in-kind contributions in the amount of 6, (of legal entities 6, and of natural persons ), which, as an applicant with the electoral list "IZBOR - Dušan Radović - Krušo" realized after election campaign funding (local elections in Herceg Novi). The audited entity was required to disclose in its Annual financial statement and its books the revenues from in-kind contributions that he realized to finance election campaigns. 2. As at 22 November 2013, the NGO "IZBOR" concluded with a physical person a lease contract of the restaurant "Belvedere" which is located in Herceg Novi for a period of five years, which was signed by the President of the Board of NGO "IZBOR". The agreement established annual rent in the amount of 22,000.00, which is the first year paid immediately after signing the contract, while for others the payment was made in advance (advance for the year), NGO "IZBOR" has paid the rent for the first year (the period from 22 November 2013 to 22 November 2014), on 25 November 2013 in the amount of 22,000.00, which is expressed as an expense in Overdue contractual obligations on the basis of the rent for 2015 has not been paid to the lessor. NGO IZBOR has concluded a sub-lease of the related property on 1 January 2014 with the NGO "Russian Cultural Centre" - Count Savo Vladislavić a period of five years. According to Article 5 of the said contract related property was given in sublease without compensation. Agreement on sublease stipulates that tax liabilities arising from the issuance of the above mentioned real estate to a sublease shall be borne by the sub lessee, as well as the cost of electricity, water and telecommunication services. The audited entity should review the rationality of giving into sublease the real estate (restaurant) free of charge, since on the basis of the lease thereof, it disclosed expenses in business books for 2014 in the amount of 22,000.00, while the total cost of the lease for the agreed period is 110, The audited entity did not separate in its business books the revenues and expenses related to regular operations and election campaigns. In order to achieve a more accurate reporting in the business books, the audited entity should separate the records of income and expenses related to the regular operations and the election campaign

291

292 EXCERPT FROM AUDIT REPORT ON 2014 ANNUAL FINANCIAL STATEMENT OF THE MINISTRY OF EXTERIOR AFFAIRS AND EUROPEAN INTEGRATIONS Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial audit and regularity audit Ministry of Exterior Affairs and European Integration Annual Financial Statement of the Ministry of Exterior Affairs and European Integration for auditing days Mr Nikola N. Kovačević, Member of Senate Head of the Auditing Board Mr Dragiša Pešić, Member of Senate Member of the Auditing Board

293

294 I GENERAL INFORMATION 1. LEGAL BASIS Legal basis for performing the audit of the Ministry of Exterior Affairs and European Integration for 2014 is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); The State Audit Institution Annual Audit Plan for 2016 (No , dated 22 December 2015); Decision on Conducting Audit of the SAI (Number ) dated 3 September Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI); Guidelines for quality follow up audit. 2. GENERAL DATA ON THE AUDITED ENTITY The Law on Foreign Affairs ("Off. Gazette of Montenegro", No. 46/10) regulates the method of keeping and carrying out foreign affairs, relations between the state authorities in the exercise of foreign affairs, the establishment and operation of diplomatic and consular missions of Montenegro abroad, diplomatic and consular titles, rights and duties of diplomats and other employees in the Ministry of Foreign Affairs and diplomatic and consular missions, the process of acquisition, management and disposition of property abroad that is necessary for the operation of diplomatic missions. The Ministry of Foreign Affairs is the competent body of the state administration for the implementation of established foreign policy. The Ministry harmonizes and coordinates foreign politics and other international activities which the state authorities and public administration bodies carry out within their jurisdiction. The authorities cooperate with each other in the performance of external affairs for which they are responsible under the Constitution. The Ministry of Foreign Affairs and European Integration performs the following tasks: 1) Represents Montenegro in its relations with other countries, international organizations and other international institutions, as well as their representative offices in Montenegro, in accordance with the law and international law; 2) Communicates and coordinates communication with other bodies and other diplomatic missions and missions of international organizations in Montenegro; 3) Performs diplomatic and consular affairs and other professional tasks related to the exercise of political, economic, cultural and informative and other relations with other countries and international organizations; 4) Issues diplomatic and official passports and keep records on them, in accordance with the law; 5) Protects the interests of Montenegro, its citizens and legal persons abroad; 6) Develops cooperation with emigrants from Montenegro and their organizations;

295 7) Analyses and evaluates the development of regional and international relations and developments, particularly in the field of foreign and security policy; 8) Analyses the international position of Montenegro, bilateral relations with other countries, foreign media information relating to Montenegro and activities in international organizations, as well as information and analysis of specialized institutes and institutions; 9) Promote the economic interests of Montenegro abroad; 10) Coordinate international development and humanitarian assistance; 11) Promotes intercultural dialogue and cooperation in culture, education and sport in international relations; 12) Proposes a foreign policy to the Government; 13) Proposes to the Government recognition of states, as well as the establishment and termination of diplomatic and consular relations with other countries; 14) Proposes to the Government membership or participation of Montenegro in international organizations and integrations, as well as other forms of multilateral cooperation; 15) Prepares draft laws, other regulations and general acts in the field of foreign affairs, gives opinion on proposals of laws and other regulations related to foreign affairs for which other authorities are competent; 16) Performs duties in accordance with the law regulating the conclusion and execution of international agreements and other regulations or international agreements; 17) Proposes to the Government the appointment and recall of heads of diplomatic missions and consular posts; 18) Participates in activities related to the accreditation of official representatives of countries and international organizations in Montenegro; 19) Participates in the organization and implementation of official and other international visits at the state level, including visits of delegations and members of the Assembly; 20) Participates in the preparations for the participation of Montenegrin representatives in international meetings and negotiations; 21) Preparation and provides legal opinions on issues of international law; 22) In cooperation with other competent authorities shall perform the tasks of demarcation between Montenegro and neighbouring countries, prepare and keep documentation on the state border in accordance with the law governing border control; 23) Makes the process of acquiring, holding, disposition and alienation of movable and immovable property abroad that is necessary for the operation of diplomatic and consular missions; 24) Collects and keeps documentation on foreign policy of Montenegro, encourages scientific research and education in the field of foreign policy and international relations; 25) In cooperation with other competent authorities organizes, maintains and protects information systems, telecommunications, courier and other ties with the diplomatic and consular missions and other information systems; 26) In cooperation with other competent authorities shall perform tasks in the securing of the Ministry, diplomatic and consular missions and their employees; 27) Performs other duties specified by law. Minister of foreign affairs manages the work of the Ministry. The Minister may, in order to improve the overall activities of the Ministry, establish advisory bodies made up of experts for the appropriate areas. The activities within its jurisdiction Ministry carries out directly and through diplomatic and consular representations of Montenegro. The diplomatic missions of Montenegro abroad are: embassies, missions of Montenegro in international organizations and consular missions. As of 31 December 2014, Montenegro had 34 (thirty four) diplomatic and consular missions i.e.: 24 Embassies, 6 (six) missions to international organizations and 4 (four) consular missions

296 Diplomatic - consular and other representations of Montenegro abroad perform the financial operations carried out in one or more convertible national currency of the receiving country. II ORGANIZATIONAL UNITS AND THEIR SCOPE Duties within the scope of the Ministry shall be made in the context of internal organizational units, as follows: 1. DIRECTORATE-GENERAL FOR BILATERAL ISSUES 2. DIRECTORATE GENERAL FOR MULTILATERAL AFFAIRS AND REGIONAL COOPERATION 3. DIRECTORATE GENERAL FOR ECONOMIC DIPLOMACY AND CULTURAL COOPERATION 4. DIRECTORATE GENERAL FOR CONSULAR AFFAIRS 5. DIRECTORATE-GENERAL FOR NATO AND SECURITY POLICY 6. DIRECTORATE-GENERAL FOR EUROPEAN AFFAIRS 7. DIRECTORATE-GENERAL FOR COORDINATION OF EU ASSISTANCE PROGRAM 8. DEPARTMENT OF PUBLIC RELATIONS AND COMMUNICATION SUPPORT IN INTEGRATION PROCESSESES 9. DEPARTMENT OF INTERNATIONAL AFFAIRS 10. INTERNAL AUDIT DEPARTMENT 11. DEPARTMENT OF HUMAN RESOURCE MANAGEMENT 12. DIPLOMATIC ACADEMY 13. DIVISION OF LEGAL AFFAIRS 14. DEPARTMENT FOR MANAGEMENT OF INFORMATION SYSTEMS 15. DIPLOMATIC PROTOCOL 16. OFFICE OF THE MINISTER 17. OFFICE FOR SUPPORT TO CHIEF NEGOTIATOR 18. SERVICE OF FINANCIAL AFFAIRS 19. SERVICE OF CLERICAL DUTIES 20. ADMINISTRATION OF DIASPORA 21. DIPLOMATIC AND CONSULAR MISSIONS OF MONTENEGRO ABROAD (EMBASSIES, MISSION WITH INTERNATIONAL ORGANIZATIONS, CONSULAR BRANCHES) The Directorate-General for Bilateral Affairs performs the following activities establishment, improvement and development of diplomatic and overall relations and cooperation between Montenegro and other countries and the strengthening of its international position; preparation and implementation of bilateral visits; monitoring and analysis of the internal situation and foreign policy activities of other countries; preparing reports, analysis, notes, reminders, the platform for the talks and participate in the negotiations, and other documents etc. The Directorate-General for Multilateral Affairs and Regional Cooperation performs the activities related to: Montenegro's participation in regional and global initiatives and forums, cooperation of Montenegro with the UN, OSCE, CoE and other international organizations, specialized agencies, international governmental and non-governmental organizations, communities, states, regional organizations and other initiatives and programs, as well as monitoring of their activities; involvement in the preparation and drafting of documents and positions for participation of Montenegro in international conferences and other meetings and the like. In the Directorate General for Economic and Cultural Co-operation shall be carried out activities related to the coordination and promotion of international economic and cultural cooperation; promotion of economic and cultural interests of Montenegro abroad; coordination of promotion of foreign trade and presentation of economic potentials and culture of Montenegro to attract foreign direct investment to economic evaluation; encouraging the internationalization of the Montenegrin economy and culture; coordination and participation in the conclusion of bilateral and multilateral economic and investment agreements etc

297 The Directorate-General for Consular Affairs performs the activities related to the protection of rights and interests of Montenegro, its citizens and legal persons abroad; developing links with the citizens of Montenegro who are working and living abroad; the implementation of foreign policy of Montenegro in the field of consular relations and national borders etc. The Directorate General for NATO and Security Policy performs the activities related to: political coordination of the process of Euro-Atlantic integration, including the preparation and production of documents and items for the participation of Montenegro in international conferences organized by NATO; participate in discussions, at international conferences, the parliamentary cooperation, seminars and round tables in the field of Euro-Atlantic integration; coordination in the areas of security policy, cooperation in the field of arms control and disarmament and security, including activities related to the fulfilment of obligations in this area deriving from the relevant conventions and documents of the UN, NATO, the SE, the OSCE, the coordination regarding the Common Foreign and security policy (CFSP) and the Common Foreign and Defence policy (CSDP), participation in the development of national strategic documents in this field; coordination of the process of regional cooperation in the area of safety and etc. The Directorate General for European Affairs performs the activities related to: the management of the accession process and accession of Montenegro to the EU in the part related to the regular monitoring of the implementation of the Stabilisation and Association Agreement between the European Community and its Member States (hereinafter referred to as SAA) on the one hand, and Montenegro, on the other hand, as well as coordinating and monitoring the work of the joint bodies established by the SAA and the like. The Directorate-General for coordination of assistance programs of the European Union carries out the activities related to: coordination of the programming process, monitoring and evaluation of the pre-accession EU assistance; Coordination of cooperation of state bodies with institutions, organs and bodies of the EU, its Member States, other countries and international organizations, in areas related to the pre-accession programs support of EU; horizontal issues, organizational management, reporting on irregularities and risk management in the context of decentralized management of EU funds support etc. The administrative body within the Ministry of Foreign Affairs and European Integration is the Administration of the Diaspora, Management of Diaspora performs tasks related to: the preservation and cultivation of language, culture and tradition, the affirmation and strengthening of national identity and of belonging to the state of Montenegro; establishing contacts with immigrants and their organizations; encouraging the organization and networking of individuals and organizations in the Diaspora; establishment of a database on immigrants and their organizations; strengthening communication, information sharing and publishing activities; assistance in fostering and promoting the cultural values of Montenegro in immigrant communities; fostering of historical and cultural heritage of the Montenegrin diaspora and providing support to these studies; Reconstruction of linguistic, cultural, identity characteristics emigration in which these characteristics during the process of assimilation lost; enhancement of economic partnership with the Diaspora, as well as other activities within its jurisdiction The diplomatic-consular and other missions The diplomatic missions of Montenegro abroad are: embassies and permanent missions to international organizations and consular missions. Consular missions of Montenegro abroad are: general consulate, consulate, vice and consular agencies. Special mission temporarily represent Montenegro in a foreign country or international organization in order to exercise specific tasks

298 Establishment and tasks of the special mission, the appointment of its chief, financing and working conditions regulated by the Government, at the proposal of the Ministry, in accordance with an international agreement. Abroad can be established and the cultural and information centres, economic and other representation. Supervision of the work of representative referred to in paragraph 1 of this Article, as well as the coordination of their work shall be carried out in diplomatic and consular missions. The method of establishing and other issues of importance for the establishment of representative offices shall be prescribed by the Government. As of 31 December 2014, Montenegro had 34 (thirty-four) diplomatic and consular missions to 24 Embassies, 6 (six) missions to international organizations and 4 (four) consular missions Activities of diplomatic missions A diplomatic mission shall perform the tasks set out in the Vienna Convention on Diplomatic Relations and the Vienna Convention on the Representation of States in their relations with international organizations of universal character, in particular: 1) represents the interests of Montenegro in the receiving state or an international organization; 2) It protects the interests of Montenegro, its citizens and legal entities; 3) Encourages and develops bilateral relations, political, economic, scientific, cultural and overall cooperation between Montenegro and the receiving state; 4) Reports to the Ministry of internal developments and external political situation of the receiving State, as well as on the activities of the receiving state or an international organization; 5) Informs the authorities, institutions and the public of the receiving State or international organization on the development and activities of Montenegro; 6) If necessary, takes part in negotiations, preparations for the conclusion of international agreements and the work of international conferences; 7) Performs other duties stipulated by law, regulations and instructions of the Ministry. The Ministry shall ensure that the work of diplomatic and consular missions is efficient and economical and provides personnel, material and spatial conditions for their work. The Ministry supervises the work of diplomatic missions across the diplomats in the position of ambassador to the Ministry or Minister Plenipotentiary, appointed by the Minister, Chief Diplomatic inspector is carrying out his duties independently and impartially. Supervision in the consular field, finance, security and other areas can be made by other officials authorized by the Minister. Closer to the main diplomatic powers of inspectors and the manner of conducting supervision of the work of diplomatic missions shall be prescribed by the Ministry. The rights, obligations and responsibilities of employees of the Ministry and diplomatic and consular missions, shall be governed by the provisions of the Civil Servants and State Employees and the general labour regulations, unless the law provides otherwise. In accordance with Article 88 of the Law on Public Administration, it was found that the state administration bodies, except in the body composition, independently dispose the means to carry out the activities. The funds for the work of the composition shall be provided within the funds for the ministry and the ministry disposes of part of which is the body. Article 93 of the Law on State Administration determined that the lawful use of resources of the state administration shall be the responsibility of the Minister or other authorized person. During the audit the competent minister was Igor Luksic, PhD, and the officer for authorization, in addition to the Minister, was the Secretary General Predrag Stamatović

299 Article 94 of the Law on State Administration established that the control of legality of the use of funds for the work of public administration shall be conducted by the Ministry of Finance, in accordance with the law Type of audit The State Audit Institution has performed a financial audit and regularity audit, which includes audit of the Annual Financial Statement for 2014, while the audit of regularity implies compliance with legal and other regulations Subject-matter of the audit Subject-matter of the audit is the Annual Financial Statement of the Ministry of Foreign Affairs and European Integration for 2014 and compliance with legal and other regulations The objective of the audit The objective of the financial audit is expressing an opinion on whether: 1. Financial statements are, in all material respects, prepared in accordance with the applicable financial reporting framework or; 2. Financial Statements, in all material respects, give in a fair and objective view in accordance with the given frame. The aim of regularity is expressing an opinion whether the financial and other operations of the audited entity, in all material respects comply with the laws, regulations and laws that have been identified as criteria for a given audit. 2.6 Criteria for regularity audit Law on Budget and Fiscal Responsibility ("Off. Gazette of Montenegro", No. 20/14); Law on Budget of Montenegro for 2015 ("Off. Gazette of Montenegro", No. 59/14 and 47/15); Labour Law ("Off. Gazette of Montenegro", No. 49/ /14); Law on Civil Servants and State Employees ("Off. Gazette of Montenegro", No. 39/ /14); Law on salaries of civil servants and state employees ("Off. Gazette of Montenegro", No. 4/ 12); Law on Personal Income Tax ("Official Gazette of the Republic of Montenegro", No. 65/01..., 04/07 and "Off. Gazette of Montenegro", No. 86/09..., 79/15); Law on Mandatory Social Insurance ("Off. Gazette of Montenegro", No. 13/07..., 08/15); Law on Public Procurement ("Off. Gazette of Montenegro", No. 42/11,,, 28/15); Law on State Property ("Off. Gazette of Montenegro", No. 21/09, 40/11); Law on internal financial controls in the public sector ( Off. Gazette of Montenegro", No. 73/08..., 34/14); Regulation on reimbursement of costs of Civil Servants and Civil Servants ( Off. Gazette of Montenegro", No. 26/12); Regulation on the establishment of internal audit in the public sector ( Off. Gazette of Montenegro", No. 50/12) Rules on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets ("Official Gazette of the Republic of Montenegro", No. 35/05..., 81/05 and "Off. Gazette of Montenegro," No. 2/13); Rules on the method of preparation and presentation of financial statements of the budget, state funds and local government units ( Off. Gazette of Montenegro", No.23/14);

300 Rules on the form, content, manner of filling in the form of a single report on calculated and paid tax on personal income tax and contributions for social insurance ("Off. Gazette of Montenegro", No.76/10..., 49/14 ); Instructions on State Treasury ("Off. Gazette of Montenegro", No.53/14 and 72/15); Instructions for calculation of gross salaries ("Off. Gazette of Montenegro", No.5/11). The Ministry, pursuant to section 13 of the law, passed the Book of Procedure that contains the following internal guidelines, rules and procedures: Rules on financial and material operations of diplomatic missions of Montenegro (No.05/1-966 from 27 April 2009); Instructions on overheads and Planning of official apartments of diplomatic and consular representations of Montenegro (No. 05/1-966 from 27 April 2009); Instructions on how to use the funds for the national team in the DCO of Montenegro (No.05/1-966 from 27 April 2009); Instruction on the organization and costs of cocktails in DCO Montenegro (No. 05/1-966 from 27 April 2009); Rules on amendments to the Rules on salaries and allowances of employees in DCO Montenegro (No.05/7-784/3 of 30 May 2012,); The internal procedures of the process of registration and payment of incoming invoices (No.05/ of 26 July 2013,); Internal rules for making internal documents that apply to the Ministry of Foreign Affairs and European Integration (No.05/ of 18 April 2013,); The internal rules of procedure of granting official travel (No.05/ of 18 April 2013,); Regulation on conditions and manner of use of official vehicles of the Ministry of Foreign Affairs and European Integration (No.05/ of 12 June 2013); Regulations on internal order in the Ministry of Finance and the Ministry of Foreign Affairs and European Integration (No.05/ of 10 October 2011); Regulations on housing in DCO (No.05/ of 24,02,2009,); Rules on the use of mobile phones for employees in the DCO (No.05/1-593/1 from 03,03,2009,); Rules on official vehicles of DCO of Montenegro abroad (No.05/1-593 from 03,03,2009,); Internal guideline on implementation of public procurement in the Ministry of Foreign Affairs and European Integration (No.05/7-3/15 of 12 June 2013,); Guide on the rights and obligations of civil servants based on the schedule in the DCO (No.05/3-4040/11 of 31 October 2013,); Guide for access to information held by the Ministry of Foreign Affairs and European Integration (No.05/3-4040/12); Guide for access to information held by the Ministry of Foreign Affairs and European Integration (No.05/3-4040/12 of 31 October 2013); Internal procedures: be sure to create a copy of the data (No.05/3-4040/9 of 30 October 2013); Internal procedure of the implementation process of public procurement by shopping (No.05/3-4040/2 of 30 October 2013); Internal procedures to record assets (No.05/3-4040/6 of 30 October 2013); Internal rule of treasury operations (No.05/3-4040/4 of 30 October 2013); The internal procedures of the process of financial reporting (No.05/3-4040/7 of 30 October 2013); Internal procedure of calculation and payment of wages (No. 05/3-4040/8 of 30 October 2013); Internal procedure of budget planning process (No. 05/3-4040/10 of 30 October 2013); Internal procedures on creating user passwords (No.05/3-4040/5 of 30 October 2013); Regulations on internal order in the building of the Directorate General for Consular Affairs of the Ministry of Foreign Affairs and European Integration (No.05/3-4040/1 of 30 October 2013);

301 Internal Audit Charter (No.05/3-4040/3 of 30 October 2013) The methods of auditing The audit was performed by combining the process of documentary and field audit. In the preparatory audit phase, identification and assessment of material risks was conducted through an understanding of the audited entity and its environment, including internal controls. There was also set a materiality at the planning stage of financial audit for the financial statements as a whole or assessment of the extent to which a misstatement in the financial statements can be tolerated, and that it does not significantly affect its accuracy and objectivity. Control of the expenditures was performed using a sample of 83%. The materiality at the level of total expenditure is set in the amount of 146, (1% of the total expenditures of the audited entity, for the year 2014 which amounted to 14,619,032.79). 3. OPINION AND RECOMMENDATIONS The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board on conducting the audit (number ) has conducted a financial audit of the Annual Financial Statement and the regularity audit, which includes compliance with legal and other relevant regulations. The audit was performed in accordance with the Rules of Procedure of the State Audit Institution, the Instruction on the methodology of the financial and regularity audit. The audit was conducted in accordance with International Standards for Supreme Audit Institutions (ISSAI-level III). Those standards require that we plan and perform the audit in a way that allows it to obtain reasonable assurance on whether the financial statements are free of materially significant errors. An audit involves performing procedures to obtain sufficient and appropriate audit evidence that will be a basis for an audit opinion. The State Audit Institution has planned and performed the audit in a manner which ensured a reasonable assurance that the statements are not a material misrepresentation of data, but we believe that the audit obtained is sufficient and appropriate evidence to support the audit opinion expressed. Based on the conducted audit, determined facts and Statement of the audited entity (No. 05/7-809/6 dated 14 April 2016,) on the Preliminary report (SAI No / /13), the competent Auditing Board comprised of the Member of Senate Nikola N. Kovacevic, Head of the Auditing Board and Member of Senate Dragisa Pesic, Member of the Auditing Board, at its meeting held on 22 April 2016, adopted the FINAL REPORT on Audit of the Annual Financial Statement of the Ministry of Foreign Affairs and European Integration for 2014 OPINION Financial audit has established that the Annual Financial Statement of the Ministry of Foreign Affairs and European Integration in 2014 is not in all material respects, compiled and presented in a fair and objective manner in accordance with the applicable financial reporting framework. Audit has established (based on the audited 18 DCO) that the audited entity carried out payment for the costs of renting of the office space and apartments for the need of DCO in the amount of 456, on the basis of inadequate documentation, that on behalf of compensation for costs of flats of employees in DCO were paid in an increased amount by 592, from the amount established by the Regulation, that in the statement of arrears (form V) it did not express liabilities in the amount of 300,163.87, and that it did not record the payment part of the expenditure in the amount of 184, to the appropriate position according to the current Regulations, which represents materially significant error in relation to the established materiality ( 146,190.30), and accordingly the competent Auditing Board expressed AN ADVERSE OPINION

302 Regularity audit has found that the Ministry of Foreign Affairs and European Integration did not align the financial transactions, and other activities in all material respects comply with the laws and regulations that have been identified as criteria for a given audit. The audit identified discrepancies and non-compliance of operations of the audited entity with the following regulations: Law on Budget and Fiscal Responsibility, Public Procurement Law, the Law on State Property; Law on Civil Servants, the Labour Law, Law of Obligations, Law on Foreign Affairs, the Law on the system of internal control of financial public sector, the Regulation on a special supplement to the basic salary, the Regulation on fees for civil servants and state employees, Instruction on State Treasury, Regulations on internal organization and job classification at the Ministry of Foreign Affairs and European Integration, Regulations of employment of local staff and the Rules on classification for the State budget, Extra-Budgetary funds and Municipal budgets, so, accordingly, the competent Auditing Board expressed AN ADVERSE OPINION. OVERVIEW OF DETERMINED IRREGULARITIES, SUGGESTIONS AND PROVIDED RECOMMENDATIONS 1. The affairs from its competencies the Ministry carries out directly and through DCO, Diplomatic consular missions of Montenegro are: embassies, Permanent Missions of Montenegro in international organizations and consular missions. The system of records of the Ministry of Foreign Affairs and European integration is based on a cash basis, the Ministry is linked to the information system SAP (software of the State Treasury in which the treasury operations are recorded). Ministry does not provide the conduct of its general ledger but the recording of expenditures is done through SAP program of the State Treasury. Execution and recording of expenditures of diplomatic and consular missions in the General Ledger of the State Treasury is not performed for individual DCMs, but at the level of the program of diplomatic consular missions by items of expenditure. Performance of diplomatic and consular missions is established by the Rules on financial and material operations of diplomatic and consular missions of Montenegro (No.05/1-966 dated 27 April 2009,). Pursuant to the internal procedure of the financial reporting process (No.05/3-4040/7 dated 30 October 2013,), the financial department of the Ministry was obliged to keep the General Ledger and the following side records: the book of incoming invoices, analytical records of suppliers, records of cash business, records of state property and records of fuel consumption. The audit has found that the Ministry in 2014 did not provide the accounting records as prescribed by internal procedures. It was also established that the Ministry provided neither records of fixed assets in the accounts of class (0), nor records of liabilities in the accounts (class 2) as provided for in the Rules of the Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets. The audited entity should, in accordance with internal procedures of the financial reporting process, provide maintenance of General Ledger and other supporting records, The obligation of keeping the general ledger and ancillary records is further stipulated by the Article 62 of the Law on Budget and Fiscal Responsibility, Instructions on the State Treasury (item 95), as well as the specificity of the activities carried out by the Ministry. The General Ledger should record all transactions to the appropriate accounts in accordance with the Regulations on the Classification for the State Budget, Extra- Budgetary Funds and Municipal Budgets. State Audit Institution recommends that the audited entity bring internal act to regulate the manner of recording of the business changes in the diplomatic-consular missions in the General Ledger

303 2. The method of preparation of preparation and submission of annual financial reports of budget beneficiaries is prescribed by Article 64 of the Law on Budget and Fiscal Responsibility Act and the Regulations on the method of preparation and presentation of financial statements of the budget, state funds and local governments. With respect to the specific operations performed in the seat and through the embassies, the Ministry of Foreign Affairs and European Integration did not initiate the adoption of a special act of the Government or the adoption of instructions from the Ministry of Finance responsible for the financial performance, which would regulate the field of budget accounting conducted at the Ministry of Foreign Affairs and European Integration and its diplomatic and consular missions, as well as the method of financial reporting of public administration bodies. It is recommended that the audited entity shall undertake activities on the adoption of a special act or instructions to regulate the field of budget accounting, which is kept by the Ministry of Foreign Affairs and European Integration and its extraterritorial organizational units, as well as ways to regulate financial reporting of public administration bodies. 3. The audit concluded that Annual Budget Law for 2014 did not adequately plan the funds for the work of the Ministry of Foreign Affairs. In this area, in particular stands out unrealistic plan for the program of diplomatic and consular missions for which there were planned the funds by reallocations from other spending units and, from other programs and positions within the Ministry, it has to be increased by 1,207, Unrealistic planning in the context of the said program with particularly referred to salaries and other employee benefits (through reallocations increased by 335,955.00), expenditures for the lease (through reallocations increased by 193,554.00), expenditures for services (through reallocations increased by 224,042.50) and other expenses including the fees per contract (through reallocations increased by 378,691.00). The audited entity is recommended to strengthen administrative capacity in the area of budget planning and provide through the Annual Budget Plan means that are adequate to the real needs of the Ministry, especially the work of diplomatic-consular missions. 4. Pursuant to the revised eighteen diplomatic-consular missions, the audit found that the compensation cost of housing of employees in DCM has been paid in a larger amount of 592, in comparison to the limit stipulated by the Regulation. The audited entity shall pay fees based on the cost of housing in accordance with Article 12 of the special supplement to the basic salary. 5. The audit has found that the Ministry paid for renting office space and apartments for the needs of the DCM the amount of 456, on the basis of inadequate documentation, Presented lease agreements based on which it was carried out indicated payment were expired, and the same were not annexed, MFAEI has, with the declaration, submitted written statements of the ambassador that contracts were annexed automatically in accordance with applicable regulations of the receiving state, without reference to specific provisions on which it was carried out an extension of the contract, which cannot be accepted as valid evidence, In addition to the above costs, the audit found that in 2014 there were paid costs in the amount of 14, which are not documented and expenses in the amount of 22, which are not justified by adequate documentation and it referred to the costs of the DCM. The audited entity should record and settle the costs on the basis of adequate documentation

304 6. The audit has found that the Ministry did not in accordance with the provisions of Article 38 - paragraph 4 of the Public Procurement Law, within the prescribed period until 31 January of the current fiscal year, prepared the procurement plan and submitted to the competent authority for publication on the Public Procurement Portal, but it submitted the plan with delay as at 18 February 2014 as well as for public procurement officials did not appoint a person who met the statutory requirements. The audited entity shall prepare and submit to the competent authority the Public Procurement Plan within the time limit specified in Article 38 of the Law on Public Procurement and for the public procurement officer shall appoint a person who meets the statutory requirements. 7. The audit identified that the Ministry in 2014 performed the procurement of goods and services in the amount of 654,338.06, and the Report on conducted public procurement procedures and concluded contracts refers to the total value of purchases in the amount of 304,539.90, from which implies that the report for 2014 did not include the procurement of goods and services in the amount of 350, The audited entity, pursuant to Article 118 of the Law on Public Procurement, shall all procurement of goods, works and services disclose in the Report on conducted public procurement procedures and concluded contracts. 8. The audit has found that the Ministry in 2014, through the direct agreement, executed the procurement of goods and services in the amount of 452, or 69.19% of total purchases, which amounted to 654,338.06, which is not in accordance with Article 30 of the Law on public Procurement. The audited entity is required to purchase goods and services through direct agreement made in an amount that is determined by the provisions of Article 30 of the Law on Public Procurement. 9. The audit has found that the Ministry procured goods and services without following due process in the amount of 308, which is not in accordance with the provisions of Article 20 and 21 of the Law. It was also found that when purchasing office supplies and equipment, as well as the service team and maintenance and repair of official vehicles, it failed to comply with the terms and procedure of public procurement determined by the provisions of Article 44 (paragraph 4); Law on Public Procurement as it, during the financial year, divided the subject of public procurement, which represented a unified whole with the intention of avoiding the law and due process of public procurement. The audited entity needs to process the purchase of goods and services from the value of class I and II (Article 21 of the Law on Public Procurement) through the application of due process under Article 20 of the Law and not to divide the subject of a procurement that represents a whole (Article 44). 10. The audit has shown that in the statement of arrears the audited entity did not disclose the liabilities for net salaries and staff in diplomatic-consular missions for the month of December 2014 in the amount of 281, and liabilities for contributions in the amount of 18, The audited entity should provide a record of outstanding liabilities and recognize those in the total amount in the statement of arrears (Form 5). 11. The Ministry, in a statement on the manner of expenditure of funds after the end of the fiscal year (Form 8) stated the funds in the amount of 41, These funds were used to pay the

305 costs of diplomatic and consular missions. After examining the presented documents it was found that the funds in the amount of 18, were spent for payment of liabilities of the DCM for 2015 which is not in accordance with the provisions of Article 40 of the Law on Budget and Fiscal Responsibility and Guidelines on State Treasury item 96. The audited entity should state the spent funds after the end of the fiscal year is done in accordance with the Law on Budget and Fiscal Responsibility and Guidelines on State Treasury. 12. In the Letter No. 05/7-246/2 dated 17 April 2015, the Ministry submitted to the competent authority information on the assets used in the seat, but no data on property used by the diplomatic and consular missions. According to Article 50 of the Law on State Property, the Ministry was obliged to, within the legally stipulated deadline (at the latest by the end of February of the previous year) submit to the competent authority a review of the total assets used by the Ministry and diplomatic and consular missions. The audited entity, pursuant to Article 50 of the Law on State Property, shall keep data on movable and immovable property which is used in the seat and in Diplomatic -consular missions to the Property Administration for the purpose of keeping a register of real estate, i.e. accounting records of movable property in electronic form no later than the end of February of the current for the previous year. 13. The audit has found that the Ministry paid with cash from the cash register, in accordance with decisions of the Secretary General, the travel expenses (daily allowances, accommodation, etc.) in the amount of 10, to persons who are not employed at the Ministry of Foreign Affairs and European Integration, which is not in accordance with the Regulation on charges related to civil servants and state employees. The audited entity, at the payment of business trip expenses, should fully apply the Regulation on charges related to civil servants and state employees. 14. Diplomatic-consular missions generate the consular revenues from charging the fees based on the issuance of passports, visas and other documents, and on the basis of the certification of the translation, statements, authorizations, certificates and the like. These Revenues are paid into the accounts of the DCM opened for this purpose. Payment of the above accounts shall be made in accordance with the instructions of the Ministry of Finance which approved that the Consular Revenues instead of the consolidated account of the State Treasury shall be paid into the accounts of the embassies, taking into account the fact that the transfer of these funds from an account abroad to the account of the State Treasury and re transfer of funds to the accounts of the DCM for financing the costs would create a very complicated procedure and produce high costs of transactional fees. The audit has shown that the giro accounts to which are paid Consular Revenues are not covered by the Order of payment of public revenues. We recommend the audited entity to initiate the adoption of the act that will regulate the manner of use of funds collected on the basis of consular revenues, as well as to initiate a change in the Instruction on the manner of payment of public revenues in a way that those include the accounts to which payment are made for the consular revenues. 15. Financial Plan of the Ministry of Foreign Affairs and European Integration for 2014 did not present the budgets for each of diplomatic -consular mission, but at the level of programs of DCM. Area of planning, execution and recording of expenditures in the diplomatic and consular missions and field reporting on expenditures that emerged in these organizational units is not regulated by the Law on Budget and Fiscal Responsibility

306 The Ministry is recommended to, in the context of the Financial Plan and budget execution plan, present the plan and execution for each diplomatic- consular mission per closer reasoned purposes, for more efficient financial management and control of expenditure of funds and the recording of executed expenditure for each diplomatic consular mission or post in accordance with economic classification. 16. The audit has found that out of the total number of the perpetrators engaged by service contracts, 12 persons were engaged to carry out the tasks for which the Regulations on internal organization systematized the position thereof, which is not in accordance with the Law on Civil Servants and State Employees, which stipulates that jobs for which the competence is provided by the Constitution, law and other regulations shall be performed by the civil servants. After examining the presented contracts, there were determined the following disadvantages: The contract fee was not agreed in a gross amount, not precisely defined scope of work of the perpetrator, and the contracts did not contain information that qualifies the engaged person (professional qualifications, specialized knowledge, etc.). Also, there were not presented the evidences of employment status of the persons employed which has an impact on the calculation of tax liabilities. For businesses which are defined in the Regulations on internal organization and job classification, the audited entity should engage the perpetrators in accordance with the Law on Civil Servants and State Employees. The service contract should contain all the essential elements stipulated by the Law on Obligations. 17. Audit has established that the Ministry during 2014 engaged on the basis of the agreements on occasional and temporary jobs 17 persons to carry out the tasks from the competence of the Ministry that are in the description of systematized jobs, which is neither in accordance with Article 163 of the Labour Law nor the Law on Civil servants and state employees. The audited entity should conclude contracts on occasional and temporary jobs to perform the duties set forth in the provisions of Article 163 of the Labour Law. 18. The audit found that, from the position of expenditures for contractual fees, there was paid the amount of 47, for local staff (for two people) engaged in the Embassy of Montenegro in Austria on behalf of compensation for salaries and benefits for housing, which in the process of auditing, the state the auditor was not presented a legal basis (contract) on the basis of any of the aforementioned payment. Funds in the amount of 36, were paid on the basis of net earnings and funds in the amount of 11, on the basis of the cost of renting an apartment, to which according to the Law and Regulation they were not entitled to. Since there were not presented the contracts on the engagement of the said persons, it was not possible to determine which jobs they were involved in. The audited entity should pay compensation made on the basis of valid documentation, and sign labour contracts with local staff in accordance with Article 37 of the Law on Foreign Affairs and the Regulations on employment of local staff in diplomatic and consular missions. 19. In the course of 2014, the Ministry engaged five persons to perform the duties of drivers in the DCM of the Ministry, whose work assignment in the DCM requires higher costs than those of hiring local staff to perform these tasks

307 For the purpose of more rational budget spending, we recommend the audited entity to hire local staff for the position of a driver, because these are jobs that do not require specific expertise and education. 20. The review of sampled files, out of twenty-eight (28), it was found that seventeen (17) employees in the Ministry did not meet the special requirements prescribed by the act on internal organization for performance of duties of the respective job in part of a passed diplomatic and consular exam and/or degree of knowledge of foreign language) which is not in accordance with the Law on Civil servants and state employees and the applicable regulations. The audited entity needs to recruit civil servants and state employees in the manner as prescribed by the Law on Civil Servants and State Employees and the Regulations on internal organization and systematization. 21. The audit has found that a number of diplomatic and consular missions audited (4 DCM), upon a payment of the costs of mobile phones to employees, did not consistently follow the prescribed limits set out in Article 4 of the Rules on the use of mobile phones of employees in DCM. We recommend that the diplomatic and consular missions in their records (log of traffic) provide analytical records of the cost of fixed and mobile telephony, Internet and other communication services, to ensure monitoring of consumption of mobile phones and respect of prescribed limits set out in Article 4 of the Rules. 22. The audit of audited expenditures (18 DCM) found that (18) Contracts on the lease of apartments were concluded by the employees in DCMs with landlords/permanent Mission to the EU, Brussels-15 contracts/consulate General of New York-2 contracts/permanent Mission to the United Nations, New York -1 contract which is not in accordance with Article 54 of the Rules which provides that: a lease contract must be concluded by the heads of missions. Contracts on the lease of apartments that are used for the purposes of diplomatic and consular staff should be concluded with landlords in line with Article 54 of the Rules of financial and material operations of the DCM of MNE. 23. Pursuant to the Rulebook on internal organization and systematization of the Ministry, preparatory activities for the implementation of the Integrity Plan are the responsibility of the Internal Audit. Article 170 of the said Rulebook stipulates that a senior internal auditor, among other matters, shall carry out operations that are not in the field of Internal Audit - preparation and implementation of the Integrity Plan, which violates the principle of independence of the internal audit, which is not in accordance with the provisions of Article 20 paragraph 3 of the system of internal financial controls in the public sector, which provides that "the head of internal audit unit and the internal auditors may perform only the internal audit". The audited entity should align the description of the tasks of the "Senior Internal Auditor" with the provisions of Article 20 of the Law on internal financial controls in the public sector. 24. The Ministry of Foreign Affairs and European Integration did not, in accordance with the provisions of Article 8 of the Law on internal financial controls in the public sector, perform the identifying and assessing the risks in relation to important business processes and activities (did not establish a Risk Register and did not issue a Risk Management Strategy). The Ministry adopted neither a plan for the establishment of financial management and control, nor a methodology for implementing the plan, which is not in accordance with Article 14, paragraph 2 of the Law

308 The Ministry of Foreign Affairs and European Integration, pursuant to Article 15 of the Law, did not provide the Central Harmonization Unit the semi-annual reports on the implementation of planned activities in the establishment and development of financial management and controls, i.e. the Annual Report on the implementation of planned activities in the establishment and development of financial management and control. Based on the presented, it is noted that the subject of the audit did not fully implement all activities aimed at establishing an adequate system of internal control as defined by the Law on internal financial controls in the public sector. Audited entity is obliged to carry out all activities and actions in order to establish an adequate system of financial management and control as defined by the Law. 25. The audit identified that the individual lease agreements for housing needs of diplomatic staff established the obligation to pay the deposit to the lessor that after the expiry of the contract shall be returned to the lessee. The audit, based on the presented documents, showed that there was a return of the deposit on giro accounts of the audited DCM in the amount of 65, It was also found that to the accounts of the foregoing DCM, it was performed the VAT refund in the amount of 90, Auditor was not presented the documentation (invoices and claims for reimbursement on the basis of which the VAT was returned), and it could not be determined which were the invoices upon which the VAT was returned, nor on which accounting period related the returned funds. The diplomatic and consular missions of the Ministry in 2014 provide neither the adequate records of receivables for deposits for rented apartments, nor a record of the paid VAT and execution of the refund on this basis. We recommend the audited entity to provide records of receivables for deposits given to the lessor at the conclusion of the lease, as well as records of receivables arising from VAT. Providing records of those receivables would enable accurate records thereof and of the returned deposits, as well as information on the Value Added Tax (VAT). 26. After inspecting the inventory lists of the Diplomatic-consular mission Ljubljana, it was found that there was not recorded a passenger car whose purchase value amounted to 82,592.00, which was procured under the Grant, also not recorded in the records of the MFAEI. The audit has found that the Ministry did not provide the inventory lists to the competent authority as prescribed by law and internal regulations of the Ministry. The audited entity is obliged to make an inventory of all movable and immovable property, enter those in the inventory lists and enter in the accounting records in accordance with article 48 of the Law on State Property. 27. The audit has found that the bank account for regular operations of the Embassy of Montenegro in the United Arab Emirates, based in Abu Dhabi, as at 27 August 2014 received a payment of a donation in the amount of 500, AED or 103, These amounts were shown neither in the General Ledger of the State Treasury on deposit accounts nor in the report on donations. In accordance with the Instructions on the State Treasury (item 143, 144 and item 145), the Ministry of Finance shall in the general ledger of the State Treasury provide a separate record of all donor funds on specific programs and projects. 28. The audit identified that the audited entity paid in cash from the cash register at the headquarters of the Ministry and the cash registers of the audited DCM the costs in the amount of 980,206.88, out of which the costs of the headquarters of the ministry referred to 160, and the audited DCM 819, The largest share in the total costs paid

309 of DCM are the costs of contracted fees with 39%, salary costs and the additional compensations of the base of salary with 31% and the cost of leasing with 16% etc., and the greatest amount of cash paid for expenses related to the following GCM: Embassy in Belgrade 212,413.18, Embassy in Beijing 182,167.75, Embassy in Moscow 128,189.80, Embassy in Zagreb 97, etc. In order to reduce cash payments, the audited entity is recommended to determine by an internal procedure the obligation of the DCM that all costs in a higher amount (salaries, wages, rent, communication services, etc.) shall be paid through bank accounts and not in cash from the cash register. 29. The audit has shown that the subject of the audit conducted payment for expenses of positions that are not required by the Regulations on the Classification for the State Budget, extrabudgetary funds and budgets for this purpose, which indicated the non-purpose spending of funds that were determined in the amount of 184, Most of the non- purpose payments were carried out with the following positions: 4141, 4142, 4146, 4171, 4172, 4131, and 4199, It was also found that the payment of certain expenses was not performed from appropriate program within the Ministry. The Ministry of Foreign Affairs and European Integration shall use the budget funds in accordance with the Plan of approved budget funds and pay the expenditures from the appropriate position according to the Rules of the Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets. 30. In the process of audit, on the basis of the submitted letter of the Ministry, it was determined that the donations to the immigrant associations and organizations were paid in the amount of 6, including: the Community of Montenegrins in the Republic of Macedonia in the amount of 1,800.00; Mountaineering associations in the Republic of Serbia in the amount of 2,000.00, the Association of Montenegrins of the Municipality of Kula in the amount of , the National Union of Montenegrins of Croatia in the amount of ; Association of Montenegrins Vuk Micunovic from Trebinje in the amount of ; Montenegrin Association of Novi Sad in the amount of and a natural person for the "Lexicon of Montenegrin Fine Artists of Vojvodina" in the amount of On the basis of data from the General Ledger, the audit identified that, based on donations, it was paid an amount of 14, Ministry - Directorate for Diaspora does not provide accurate records of donations, while the associations and organizations to which payments of donations were made did not submit to the Ministry the reports on implementation of the projects for which the funds were intended for, nor justified the donated funds. It is necessary that the audited entity provide an accurate record of expenditures from donations and to establish the obligation of associations and organizations in the Diaspora to submit a report on the funds spent with valid documentation to justify those. Because of the character of the noted irregularities, the competent Auditing Board agreed that the final report shall be submitted to the Committee for International Relations and Emigrants and the Ministry of Finance. The audited entity shall, in accordance with Article 15 of the Law on State Audit Institution, within six (6) months, notify the State Audit Institution on the activities undertaken by the prepared and submitted recommendations

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311 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE MINISTRY OF JUSTICE Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial audit and regularity audit Ministry of Justice Annual Financial Statement of the Ministry of Justice for auditing days Mr Nikola N. Kovačević, Member of Senate Head of the Auditing Board Mr Branislav Radulović, PhD, Member of Senate Member of the Auditing Board

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313 1. LEGAL BASIS Legal basis for performing the audit of the Ministry of Justice is comprised in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); State Audit Institution Annual Audit Plan for 2016 (No , dated 22 December 2015); Decision on Conducting the Audit of the SAI (Number ) dated 23 February Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI); Guidelines for quality follow up audit. 2. GENERAL DATA ON THE AUDITED ENTITY Regulation on the Organization and Functioning of the State Administration ("Official Gazette of Montenegro", No. 5/12.., 6/15) stipulates that the Ministry of Justice shall perform the administrative tasks relating to the organization and work of courts and public prosecution authority, the enforcement of criminal sanctions, lawyers, notaries, public enforcement officers, mediators and court experts; status of judicial functions, criminal legislation; legislation that regulates the contractual, family and hereditary relations, court proceedings, misdemeanour proceedings and legal assistance; the analyst of justice; the preparation and monitoring of the implementation of strategic documents and projects in the field of justice, give opinions on draft laws and other regulations governing proceedings before the courts, misdemeanour proceedings and sanctions, control the execution of prison sentences and other criminal sanctions in cases prescribed by law; the bar exam; notary exam, international legal assistance in civil and criminal matters, extradition, cooperation in the field of international criminal justice system and with international organizations in the field of justice; preparation, development and execution of international treaties in the field of mutual legal assistance; revalidation of documents for use in other countries; preparation for ratification of international treaties in the field of criminal justice system and monitoring the execution of these contracts; cooperation with international organizations in the process of harmonization of the judicial system with international standards; administrative tasks for the appointment of a representative of Montenegro before the European Court of Human Rights and of candidates for the election of judges of the European Court of Human Rights; pardon, parole, and an agreement on compensation for damages for unlawful deprivation of liberty and fine prison sentence; permanent court interpreters; bankruptcy administrators; prescribing training programs for intermediaries and the manner of their implementation; appointment and dismissal of mediators; Anti-corruption; lobbying; keeping proper records; harmonization of national legislation within its competence with the legal order of the European Union; administrative supervision in the areas for which the Ministry is established; as well as other activities within its jurisdiction. Article 4 of the Regulation established that the Directorate for Anti-Corruption Initiative and the Institute for execution of criminal sanctions established within the Ministry of Justice and their scope of work are the following:

314 Directorate for Anti-Corruption Initiative 1 performs the tasks related to: advertising and preventive actions, such as raising public awareness about the problem of corruption and conducting research on the extent, forms, causes and mechanisms of corruption; cooperation with the competent authorities for the purpose of drafting and implementing regulations and program documents of importance to the prevention and combating of corruption; cooperation with NGOs and the private sector to combat corruption; cooperation with state bodies in proceedings under charges of corruption that administration receives from citizens and other entities; initiate conclusion of international agreements and the implementation of European and other international anticorruption standards and instruments; monitoring the implementation of recommendations of the Group of States against Corruption (GRECO); coordination of activities resulting from the application of the United Nations Convention against Corruption; collect data on corruption from authorities receiving reports and processing the collected data for analytical purposes; authorization to carry out lobbying activities; certification and maintenance of the register of lobbyists; acting on the charges against lobbyists who violated the law; preparation of guidelines for developing integrity plans; other tasks arising from membership in the Council for Regional Cooperation in South East Europe and in other international organizations and institutions; and other activities that are within its jurisdiction. Institute for Execution of Criminal Sanctions shall conduct activities with regard to: execution of criminal sanctions, such as: imprisonment and juvenile imprisonment, safety measures which are in accordance with the law executed by the Institute for Execution of Criminal Sanctions; prison sentences imposed in misdemeanour proceedings and measures for the protection of the accused in criminal proceedings - detention; as well as other activities within its jurisdiction. Organizational units within the Ministry are the directorates, departments, directorates and department of internal audit. II. ORGANIZATION UNITS AND THEIR COMPETENCE 1. DIRECTORATE FOR JUSTICE 1.1. Directorate for Organisation of the Judiciary 1.2. The Directorate for criminal legislation 1.3. Directorate of civil legislation 1.4. Supervisory Authority 2. DIRECTORATE FOR EXECUTION OF CRIMINAL SANCTIONS 2.1. Directorate for controlling the execution of prison sentences and security measures 2.2. The Directorate for criminal and misdemeanour records 2.3. Directorate for Probation 3. DIRECTORATE FOR INTERNATIONAL LEGAL COOPERATION AND EUROPEAN INTEGRATION 3.1. Directorate for International Legal Cooperation and European Integration 3.2. Directorate for International Legal Assistance 4. DEPARTMENT FOR INTERNAL AUDIT 4.1. Department for planning, programming and implementation of projects financed by international and IPA funds. 5. CABINET OF THE MINISTER 6. DEPARTMENT FOR LEGAL, PERSONNEL AND OFFICE AFFAIRS 6.1. Scriptorium - IECS 7. SERVICE FOR FINANCIAL AFFAIRS 7a. Department of investments and public procurement and 8. SERVICE FOR ICT AND DATA SECURITY 1 DACI was a body within the Ministry of Justice as of 31 December 2015, when the Agency was established to prevent corruption, which is from January 1, 2016 taken over the activities of the Directorate for Anti-Corruption Initiative, employees, as well as rights, obligations, objects, equipment, tools, documentation, registers and etc

315 2.1. Type of audit The State Audit Institution has performed a financial audit and regularity audit. Financial Audit includes auditing of the Annual Financial Statement while the regularity audit implies compliance with legal and other regulations Subject-matter of the audit Subject-matter of the audit is the Annual Financial Statement of the Ministry of Justice (excluding its Authority - IECS) 2 for 2015 and compliance with legal and other regulations. Pursuant to the Rules on the method of preparation and presentation of financial statements of the Budget, state funds and local self-government units, the Ministry of Justice is obliged to provide the Ministry of Finance the annual financial statements as follows: Cash Flow Statement Form III, Report on outstanding debts Form V. Apart from these reports, the Ministry of Justice is obliged to deliver the financial statements: A report on the manner of expenditure of funds from the current budget reserve, Form 9, and A statement on the manner of expenditure of funds after the end of the fiscal year, form The objective of the audit The objective of the financial audit is expressing an opinion on whether: 1. Financial Statements, in all material respects, are prepared in accordance with the applicable financial reporting framework, or; 2. Financial Statements, in all material respects, are presented in a fair and objective manner in accordance with the given framework. The objective of the regularity audit is providing an opinion on whether the financial and other operations of the audited entity, in all material respects, comply with the laws, other regulations and acts that have been identified as criteria for a given audit Criteria for regularity audit Law on Budget and Fiscal Responsibility ("Off. Gazette of Montenegro", No. 20/14); Law on Budget of Montenegro for 2015 ("Off. Gazette of Montenegro", No. 59/14 and 47/15); Labour Law ("Off. Gazette of Montenegro", No. 49/08,31/14); Law on Civil Servants and State Employees ("Off. Gazette of Montenegro", No. 39/11..., 53/14); Law on salaries of civil servants and state employees ("Off. Gazette of Montenegro", No. 14/12); Law on Personal Income Tax ("Official Gazette of the Republic of Montenegro", No. 65/01..., 04/07 and "Off. Gazette of Montenegro", No. 86/09..., 79/15); Law on Mandatory Social Insurance ("Off. Gazette of Montenegro", No. 13/07..., 08/15); Law on Public Procurement ("Off. Gazette of Montenegro", No. 42/11,,, 28/15); Law on State Property ("Off. Gazette of Montenegro", No. 21/09, 40/11); Law on internal financial controls in the public sector ("Off. Gazette of Montenegro", No. 73/08..., 34/14); 2 The present audit referred to the Annual Financial Report of the Ministry of Justice in 2015 (without a body within i.e. Institute for execution of criminal sanctions) because SAI conducted a special audit of the Annual Financial Report of the IECS for the year 2009, as well as control audit of implementation of recommendations made after 2015 (No /10), and for this reason, the related audit did not cover the operations of IECS, except for public procurement by the Ministry of Justice for their own needs and the needs of IECS

316 Regulation on Reimbursement of Expenses Civil Servants ("Off. Gazette of Montenegro", No. 26/12); Regulation on the establishment of internal audit in the public sector ("Off. Gazette of Montenegro", No. 50/12) Rules on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets ("Official Gazette of the Republic of Montenegro", No. 35/05..., 81/05 and "Off. Gazette of Montenegro," No. 2/13); Rules on the method of preparation and presentation of financial statements of the budget, state funds and local government units ("Off. Gazette of Montenegro", No. 23/14); Rules on the form, content, manner of filling in the form of a single report on calculated and paid personal income tax and contributions for compulsory social insurance ("Off. Gazette of Montenegro", No. 76/10..., 49/14 ); Instructions on State Treasury operations ("Off. Gazette of Montenegro", No. 53/14 and 72/15); Guidelines for the calculation of gross earnings ("Off. Gazette of MNE", No. 5/11); Rules on internal organization and systematization of jobs in the Ministry of Justice and the organs thereof (Directorate for Anti-Corruption Initiative) Rules on the procedure for establishing and implementing financial management and control ("Off. Gazette of Montenegro", No. 37/10); Internal procedures and rules of the Ministry of Justice Methods of auditing The audit was performed by combining the methods of documentary and field audits, In the preparatory phase of the audit, it was carried out the identification and assessment of risks of material through an understanding of the audited entity and its environment, including internal controls. There was also set a materiality at the planning stage of financial audit for the financial statements as a whole i.e. assessment to what extent there can be tolerated the misstatement in the financial statements, and that this does not significantly affect its veracity and objectivity. Expenditure control was performed using a sample of 94%. Materiality level of total expenditure was determined in the amount of 25,225.45, i.e. (1.5% of the expenditure of the Ministry amounting to 1,681, without the program of IECS). For the purposes of gathering audit evidence, state auditors were acquainted with legal regulations, internal regulations, and documentation and information on the operations of the Ministry. In the planning phase of the audit, there were applied the analytical methods by which it made an analysis of significant indicators, and checked for deviations from the planned amount. There were checked the books and accounting documents that serve as proof of the resultant business events. There were examined the application of the laws, rules, procedures, decisions and other internal documents, to determine the legality of operations. There were conducted the checks of major value items in the accounts, while the items of the less significant value have been tested on a test basis, For the purposes of the audit reports, there were used the reports for implementation of certain activities. There were checked the documents relating to the calculation of salaries and benefits for employees, the exercise of its own revenues, and public procurement procedures and execution of signed contracts. The interviews were performed and obtained the explanation of persons responsible for individual segments

317 OPINIONS AND RECOMMENDATIONS Based on the conducted audit, determined facts and Statement of the audited entity (No /16 dated 1 July 2016) on the Preliminary report of SAI (No / /23), the competent Auditing Board comprised of Member Senate of Nikola Kovačević, Head of the Auditing Board and Member of Senate Branislav Radulovic, PhD, Member of the Auditing Board, at its meeting held on July 7, 2016 adopted the FINAL REPORT on the audit of the Annual Financial Statement of the Ministry of Justice excluding an authority within (IECS) for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Ministry of Justice, excluding an authority within (IECS), in all material respects was prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and, accordingly, the competent Auditing Board expressed an unqualified opinion. Regularity audit has found that the Ministry of Justice did not align all financial transactions and other activities with legal and other regulations that have been identified as criteria for a given audit. Inconsistency refers to the inconsistent application of the provisions of Articles 8 and 14 of the Law on internal financial controls in the public sector, articles 20, 44, 107 and 118 of the Law on Public Procurement, Article 50 of the Law on Property, Article 163 of the Labour Law, article 22 of the Law on Vocational Rehabilitation and employment of persons with disabilities and Article 9 of the Decision on the criteria for determining the amount of compensation for the work of members of a working team or other forms of work, and accordingly the competent Auditing Board expressed a qualified opinion. RECOMMENDATIONS The audit of the Annual Financial Statement of the Ministry of Justice, excluding an authority therein (IECS) for 2015 has established the following irregularities and recommendations for eliminating those and improving the work of the audited entity. 1. The Ministry did not, pursuant to the provisions of Article 8 of the Law on internal financial controls in the public sector, adopt the risk management strategy and did not, in accordance with Article 14 of the Law, adopt the Plan for the establishment of financial management and control as well as the methodology for the implementation of the Plan. The head of the audited entity in accordance with Article 8 of the Law on internal financial controls in the public sector is obliged to adopt a strategy of risk management and pursuant to Article 14 of the Law adopt the Plan for the establishment of financial management and control as well as the methodology for the implementation of the Plan. 2. During the audit, the Ministry paid the fees for the work of the working bodies and committees in 2015 the amount of 126, Payment of the fees was carried out according to the decisions of the Ministry of Finance adopted on the basis of Article 8 and 9 of the Decision on the criteria for determining the amount of compensation for the work of members of a working team or other forms of work, Article 9 of the Decision stipulates that the fee for the work team can be accomplished for work performed after regular working hours and outside the scope of regular work tasks, and that upon completion of the work, the work team will submit a report which forms the basis for the provision of fees

318 The audit has established that a member of the Working Team was an appointed person who is employed in the Ministry of Justice on the activities of the Independent Advisor II in the Directorate for controlling the execution of prison sentences and security measures whose job description includes the operations involved in the working body, the Ministry did not submit the evidence that the work performed therein represented the work after regular working hours, so it is noted that the benefits in working groups and committees were not made in accordance with Article 9 of the foregoing Decision. The audit entity is obliged, when paying the compensations for work in the working bodies and commissions to consistently apply the provisions of Article 9 of the Decision on the criteria for determining the amount of compensation for the work of team members or other forms of work. 3. The audit has found that the Ministry of Justice, using the direct agreement with the three suppliers, procured the following: repair of the video surveillance in the amount of 6,169.56, purchase of supplies in the amount of 6, and procurement of services of pest control and disinfection in the amount from 5,797.23, which by the amounts of the value belong to class II as defined by the Article 21 of the Law on public Procurement and which should be implemented in shopping method. It was also established that the Ministry, upon the procurement of office furniture, office supplies and services of representation, did not comply with the conditions and manner of procurement determined by the provisions of Article 44 (paragraph 4) of the Law on Public Procurement, as it has, during the financial year, divided the subject of public procurement, which represents a whole with the intention to evade the law and due process of public procurement. The audited entity is required to perform the procurement of goods and services by applying the prescribed procedure under Article 20 of the Law on Public Procurement and during the financial year it shall not divide the subject of public procurement that is to be represented as a whole (Article 44 of the Law). 4. The audit has found the delay in the delivery of guarantee for good performance in 11 conducted open public procurement procedures (5 to 40 days) which is not in accordance with the provisions of Article 107 of the Law on Public Procurement, which stipulates that the Bidder is obliged to sign public procurement contract no later than eight days from receipt of the contract and return the Contracting Authority the signed contract with a guarantee for good performance of the contract. The audited entity is required to conclude the public procurement contracts with the bidders in a manner prescribed by Article 107 of the Law on Public Procurement 5. The audit has found that the Ministry included in the Report on conducted public procurement procedures and concluded contracts on the public procurement also the procurement the contracted value of which amounted to 10,376.80, for which the contract was concluded in 2016 (Contract No /16 dated 3 February 2016), which is not in accordance with the provisions of Article 118 of the Law which provides that the contracting authority shall provide the competent authority, not later than 28 February of the current year for the previous year, a report on conducted public procurement procedures and concluded contracts thereof. The audited entity should disclose data in the report on conducted public procurement procedures and concluded public procurement contracts in accordance with the provisions of Article 118 of the Law on Public Procurement. 6. The audit has found that the Ministry in 2015, pursuant to the contracts on occasional and temporary jobs, hired two persons to perform the tasks for which the positions were

319 systematized i.e. as follows: (Chief of Cabinet and Advisor I in the Department of ICT and security of data (period of engagement of the engaged from two to six months). After examining the presented contracts, it was concluded that those were not completed in accordance with Article 163 of the Labour Law. Also, hiring persons for performing tasks of position which is systematized under the contract on temporary and occasional work is not in accordance with the Law on Civil Servants and State Employees, which in Article 2 provides that activities aimed at exercising the competences prescribed by the Constitution, law and other regulations shall be performed by the persons who were employed in a state body, i.e. civil servants. The audited entity shall engage the executors for conducting the systematized workplaces in accordance with the Law on Civil Servants and State Employees, while contracts on temporary and occasional services should be concluded for the performance of the tasks laid down in the provisions of Article 163 of the Labour Law. 7. The audit has found that the subject of the audit did not, according to the Rules on the form, content, manner of filling in the form of a single report on calculated and paid tax on personal income and contributions for compulsory social insurance ("Off. Gazette of Montenegro", No. 76/ /15) submit the IOPPD forms to the competent tax authority by the 15th of the month for the previous accounting period (month), which is not in accordance with Article 5 of the Regulations. The audited entity is required to submit the reports the calculated and paid tax on personal income and contributions for compulsory social insurance (IOPPD form) to the competent tax authority by the 15th of the month for the previous month, as required by the applicable Regulations. 8. The audit has found that the Ministry of Justice has not employed disabled persons and did not pay special contribution for professional rehabilitation and employment of persons with disabilities, in accordance with the provisions of Article 22 of the Law on professional rehabilitation and employment of persons with disabilities. The audited entity is obliged to employ disabled people or make payment of the special contribution for professional rehabilitation and employment of persons with disabilities as required by law. 9. The Ministry, pursuant to Article 50 of the Law on State Property, submitted to the Property Administration the data on the assets at the disposal of the Ministry and the Directorate for Anti-Corruption Initiative as of 31 December 2015 after the legal deadline, but did not submit data on movable and immovable property of the Institute for execution of criminal sanctions in due time (Z-R No. 196/1 dated 4 June 2016). In accordance with Article 50 of the Law on Property, the audited entity is obliged to, by the end of February of the current year for the previous year, submit data on movable and immovable property owned by the Ministry and the authorities belonging thereto. Audited entity shall, in accordance with Article 15 of the Law on State Audit Institution (SAI), within 6 months, submit a report to SAI on the actions taken by the prepared and submitted recommendations

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321 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE STATE PROSECUTOR'S OFFICE Type of audit: Audited entity: Subject-matter of the audit: Audit duration: Auditing Board Members: Financial audit and regularity audit State Prosecutor s Office Annual Financial Statement for 2015 of the State Prosecutor s Office 60 auditing days Mr Nikola N. Kovačević, Member of Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate Member of the Auditing Board

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323 I. BASIC ELEMENTS 1. LEGAL BASIS Legal basis for performing the audit of the State Prosecutor s Office for 2015 is contained in the following: Constitution of Montenegro, Article 144 ( Official Gazette of MNE, No. 01/07); Law on State Audit Institution, Article 4 ( Official Gazette of the Republic of Montenegro, No. 28/04, 27/06, 78/06 and Official Gazette of MNE, No. 17/07, 73/10, 40/11 and 31/14); State Audit Institution Annual Audit Plan passed by the Senate as of 22 December 2015 (SAI No ); Decision on Conducting Audit of (SAI No dated 25 February 2016). Audit has been conducted in line with the following: Rules of Procedure of the State Audit Institution ( Official Gazette of Montenegro, No. 3/15); Instruction on Methodology for Conducting Financial and Regularity Audit ( Official Gazette of MNE, No. 07/15); International Standards for Supreme Audit Institutions (ISSAI); Guidelines for quality follow up audit. 2. GENERAL DATA ON THE AUDITED ENTITY Law on State Prosecutor's Office regulates the establishment, organization and jurisdiction of the State Prosecutor's Office, the organization of state prosecutors' offices, election, mandate, organization and methods of work of the Prosecutorial Council, as well as other issues of importance to the work of the State Prosecutor's Office. State Prosecutor's Office performs tasks of prosecution of perpetrators of criminal offenses that are prosecuted ex officio and offenses, as well as other duties prescribed by law. State Prosecutor's Office performs its function based on the Constitution, laws and ratified international treaties. Public prosecution may not be performed under anybody's influence and nobody shall influence the State Prosecutor in the exercise of its functions. II. ORGANIZATIONAL UNITS AND THEIR SCOPE Within the State Prosecutor's Office, there shall be established: the Supreme Public Prosecutor's Office, Special Public Prosecutor's Office, senior state prosecutor's office and the basic state prosecutor's office. The Supreme State Prosecutor's Office is established for the territory of Montenegro, based in Podgorica. Special State Prosecutor's Office is established for the territory of Montenegro, based in Podgorica. State Prosecutor's Office is established for the territory of the High Court jurisdiction. Basic State Prosecutor's Office is established for the territory of one or more basic courts. Supreme State Prosecutor shall proceed before the Supreme Court of Montenegro, the Appellate Court of Montenegro, Administrative Court of Montenegro, other courts and other state authorities, in accordance with the law

324 The Supreme State Prosecutor's Office shall, in accordance with the law, raise the request for protection of legality, and perform other tasks that are not defined as the jurisdiction of other state prosecutors' offices. Special Public Prosecutor's Office operates in accordance with a special law governing the conditions for the selection of managers and state prosecutors in the Special State Prosecutor's Office, the jurisdiction and organization of the Special Public Prosecutor's Office and other issues of importance for the work. Higher State Prosecutor's Offices are: 1) State Prosecutor's Office in Bijelo Polje, to appear before the High Court in Bijelo Polje; and 2) State Prosecutor's Office in Podgorica, to appear before the High Court in Podgorica. Higher State Prosecutor s office shall take all actions within its competence before the matter and territorial jurisdiction of the courts and other authorities. Basic State Prosecutor's Office are: 1) The Basic State Prosecutor in Bar, for the territory of the Basic Court in Bar; 2) The Basic State Prosecutor in Berane, for the territory of the Basic Court in Berane; 3) The Basic State Prosecutor in Bijelo Polje, for the territory of the Basic Court in Bijelo Polje; 4) The Basic State Prosecutor in Kolasin, for the territory of the Basic Court of Kolasin; 5) The Basic State Prosecutor in Kotor, for the territory of the Basic Court in Kotor; 6) The Basic State Prosecutor in Niksic, for the territory of the Basic Court of Niksic; 7) The Basic State Prosecutor in Plav, for the territory of the Basic Court in Plav; 8) The Basic State Prosecutor in Pljevlja, for the territory of the Basic Court in Pljevlja and the Basic Court of Zabljak; 9) The Basic State Prosecutor in Podgorica, for the territory of the Basic Court in Podgorica and the Basic Court in Danilovgrad; 10) The Basic State Prosecutor in Rozaje, for the territory of the Basic Court of Rozaje; 11) The Basic State Prosecutor in Ulcinj, for the territory of the Basic Court in Ulcinj; 12) The Basic State Prosecutor in Herceg Novi, for the territory of the Basic Court in Herceg Novi; 13) The Basic State Prosecutor in Cetinje for the territory of the Basic Court in Cetinje. Basic State Prosecutor shall take all actions within its jurisdiction. State Prosecutor's Office is managed by the supreme state prosecutor. The operations of the basic and high public prosecution offices shall be managed by managers of state prosecutor's offices, the Special State Prosecutor's Office is managed by the special prosecutor, and the work of the Supreme State Prosecutor's Office is managed by the supreme state prosecutor, Head of the State Prosecutor's Office and the State Prosecutor shall perform prosecutorial functions in the state prosecutor's office in which they were elected or who are knowledgeable, or transferred in accordance with this Law. Prosecutorial Council has a chairman and ten members. Head of the State Prosecutor's Office and the public prosecutor are entitled to salary and other rights from work and from work, in accordance with the law. President of the Prosecutorial Council is the supreme state prosecutor. Members of the Prosecutorial Council are: 1) Five public prosecutors who have permanent office and at least five years experience in carrying out prosecutorial functions. four of them from the Supreme Public Prosecutor's Office, the Special Public Prosecutor's Office and senior state prosecutor's offices, and one of the basic state prosecutor's offices, and appointed and dismissed by the Conference of State prosecutors;

325 2) Four reputable lawyers appointed and dismissed by the Parliament of Montenegro (hereinafter Assembly) at the proposal of the competent working body; 3) One representative of the state administration responsible for justice (hereinafter: the Ministry of Justice), appointed by the Minister of Justice from among the employees in the Ministry of Justice. A member of the Prosecutorial Council from among public prosecutors cannot be appointed a state prosecutor who is rated as not satisfactory or who was announced a disciplinary sanction. The composition of the Prosecutorial Council shall be promulgated by the President of Montenegro, Administrative duties for the Council of Prosecutors shall be performed by the Secretariat of the Prosecutorial Council. The mandate of the Prosecutorial Council is four years. Members of the Prosecutorial Council who are employed, in accordance with Article 33 of the Law, have the right to be absent from work for the performance of duties in the Prosecutors Council. Members of the Prosecutorial Council, whose earnings are ensured from public funds, during the absence, shall be entitled to earnings and other benefits based on the employment relationship with the body in which they are employed. Members of the Prosecutorial Council from among state prosecutors can, for their work in the Prosecutorial Council, based on the decision of the Prosecutorial Council, be working up to 70% of their working time during the year in the Prosecutors Council. The decision of the Prosecutorial Council shall define the jobs to be performed by members of the Prosecutorial Council. Members of the Prosecutorial Council are entitled to remuneration for work in the Prosecutorial Council on a net basis in the amount of 80% of the average gross salary in Montenegro in the previous year, and the President of the Prosecutorial Council in the net amount of 120% of the average gross salary in Montenegro in the previous year. Prosecutors Council work and make decisions at meetings. The session of the Prosecutorial Council may be held if there is present a majority of the total number of members of the Prosecutorial Council. Sessions of the Prosecutorial Council shall be convened and chaired by the President of the Prosecutorial Council. So as to more efficiently perform tasks from its jurisdiction, the Prosecutors Council may form committees. President of the Prosecutorial Council cannot be president or a member of the committee. Members of the Commission and the Commission for a code of ethics for state prosecutors are entitled to net remuneration established by the Council of Prosecutors, of up to 40% of the average gross salary in Montenegro in the previous year. The manner of work shall be arranged by the Rules of Procedure of the Prosecutorial Council. Prosecutors Council, in addition to the responsibilities established by the Constitution, shall: 1) determine the number of state prosecutors; 2) establish a proposal for dismissal of the Chief State Prosecutor; 3) decide on disciplinary responsibility of State Prosecutors and the state prosecutor s offices heads; 4) ensure the training of state prosecutors and the state prosecutor s offices heads; 5) provide for the use, functionality and uniformity of the Judicial Information System in the part related to the State Prosecutor's Office; 6) keep records of state prosecutors and heads of state prosecutor's offices; 7) adopt the Prosecutorial Council; 8) give an opinion on the incompatibility of performing certain tasks with the exercise of prosecutorial functions;

326 9) consider complaints of state prosecutors and the state prosecutor s offices heads and make opinions regarding threats to their independence; 10) consider complaints about the work of state prosecutors and the state prosecutor s offices heads as to the legality of work; 11) set up the Committee for the evaluation of state prosecutors; 12) elect the Disciplinary Counsel; 13) establishes the methodology for preparing reports on the work of the State Prosecutor's Office and annual allocation of tasks; 14) issue official identity cards to state prosecutors and state prosecutor s offices heads and keeps records of official identification card; and 15) perform other tasks stipulated by law. Number of state prosecutors for each State Prosecutor's Office is determined by the Prosecutorial Council. The decision on the number of state prosecutors shall be published in the "Official Gazette of Montenegro". Prosecutors Council shall adopt rules governing the matters prescribed by law and other issues of importance to the organization of work of the Prosecutorial Council. Prosecutors Council constitutes the annual work report containing information on the work of the Prosecutorial Council. The draft annual report on the work of the Prosecutorial Council shall be submitted by all state prosecutors offices for an opinion. The annual work report shall be submitted to the General Assembly no later than 31 March of the current year for the previous year for its consideration. Annual report on the work is published on the website of the Supreme Public Prosecutor's Office and the Prosecutorial Council. Head of the State Prosecutor's Office is required to submit a report on the work of the State Prosecutor's Office to the Prosecutorial Council and the Ministry of Justice, at the latest by 10 February of the current year for the previous year, and by the same deadline on the website of the State Prosecutor's Office. The data in the reports shall be a responsibility of the head of state prosecutor s office. At the request of the Parliament and the competent working body, the Supreme State Prosecutor and the Chief Special Prosecutor are obliged to provide specific and periodic reports on its work within a period to be determined by the Parliament of Montenegro or the competent working body Type of audit The State Audit Institution has performed a financial audit and regularity audit. Financial Audit includes auditing of the Annual Financial Statement while the regularity audit implies compliance of the business operations with legal and other regulations Subject-matter of the audit Subject-matter of the audit is the Annual Financial Statement of the State Prosecutor s Office for 2015 and compliance of the business operations with legal and other regulations. Pursuant to the Rules on the method of preparation and presentation of financial statements of the Budget, state funds and local self-government units, the spending units are obliged to provide the Ministry by the end of February of the current year for the previous year, the forms 3 and 5 of Article 2 of this Rules. Regulation stipulates that the State Prosecutor's Office is obliged to deliver to the Ministry of Finance the annual financial statements as follows:

327 Form 3 - Cash Flow Statement III and Form 5 - Report on outstanding debts. Apart from these reports, the State Prosecutor s Office is obliged to deliver the financial statements: A report on the manner of expenditure of funds from the current budget reserve, Form 9, and A statement on the manner of expenditure of funds after the end of the fiscal year, form Objective of the audit The objective of the financial audit is to express an opinion on whether: 1. Financial Statements, in all material respects, are prepared in accordance with the applicable financial reporting framework, or; 2. Financial Statements, in all material respects, are presented in a fair and objective manner in accordance with the given framework. The objective of the regularity audit is to express an opinion on whether the financial and other operations of the audited entity, in all material respects, comply with the laws, other regulations and acts that have been identified as criteria for a given audit Criteria for regularity audit Law on Budget and Fiscal Responsibility ("Off. Gazette of Montenegro", No. 20/14, 56/14); Law on Budget of Montenegro for 2015 ("Off. Gazette of Montenegro", No. 59/14 and 47/15); Law on State Prosecutor s Office ("Off. Gazette of Montenegro" No. 11/15 and 42/15); Law on Special State Prosecutor s Office ("Off. Gazette of Montenegro" No. 10/15); Labour Law ("Off. Gazette of Montenegro", No. 49/08..., 53/14); Law on Salaries and other Incomes of Judges and Prosecutors ("Official Gazette of the Republic of Montenegro", No. 36/07, 73/10) Law on Civil Servants and State Employees ("Off. Gazette of Montenegro", No. 39/11..., 34/14, 53/14); Law on salaries of civil servants and state employees ("Off. Gazette of Montenegro", No. 14/12); Law on Personal Income Tax ("Official Gazette of the Republic of Montenegro", No.65/01..., 04/07 and "Off. Gazette of Montenegro", No.86/09..., 79/15); Law on Mandatory Social Insurance ("Off. Gazette of Montenegro", No.13/07..., 8/15); Law on Public Procurement ("Off. Gazette of Montenegro", No.42/11..., 28/15); Law on State Property ("Off. Gazette of Montenegro", No.21/09, 40/11); Law on internal financial controls in the public sector ("Off. Gazette of Montenegro", No.73/08..., 34/14); Regulation on Reimbursement of Expenses Civil Servants and State Employees ("Off. Gazette of Montenegro", No. 26/12); Regulation on the establishment of internal audit in the public sector ("Off. Gazette of Montenegro", No. 50/12); Rules on Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets ("Official Gazette of the Republic of Montenegro", No.35/05..., 81/05 and "Off. Gazette of Montenegro," No. 2/13); Rules on the method of preparation and presentation of financial statements of the budget, state funds and local government units ("Off. Gazette of Montenegro", No. 23/14); Rules on the method and deadlines for inventory and adjusting the balance of the actual situation ("Off. Gazette of Montenegro", No.34/09);

328 Regulations on internal organization and systematization of the Supreme, the Special and Higher Public Prosecutor's Office in Podgorica and Bijelo Polje, thirteen basic state prosecutor s offices and the Prosecutorial Council Secretariat; Rules on internal rules and procedures of the State Prosecutor s Office 650/15; Podgorica, October 1, 2015; Rules on the procedure for establishing and implementing financial management and control ("Off. Gazette of Montenegro", No. 37/10); Instructions on State Treasury ("Off. Gazette of Montenegro", No. 80/08..., 11/14, 72/15); Instructions on detailed procedure for the inventory of movable and immovable property owned by the state ("Off. Gazette of Montenegro", No. 47/11); Guidelines for the calculation of gross earnings ("Off. Gazette of Montenegro", No. 5/11); Rules of Procedure of the Prosecutorial Council ("Off. Gazette of Montenegro", No. 52/11) and ("Off. Gazette of Montenegro", No. 67/15). With the report on the audit, the auditor gives an opinion on: the functioning of the internal control system, recording, proper treatment and disposal of state property Methods of auditing The audit was performed by combining the process of documentary and field audits. In the preparatory phase of the audit, it was carried out the identification and assessment of material risk through an understanding of the audited entity and its environment, including internal controls. There was also set a materiality at the planning stage of financial audit for the financial statements as a whole i.e. the assessment to what extent can be tolerated the misstatements in the financial statements, and that this does not significantly affect its veracity and objectivity. Control of costs without salaries and benefits under the contracts was performed using a sample of 77%. Materiality level of total expenditure was determined in the amount of 64, (1% of the expenditure of the State Prosecutor's Office, which amount to 6,472,020.77). For the purposes of gathering audit evidence, state auditors were acquainted with legal regulations, internal regulations, and documentation and information on the operations of the Ministry. In the planning phase of the audit, there were applied the analytical methods by which it made an analysis of significant indicators, and checked for deviations from the planned amount. There were checked the books and accounting documents that serve as proof of the resultant business events. There were examined the application of the laws, rules, procedures, decisions and other internal documents, to determine the legality of operations. There were conducted the checks of major value items in the accounts, while the items of the less significant value have been tested on a test basis. For the purposes of the audit reports, there were used the reports for implementation of certain activities. There were checked the documents relating to the calculation of salaries and benefits for employees, the exercise of its own revenues, and public procurement procedures and execution of signed contracts. The interviews were performed and obtained the explanation of persons responsible for individual segments

329 III OPINION AND RECOMMENDATIONS The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board of Conducting the Audit (No ) has conducted a financial audit of the Annual Financial Statement and regularity audit of the State Prosecutor's Office for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of financial and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (here No. 417/16 of 26 July 2016) on the Preliminary report of SAI (No / /24), the competent Auditing Board comprised of Member Senate Nikola Kovacevic, Head of the Auditing Board and President of the Senate Milan Dabović, PhD, Member of the Auditing Board, at its meeting held on 27 July 2016 adopted the FINAL REPORT on the audit of the Annual Financial Statement of the State Prosecutor s Office for 2015 OPINION Financial audit has found that the Annual Financial Statement of the State Prosecutor's Office for 2015 is in all material respects was prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and accordingly the competent Auditing Board expressed an unqualified opinion on the Annual Financial Statement. Regularity audit has identified that the audited entity did not align all financial and other actions in all material respects with the laws and regulations that have been identified as criteria for a given audit. Inconsistency refers to the inconsistent application of Article 8, 15, 17 and 20 of the Law on system of internal financial controls in the public sector, Article 163 of the Labour Law and Article 20, 30, 38, 57, 107, 117 and 118 of the Law on Public Procurement and into accordingly the competent Board has expressed a qualified opinion. The qualified opinion was influenced by the following deficiencies and defects: 1. The State Prosecutor s Office did not, pursuant to the provisions of Article 8 of the Law on internal financial controls in the public sector adopt the strategy of risk management, and did not in accordance with Article 15 of the CHU submit the semi-annual and annual report on the implementation of planned activities in the establishment and development of financial management. The head of the audited entity is obliged to, in accordance with Article 8 of the Law on internal financial controls in the public sector, adopt the risk management strategy, and in accordance with Article 15 to the CHU within the legal deadline deliver semi-annual and annual report on the implementation of planned activities in the establishment and development of financial management. 2. The audit has found that the subject of the audit did not, pursuant to the provisions of Article 38 paragraph 1 of the Law on Public Procurement within the prescribed period until 31 January of the current financial year procurement plan, prepare and submit to the competent authority for publication on the Public Procurement Portal, but submitted with a delay i.e. as of 3 March 2015 (No 224/15)

330 The audited entity shall prepare and submit the Public Procurement Plan to the competent authority for publication on the portal of public procurement within the time limit prescribed by Article 38 of the Law on Public Procurement. 3. The audit has found that the State Prosecutor s Office conducted procurements by direct agreement in the amount of 49,288.59, as follows: printing services in the amount of 5,098.90, representation services in the amount of 5,650.12, fixed telephony services in the amount of 12, and maintenance of vehicles in the amount of 6,453.17, lease office space 11,444.74, 8,123.39, parking services belonging to the value class II of Article 21 of the Law on public Procurement, which in accordance with Article 20 of the Law should be implemented by shopping method. It was also found that the Prosecution to conduct the procurement of postal services in the amount of 34,468.72, which is the value according to the class III of Article 21 of the Law on Public Procurement, should be implemented through an open procedure. The audited entity is required to conduct the procurement of goods and services of the value classes II and III carry out in the manner prescribed by Article 20 of the Law on Public Procurement. 4. The audited entity did disclosed in the report on executed public procurement the purchases in the amount of 64, by using direct agreements and purchases in the amount of 2, of shopping method, which is not in accordance with Article 117 and 118 of the Law on Public Procurement. The audited entity, in accordance with Article 117 and 118 of the Law, shall keep the records of the implemented procedures and to include in the report on conducted procedures and concluded public procurement contracts all the purchases made. 5. The audited entity, in the Report on Public Procurement which was submitted to the Public Procurement Office, expressed the supplies made by applying direct agreement in the amount of 119, (Form C), which makes 32.8% of public procurement carried out in 2015 ( 364,711.89), and the audit has found that the purchases made through direct agreement amounted to ,92, which makes 42.63% compared to purchasing of new assets ( 432, audit determined amount), which is not in accordance with Article 30 of the Law on Public Procurement. An audited entity is required to perform the procurement of goods and services through direct agreement in an amount that is determined by the provisions of Article 30 of the Law on Public Procurement 6. The State Prosecutor s Office did not conclude contracts on public procurement (procurement field and passenger vehicles, purchase of office supplies, toner and procurement of implementation of Case Management System) executed by open procedure and negotiation procedure without prior publication of a contract notice in accordance with the provisions of Article 107 of the Law while the negotiation procedure without prior publication of the invitation to tender was not applied in accordance with Article 57 of the Law. An audited entity is required to conclude the public procurement contracts after the conducted open and negotiated procedure without prior publication of a tender in the manner prescribed by Article 57 and Article 107 of the Law on Public Procurement. 7. The State Prosecutor s office did not, according to the Rules on keeping and content of records on violation of anti-corruption policies within the prescribed period until 31 December of the current year prepare a report on violation of anti-corruption rules, but it was submitted to the Public Procurement Administration with delay as at 26 January

331 The audited entity is obliged to submit a report on the violation of anti-corruption rules of the Public Procurement Office within the time limit specified in the Regulations on keeping and content of records on violation of anti-corruption rules. 8. The audit has shown that, on the basis of compensation for work in committees, working groups and fees for work in the Prosecutorial Council, there was paid an amount of 276,543.46, and that some persons were engaged in several committees or working groups. During the audit, the subject of the audit did not perform adequate reports on the work of committees and working groups, as well as indicators for determining the quality of the results of work i.e. on the basis of evidence submitted it could have not been determined whether all the planned tasks for which compensations were paid were finalized. The State Audit Institution recommends that the audited entity establishes by an internal act the obligation of committees and working groups to submit reports on the work after completion of the transaction. It also recommends that the audited entity determines indicators for evaluating the results which would be the basis for payment of those fees. 9. The audit has found that, pursuant to a service contract, or a contract on occasional and temporary works, the persons were engaged to perform duties of the position that were systematized as follows: (public procurement officials, the use of public relations, safety and site security and updates thereof, counsellor jobs, state employees, registrars, independent clerks) which is not in accordance with the Law on Civil servants and State employees. It was also established that contracts of temporary and occasional jobs for performance of the tasks of independent advisors and senior officers were not completed in accordance with Article 163 of the Labour Law, which stipulates that the employer may, for certain jobs that do not require special knowledge and expertise, and by their nature are such that they do not last for more than 120 working days in a calendar year (temporary and occasional jobs), with certain person that is registered with the employment Service, or intermediary agencies, conclude a separate labour contract. The audited entity need to engage executors to perform the tasks of the systematized positions according to the Law on Civil Servants and State Employees, and the contracts of occasional and temporary works conclude for performance of the tasks laid down in the provisions of Article 163 of the Labour Law. 10. Pursuant to the Rulebook on internal organization and systematization, within the Secretariat of Prosecutorial Council, the Prosecutor s Office established the Internal Audit Department which is not in accordance with Article 20 of the Law on internal financial controls in the public sector, according to which the internal audit unit must be functionally and organizationally independent from other organizational units of the entity. The audit has found that the subject of the audit did not perform the occupying of the systematized jobs in the Department of Internal Audit, and, therefore, did not implement the activities stipulated by the Law (Article 17) relating to: the adoption of a strategic plan, annual internal audits, quarterly and annual reports on the work of internal audit, and conducting audits. The audited entity is required to establish the Internal Audit Unit by the Rules on internal organization and in the manner prescribed by Article 20 of the Law on internal financial controls in the public sector, and to ensure the functioning of the Internal Audit Unit, so that it pursued activities laid down in Article 17 of the Law. 11. The State Prosecutor s Office did not record in the business books a record of contributions for disabled persons in 2015, but those were recorded as off-balance items. Liabilities in respect of contributions as at 31 August 2014 were reported in the amount of 52, (commitments

332 expressed under the Law on Vocational Rehabilitation and Employment of Persons with Disabilities). The audited entity is required to record in its business books the liabilities arising from the special contribution for professional rehabilitation and employment of persons with disabilities that requires the approval of budget funds for that expenditure and to carry out the payment of the liabilities established on this basis, according to the Law. 12. Having reviewed the Minutes of the meeting of representatives of the Prosecutor's Office and the CCM (No. 03/ dated 12 July 2015) it was found that the State Prosecutor s Office has the outstanding liabilities to CC of Montenegro in the amount of 501,386.75, listed liabilities relate to period ( ), according to the allegations of the Prosecutor s Office for provision of services by expert witnesses, and not the Clinical centre, and, on the basis of its knowledge, there is no valid documentation that could pose a legal basis for the receivable of the CCM from the Prosecutor s Office. These liabilities are not reported in the ledgers of the State Prosecutor s Office, because they are seen as controversial, and harmonization thereof was not performed. SAI recommends that audited entity shall reconcile the liabilities with the providers of services and that, after the harmonization, record the undisputed liabilities in the ledgers, based on credible accounting documents. 13. Due to the lack of cooperation between the Ministry of Finance (State Treasury) and the State Prosecutor's Office, it is the case that the Treasury, from the account of the State Prosecutor's Office pays funds on the basis of a court order, which is not related to the State Prosecutor's Office, and also, the bailiff does not provide the State Prosecutor's Office with the decisions on forced collection of the receivables relating to the Prosecutor's Office, and for that reason the State Prosecutor's Office does not have the documentation for most of the costs to be collected through the courts. Prosecutors Council of the State Prosecutor's Office addressed the Chamber of bailiffs, with a written document: TS No 201/2015, on 09 October 2015, asking that the bailiffs should deliver the execution decisions to the Department of Accounting and Finance Secretariat of the Prosecutorial Council in order to ensure accurate records and monitoring of payment of liabilities in this respect. We recommend the audited entity to, in communication with the Ministry of Finance, provide documentation relating to the forced collection of receivables, so that in its general ledger properly records the financial transactions. 14. After examining the documents accompanying the payment applications it has been found that the expenditure declared on the basis of the cost of renting parking lot amounted to 8, After examining the individual invoices and contracts it was found that the subject of the audit paid rent of parking lots for vehicles by the number of registration plates and brands of vehicles that do not comply with those in the analytical records of prosecution. The audited entity shall with an internal act determine who is entitled to use the parking lot

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334 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF DEMOCRATIC PARTY OF SOCIALISTS OF MONTENEGRO Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Democratic Party of Socialists Annual Financial Statement of the Democratic Party of Socialists for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

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336 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14), Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ); Decision of the Auditing Board competent for carrying out this audit (No.40116/ ) of 10 May Audit of the Annual Financial Statement of the Democratic Party of Socialists was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Democratic Party of Socialists and audit of compliance of the business operations with legislative and other regulations. 3. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Democratic Party of Socialists of Montenegro for OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. financial statements in all material respects are prepared in accordance with the financial reporting framework, 2. financial statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant legislative and other regulations which are identified as criteria. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11);

337 Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work for METHODS OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 21, (1% of the expenditures of the Party). DEMOCRATIC PARTY SOCIALISTS 1.1. Revenues The Party in 2015 expressed in the business books revenues in the amount of 1,951, and it is revenues from the budget of Montenegro in the amount of 1,395,682.00, revenues from local government budgets in the amount of 368,696.00, revenues from membership fees in the amount of 135,336.00, revenues from renting in the amount of 27,685.00, other operating revenues in the amount of 21,870.00, revenues from contributions in the amount of 1, and financial revenues in the amount of Comparative review of the revenue generated in 2014 and 2015 No. Type of revenue 2014 Share (%) 2015 Share (%) 1 Revenues from the Budget 1,136, % 1,395, % 2 Revenues from the budget of local government 627, % 368, % 3 Revenues from contributions 155, % 1, % 4 Revenues from membership fees 152, % 135, % 5 Revenues from services rendered 11, % 27, % 6 Other business revenues 13, % 21, % 7 Financial contributions 1, % % Total 2,098, % 1,951, % In accordance with the presented data it is concluded that the largest share in total revenues are revenues from the budget of Montenegro with (71.53%), revenues from local governments with (18.90%), income from membership fees with 6.94% and so on

338 1.2. Expenditures In its business books the Party reported the total expenditures for 2015 in the amount of 1,912,110.12, and those relate to the cost of gross wages and contributions paid by the employer in the amount of 983,601.98, the expenditures for compensations based on contract in the amount of 69,823.72, the expenditures for procurement of fixed assets and investment maintenance in the amount of 143,243.72, overhead costs and office supplies in the amount of 88,712.47, the cost of fuel and electricity in the amount of 83,024.67, the cost of water supply and sewage in the amount of 1,173.58, expenses for subsistence costs in the country in the amount of 87,068.21, the cost of transportation, mobile telephones and post and telephone in the amount of 127,506.35, the cost of services in the amount of 11,973.98, rental costs in the amount of 31,542.42; advertising costs in the amount of 113,328.86, research costs in the amount of 58,975.00, the cost of printing and photographic services in the amount of 21,025.67, and the costs of providing vehicle registration in the amount of 11,340.59, the costs of representation in the amount of 20,521.85; other expenses in the amount of 47, and financial expenditures from the previous period in the amount of 11,867.58, Out of the total reported expenditures of the Party, the amount of 893, (47%) relates to the cost of the Main Board, the amount of 812, (42%) to the cost of the municipal Committees, while the amount of 205, (11%) relates to the costs of electoral Conferences for the preparation and holding of the VII Congress and DPS. Comparative review of the total reported expenditures in the business books for 2014 and 2015 No. Type of expenditure Total expenditures in 2014 % Share in total expenditures Total expenditures in 2015 % share in total expenditures 1 Expenditures for gross salaries and contributions 1,006, % 983, % paid by the employer 2 Expenditure for compensations on the basis of 47, % 69, % contracts 3 Procurement of fixed assets and investment 139, % 143, % maintenance 4 Overhead costs and office material 53, % 88, % 5 Expenditures for electricity and fuel 100, % 83, % 6 Expenditures for water supply and utilities 1, % 1, % 7 Expenditures for per diems in the country 69, % 87, % 8 Expenditures for transportation, mobile phones and 182, % 11, % post and telephone services 9 Expenditures for services 65, % 11, % 10 Renting expenditures 25, % 31, % 11 Expenditures for advertising 248, % 113, % 10 Research expenditures 60, % 58, % 11 Expenditures for printing and photographic services 3, % 21, % 12 Expenditures for security and vehicle registration 12, % 11, % 13 Expenditures for representation 22, % 20, % 14 Other expenditures 36, % 47, % 15 Interest expenses 3, % 0.00% 16 Shortages % 0.00% 17 Expenditures from previous period 12, % 11, % Total 2, 094, % 1,912, % The largest share of the total costs of regular operations have costs of salaries and benefits with 52%, the purchase costs of fixed assets and investment maintenance with 7%, the cost of the phone and transportation with 7%, the cost of advertising with 6%, and so on

339 1.3. Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, the Law on Financing of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on the conducting of audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Democratic Party of Socialists of Montenegro for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of conducting the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No of 25 July 2016) on the Preliminary Report of SAI (No /7), the competent Board comprised of a member of the member of Senate, Mr. Nikola Kovačević, Head of the Auditing Board and member of the Senate, Mr. Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 28 July 2016, adopted: FINAL REPORT on audit of the Annual Financial Statement of the Democratic Party of Socialists for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Democratic Party of Socialists in 2015 in all material respects substantially assembled and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. The regularity audit has found that the audited entity complied the financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit, and in accordance with that the competent Auditing Board expresses an unqualified opinion with emphasis of matter to the fact that: Audited entity should record in business books all complied receivables with local governments and perform this recording chronologically during the financial year

340 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF SOCIAL DEMOCRATIC PARTY OF MONTENEGRO Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Social Democratic Party Annual Financial Statement of the Social Democratic Party for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

341

342 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No ) of 22 December 2015; Decision of the Auditing Board competent for carrying out this audit (No.40116/ ) of 9 May Audit of the Annual Financial Statement of the Social Democratic Party was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology for conducting the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Social Democratic Party (SDP) for OBJECTIVE OF THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework. 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant laws and other regulations which are identified as criteria. 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Social Democratic Party of Montenegro for Financial audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14);

343 Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work for METHODS OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 7, (1, 25% of the expenditures of the Party which amount to 638, ). SOCIAL DEMOCRATIC PARTY 1.1. Revenues The audit has found that the Party in the general ledger reported revenues in the amount of 735, and those relate to: revenues from the budget of Montenegro in the amount of 417,763.05, revenue from local government budgets in the amount of 171,040.81, revenues from previous years in the amount of 126,427.56, revenues from membership fees in the amount of 18,580.36, income from contributions in the amount of and other income in the amount of 1, The following table provides a comparative overview of reported revenues in the General Ledger of the Party for 2014 and No. Type of revenue 2014 Share (%) 2015 Share (%) 1 State budget revenues 343, % 417, % 2 Municipal budget revenues 358, % 171, % 3 Revenues from contributions made by natural 20, % % persons 4 Revenues from coalition partners 20, % 0.00% 5 Revenues from previous years 27, % 126, % 6 Revenues from membership fees 26, % 18, % 7 Other revenues % 1, % Total 795, % 735, %

344 The largest share in total revenues relates has the revenue from the Budget of Montenegro with 56.79%, budget of local governments with 23.25%, revenue from previous years (deferred revenue) with 17.19% and other revenues with 2.78% Expenditures In 2014 the Party generated total expenses in the amount of 638, and those refer to the expenditures for office and other material in the amount of 115,991.76, the cost of electricity, water and fuel in the amount of 41,923.46, costs of gross salaries and contributions paid by the employer in the amount of 200,198.83, the cost of royalties in the amount of 12,934.40, the cost of rent in the amount of 55,772.32, travel expenses in the amount of 31,226.72, the cost of the phone, Internet and transport in the amount of 54,196.21, the cost of maintenance, registration and production services in the amount of 11,189.15, the cost of advertising, propaganda and seminars in the amount of 1,472.81, the cost of utilities and other operating expenses in the amount of 12,713.59, depreciation costs in the amount of 9,029,10, the costs of other nonproduction services in the amount of 18,283.17, representation expenses in the amount of 43,328.47, the cost of payment transactions in the amount of 1,502.65, costs of membership fees of the Socialist International in the amount of 19,775.87, other intangible costs in the amount of 8, Below in the Report is provided a table of expenditures incurred in 2014 and No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office and other material 64, % 115, % 2 Expenditure for electricity, water and fuel 61, % 41, % 3 Expenditures for gross salaries % 200, % 4 Expenditures for royalties and service contracts % 12, % 5 Expenditures for renting 54, % 55, % 6 Expenditures for business travels 39, % 31, % 7 Expenditures for telephone, internet and 68, % 54, % transportation 8 Expenditures for maintenance, registration and 20, % 11, % non-productive services 9 Expenditures for advertising, propaganda and 90, % 1, % seminars 10 Expenditures for of utilities and other operating 12, % 12, % expenses 11 Depreciation costs (equipment, buildings, vehicles, 11, % 9, % etc.) 12 Expenditures for other non-productive services 29, % 18, % 13 Expenditures for representation 48, % 43, % 14 Expenditures for payment transactions in the 1, % 1, % country and abroad 15 Expenditures for membership fees of the Socialist 5, % 19, % International 16 Other non-material expenditures 1, % 8, % 17 Interest expenditures 1, % 0.00% Total 669, % 638, % According the tabular overview of the expenses the largest share of the total costs are the costs of gross salaries and contributions paid by the employer with 31.38%, the cost of stationery and other material with 18.18% and other non-material expenses with 18.18%, and the like Implementation of recommendations from the previous year By the audit of the Annual Financial Statement of the Social Democratic Party of Montenegro for 2014, the State Audit Institution has identified a number of deficiencies and made recommendations for their removal. The recommendations were related to: Providing data on the total fixed assets and the recording of new purchases of assets to the appropriate account in the context of class 0 permanent assets, since the accounting records is the basis for compliance of the balance determined by inventory

345 Annual Report of the State Audit Institution for the Period October 2015 October 2016 Reporting of total income in the Income Statement and the harmonization of internal act (Decision) with the Current Statute. The audit of the Annual Financial Statement for 2015 found that the audited entity realized the given recommendations Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Social Democratic Party of Montenegro for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of conducting the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. XI 400 of 25 July 2016) on the Preliminary Report of SAI (No /9), the competent Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and President of the Senate Milan Dabović, PhD, member of the Auditing Board, at its meeting held on 27 July 2016, adopted: FINAL REPORT on audit of the Annual Financial Statement of the Social Democratic Party for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Social Democratic Party in 2015 in all material respects substantially assembled and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. The regularity audit has found that the audited entity complied the financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit,) and in accordance with that the competent Auditing Board expresses an unqualified opinion with emphasis of matters on the fact that: Audited entity should engage the persons providing administrative and technical support in the work of Councillors clubs (associates) on the basis of the employment contract, and not on the basis of service contract

346 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF DEMOCRATIC PEOPLE S PARTY OF MONTENEGRO Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Democratic People s Party Annual Financial Statement of the Democratic People s Party for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

347

348 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14), Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ) of 22 December 2015, Decision of the Auditing Board competent for carrying out this audit (No.40116/ ) of 10 May Audit of the Annual Financial Statement of the Democratic People s Party was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology for conducting the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Democratic People s Party for 2015 and regularity audit. 3. OBJECTIVE OF THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework, and 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant laws and other regulations which are identified as criteria. 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Democratic People's Party of Montenegro for Financial audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations, 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11);

349 Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 3, (1,50% of the expenditures of the Party 251, ). DEMOCRATIC PEOPLE S PARTY 1.1. Revenues In 2015 the Party generated total revenue in the amount of 327, and those are related to revenues from the budget of Montenegro in the amount 233,491.05, revenues from local government budgets in the amount of 79,817.00, other operating income in the amount of 14, The following table provides overview of revenues in 2014 and No. Type of revenue 2014 Share (%) 2015 Share (%) 1 State budget revenues 147, % 233, % 2 Revenues from the budget of 83, % 79, % local governments 3 Other revenues 6, % 14, % Total 237, % 327, % Based on the presented data, it is noted that the largest share in total revenues have revenues generated from the budget of Montenegro with 71.22%, revenues from the budgets of local governments with 24.35% while other revenues accounted for 4.44%

350 1.2. Expenditures The party in 2015 has made the expenditures in the amount of 251,995.31, and those relate to: costs of stationery and other materials in the amount of 9,557.10, the cost of electricity and water in the amount of 1,924.35, costs of fuel in the amount of 2,396.23, the costs of gross salaries and contributions paid by the employer in the amount of 7,493.26, the costs of contracted fees in the amount of 100,880.08, travel expenses amounting to 49,558.53, costs of telephone and post and maintenance services in the amount of 1,750.88, rental costs in the amount of 10,839.20, the cost of advertising and propaganda in the amount of 15,704.30, depreciation costs in the amount of 3,601.41, representation costs in the amount of 13,282.97, the cost of support and sponsorship in the amount of 10,630.00, financial expenses in the amount of 22,072.97, the costs of penalties in the amount of and undocumented expenses in the amount of Comparative overview of the total expenditures made in 2014 and 2015 No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office and other material 2, % 9, % 2 Expenditures for electricity and water 1, % 1, % 3 Expenditures for fuel 33, % 2, % 4 Expenditures for gross salaries and % 7, % contributions paid by the employer 5 Expenditures for compensations based on 132, % 100, % service contracts 6 Expenditures for business travels 3, % 49, % 7 Expenditure for post and telephone and 1, % 1, % maintenance 8 Renting expenditures 9, % 10, % 9 Expenditures for advertising and propaganda % 15, % 10 Depreciation expenditures 3, % 3, % 11 Representation expenditures 9, % 13, % 12 Expenditures for assistance and sponsorship 4, % 10, % 13 Expenditures for non-productive services 1, % 1, % 14 Other non-material expenditures % % 15 Financial expenditures 1, % 22, % 16 Expenditures for Election Campaigns 26, % % 17 Penalties for commercial offenses % % 18 Non-documented expenditures from 2, % % previous years Total 234, % 251, % The largest share of the total costs have compensation expense per service contract with 40.03%, the cost of business trips with 19.67%, the cost of advertising with 6.23%, and the like Implementation of recommendations from the previous year By the audit of the Annual Financial Statement for 2014 of the Democratic People s Party, the State Audit Institution has identified a number of deficiencies and gave to the Party the following recommendations: 1) to document all costs with credible and full documentation, 2) to conclude contracts with natural persons in accordance with the Labour Law and the Law on Obligations according to the types of contracts concluded, 3) to provide a record receivables from local governments, 4) to additionally document the cost paid in cash of fuel besides the fiscal accounts and travel orders, lists of persons who are granted compensation for the cost of fuel and slips from the gas stations on which the number plates of vehicles that filled the fuel is specified, 5) to determine with an internal act that is entitled to compensation based on the cost of fuel and the amount of compensation

351 Audit of the annual financial statement for 2015 found that the Party has implemented recommendations (No. 4 and No. 5), has not implemented a recommendation (No. 3) while the recommendations (No. 1 and No. 2) it has implemented for the most part but not completely Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Democratic People s Party of Montenegro for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology for performing the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 110/16 of 25 July 2016) on the Preliminary Report of SAI (No /6), the competent Auditing Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 28 July 2016, adopted: FINAL REPORT on audit of the Annual Financial Statement of the Democratic People s Party for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Democratic People s Party in 2015 in all important material respects prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. The regularity audit has found that the audited entity has not complied all financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit. The incompliance refers to the inconsistent application of Article 4 of the Law on Accounting and Auditing, article 23 of the Labour Law and Article 26 of the Law on Employment and Exercising the Rights from Unemployment Insurance, and accordingly the competent Auditing Board expresses a qualified opinion. The expression of qualified opinion was influenced by the following irregularities and shortcomings: 1. Based on the presented data it is concluded that the part of the expenditures paid in cash in the amount of 2, (representation (from multiple suppliers) - 1, procurement and maintenance of equipment ) justified with inadequate documentation (non-fiscal accounts) and costs in the amount of 420 relating to bus transportation (from four carriers) are justified with incomplete documentation (not presented proof of taking cash). Payment of all expenses from the petty cash should be performed on the basis of adequate and complete documentation in accordance with Article 4 of the Law on Accounting and Auditing. 2. In 2015 the Party employed 5 persons on the systematized work positions and concluded with them the employment contracts. After examining the presented contracts it was found that

352 employment contracts, beside the amount of the base salary, do not include the height of the coefficient and elements for determining the performance as required by Article 23 of the Labour Law. Also, when employing the Party did not perform public announcement of the vacancies, in accordance with the provisions of Article 26 of the Law on Employment and Exercising Rights from Unemployment Insurance. The audited entity is obliged to conclude the employment contract in accordance with the provisions of Article 23 of the Labour Law and to report the vacancies to the Employment Agency for the purpose of monitoring the offers at the labour market, as specified with the provisions of Article 26 of the Law on Employment and Exercising Rights from Unemployment Insurance. 3. After examining the concluded service contracts it has been found that those are of same type, that they have been concluded with reference to the provisions of the Law on Obligations, that they contain a defined obligation of the engaged persons and period of engagement. It was also found that they were recorded in the archive and signed by the President of the Party and the work provider. Contractual fees are determined on a net basis and for those were calculated and paid tax obligations (tax and surtax). The calculation of tax liabilities was carried out in a manner as if all persons engaged were employed. In the audit procedure the State Auditor was presented evidence for ten (10) persons that they are employed. The audited entity is recommended to determine the compensation for jobs performed on the basis of service contract in the gross amount, as well as to ensure data on the employment status of all persons engaged on the basis of service contract to ensure proper calculation of tax liabilities. 4. On the basis of service contracts the Party paid compensation in the amount of 100, for performing administrative and technical jobs, security jobs, marketing services, public opinion research, the creation and placement of flyers, preparing meetings, work on the establishment of pensioners' associations, women's organizations, preparation of the press of the Party, organization of cultural events, as well as the preparation of materials for the sessions of MC of the Party jobs of professional - political associate, drivers, hygiene maintenance, etc. Monthly net fees were paid in the amount from to 2, or, from to 9, per engaged person for a period of engagement (from one to twelve months). The audit has found that these costs were documented with contracts and are paid through bank accounts. Jobs of administrative and technical support, preparation of meetings, preparation of press of the Party, preparing materials for the sessions of the MC of the Party, jobs of political expert associate and job of driver by nature and description do not belong to the jobs for which the persons should be engaged on the basis of service contract, but for those jobs employment contracts are concluded. For performance of jobs of providing administrative and technical support, preparation of the meetings, preparation of statements of the Party, preparation of materials for meetings of MC of the Party, jobs of political expert associate and jobs of driver, the audited entity should engage persons on the basis of the employment contract, rather than service contract. 5. The audit has found that the Party as costs of the use of own vehicle for business purposes paid the amount of 32,160.25, The payment was performed on the basis of travel orders, checking the travel orders it was established that the calculation of those costs was carried out in accordance with the applicable Decree. With part of the travel orders fiscal bills for fuel were also attached

353 The audited entity is recommended, in order to justify the expenses for use of own vehicle for business purposes, to provide in addition to travel order also the information on car mileage of the car used for business purposes

354

355 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF MOVEMENT FOR PLJEVLJA Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Movement for Pljevlja Annual Financial Statement of the Movement of Pljevlja for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

356

357 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14), Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ) of 22 December 2015 and) with amendments to the Annual Audit Plan (No. 4011/ ), Decision of the Auditing Board competent for carrying out this audit (No / ) of 29 June Audit of the Annual Financial Statement of the Movement for Pljevlja was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Movement for Pljevlja for 2015 and regularity audit. 3. TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the Movement for Pljevlja for OBJECTIVE OD THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework, and 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant laws and other regulations which are identified as criteria. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14);

358 Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity. 6. METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 258,23 (2% of the expenditures of the Party which amount to 12, ). For the purpose of gathering audit evidence the State Auditor got acquainted with the regulations, analysed the financial statements and other acquired documents of the audited entity on the basis of conducted tests and assessed functioning of the internal control system to determine audit approach. The ledgers and accounting documents that serve as proof of the resultant business events were checked. The consistency of the application of laws and rules, procedures and other internal documents was examined according to established criteria

359 MOVEMENT FOR PLJEVLJA 1.1. Revenues In the business the Party reported revenues in the amount of 11, and those relate to income from the budget of Montenegro in the amount of 3, and income from local government budgets in the amount of 8, Tabular overview of the revenue generated in 2015 No. Type of revenue Amount Share (%) 1 State budget revenues % 2 Revenues from the budget of local governments 8, % Total 11, % The audit has shown that the Party gained the revenues from the budget of Montenegro on the basis of financing the work of the parliamentary group in the amount of 3,146.00, while the amount of 8, was made on the basis of payment of the Municipality of Pljevlja Expenditures The party reported in the business books expenditures in the amount of 12,911.58, and those concern: the cost of office supplies in the amount of 41.87, electricity costs in the amount of 86.57, the costs of gross salaries and contributions paid by the employer in the amount of 3,216.70, the cost of fees under service contract in the amount of 1,829.15, travel expenses in the amount of 1,450.00, the cost of postal services in the amount of 170,11, the cost of advertising and propaganda in the amount from , depreciation costs in the amount of , the cost of representation in the amount of , other costs in the amount of 92,68 and extraordinary expenses - the election campaign in May 2014 in the amount of 4, The following table provides comparative overview of expenditures made in 2015 per type: No. Type of expenditure Amount % share 1 Expenditures for office and other material % 2 Expenditures for electricity % 3 Expenditures for gross salaries and contributions paid by the 3, % employer 4 Expenditures for compensations based on service contracts 1, % 5 Expenditures for business travels 1, % 6 Expenditure for post and telephone services % 7 Expenditures for advertising and propaganda % 8 Depreciation expenditures (equipment, facilities, vehicles, % etc.) 9 Representation expenditures % 10 Other non-material expenditures % 11 Expenditures from previous years (Election campaign from 4, % 2014) Total 12, % The largest share of the total costs are expenses from previous years with 34.85%, the cost of gross earnings with 24.91%, the cost of the agreed fee with 14.71%, and the like Opinion with recommendations Based on the conducted audit, determined facts and Statement of the audited entity (No.70/16 of 27 July 2016) on the Preliminary Report of SAI (No / /6), the competent Auditing Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing of the Board and

360 member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at the session held on 15 September 2016 adopted: FINAL REPORT on the audit of the Annual Financial Statement of the Movement for Pljevlja for 2015 OPINION Financial audit has established that the Annual Financial Statement of the Movement for Pljevlja for 2015 prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, and accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement with an emphasis on the presented in the Statement under item Chapter recording and inventory of property and under point Chapter expenditures from the previous period): After the completed inventory of assets and liabilities a Report on the Inventory should be made as it is prescribed by the Rulebook on the Manner and Deadlines for Performance of Inventory and Alignment of Book-keeping balance with the Actual Balance. The same business transaction in various reports (Annual Financial Statement and the Report on Origin, Amount and Structure of Collected and Spent Funds for Election Campaign) should be presented in the same way. (Data must be consistent). Regularity audit has established that the audited entity aligned financial and other activities in all important material respects with legal and other regulations which are identified as criteria for the subject audit, so accordingly the competent Auditing Board expresses unqualified opinion

361

362 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF POSITIVE MONTENEGRO Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board members: Financial audit Positive Montenegro Annual Financial Statement of the Positive Montenegro for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

363

364 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14), Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ) of 22 December 2015; Decision of the Auditing Board competent for carrying out this audit (No / ) of 10 May Audit of the Annual Financial Statement of the Positive Montenegro was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Positive Montenegro for TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the Positive Montenegro for The financial audit involves the audit of the Annual Financial Statement and the audit of regularity implies compliance with legal and other regulations. 4. OBJECTIVE OD THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework; 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework, 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13);

365 Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Work Program of the Party for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 5, (1,50 % of the expenditures of the Party which amount to 392, ). POSITIVE MONTENEGRO 1.1. Revenues In 2015 the Party generated revenues in the amount of 507,292.00, and those refer to revenues from the budget of Montenegro in the amount of 365,065.00, revenues from local government budgets in the amount of 16,697.00, revenues from contributions in the amount of 1,400.00, revenues from membership fees in the amount of 3,962.00, and the financial income in the amount of The following table provides comparative overview of total revenues in 2014 and No. Type of revenue Amount 2014 Share (%) Amount 2015 Share (%) 1 State budget revenues 301, % 233, % 2 Municipal budget revenues 71, % 136, % 3 Revenues from contributions % 1, % 4 Revenues from membership 7, % 3, % fees 5 Financial revenues % % 6 Other revenues % % Total 381, % 507, % In accordance with the table overview it is noted that out of the total revenues 72% refers to revenues from the budget of Montenegro, 27% to the revenues from local governments and 1% on other revenues Expenditures The party in 2015 recorded expenditures in the amount of 392, and those concern: the cost of stationery and other materials in the amount of 3,701.44, the cost of fuel and electricity in the

366 amount of 15,300.96, wages, contracted fees and provision of other personnel expenses in the amount of 224,495.31, costs of telephone and transportation services in the amount of 15,129.84, costs of renting rooms in the amount of 2,563.02, the cost of maintaining equipment in the amount of 4, advertising and propaganda expenses in the amount of 52,685.12, depreciation costs in the amount of 5,864.00, the costs of non-production services in the amount of 16,812,40, the costs of representation and public opinion polls in the amount of 45,180.97, the cost of the payment system in the amount of 1,180.60, the cost of scholarships and grants in the amount of 3,400.00, other non-material expenses in the amount of 1, and interest expenses in the amount of The table provides comparative overview of the total expenditures in 2014 and 2015 per type of expenditure. No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for material 14, % 3, % 2 Expenditures for electricity and water 20, % 15, % 3 Expenditures for salaries, contracted 129, % 224, % compensations, and other personal expenditures 5 Expenditures for telephone services and 12, % 15, % transportation 6 Renting expenditures 132, % 2, % 7 Expenditures for advertising, propaganda and 56, % 52, % press 8 Depreciation expenditures 4, % 5, % 9 Expenditures for other services (equipment 6, % 4, % maintenance and road compensation) 10 Expenditures for non-productive services 46, % 15, % 11 Representation expenditures 19, % 45, % 12 Expenditures for payment system 9, % 1, % 13 Other non-material expenditures 9, % 1, % 14 Compliance of expenditures 1, % % 15 Expenditures for interests on loans 4, % % 16 Expenditures on the basis of scholarships and % 3, % donations Total 356, % 392, % Based on the data presented in tabular overview it is noted that the largest share of the total expenditures are the expenditures for salaries and fees based on contracts (57.22%), advertising and propaganda expenses (13.43%), representation expenditures (11.52%), costs of non-production services (4.29%), and so on Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No of 29 June 2016) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Positive Montenegro for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit

367 Based on the conducted audit, determined facts and Statement of the audited entity (No /2016) on the Preliminary Report of SAI (No /11), the competent Auditing Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and President of the Senate Milan Dabović, PhD, member of the Auditing Board, at its meeting held on 30 September 2016, adopted: FINAL REPORT on the audit of the Annual Financial Statement of the Positive Montenegro for 2015 OPINION Financial audit has found that the Annual Financial Statement Positive Montenegro for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. Regularity audit has found that the audited entity complied financial and other activities within all important material respects with legal and other regulations which are identified as criteria for the respective audit, so accordingly the competent Auditing Board expresses unqualified opinion with emphasis of matter to the following: To conclude employment contracts, and not service contracts, for performance of duties at systematized positions and to define precisely in the service contract obligation of the engaged person. To record all expenses on the appropriate accounts in accordance with the current Rulebook and to record the same kind of expenditure in one account. To establish a method for calculation of depreciation (IAS 16) by an internal act

368

369 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF MOVEMENT FOR CHANGES Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Movement for Changes Annual Financial Statement of the Movement for Changes for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

370

371 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No ); Decision of the Auditing Board competent for carrying out this audit (No / ) of 10 May Audit of the Annual Financial Statement of the Movement for Changes was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Movement for Changes for 2015 and audit of compliance of activities with law and other regulations. 3. TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the Movement for Changes for OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework; 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant laws and other regulations which are identified as criteria. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11);

372 Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 5, (1,50 % of the expenditures which amounted to 375, ). MOVEMENT FOR CHANGES 1.1. Revenues The party in 2015 reported in the business books total revenues in the amount of 419, Realized revenues include income from the budget of Montenegro in the amount of 316,175.00, revenue from local government budgets in the amount of 102,509.00, revenues from contributions amounting to 1, The following table provides the overview of planned and realized revenues in 2014 and No. Type of revenue Amount 2014 Share (%) Amount 2015 Share (%) 1 State budget revenues 241, % 316, % 2 Municipal budget revenues 118, % 102, % 3 Revenues from contributions % 1, % 4 Other business revenues 68, % % 5 Financial revenues % % 6 Other revenues 10, % % Total 438, % 419, % Based on the presented data it is noted that the largest share in total revenues have the revenues from the Budget of Montenegro with 75.31%, revenues from budgets of local self-governments with 24.42%, other revenues with 0.27%

373 1.2. Expenditures The Party in 2015 reported expenditures in the amount of 375,206.94, and those were realized in 2014 in the amount of 421, Total realized expenditure relate to: expenditures for office material in the amount of 7,782.42, expenditure for fuel and electricity in the amount of 6,918.68, expenditure for gross salaries and contributions paid by the employer in the amount of 36,420.80, expenditures for contracted fees in the amount of 69,459.79, travel expenses in the amount of 37,589.08, expenditures for telephone services and transport in the amount of 16,110.57, expenditures for maintenance of fixed assets and vehicle registration in the amount of 1,015.85, rental costs in the amount of 36,848.00, expenditures for advertising, propaganda and press in the amount of 23,557.98, depreciation costs in the amount of 5,867.19, expenditures for other services in the amount of 14,418.73, entertainment expenses in the amount of 32,147.77, expenditures for enforced collection and payment services, etc. in the amount of 2, and expenditure for sponsorships and scholarships in the amount of 84, Comparative tabular overview of realized expenditures in 2014 and 2015 No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office material 3, % 7, % 2 Expenditures for electricity and water 16, % 6, % 3 Expenditures for gross salaries and compensations paid by the employer 24, % 36, % 4 Expenditures for contracted 12, % 69, % compensations 5 Travel expenditures 29, % 37, % 6 Expenditures for telephone and 11, % 16, % transportation services 7 Expenditures for maintenance of fixed 3, % 1, % assets and vehicle registration 8 Renting expenditures 76, % 36, % 9 Expenditures for advertising, 12, % 23, % propaganda and press 10 Expenditures for elections campaign 29, % % 11 Depreciation expenditures 7, % 5, % 12 Expenditures for other services 15, % 14, % 13 Expenditures for utility services 1, % % 14 Expenditures for representation 18, % 32, % 15 Expenditures of enforced collection, payment system 40, % 2, % 16 Expenditures for sponsorships, 8, % 84, % scholarships and other expenditures Total 421, % 375, % The largest share of the total expenditures have sponsorships, scholarships and other expenses with 22.64%, expenditures for service contracts and other benefits with 18.51%, expenditures for business trips with 10.02%, rental costs with 9.82%, expenditures for representation with 8.57%, and the like Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No. 4016/ ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Movement for Changes for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 1540/16 of 28 September 2016) on the Preliminary Report of SAI (No /10), the competent

374 Auditing Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 30 September 2016, adopted: FINAL REPORT on the audit of Annual Financial Statement of the Movement for Changes for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Movement for Changes for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement with emphasis of matter on the stated in the Statement (item Receivables - paid advances and point Cashier operations expenditures for foreign per diems and expenses of representation). Regularity audit has found that the audited entity did not comply all financial and other activities in all important material respects with legal and other regulations which are identified as criteria for the respective audit. Non-compliance refers to the inconsistent application of the Law on Accounting and Auditing (Article 4), the Labour Law, the Law on Obligations, the Law on Financing of Political Parties and Election Campaigns (Article 38), Rulebook on the form, content, manner of filling in and submitting the form of a single report the calculated and paid tax on personal income tax and contributions for mandatory social insurance (Article 5), so accordingly the competent Auditing Board expresses qualified opinion

375 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF LIBERAL PARTY OF MONTENEGRO Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit Liberal Party Annual Financial Statement of the Liberal Party of Montenegro for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

376 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14), Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ), Decision of the Auditing Board competent for carrying out this audit (No / ) of 10 May Audit of the Annual Financial Statement of the Liberal Party was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Liberal Party for TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the Liberal Party for Financial audit involves the audit of the Annual Financial Statements and the audit of regularity implies compliance with legal and other regulations. 4. OBJECTIVE OD THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework; 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14);

377 Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Work Program of the Party for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 1, (1,50 % of the expenditures of the Party which amount to 131, ). LIBERAL PARTY 1.1. Revenues The Party in 2015 reported in the business books total revenues in the amount of 141,821, The reported revenues includes revenues from the budget of Montenegro in the amount of 102,939.36, revenues from financing Deputies Club in the amount of 2, which were transferred by the Croatian Civil Initiative, revenues from local governments in the amount of 33,818.00, revenues from membership fees in the amount of 1, and other revenues in the amount of The following table provides the overview of realized revenues in 2014 and 2015 No. Type of revenue Revenues in 2014 Share (%) Revenues in 2015 Share (%) 1 State budget revenues 81, % 102, % 2 Revenues based on financing 3, % % of the club of CCI 3 Municipal budget revenues % 33, % 4 Revenues from membership 1, % 1, % fees 5 Other revenues 6, % 14, % Total 86, % 141, % 1.2. Expenditures The party realized in 2015 generated total expenses in the amount of 131, and those concern: expenditures for other material (overhead) in the amount of , expenditures for fuel and electricity in the amount of 3,996.39, expenditures for materials of Municipal Committees in the amount of 1,705.00, expenditures for gross salaries and contributions paid by the employer in the amount of 19,768.35, expenditures for compensation on the basis of service contracts -net

378 amount in the amount of 14,100.00, expenditures for the compensation on the basis of Municipal Committee in the amount of 10,471.00, expenditures for transport, accommodation and food on business trip in the amount of 12,514.98, expenditures for transport services in the amount of 2,365.93, rental expenses in the amount of 8,367.60, the cost of rent of Municipal Committees in the amount of 1,800.00, expenditures for fairs in the amount of 3,702.80, expenditures for advertising in the amount of 8,559.11, other operating expenditures of the Municipal Committees in the amount of 9,105.00, depreciation costs in the amount of 1,123.18, the depreciation costs of Municipal Committees in the amount of , provisions for expenditures for recovery of natural resources in the amount of 1,500.00, provisions for expenditures for program activities/seminars for young people, public opinion research, consultation and provision of membership fees for the international associations/in the amount of 16,000.00, expenditures for other non-production services in the amount of 32.00, representation expenditures in the amount of 5,274.46, expenditures for insurance premiums for fixed assets in the amount of , payment transaction costs in the amount of , expenditures for membership fees in the amount of 2,475.00, other intangible costs -tax in the amount of 5.00, the financial expenditures of the Municipal Committees in the amount of 12.00, other expenses in the amount of 5,950.00, other expenditures of the Municipal Committees in the amount of , expenditures from previous years - subsequently determined in the amount of The following table provides an overview of realized expenditures in 2014 and No. No. of Type of expenditure Expenditures Share% Expenditures Share% Account for 2014 for Expenditures for materials, tools and small inventory 1, % % Expenditures for fuel and electricity 5, % 3, % Expenditures for materials of Municipal Committees % 1, % 4 520,521 Expenditures for gross salaries and contributions 9, % 19, % paid by the employer Expenditures for compensations based on service contract 21, % 14, % Expenditures for compensations of Municipal % 10, % Committees Expenditures for transportation, accommodation 9, % 12, % and food at the business trip Expenditures for post office and telephone services 1, % 2, % Renting expenditures 13, % 8, % Fairs expenditures % 3, % Expenditures for advertising and propaganda in the 6, % 8, % country Other business expenditures of the Municipal % 10, % Committees Depreciation costs 1, % 1, % Reservation for performance of basic activities % 1, % Expenditures for compensations and other benefits % % Expenditures for opinion polls and consulting 2, % 16, % services Expenditures for other non-productive services 2, % % Expenditures for representation 4, % 5, % Expenditures for Insurance premium for fixed assets % % Expenditures for payment system % % Expenditures for membership fees % 2, % ,559, Other expenditures 4, % 6, % 565, Expenditures from previous years subsequently established % % Total 85, % 131, % In accordance with the presented data it is concluded that the largest share of the total expenditures realized in 2015 have expenditures for gross salaries and contributions paid by the employer with 15.05%, expenditures for opinion polls with 12.18%, expenditures for fees on the basis of service contracts with 10.73%, expenditures for transport and accommodation on a business trip with 9.52%

379 1.3. Opinion for recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No. 4016/ ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Liberal Party for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 07/10 of 7 October 2016) on the Preliminary Report of SAI (No /05), the competent Auditing Board comprised of Mr Nikola Kovačević a member of the Senate, Head of the Auditing Board and Mr Milan Dabović, PhD, the President of the Senate - a member of the Auditing Board, at its meeting held on 12 October 2016, adopted: FINAL REPORT on the audit of Annual Financial Statement of the Liberal Party for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Liberal Party for 2015 is not prepared and presented, in all important material respects, in a fair and objective manner in accordance with the applicable financial reporting framework, since in it the revenues Municipal Committee of Niksic were not reported in the amount of 2, and expenditures in the amount of 4,641.18, which is significant error in relation to the established materiality which is 1, Accordingly, the competent Auditing Board expresses adverse opinion on the Annual Financial Statement. Regularity audit has found that the audited entity did not comply all financial and other activities in all important material respects with legal and other regulations which are identified as criteria for the respective audit, The non-compliance refers to inconsistent implementation of the Law on Personal Income Tax, Law on Accounting and Auditing, Law on Financing of Political Parties and Electoral Campaigns, Labour Law and Rulebook on Internal Organization and Systematization of Work Positions, so accordingly the competent Auditing Board expresses qualified opinion. The expression of qualified opinion was influenced by the following irregularities and deficiencies: 1. The audit has found that in the General Ledger and in the Annual Financial Statement of the Liberal Party were reported revenues of local governments in a reduced amount of 2, and expenditures in the amount of 4, This difference in revenues relates to MB of Niksic, while the difference in expenditures relates to the Municipal Committees 3, (the MB of Nikšić 3,282.73) and to the Central the amount of It was also found that deposits on the accounts were reported in the reduced amount of The audited entity is obliged to record all business transactions of the Central and Municipal Committees in the General Ledger on the basis of credible documentation and to report them in the Annual Financial Statement. 2. The audited entity paid the fees in the amount of 3, (monthly from ) on the basis of engagement of Administrative Officer in the office of the Municipal Committees in Niksic, The payment of those fees was performed in accordance with the Decision of the President of the MB Niksic, No.16/13 of 18 October For the performance administrative tasks the person should have been engaged by employment contract, because the subject tasks by their description are included in the regular activity of the audited political entity and the person has been engaged since The audit has found that the paid fees were not calculated and paid the tax liabilities

380 The audited entity should engage for performance of administrative tasks on the basis of employment contract and to calculate and pay for those paid fees the tax liabilities in accordance with the Law on Personal Income Tax. 3. The audit has found that the audited entity did not calculate and pay tax liabilities, on the paid compensations for renting of business premises, in the amount of 3,000.00, which is not in accordance with the Law on Personal Income Tax. The audited entity is obliged to calculate and pay tax liabilities on the paid compensations for renting of business premises, in accordance with the Law on Personal Income Tax. 4. The audit has found that from the cash register of MB of the amount of was paid for the reimbursement of a loan to a natural person (to the President of MB of Budva) who borrowed the mentioned funds from the MB of Budva in accordance with the Decision on 23 July 2015, which is contrary to the provisions of Article 24 Paragraph 4 of the Law on Financing Political Parties and Electoral Campaigns. Audited entity is obliged to respect the provisions of Article 24 of the Law on Financing Political Parties and Electoral Campaigns. 5. The audit has found that the Party has two employees: The Secretary General and Technical Secretary engaged under the employment contract of indefinite duration, the Rulebook on the Systematization did not provide for these positions, The audited entity should establish the mentioned work positions in the Rulebook on Internal Organization and Systematization of Work Positions for which it has concluded employment contracts. 6. The audit has found that two employees were engaged on the basis of service contracts for performance of tasks on the systematized work positions (PR activities and accounting and financial affairs) which is not in accordance with the Labour Law. The audited entity should engage employees for the performance of jobs on systematized work positions on the basis of employment contract, and not the service contract

381 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF DEMOS Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing Board members: Financial audit DEMOS Annual Financial Statement of DEMOS (Democratic Alliance) for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

382 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14) Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No ); Decision of the Auditing Board competent for carrying out this audit (No / ) of 10 May Audit of the Annual Financial Statement of the DEMOS was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the DEMOS for TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the DEMOS for Financial audit involves the audit of the Annual Financial Statement and the audit of regularity implies compliance with legal and other regulations. 4. OBJECTIVE OD THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework; 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework, 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14);

383 Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Work Program of the Party for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of (2 % of the expenditures of the Party which amount to 9, ). DEMOS 1.1. Revenues The party in the business books reported revenues in the amount of 10, and those relate to revenues from the Budget of the Parliament of Montenegro in the amount of 8, and revenues from contributions amounting to 1, Revenues from the budget of the Parliament of Montenegro in the amount of 8, ( 1, per month on average) were allocated to the Party in accordance with the Decision of the Administrative Committee of the Parliament of Montenegro, which determined the amount of the funds that are allocated for engagement of Secretaries and Expert Consultants in Deputies Club of the Party. Revenues from contributions amounting to 1, are presented in respect of payment of the Democratic Party of Unity in accordance with the Decision on the granting of 28 May 2015, in the amount of 1, and payment of two natural persons in the amount of The party did not report the revenues from membership fees because the Decision on the amount of membership fee determined that the Party members are exempted from paying membership fees for No. Type of revenue Amount Share (%) 1 State budget revenues 8, ,53% 2 Revenues from the contributions 1, ,47% Total 10, % According the tabular overview it is noted that out of the total income 72% relates to revenues from the Budget of Montenegro, 27% to the revenues from local governments and 1% to other revenues

384 1.2. Expenditures The Party in the business books reported expenditures in the amount of 9,417.00, and those concern: expenditures for phone in the amount of 86.54, expenditures for fuel and electricity in the amount of , expenditures for compensations to activists in the amount of , rental costs in the amount of 7,700.00, representation expenditures in the amount of , the cost of payment transactions in the amount of and the cost of property tax in the amount of The following table provides the overview of realized expenditures in 2015 per type: O/N Type of expenditure Amount Share% 1 Telephone expenditures 86,54 0,92% 2 Fuel and electricity expenditures 194,23 2,06% 3 Expenditures for compensations to activists ,37% 4 Renting expenditures 7, ,77% 5 Representation expenditures ,34% 6 Payment system expenditures ,22% 7 Expenditures for property tax 595,38 6,32% TOTAL: 9,417, % The largest share in the total expenditures have the expenditures for renting with 81.77%, than expenditures for compensations to activists with 6.37%, expenditures for property tax (tax on rent) with 6.32%, and the like Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the DEMOS for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (of 4 October 2016) on the Preliminary Report of SAI (No /13), the competent Auditing Board comprised of Mr Nikola Kovačević, a member of the Senate, Head of the Auditing Board and Mr Milan Dabović, PhD, the President of the Senate - a member of the Auditing Board, at its meeting held on 12 October 2016, adopted: FINAL REPORT on the audit of Annual Financial statement of Demos for 2015 OPINION Financial audit has found that the Annual Financial Statement of the DEMOS for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. Regularity audit has found that the audited entity did not comply all financial and other activities in all important material respects with legal and other regulations which are identified as criteria for the respective audit. The non-compliance relates to the inconsistent implementation of the Law on

385 Financing of Political Parties and Electoral Campaigns (Article 6 and 37) and Law on Personal Income Tax, so accordingly the competent Auditing Board expresses qualified opinion. The expressing of qualified opinion was influenced by following irregularities and deficiencies: 1. In accordance with a written statement of the President of the Executive Committee of the Party of 26 July 2016,the expenditures for hall for the purpose of holding the meeting of DEMOS are financed from the funds of natural persons (activists), and business premises for meetings was used without compensation. The audit has shown that the Party in its business books did not report in this respect neither revenue nor expenditure arising from the use of hall for the meeting of Assembly which is paid, according the mentioned Statement, from the funds of the party activists. The audited entity is obliged to record all revenues and expenditures in the business books in accordance with Article 37 of the Law on Financing of Political Parties and Electoral Campaigns and to calculate in accordance with Article 6 of the mentioned Law non-monetary contributions according their market value and to report those as revenue from contribution in the business books. 2. The party paid as compensations to the activists the amount of , in accordance with the Decision of the President of the Party, The audit has found that for the compensations paid no tax liabilities were calculated and paid, which is not in accordance with the Law on Personal Income Tax, The audited entity is obliged to calculate and pay tax liabilities for all compensations paid to natural persons in accordance with the Law on Personal Income Tax. 3. Having examined the presented documentation (lease agreements, decisions and the like) it was found that it does not contain an archive number or the date of filing of the document. We recommend to the audited entity to define the tasks of receiving, recording, noting, sending, archiving, and keeping of the archived files by means of an internal procedure, for the purpose of ensuring an adequate validity of incoming and outgoing acts

386 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF NEW SERBIAN DEMOCRACY Type of audit: Audited entity: Subject-matter of audit: Duration of audit: Auditing Board members: Financial audit New Serbian Democracy Annual Financial Statement of New Serbian Democracy for auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

387

388 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No of 22 December 2015); Decision of the Auditing Board competent for carrying out this audit (No / ) of 10 May Audit of the Annual Financial Statement of the New Serbian Democracy was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the New Serbian Democracy for 2015 and regularity audit. 3. OBJECTIVE OF THE AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework; 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity are complied, in all material respects, with relevant laws and other regulations which are identified as criteria. 4. TYPE OF AUDIT The State Audit Institution has performed financial audit and regularity audit of the New Serbian Democracy for Financial audit involves the audit of the Annual Financial Statement and the audit of regularity implies compliance with legal and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14);

389 Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Work Program of the Party for METHODOLOGY OF THE PERFORMANCE OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 8, (1.25 % of the expenditures of the Party which amount to 647,504.00). NEW SERBIAN DEMOCRACY 1.1. Revenues Tabular overview of reported revenues of the New Serbian Democracy for 2014 and 2015 No. Type of revenue 2014 Share (%) 2015 Share (%) 1, State budget revenues 383,316,21 56,76% 445, % 2, Revenues from local governments 171,612,18 25,41% 151, % 3, Revenues from contributions made by natural persons 33, ,96% 31, % 4, Other revenues 26, ,94% 0 0% 5, Outstanding revenues 60,295,56 8,93% 41, % Total 675,232, % 670, % 1.2. Expenditures The party reported in the business books expenditures for 2015 in the amount of 647, as follows: expenditures for salaries and compensations for activists in the amount of 84,566.04, expenditures for official travels in the amount of 1,276.00, expenditures for transportation and phone in the amount of 12,034.63, the cost of the equipment and vehicle maintenance in the amount of 6,454.50, overhead expenses in the amount of 9,954.21, marketing expenses in the amount of 33,214.43, renting and maintenance costs in the amount of 16,060.00, the cost of utilities in the amount of 895,35, depreciation costs in the amount of 19,572.56, fees,

390 commissions and insurance, enforced collection and court fees in the amount of 5,612.81, the cost of services rendered in the amount of 135,015.34, representation expenses and other costs in the amount of 46,645,49, the cost of loan repayment and interest on loans in the amount of 34,513.79, the cost of the box office of the Municipal Committees in the amount of 144,626.76, costs of box office of the Central in the amount of 65,963.54, expenditures of MB from prior periods in the amount of and expenses from write-off of receivables in the amount of 30, Tabular overview of the realized expenditures of the Party in 2014 and 2015: No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for salaries, compensations for 97, % 84, % work of activists 2 Business travel expenditures 5, % 1, % 3 Expenditures for transportation and 14, % 12, % telephone 4 Expenditures for equipment and 12, % 6, % maintenance of vehicles 5 Overhead expenditures 2, % 9, % 6 Marketing expenditures 127, % 33, % 7 Expenditures for renting and maintenance 9, % 16, % 8 Expenditures for utility services % % 9 Depreciation expenditures 12, % 19, % 10 Expenditures for commissions, insurance and 7, % 5, % enforced collection 11 Expenditures for performed services 82, % 135, % 12 Expenditures of paid assistances and 11, % % donations 13 Expenditures for representation and other 17, % 46, % expenditures 15 Expenditures for payment of loans and 16, % 34, % interest on loans 16 Expenditures of Cashiers of the Municipal 100, % 144, % Committees 17 Expenditures of DF 53, % % 18 Expenditures of the Cashier of the Central 42, % 65, % 19 Expenditures of the MC from the previous period 5, % % 20 Expenditures based on write-off of % 30, % receivables Total 620, % 647, % According to the data from the table of the largest share in the total expenditures for 2015 have expenditures of the Municipal Committees Cashiers with 22.34%, expenditures for services rendered 20.85%, expenditures for salaries and compensations 13.06% and expenditures of Cashier of the Central 10.19% Implementation of recommendations from the previous year Audit of the Annual Financial Statements for 2014 of the New Serbian Democracy, the State Audit Institution had identified a number of irregularities and had made six recommendations for their removal. 1. The audited entity should at the time of payment of compensations to natural persons, withhold and pay tax on personal income, as defined by the Law on Personal Income Tax. 2. The audited entity should record in General Ledger all purchases of fixed assets within the (class 0) and to conduct an inventory and depreciation calculation thereof. 3. The audited entity should record all receivables on the basis of certified and complied documentation

391 4. The audited entity should perform the recording and payment of all expenses on the basis of adequate and complete documentation. 5. The audited entity should ensure recording of expenditures in a way so that the same type of expenditure is presented on a single account regardless of the method of payment (cash or a bank account). 6. The audited entity should engage persons performing tasks of Secretaries and Advisers in the Deputies Club of the NEW and Spokesman of the Party on the basis of the employment contract, rather than service contract, Audit of the Annual Financial Statements of the NEW for 2015 determined that the audited entity out of six given recommendations implemented two (recommendations No. 2 and No. 3) while it partially implemented the recommendation No.4, while it has not implemented recommendations No. 1.5 and Opinion and recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No. 4016/ ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the New Serbian Democracy for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (of 10 October 2016) on the Preliminary Report of SAI (No /7), the competent Auditing Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 14 October 2016, adopted: FINAL REPORT on the audit of Annual Financial Statement of the New Serbian Democracy for 2015 OPINION Financial audit has found that the Annual Financial Statement of the New Serbian Democracy for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. Regularity audit has found that the audited entity did not comply all financial and other activities in all important material respects with legal and other regulations which are identified as criteria for the respective audit. The non-compliance relates to the inconsistent implementation of the Law on Personal Income Tax, Law on Contributions for Mandatory Social Insurance, Law on Accounting and Auditing and Labour Law, so accordingly the competent Auditing Board expresses qualified opinion. The expressing of qualified opinion was influenced by the following irregularities and deficiencies: 1. The audit has found that the cash paid expenditures are not recorded chronologically in the General Ledger but the recording of expenditures paid from the Cashier of the Central was performed on a monthly basis and expenses paid from the Cashier of the Municipal Committee as a summary at the end of the year, It was also established that the party does not provide in the General Ledger a record of expenditures by type analogously to records in the cash journals

392 The audited entity should record in the General Ledger expenditures paid in cash chronologically and by type of expenditure. 2. The audit has shown that the audited entity in relation to net compensations on the basis of service contracts, paid the amount of 96,955,50 for 31 people, net fees were paid in monthly instalments from to 9,400.00, for a period of engagement of the first (one) to 12 (twelve) months in the following activities: administrative and technical tasks (sorting the database, records of membership, etc.); activities of Spokesman for the party; tasks of visiting MB and training of electoral committees from among the NEW; tasks of Secretary; tasks of the marketing of the New Serbian Democracy - creating and placing flyers and other advertising materials; business accounting, cashier and technical assistance; redesign jobs and regular maintenance of the site of MB of the New Tivat and activities related to the organization of protest of the DF; tasks of relocating and installing furniture; jobs of technical support and securing of facilities; transport operations; and business communications with the members of the New Serbian Democracy, In accordance with the job description from the presented contracts it is stated that the same except bookkeeping tasks, redesign and regular maintenance of the site; tasks of relocation and assembly of furniture fall within the scope of the regular activities of the entity, for which the employment contracts should have been concluded, and not the service contracts, It was also established that the audited entity for 12 months of 2015 hired one person on the basis of service contract for the provision of activities of the Spokesman of the party, for which the Rulebook of the NEW systematized work position until 30 December 2015, when it was lifted (by the Decision No. 499/15), so it is stated that for performance of these jobs the employment contract should be concluded, and not the service contract. The audited entity should conclude employment contracts, and not the service contracts, with persons performing jobs on systematized work positions and jobs that fall into regular activities. 3. After examining the presented contracts on debt takeover concluded with coalition partners (Movement for Change and the Democratic People's Party) and the NGO Freedom is looking for people, it was found that those do not contain neither an archive number nor the date of their filing. For the purpose of ensuring adequate validity of incoming and outgoing acts, the audited entity should enter those in the register book in such a way so that each act contains number from the register book and date of entry into the book. 4. The audit has shown that the net fees were paid for three persons pursuant to service contracts concluded for the work involved in performing the duties of Secretary and two Advisers in the Deputies Club of the NEW, It was also found that the fees paid were calculated the tax liabilities but they were not paid, what is not in accordance with the provisions of Article 46 of the Law on Personal Income Tax. The audited entity should engage the persons performing tasks of Secretaries and Advisors in the Deputies Club on the basis of service contract, and not the service contract. Audited entity should, at the time of payment of fees to natural persons calculate, withhold and pay tax liabilities on personal income as it is established by the Law on Personal Income Tax and Law on Contributions for Mandatory Social Insurance

393 5. The audit has shown that the audited entity did not justify the expenditures in the amount of , and expenditures in the amount of justified by inadequate or incomplete documentation. The audited entity should justify all expenditures (representations, telephone, write-offs and etc.) by adequate and complete documentation. 6. The party's Rulebook on Systematization of Work Positions foresaw that certain jobs may be filled by the conclusion of the service contracts with certain persons, which is not in accordance with the provisions of the Labour Law, This Rulebook provides for Administrative - Financial Service, Spokesperson of the Party (who was lifted, by the Decision No. 499/15 of 30 December 2015, from the act on systematization), Legal Advisor, Economic Adviser and Deputies Club, but this act does not provide for number of employees or the terms for employment. The audited entity should determine in the Rulebook on Internal Organization and Systematization of Work Positions number of persons engaged, conditions for employment on systematized work positions, as well as to align it with the provisions of the Labour Law. 7. The cost of using own vehicles for official purposes in the amount of 36,594,83 were paid by travel orders to party members, activists, party officials and on the basis of a tour of local Boards, distributing propaganda materials, attending meetings of the Executive, the Central Committee, the Forum of the Women from the Party, organizing protest assembly and the like. As annex to travel orders Decisions are attached, Issued in accordance with the applicable Rulebook and fiscal accounts, Compensations based on the use of own vehicle for business purposes are calculated and paid in accordance with article 29 of the Decree on Reimbursement of the Costs of Civil Servants and Employees. The audited entity is recommended to ensure records on car mileage vehicles that the person used for official purposes, in addition to travel order and fiscal bills, for the purpose of justifying. 8. The audit has found that according to the Decision of the President of the Executive Committee of 30 December 2015 the increased liabilities arising from the loan contract No for an amount of 29, on behalf of unregistered interests that are recorded as an expense. In order to express the real costs for the financial year the audited entity should record interest expense according to maturity of the Annuity Plan and not in the total amount. 9. The audit procedure has found that the party did not report liabilities and expenditures in the General Ledger based on surtax which would amount as assessed to 2, The audited entity should report in business books liabilities and expenditures arising from surtax on the calculated tax. 10. The audit has shown that from the Cashier of the Central and cashier of the Municipal Committee the cash was paid in the amount of 242, as follows: from the Cashier of the Central amount of 97, and from the Cashiers of the Municipal Committees the amount of 144,819.40, which represents 37.40% of the total cost of the Party

394 In order to decrease cash payments we recommend the audited entity to make payments of expenditures for renting, scholarships, assistance, representations and the like from the bank account. 11. Inventory Commission reported in inventory lists and Report on the Inventory identified lack of equipment and small inventory (tents curing spinners etc.), whose current book value wore 7, Commission did not explain in the Report on Inventory the reasons that led to the established shortage. The audit has found that the equipment and small inventory were booked out from the business books in the specified amount. In the audit procedure the Decision on recognition of the established shortage was not presented, neither the Decision approving to conduct relevant postings on this basis in the business books. The audited entity should perform booking out of the equipment and small inventory on the basis of the established shortage, based on the adequate documentation (explanation of the Inventory Commission, statements of persons who possessed property and the decision of the competent authority)

395 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF CROATIAN CIVIC INITIATIVE Type of audit: Audited entity: Financial audit Croatian Civic Initiative Subject-matter of audit: Annual Financial Statement of the Croatian Civic Initiative for 2015 Duration of audit: Auditing Board members: 15 auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

396

397 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No of 22 December 2015); Decision of the Auditing Board competent for carrying out this audit (No / ). Audit of the Annual Financial Statement of the Croatian Civic Initiative was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Croatian Civic Initiative for 2015 and audit of regularity. 3. OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework. 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant legislative and other regulations which are identified as criteria. 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Croatian Civic Initiative for 2015 audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14);

398 Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work for METHODS OF AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 1, (1.50% of the expenditures of the audited entity which amounted to 109,481.28). CROATIAN CIVIC INITIATIVE 1.1. Revenues In 2015 the Party realized total revenues in the amount of 126,265.00, realized revenues refer to the State budget revenues in the amount of 113,908.70, revenues from the budget of municipalities in the amount of 11,955.80, revenues from membership fees in the amount of , other revenues in the amount of The following table provides comparative overview of the realized revenues in 2014 and No. Type of revenue 2014 Share (%) 2015 Share (%) 1 State budget revenues 93, % 102, ,53% 2 Municipal budget revenues 12, % 11, % 3 Revenues from membership fees % % 4 Other business revenues % 11, % TOTAL: 107, % 126, % 1.2. Expenditures In 2015 the Party 2015 reported in its business books total revenues in the amount of 109, and those refer to expenditures for office material and electricity in the amount of 2,662.51, expenditures in the amount of 15,633.28, expenditures for compensations in the amount of 33,806.78, expenditures for business trips in the amount of 22,321.65, expenditures for telephone

399 and transportation in the amount of 5,543.06, expenditures for maintenance in the amount of 164,42, expenditures for advertising and propaganda in the amount of 3,921.73, depreciation expenditures in the amount of 2,618.03, expenditures for assistance, sponsorships and scholarships in the amount of 14,735.30, expenditures for representation in the amount of 3, and other expenditures in the amount of 2, The following table provides comparative overview of the realized expenditures in 2014 and No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office material and electricity 1, % 2, % 2 Expenditures for net salaries and contributions 15, % 15, % 3 Compensations for officials of the party and compensations on the basis of service contract 35, % 33, % 4 Expenditures for business trips 23, % 22, % 5 Expenditures for services of transportation and telephone in the country 5, % 5, % 6 Expenditures for maintenance of fixed assets % % 7 Expenditures for advertising, propaganda and fairs 2, % 3, % 8 Depreciation expenditures 2, % 2, % 9 Expenditures for services 2, % 2, % 10 Sponsorships and assistances 16, % 14, % 11 Expenditures for representation 5, % 3, % 12 Expenditures arising from the concluded agreement % % 13 Other expenditures 2, % 2, % TOTAL: 112, % 109, % Based on the given table and graphic figure it is noted that the largest share of the total expenditures are compensation expenditures for the members of the central committee and the compensations for service contracts with 30.88%, expenditures for business trips with 20.39%, the costs of gross salaries with 14.28%, expenditures for assistance, sponsorships and scholarships with 13.46%, and the like Realization of recommendations from the previous year Audit of the Annual Financial Statement of the Croatian Civic Initiative for 2014 found certain irregularities and recommendations were made by the SAI and those are related to: documentation of all cash paid expenses, concluding the service contract in accordance with the Law on Obligations and providing records of claims from local governments. Audit of the Annual Financial Statement for 2015 it has been found that the audited entity out of the three recommendations failed to comply with two Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Croatian Civic Initiative for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit

400 Based on the conducted audit, determined facts and Statement of the audited entity (No. 200/2 of 19 October 2016) on the Preliminary Report of SAI (No /10), the competent Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and President of the Senate Milan Dabović, PhD, member of the Auditing Board, at its meeting held on 24 October 2016, adopted: FINAL REPORT on the audit of Annual Financial Statement of the Croatian Civic Initiative for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Croatian Civic Initiative for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement. The regularity audit has found that the audited entity did not comply the financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit. The non-compliance refers to the inconsistent application of the Law on Accounting and Auditing (Article 4), Law on Obligations and Decree on reimbursement of expenses to Civil Servants and Employees, so in accordance with that the competent Auditing Board expresses a qualified opinion. The expressing of the qualified opinion was influenced by the following irregularities and deficiencies: 1. The insight into the presented service contracts found that four service contracts were concluded with reference to the provisions of the Law on Personal Income Tax which does not regulate this area, and two contracts do not contain legal basis for their conclusion. The total compensations paid per person engaged amounted from to 2, Payment of compensation to natural persons was conducted monthly throughout For the paid compensations tax liabilities were calculated and paid. The audited entity should conclude service contracts in accordance with the provisions of the Law on Obligations, contract should define the tasks of engaged persons, 2. After examining the documentation presented decisions for the payment of aid, scholarships, requests of natural and legal persons, travel orders, etc.). It was found that it does not contain an archive number or the date of their filing. The audited entity is recommended to define by internal procedure tasks of receiving, recording, dispatch, archiving and storage of archived files for the purpose of ensuring adequate validity of outgoing and incoming acts. 3. The audit has found that the expenditures of these of personal vehicle for official purposes were justified by travel orders and part of those also by fiscal bills for fuel. The audited entity is recommended to provide for the purpose of justification of expenditures for usage of personal vehicle for business, in addition to travel order and fiscal bills, information on car mileage of the vehicles used for official purposes

401 4. The audit has found that the Party leads the following business books: general ledger and ancillary records of cash operations, obligations, analytical records of fixed assets (in excel table) but does not provide records of claims from local governments. The audited entity is recommended to provide in business books records of claims from local governments. The records must be based on verified and complied documentation. 5. The audit has found certain shortcomings in justification of travel expenses for business trips in the country and abroad because the travel orders mostly were not justified within the prescribed deadline and reports from the business trips were not submitted which is not in accordance with the valid Decree. The audited entity is obliged to consistently apply the valid Decree when justifying travel expenses or to regulate this area by an internal act

402 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF DEMOCRATIC PARTY Type of audit: Audited entity: Financial audit Democratic Party Subject-matter of the audit: Annual Financial Statement of Democratic Party for 2015 Duration of audit: Auditing Board members: 15 auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

403

404 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No of 22 December 2015); Decision of the Auditing Board competent for carrying out this audit (No / ). Audit of the Annual Financial Statement of the Democratic Party was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Democratic Party for 2015 and audit of regularity. 3. OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework, 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant legislative and other regulations which are identified as criteria. 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Democratic Party of Montenegro for Financial audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14);

405 Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work of the Party for METHODS OF PERFORMING THE AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of (2 % of the expenditures of the audited entity which amounted to 37,647.00). DEMOCRATIC PARTY 1.1. Revenues The audit has found that the income reported in the financial statements in the amount of 41,850.00, relate to: state budget revenues on behalf of regular funding in the amount of 30,881.76, the revenues from the municipality of Ulcinj in the amount of 10, and interest income in the amount of The following table provides the comparative overview of the reported revenues of the Party for 2014 and 2015: No. Type of revenue 2014 Share (%) 2015 Share (%) 1 State budget revenues 81, % 30, % 2 Municipal budget revenues 6, % 10, % 3 Revenues based on funding MP clubs % % 4 Income interest % % TOTAL: 88, % 41, % 1.2. Expenditures The party reported in the business books expenditures in the total amount of 37,646.39, and the same applies to the expenditures for office supplies in the amount of 3,003.68, fuel costs in the amount of 3,210.03, the expenditure for wages and salaries in the amount of 3,859.32, travel expenses in the amount of 9,647.29, the cost of telephone services in the amount of 73.27, the cost of accounting and auditing services in the amount of 3,149.45, the expenditure for

406 maintenance of fixed assets in the amount of , registration fee of , 3, rent costs, depreciation costs of 1,350.00, representation costs in the amount of 3,153,70 interest costs and payment transactions , the cost of aid and donations in the amount of 3,683.75, and other costs in the amount of The following table provides comparative overview of the expenditures of the Party for 2014 and 2015: No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office material 1, % 3, % 2 Expenditures for fuel 2, % 3, % 3 Expenditures for salaries and compensations 14, % 3, % 4 Reimbursement of costs of transportation at business trips % 9, % 5 Expenditures for telephone and other services % % 6 Expenditures for accounting and auditing % 3, % 7 Expenditures for the services of maintenance of fixed assets % % 8 Renting expenditures 3, % 3, % 9 Expenditures for registration of vehicle % % 10 Depreciation expenditures 1, % 1, % 11 Expenditures for representation in the country 1, % 3, % 12 Expenditures for interest rates and payment system in the country 1, % % 13 Expenditures for humanitarian aid 12, , % 14 Expenditures based on agreement with Albanian Alternative 46, % % 15 Other expenditures % % TOTAL: 84, % 37, % The largest share in total expenditures are the costs of business trips with 25.63%, salaries and compensations in the amount of 10.25%, the costs of paid aids 9.79%, 10.29% cost of rent and the like Implementation of recommendations from the previous year Audit of Annual Financial Statement for 2014 has found certain irregularities and recommendations concerning the following: To submit the Annual Financial Statement to the State Audit Institution within the established deadline (Article 37 of the Law on Financing of Political Entities and Election Campaigns). To report in the Annual Financial Statement for the previous year data which it had presented in the official Annual Financial Statement for that year and which was submitted to the State Audit Institution. That after concluding the business books, preparing the Annual Financial Statement and submitting it to the competent institutions it cannot perform rebooking and subsequent booking in that year, or modify the book values of balance sheet items compared to the officially presented Annual Statements without an order of the authorized institution. To report in business books and Annual Financial Statements only part of its revenues, while transfer of funds to coalition members should not be reported as an expenditure, because it was not realized from the activities of the Party. To perform inventory of total permanent property, to make records of it in the business books and report it in the Annual Financial Statement. To pay the tax obligations for compensations to natural persons in accordance with the provisions of Article 46 of the Law on Personal Income Tax and to submit the prescribed reports to the competent tax authority in accordance with Article 47 of the same Law

407 To conclude renting contracts and service contracts in accordance with provisions of the Law on Obligations. To align the claims with local self-government and to make records of those in the business books on the basis of the verified documentation. The audit of the Annual Financial Statement for 2015 has found that the audited entity out of the eight recommendations in the Report on Audit for 2014 realized five recommendations (No. 1,2,3,4 and 8), partially realized two recommendations (No. 5 and 6) while one recommendation (No. 7) it has not realized Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Democratic Party of Montenegro for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity (No. 65/16 of 21 October 2016) on the Preliminary Report of SAI (No /8), the competent Board comprised of a member of the Senate Nikola Kovačević, Head of the Auditing Board and member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 24 October 2016, adopted: FINAL REPORT on audit of the Annual Financial Statement of the Democratic Party for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Democratic Party for 2015 in all important material respects is not prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses a qualified opinion on the Annual Financial Statement. The expressing of the qualified opinion was influenced by the following irregularity: 1. The audit has found that the audited entity paid expenses in the amount of 1,726,05 which it had not justified with adequate and complete documentation (expenditures for maintenance of the vehicle in the amount of 875,30 were justified with non-fiscal bills, and expenses of aid in construction material in the amount of 850,75 with incomplete documentation presented invoice of the supplier Decision and request are missing), which represents materially important mistake in respect of established materiality which amounts to The audited entity is obliged to justify all expenditures with adequate and complete documentation. Regularity audit has found that the audited entity did not comply the financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit. The non-compliance refers to the inconsistent application of Law on Accounting and Auditing (Article 4), Law on Obligations, Rulebook on the form, content, manner of filling in and submitting the form of a single report on calculated and paid tax on personal income and contributions for social insurance (Article 5) and Rulebook on the method and deadlines for

408 performing inventory and complying book-keeping balance with the actual situation, so accordingly the competent Auditing Board expresses qualified opinion. The expressing of the qualified opinion was influenced by the following irregularities and deficiencies: 1. The Inventory Commission which was appointed by the Decision of the President of Party of 25 December 2015, performed the inventory listing of permanent property with the balance of 31 December 2015, but it did not make listing of obligations and claims. The Commission also listed in inventory the office furniture and communications equipment that was purchased in 2013 and during previous years, which in the inventory lists is expressed only in quantity. The audited entity is obliged, in accordance with the Rulebook on the method and deadlines for performing inventory and complying book-keeping balance with the actual situation, to make listing of claims and obligations, in addition to permanent property, with balance as of 31 December of the current year, The audited entity is recommended to evaluate property that has no book value and to make records of it in the business books by the estimated value, 2. The audit has found that the audited entity prepared RCPTC forms but did not submit them to the competent tax authority within the deadline prescribed by the Article 5 of the Rulebook, The audited entity is obliged to submit the Report on calculated and paid tax on personal income and contributions for mandatory social insurance (RCPTC) to the competent authority within the prescribed deadline in accordance with Article 5 of the valid Rulebook. 3. The insight into presented renting contracts found that those were not verified by the notary, as well as that they do not contain the legal basis for their conclusion, Renting contracts should contain, in addition to other elements, also the legal basis for their conclusion. 4. By the insight into the presented documentation (renting contracts, decisions, request of natural persons for assistance and donations, travel orders for business trips in the country etc.) it was found that it does not contain the archive number. The audited entity is recommended to define by internal procedure tasks of receiving, recording, dispatch, archiving and storage of archived files for the purpose of ensuring adequate validity of outgoing and incoming acts, 5. The audit has found that the expenditures for the use of personal vehicle for official purposes were paid in the amount of 3, The expenditures were justified by travel orders (which mainly were not registered). The audited entity is recommended to provide for the purpose of justification of expenditures for usage of personal vehicle for business, in addition to travel order and fiscal bills, information on car mileage of the vehicles used for official purposes

409

410 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF NEW DEMOCRATIC FORCE (FORCA) Type of audit: Audited entity: Financial audit New Democratic Force (FORCA) Subject-matter of audit: Annual Financial Statement of the New Democratic Force (FORCA) for 2015 Duration of audit: Auditing Board members: 15 auditing days Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

411

412 GENERAL INFORMATION 1. LEGAL BASIS The legal basis for conducting the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14) Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14), Annual audit plan of the State Audit Institution for 2016, (No of 22 December 2015); Decision of the Auditing Board competent for carrying out this audit (No / ), Audit of the Annual Financial Statement of the New Democratic Force (FORCA) was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the New Democratic Force (FORCA) for 2015 and audit of regularity. 3. OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework, 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework. Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant legislative and other regulations which are identified as criteria. 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the New Democratic Force (FORCA) for Financial audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11);

413 Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13); Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work of the Party for METHODS OF PERFORMING THE AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of 1, (2 % of the expenditures of the audited entity which amounted to 53,319.00). NEW DEMOCRATIC FORCE (FORCA) 1.1. Revenues Revenues realized in 2015 in the amount of 53, relate to state budget revenues in the amount of 49, and other revenues in the amount of 3, The following table provides comparative overview of revenues for 2014 and No. Type of revenue 2014 Share (%) 2015 Share (%) 1 State budget revenues 55, % 49, % 2 Municipal budget revenues 11, % % 3 Other revenues (CCI revenue) 3, % 3, % 4 Income interests % % TOTAL: 70, % 53, % Based on the presented tabular overview it is stated that 93% of the realized revenues relate to the State budget revenues Expenditures In the annual accounts and business books the party reported expenditures for 2015 totalling 53, The breakdown of reported expenditures relates to the cost of stationery and other materials in the amount of , the cost of fuel and electricity in the amount of , the

414 cost of gross earnings in the amount of 12,300.00, per diem expenses for business trips in the amount of 8,701.00, scholarship expenditures 2,400.00, telephone costs in the amount of 1,666,09, rental costs in the amount of 11,690.00, the cost of advertising in the amount of 3,378.41, the cost of utilities and other services 2,678.78, the cost of previous campaigns , depreciation costs in the amount of 1,962,28, representation costs in the amount of 2,329.99, the cost of bank fees in the amount of , the cost of the tax on rent 785,98, the costs of assistance, donations and other intangible costs 2, and the interest expense of the loan The Table below shows a comparative overview of expenditures reported in 2014 and 2015 No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office material, other material and professional literature 2, % % 2 Expenditures for fuel and electricity % % 3 Expenditures for gross salaries and compensations based on service contracts 11, % 12, % 4 Expenditures for per diems at business trips 9, % 8, % 5 Expenditures for scholarships 2, % 2, % 6 Expenditures for telephone 2, % 1, % 7 Renting expenditures 5, % 11, % 8 Expenditures for advertising and propaganda 7, % 3, % 9 Expenditures for utility services 3, % 2, % 10 Expenditures for election campaigns 19, % % 11 Depreciation expenditures 1, % 1, % 12 Expenditures for representation 6, % 2, % 13 Expenditures for banking commissions % % 14 Expenditures for tax on rent % % 15 Expenditures for aid, donations and other intangible expenditures 2, % 2, % TOTAL: 76, % 53, % Based on the presented tabular and graphic overview it is stated that in the total expenditures the largest share have expenditures for gross salaries 23.07%, renting expenditures 21.92%, expenditures for per diems at business trips 16,32%, expenditures for advertising and propaganda 6.34%, and other Implementation of recommendations from the previous year Audit of Annual Financial Statement for 2014 found irregularities and recommendations are made for the audited entity to: Perform corrective entries on account of liabilities for net earnings and account of active time limits. Conclude employment contract with persons who perform administrative and assistance jobs. Record all transactions in the business books and to justify them with adequate documentation. Record claims from local governments on the basis of certified and compliant documentation. To submit reports on calculated and paid taxes (IOPPD form) pursuant to Article 5 of the Rulebook on the form, content, manner of filling in and submitting the form of a single

415 report on calculated and paid tax on personal income tax and contributions for mandatory social insurance. Audit of the Annual Financial Statement for 2015 found that the Party has implemented three recommendations (No. 1, 2 and 4), and one partially implemented (No. 3) and one recommendation it did not implement (No.5) Opinion with recommendations Pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ), the State Audit Institution, conducted a financial audit of the Annual Financial Statement and the regularity audit of the New Democratic Force (FORCA) for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity of 22 October 2016 on the Preliminary Report of SAI (No / /10), the competent Auditing Board comprised of a member of the Senate Mr Nikola Kovačević, Head of the Auditing Board and president of the Senate Mr Milan Dabović, PhD, member of the Auditing Board, at its meeting held on 25 October 2016, adopted: FINAL REPORT on audit of Annual Financial Statement of the New Democratic Force (FORCA) for 2015 OPINION Financial audit has found that the Annual Financial Statement of the New Democratic Force for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion on the Annual Financial Statement, with emphasis of matters on: Transportation costs in addition to travel orders should further be documented with fuel bills or transportation tickets. Regularity audit has found that the audited entity complied the financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit, except for the part of inconsistent application of Law on Personal Income Tax and Rulebook on the form, content, manner of filling in and submitting the form of a single report on calculated and paid tax on personal income and contributions for social insurance (Article 5), so accordingly the competent Auditing Board expresses unqualified opinion, with emphasis of matters on: The audited entity is obliged to calculate, suspend and pay personal income tax during each payment of income pursuant to Article 46 paragraph 2 of the Law on Personal Income Tax. The audited entity is obliged to submit RCPTC to the competent tax administration, until 15 in the month, for the previous accounting period (month), pursuant to Article 5 of the Rulebook on the form, content, manner of filling in and submitting the form of a single report on calculated and paid tax on personal income and contributions for social insurance

416

417 EXCERPT FROM AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF DEMOCRATIC SERBIAN PARTY Type of audit: Audited entity: Financial audit Democratic Serbian Party Subject-matter of audit: Annual Financial Statement of the Democratic Serbian Party for 2015 Duration of audit: 15 auditing days Auditing Board members: Mr Nikola N. Kovačević, member of the Senate Head of the Auditing Board Mr Branislav Radulović, PhD, member of the Senate member of the Auditing Board

418 GENERAL INFORMATION 1. LEGAL BASIS

419 The legal basis for performing the audit is contained in: Law on State Audit Institution (Official Gazette of Montenegro, No. 15/07, 73/10, 40/11 and 31/14); Law on Funding of Political Parties (Official Gazette of Montenegro, No. 52/14); Annual audit plan of the State Audit Institution for 2016, (No of 22 December 2015); Decision of the Auditing Board competent for carrying out this audit (No / ). Audit of the Annual Financial Statement of the Democratic Serbian Party was performed in accordance with: Rules of Procedure the State Audit Institution (Official Gazette of Montenegro, No. 03/15); Instruction on the methodology of performing the financial audit and regularity audit (Official Gazette of Montenegro, No. 07/15); Guidelines for audit quality control; International standards (ISSAI). 2. SUBJECT-MATTER OF AUDIT Subject matter of audit is Annual Financial Statement of the Democratic Serbian Party for 2015 and audit of regularity. 3. OBJECTIVE OF AUDIT Objective of the financial audit is expressing the opinion whether: 1. Financial Statements in all material respects are prepared in accordance with the financial reporting framework 2. Financial Statements in all material respects are presented in a fair and objective manner in accordance with the given framework, Objective of the regularity audit is expressing the opinion whether financial and other activities of the audited entity, in all material respects, are in compliance with relevant legislative and other regulations which are identified as criteria, 4. TYPE OF AUDIT State Audit Institution has performed financial audit and regularity audit of the Democratic Serbian Party for Financial audit involves the audit of the annual financial statement while the regularity audit involves compliance of activities with laws and other regulations. 5. CRITERIA FOR REGULARITY AUDIT Law on Financing of Political Parties and Electoral Campaigns (Official Gazette of Montenegro, No. 52/14); Law on Accounting and Auditing (Official Gazette of Republic of Montenegro, No. 69/05 and Official Gazette of Montenegro No. 80/08 and 32/11); Labour Law (Official Gazette of Montenegro, No. 49/08 31/14); Law on Obligations (Official Gazette of Montenegro, No. 047/08, 004/11); Law on Contributions for Compulsory Social Insurance (Official Gazette of Montenegro, No. 13/ 07 62/13);

420 Law on Personal Income Tax (Official Gazette of Republic of Montenegro, No. 65/01, 37/04, 78/06, 86/09, 14/12, 06/13, 62/13 and 60/14); Decree on Reimbursement of Costs to Civil Servants and Employees (Official Gazette of Montenegro, No. 57/11 of 30 November 2011); Rulebook on the Chart of Accounts and content of accounts for companies and other legal entities (Official Gazette of Montenegro, No. 5/11); Rulebook on Form of the Annual Report on the income, assets and expenditures of political party (Official Gazette of Montenegro, No. 17/12); The Statute of the political entity; Rulebook on Internal Organization and Systematization of Work Positions of the Party; Financial Plan of the Party for 2015; Program of Work of the Party for METHODS OF PERFORMING THE AUDIT The audit has been performed by combining the methods of documentary evidence and audit fieldwork. In the preparatory phase of the audit, the identification and assessment of material risks was carried out through understanding the audited entity and its environment, including internal controls. The materiality was also determined at the planning stage of financial audit for the financial statements as a whole, that is, assessment of the extent to which a misstatement in the financial statements can be accepted, and that it does not significantly affect their accuracy and objectivity. Materiality is determined in the amount of (2 % of the expenditures of the audited entity which amounted to 12,514.00). DEMOCRATIC SERBIAN PARTY 1.1. Revenues The Party in 2015 realized the total revenues in the amount of 20, Realized revenues refer to revenues from the budget of local self-governments in the amount of 19,974.65, revenues from the previous year in the amount of and other revenues in the amount of The following table provides overview of realized revenues in 2014 and 2015 No. Description 2014 Share (%) 2015 Share (%) 1 Municipal budget revenues 18, % 19, % 2 Revenues from the previous year % % 3 Financial revenues % % 4 Other income % % TOTAL: 18, % 20, % 1.2. Expenditures The Party in 2015 generated total expenditures in the amount of 12, and the same applies to the cost of office material in the amount of , the cost of fuel in the amount of 1,110.07, the costs of compensation for official travel in the amount of 1,592.84, the cost of postal services in the amount of 3,610.19, depreciation costs in the amount of 59.80, the cost of services in the amount of , the cost of representation in the amount of , the cost of payment transactions the amount of , the cost of the renting in the amount of 2,641.90, the cost of ads in newspapers and expenditure for assistance in the amount of 1, The following table provides overview of realized expenditures in 2014 and

421 No. Type of expenditure 2014 Share (%) 2015 Share (%) 1 Expenditures for office material % % 2 Expenditures for fuel 2, % 1, % 3 Expenditures for natural persons % % 4 Expenditures for business trips 2, % 1, % 5 Expenditures for aid and sponsorships 2, % % 6 Expenditures for posting and telephone services 3, % 3, % 7 Expenditures for transportation services % % 8 Expenditures for maintenance of fixed assets % % 9 Expenditures for advertising and propaganda % % 10 Depreciation expenditures % % 11 Financing the work of the Club of Deputies % % 12 Expenditures for services % % 13 Expenditures for representation % % 14 Expenditures for payment system % % 15 Expenditures for renting of business premises 2, % 2, % 16 Expenditures for financing the election campaigns 1, % % 17 Other expenditures % % 18 Expenditures for advertisements in daily newspapers 1, % 1, % 19 Expenditures for registration of vehicles % % TOTAL: 21, % 12, % In accordance with the presented data it is concluded that the largest share of the total costs are the costs of postal services (28.85%), the cost of renting the office premises (21.11%), the cost of ads in newspapers and expenditure for humanitarian, sport and religious purposes (13.66%), costs of business trips (12.73%) and the like Implementation of recommendations from previous year Audit of the Annual Statement of the Democratic Serbian Party in 2014 identified the deficiencies and SAI made recommendations to eliminate them, and those refer to: To justify all expenditures with adequate and complete documentation, That it cannot borrow money through loans from natural persons in accordance with Article 24 of the Law on Financing of Political Entities and Election Campaigns, To calculate, withhold and pay tax obligations for paid compensations to natural persons in accordance with Law on Personal Income Tax, To ensure record of claims from local governments. Audit of the Annual Report of the Democratic Serbian Party in 2015 found that the Party implemented two recommendations relating to the calculation and payment of tax on the compensations paid to natural persons and borrowing from natural persons, but it did not implement two recommendations relating to the justification of the cost with an adequate and complete documentation and providing records of claims from local governments Opinion with recommendations The State Audit Institution, pursuant to Article 4 and Article 12 of the Law on State Audit Institution, Law on Funding of Political Entities and Electoral Campaigns and the Decision of the Auditing Board on Conducting the Audit (No / ) has conducted a financial audit of the Annual Financial Statement and the regularity audit of the Democratic Serbian Party for The audit was performed in accordance with the Rules of Procedure of the State Audit Institution and the Instruction on the methodology of performance of the financial audit and regularity audit. Based on the conducted audit, determined facts and Statement of the audited entity of 21 October 2016 on the Preliminary Report of SAI (No / /8), the competent Board comprised

422 of a member of the Senate Nikola Kovačević, Head of the Auditing Board and member of the Senate Branislav Radulović, PhD, member of the Auditing Board, at its meeting held on 25 October 2016, adopted: FINAL REPORT on the audit of Annual Financial Statement of the Democratic Serbian Party for 2015 OPINION Financial audit has found that the Annual Financial Statement of the Democratic Serbian Party for 2015 in all important material respects is prepared and presented in a fair and objective manner in accordance with the applicable financial reporting framework, so accordingly the competent Auditing Board expresses an unqualified opinion with emphasis of matters on the stated in the Report (item Expenditures Expenditures for telephone and Internet services). Regularity audit has found that the audited entity did not comply all financial and other activities in all important material respects, with laws and other regulations that have been identified as criteria for the relevant audit, The non-compliance refers to inconsistent application of Law on Accounting and Auditing (Article 4) and Law on Financing of Political Entities and Electoral Campaigns (Article 38), so accordingly the competent Auditing Board expresses qualified opinion. The expressing of qualified opinion was influenced by the following irregularities: 1. The audit has shown that the audited entity payments based on costs (telephone, internet service, representation and fuel) in the amount of 1, did not justify by adequate and complete documentation; telephone expenditures in the amount of 1, are documented by the decision of the competent authority, but they are not documented by invoices of the operators, while the paid expenses for representation and fuel in the amount of justified by inadequate documentation. The audited is obliged to justify all payments by adequate and complete documentation and to perform payment of compensations based on expenditures for telephone and internet according the real spending. 2. In accordance with the statement of the inventory, the value of permanent property (fixed assets) at purchase price amounted to 1,906.13, written-off 1, and the present value of The property of the Party consists of office equipment, office furniture and passenger car. Based on the presented data, it is noted that the present value is unrealistic for the said property, especially for the passenger car. The audited entity should evaluate the value of permanent property (fixed assets) and to make record of it, with the estimated value, in the business books because the reported present value is unrealistic for the property reported in the business books. 3. The Party did not adopt, in accordance with the Article 38 of the Law on Financing of the Political Entities and Election Campaigns, the financial plan and Work Program for Also, the Party did not adopt other basic and specific acts, except for the Statute and Work Program, (Rulebook on Internal Organization and Systematization of Work Positions, Rulebook on Material and Financial Business Performance, Rulebook on Work, Decisions on Restrictions of Telephone Expenditures, fuel and etc.). The audited entity should adopt Work Program and financial plan by the end of the current for the next year in accordance with the Article 38 of the Law on Financing of Political Entities and Election Campaigns

423 4. The Party does not provide in its business books records of claims form local self-governments. The audited entity is recommended to ensure records of claims from local selfgovernments. The records should be based on the complied and verified documentation. 5. Insight into the presented documentation (rental agreement, part of decisions, requests of natural persons and legal persons for assistance and donation, and etc.) found that it does not contain the archive number nor the date of its filing. The audited entity is recommended to define by internal procedure tasks of receiving, recording, dispatch, archiving and storage of archived files for the purpose of ensuring adequate validity of outgoing and incoming acts

424 EXCERPT FROM AUDIT REPORT ON 2014 ON THE FINAL STATEMENT OF BUDGET ACCOUNTS OF MUNICIPALITY ŽABLJAK Type of audit: Financial and regularity audit Audited entity: Žabljak Municipality Subject-matter of audit: Final Statement of Accounts of the Budget of Žabljak Municipality for 2014 Duration of audit: 60 auditing days Mr Dragiša Pešić, Member of Senate Head of the Auditing Board Auditing Board members: Mr Branislav Radulović, PhD, Member of Senate Member of the Auditing Board

425

426 1. GENERAL INFORMATION ON AUDITED ENTITY Žabljak Municipality functions in accordance with the Law on Local Self-Government (Official Gazette of the Republic of Montenegro No 42/03, 28/04, 75/05, 13/06 and Official Gazette of the Republic of Montenegro No 88/09, 3/10, 73/10, 38/12 and 10/14), Law on Local Self-Government Financing (Official Gazette of the Republic of Montenegro No 42/03, 44/03, and Official Gazette of the Republic of Montenegro No 05/08, 51/08 and 74/10 and 01/15), Law on Budget and Fiscal Responsibility (Official Gazette of the Republic of Montenegro No 20/14), Law on State Property (Official Gazette of the Republic of Montenegro No 21/09, 40/11), and Statute of Žabljak Municipality (Official Gazette of the Republic of Montenegro Municipality regulations, No 9/05 and 23/07 and Official Gazette of the Republic of Montenegro Municipality regulations No 3/11 and 7/14). Municipal bodies are Municipal Assembly and the President of Municipality. Municipal Assembly constitutes of representatives elected by citizens for a 4 year term in accordance with Article 44 of Law on Local Self-Government. The number of representatives in the Assembly is determined by a special decision. The Assembly is a representative body of the citizens and its work is governed by Law on Local Self-Government (Art 45 - Art 52) and Statute of Žabljak Municipality (Art 38 - Art 62). President of Municipality is an executive body of Municipality, elected by citizens for a 5 year term, His work is governed by Law on Local Self-Government (Art 56 - Art 67) and Statute of Žabljak Municipality (Art 63 - Art 75). President represents the Municipality. 2, ACCOUNTING POLICIES AND TREASURY OPERATIONS Financial and accounting operations of Žabljak Municipality budget are performed by Secretariat for Finance and Economic Development, Records of income and expenditures of Žabljak Municipality are made in the General Ledger of the Treasury, and payroll and other benefits through software for payrolls. There is no book of invoices, paper invoices or electronic records of property. Žabljak Municipality does not use modified base for records of property and liabilities, meaning that the liabilities are not recorded as class 2 and property as class 0, while the records of income and expenditures have cash base, Regulation on Unified Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities stipulates that state of property and liabilities of the budget of the Republic, extra-budgetary funds and budgets of municipalities be recorded in following classes: 0 non-financial assets; 1 financial assets; 2 liabilities; 3 capital. President of Žabljak Municipality passed an Instruction on the Operations of Local Self-Government Treasury that stipulates implementation of self-government budget, control of financial transactions, liquidity of consolidated account of treasury, management of the debt of the Royal Capital as well as form and content of templates for the General Ledger of the Treasury. Instruction on the Operations of Local Self-Government Treasury (Official Gazette of the Republic of Montenegro Municipality regulations No 7/05 17 March 2005) was passed in 2005, with no further amendments in accordance with corresponding amendments on Law on Budget and Law on Budget and Fiscal Responsibility. 3. OPINION AND RECOMMENDATIONS The State Audit Institution conducted an audit of Final Statement of Accounts of Žabljak Municipality for 2014 in accordance with Article 4 of Law on State Audit Institution and Decision of the Auditing Board tasked with the relevant audit. The audit was conducted in accordance with the Rulebook of

427 the State Audit Institution, Directive on work methodology of the State Audit Institution and International Standards of Supreme Audit Institutions ISSAI. Based on the conducted audit, established facts and statement of Žabljak Municipality on Preliminary Report of the State Audit Institution No /22 from 24 November 2015, and in accordance with Art 44 of Law on State Audit Institution and Art 45 of Rulebook of State Audit Institution, the competent Auditing Board of SAI made by Mr Dragiša Pešić (member of Senate head of Auditing Board) and Branislav Radulović, PhD (member of Senate member of Auditing Board), adopted the following on Auditing Board of SAI session held on 17 December 2015: FINAL REPORT on audit of the 2014 Final Statement of Accounts of the Budget of Žabljak Municipality The responsibility of the audited entity In accordance with Art 52 of Law on Local Self-Government Financing, President of Municipality is responsible for implementation of the municipality budget, while budgetary executor is responsible for purposeful allocation of budget funds. In accordance with Art 69 of Law on Budget and Fiscal Responsibility, the Final Statement of Accounts of the Budget is prepared by a responsible individual of the municipality following this Law. Management of the subject of audit is responsible for preparation and presentation of financial reports, in accordance with the accepted framework of financial reports, as well as compliance with legislative and other relevant regulations. The responsibility of the State Audit Institution The responsibility of the State Audit Institution (SIA) is to determine, based on the conducted audit, whether the Decision on Final Statement of Accounts of the Budget of Žabljak Municipality for 2014 has been prepared and presented in compliance with accepted framework of financial reporting. Along with stating its opinion on financial report, SIA has responsibility to state its opinion on whether financial and other activities of the subject of audit were performed in accordance with laws, other regulations and documents that are identified as relevant for the given audit. The audit was conducted in accordance with International Standards of Supreme Audit Institutions ISSAI level III. SIA has complied with ethical requests, and it has planned and conducted the audit in a manner that ensured reasonable belief that financial reports of Žabljak Municipality were prepared and presented, in all their materially significant matters, in accordance with valid and accepted frameworks of financial reporting and that actions of the subject of audit were in accordance with standing legislation and other regulations. The audit entailed implementation of procedures of procurement of adequate evidence on amounts disclosed in financial reports, Implemented procedures included estimates of interior system controls, estimates of implemented accounting policies, estimates of materially wrongful representation of amounts in financial reports and estimates of general presentation of financial reports, We consider the evidence gathered in the audit to be adequate and sufficient as a basis for an opinion. FINANCIAL AUDIT of the Final Statement of Accounts of the Budget of Žabljak Municipality for 2014 has determined that the Final Statement of Accounts does not contain materially significant errors, and that it gives a fair and objective view of incomes and expenditures on cash basis, except for irregularities noted in comments of Report on consolidated public expenditures for 2014 that pertain to budget funds transferred from previous year, net repayment liabilities and declared surplus. Accordingly, the Auditing Board expresses the QUALIFIED OPINION

428 BASIS FOR EXPRESSION OF QUALIFIED OPINION ON FINANCIAL AUDIT: In the Report on consolidated public expenditures for 2014, Žabljak Municipality reported a surplus in the amount of 29, However, the audit determined irregularities that influenced said financial results so the reported surplus was corrected based on audit findings to 58,240,96. In the Report on consolidated public expenditures for 2014, Žabljak Municipality did not report on changes in net liabilities. Repayment of liabilities from previous years was done not only from the account 463 Repayment of liabilities from previous period, but it was also planned and executed from current expenditures (liabilities for gross earnings from previous year - 40,633,64 and other personal income 20,603,75), The audit determined following facts that influenced the financial result: 1. Account 732 Funds transferred from previous years, reported in the amount of 34,595.58, was brought down to 0, because the resources left over at the end of the year were reported as deposits at the beginning of the next year and cannot be reported as income in the Budget of the current year, Account 7149 Other reimbursements was reported in the amount of 52,567.17, Said account contained evidence of income from Ministry of Sustainable Development and Tourism ( 4,000.00) and Ministry of Agriculture and Rural Development ( 40,000.00), so the reclassification was carried out and the account was reduced by 44,000.00, while account 7421 Transfers from budget of Montenegro was increased. 2. Account 461 Repayment of securities and credits was used to pay the amount of 24, (capital - 17,579.16, interests - 6,859.32), Reclassification of account 461 was carried out and the account was reduced in the amount of interests 6,859.32, while account 416 Interests was increased. 3. Account 441 Capital expenditures was used to pay the amount of 15, that includes payments based on invoice and contract from 2013, Reclassification of account 441 was carried out, and the account was reduced in said amount, while account 462 Repayment of liabilities from previous period was increased. 4. Account 411 Gross earnings and benefits payable by the employer was used to pay the amount of 112, pertaining to liabilities on rescheduling ( 71,905.87) and repayment of liabilities for gross earnings and benefits payable by the employer for December 2013 ( 40,633.64), Reclassification of account 411 was carried out and the account was reduced in the amount of 112,539.51, while account 463 Repayment of liabilities from previous period was increased, 5. Account 412 Other personal income previous year liabilities was used to pay the amount of 20,603.75, from which 19, pertains to reimbursements for representatives for 2013, Reclassification of account 412 was carried out and the account was reduced in the amount of 19,775.67, while account 463 Repayment of liabilities from previous period was increased

429 After said accounts were corrected, cash surplus of Žabljak Municipality for 2014 amounts to 65,100.28, and primary surplus to 58, (cash surplus reduced in the amount of interests - 6,859.32). REGULARITY AUDIT of Decision on Final Statement of Accounts of the Budget of Žabljak Municipality for 2014 has determined that Žabljak Municipality failed to comply with materially significant aspects of legislation and other documents that regulated the subject of the audit. The audit established discrepancies with the following legislative regulations: Law on Systems of Interior Regulation, Law on Budget and Fiscal Responsibility, Law on Local Self-Government Financing, Law on Civil Servants and State Employees, Law on Earnings of State Officials and Employees, Law on Public Procurements, Law on Tax Administration, Law on Prevention of Illegal Business Affairs, Law on State Property, Directive on methods of records of movable and immovable property and evidence of state property, Regulation on Unified Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, Rulebook on the Manner of Submission and Content of Data on Revenues, Expenditures and Budget Debt of Local Self-Government Units, Regulations on the Manner and Procedure of Establishing and Implementing Financial Management and Control, Regulation on tax bookkeeping and Directive on work of Žabljak Municipality treasury, Accordingly, Auditing Board expresses its ADVERSE OPINION. BASIS FOR EXPRESSION OF ADVERSE OPINION ON REGULARITY AUDIT: Budget planning Decision on Final Statement of Accounts of the Budget for 2014 stipulated that account 441 Gross earnings and benefits payable by the employer be used to pay late liabilities from previous period in the amount of 113, (taxes and benefits in the amount of 72, in accordance with Contract on financial restructuring signed with Ministry of Finance and liabilities for gross earnings from 2013 in the amount of 41,100.00) and that account 412 Other personal income (reimbursements for representatives from previous years) be used to pay liabilities from previous year in the amount of 20,700.00, that were to be paid from account 463 Repayment of liabilities from previous period. Decision on budget for 2014 specifically stated the Capital budget in the amount of 303,400.00, Capital budget was presented as a special organizational unit (09), not belonging to any expense unit, so it was not possible to determine person accountable for its execution, As a part of the capital budget, aside from capital expenditures, there was a plan to repay following debts: account 461 Repayment of securities and credits in the amount of 80, and account 463 Repayment of liabilities from previous period in the amount of 43, Cited expenditures were supposed to be paid from the expense units they belonged to. Decision on Final Statement of Accounts of the Budget of Žabljak Municipality does not contain the start and end state of consolidate account of the treasury, which does not comply with Art 68 of Law on Budget and Fiscal Responsibility, Draft of Decision on Final statement of Žabljak Municipality budget for 2014 was not submitted to the Municipality Assembly within the deadline stipulated by Art 56 of Law on Local Self-Government Financing, which was by the end of May of the current year

430 Žabljak Municipality must plan and implement liabilities for gross earnings and other personal income (reimbursements for representatives from previous years) in accordance with Art 9 of Regulation on Unified Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities within group of accounts 462 Repayment of liabilities from previous period. Žabljak Municipality must use organizational, functional and economic classification when planning expenditures from the budget, so that the source and the executor of the expense can be determined. Žabljak Municipality must submit Draft of Decision on Final Statement of Accounts of the Budget in stipulated form and stipulated deadline to the Municipality Assembly, in accordance with Art 56 of Law on Local Self-Government and Art 68 of Law on Budget and Fiscal Responsibility. Internal control system and internal audit Žabljak Municipality did not, in accordance with Art 14 of Law on System of Interior Financial Regulation in Public Sector, designate a person accountable for establishing, implementing and developing financial management and control (FMC manager) and it did not create a plan for establishing financial regulation and management. Žabljak Municipality did not, in accordance with Art 18 of Law on System of Interior Financial Regulation in Public Sector and Art 4 of Directive on establishing interior audit in public sector, designate a special organization unit for interior audit or come to an agreement on performing interior audit by units of interior audit of other subjects, with previous agreement from Ministry of Finance. Instruction on the Operations of Local Self-Government Treasury (Official Gazette of Montenegro municipal regulations No. 7/05 17 March 2005) was not made to comply with the Law on Budget and Fiscal Responsibility within 9 months stipulated by Art. 87 of said law, that sets the deadline at 3 December Žabljak Municipality did not pass a document on method and conditions of using official vehicles that would determine the conditions of using official vehicles of the Municipality, the individuals who have a right to use official vehicles, limits for oil expenditures, procedures, etc. The Municipality, except for Service for protection and rescue, does not issue warrants for using vehicles on the prescribed form (PN) to the employees who used official vehicles nor does it prepare and issue warrants for control of usage of official and other vehicles and oil expenditures (OK form). Žabljak Municipality must, in accordance with the Law on System of Interior Financial Regulation in Public Sector, establish a system of interior financial regulation and designate an individual responsible for establishing, implementing and developing financial management and regulations, It also needs to pass a plan for establishing financial management and regulations, as well as interior rules, procedures and guidelines for systems of financial management and regulation

431 Žabljak Municipality must, in accordance with Art 18 of Law on System of Interior Financial Regulation in Public Sector and Art 4 of Directive on establishing interior audit in public sector, establish a special organization unit for interior audit or have affairs of interior audit allocated to the unit of interior audit of some other subject through an agreement, with previous agreement from Ministry of Finance. Žabljak Municipality must make Directive on work of local self-government treasury comply with the Law on Budget and Fiscal Responsibility and ensure its full implementation. Žabljak Municipality must, in accordance with Article 28 of Law on State Property, adopt a document that would set the conditions and methods of using transport vehicles, limits for oil expenditures, records-keeping and reports on control of usage of official vehicles. Accounting policies and treasury operations Žabljak Municipality does not use modified base for records of property and liabilities, meaning that the liabilities are not recorded as class 2 and property as class 0, while the records of income and expenditures have cash base, Rulebook on classification of accounts for budget of Montenegro, budgets of non-budget funds and budgets of municipality stipulates that state of property and liabilities of the budget of the Republic, budget of non-budget funds and budgets of municipalities be recorded on following classes: 0 non-financial assets; 1 financial assets; 2 liabilities; 3 capital. The audit determined that the Secretariat for finance and economic development, the body tasked with treasury operations, keeps only the General Ledger, while there is no bookkeeping or assisting documentation, as is stipulated by the Law on Local Self-Government Financing, Secretariat does not keep a Book of invoices that would be used as a base to monitor incomes and their implementation. Law on Local Self-Government Finances stipulates in Article 67 that treasury operations should be done by the body of self-government tasked with finances, that also manages budget and reports of accounting affairs for processing of payments and invoices, bookkeeping, general ledger and other assisting documents for all incomes, expenditures, international donations and other types of funds. Žabljak Municipality must ensure that the records of property be kept on accounts class 0, and records of liabilities on accounts of class 2, in accordance with Art 1 and 4 of Regulation on Unified Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. Žabljak Municipality must pass a Rulebook on methods of record-keeping and payment of invoices that precisely defines the manner of processing documentation from receiving to posting, and maintain the register of incoming invoices (KUF), Rulebook on procedures and issuing of exiting invoices that prescribes register of exiting invoices (KIF) must be passed as well

432 Žabljak Municipality must, in accordance with Art 67 of Law on Local Self-Government Financing maintain budget accounting and reporting that entails accounting affairs pertaining to processing of payments and incomes, keeping of journals, general ledger and assisting documents for all incomes, expenditures, international donations and other types of funds. Revenues In accordance with the Order on manner of payment of public revenues, Žabljak Municipality for its own revenues has open accounts with Atlas Bank a.d. Podgorica, Aside from the accounts determined by the Order on manner of payment of public revenues, the Municipality has an open account No with Invest Bank Montenegro, for surtax payments on personal income, Funds paid to account with Invest Bank Montenegro are not transferred to the General account of treasury every day. The transfer is done on request of Žabljak Municipality. Secretariat for finance and economic development receives, once a month, information from State Treasury on paid revenues to the Municipality general treasury account classified by date, type and amount. Authorized official, based on daily reports copies of the completed transfer of funds to the account of Žabljak Municipality performs book and record keeping of revenues by type. In this way, the Municipality is enabled, with significant delay, to have an insight into the type and amount of lawfully allocated revenues. In accordance with the Order on manner of payment of public revenues Common Provisions Point 7, State Treasury is obliged to transfer public revenues to users at least once a day, after which a report on structure of public revenues is to be sent. Authorized officials tasked with record-keeping of local revenues do not fill out or submit the statement of receiver to the Treasury of local self-government, and so the official at the Treasury does not check whether the total amount of funds paid to consolidated account of the treasury corresponds with the revenues paid to record-keeping account. Žabljak Municipality does not maintain tax accounting except for tax on real-estate and tourist tax. Software for recording real-estate tax does not provide complete data on total number, type and debt based on real-estate tax, and the data on the number of taxpayers presented in the audit do not correspond with data submitted in yearly report for Software for recording real-estate tax does not enable total insight into debts of taxpayers by year, or their payments, or the state of taxpayers debt on 31 December Measures for tax collection on real-estate are not always taken, and for individuals non-residents they are not taken at all, which does not comply with Art 56 of Law on Tax Administration. In certain cases, taxpayer had status changed from active to non-active, while tax liabilities were not paid at all. Some taxpayers were brought together with a resolution, while debts of the one were not transferred to the other taxpayer. Those changes were made without submitted legal basis (resolution of Directorate for real-estate or court verdicts). There were also cases of exemption from paying liabilities on the basis of real-estate tax for agricultural land used in agricultural purposes, for all taxpayers in Žabljak Municipality in 2014, without the Decision on exemption being passed. The

433 state auditor was not presented with data on the number of taxpayers concerned and what was the amount of real-estate tax that was not paid on the basis of this exemption. Planned and achieved revenues on the basis of real-estate tax accomplished in 2014 (plan 260,000.00, accomplished 263,282.92) are significantly lower than tax obligation for 2014 ( 422,051.48), which points to unrealistic planning, as well as the fact that the measures prescribed in the Law on Tax Administration were not being adequately implemented. Local revenue official tasked with record-keeping of invoices on the basis of tourist tax has the ability to check debts by individual taxpayer, however he does not have data on total debt on the basis of tourist tax on 31 December 2013, or total debt in 2014, or debt situation on 31 December Secretariat for finances and economic development has not started a procedure of forceful payment nor has it passed Conclusions on forceful payments for debts on the basis of unpaid tourist tax. The audit has determined that the Inspector for public revenue issued warnings to taxpayers that have not been paying regularly on the basis of lease of land and compensation for communal furnishing of the land. Due to irregular payments, Secretariat for spatial planning, environment protection and communal and residential affairs has been notified, and it should have initiated lawsuits or proposals for execution with public executioners for collection of contract debts. Authorized official of the Municipality did not take lawful measures to enforce payments. The audit has also determined that the authorized official of the Municipality has not initiated lawsuits or proposals for execution with public executioners for collection of contract debts pertaining to communal furnishing of construction land. The audit has determined that the Municipality recorded proceeds from Ministry of Sustainable Development and Tourism in the amount of 4, and from Ministry of Agriculture and Rural Development in the amount of 40, in the General Ledger of the Treasury on the account 7149 Other reimbursements, instead of account Transfers from budget of Montenegro, thus reducing the account for transfers for 44,000.00, while increasing account Other reimbursements for the same amount. The audit has determined that Žabljak Municipality did not include the account opened for Permanent budget reserves within Consolidated treasury account, which does not comply with Art 66 of Law on Local Self-Government Financing, Changes on the said account are not recorded in the General Ledger of the Treasury, so transactions and events in the General Ledger are not in compliance with consolidated bank accounts. It is recommended that Žabljak Municipality use only accounts opened in accordance with Order on manner of payment of public revenues for payment of its own revenues and to ensure that the transfer of funds from these accounts is made every day, so that the final amount would be 0. Žabljak Municipality should, in accordance with Order on manner of payment of public revenues Joint provisions point 7, cooperate with Ministry of Finance and ensure that

434 the data on revenues be submitted immediately after payments, thus creating accurate and timely management of all Municipality revenues. Secretariat for finances and economic development of Žabljak Municipality should act in compliance with Art of Directive on work of treasury of local self-government and to fill Statement of receiver and submit it to the authorized official of the treasury so that it can be checked whether the total amount of funds paid to Consolidated account of the treasury is in compliance with amount paid to revenue (evidentiary) accounts of the treasury. Žabljak Municipality must ensure records of revenues on the basis of real-estate tax, reimbursements and all other local revenues, through a unique software for tax accounting, in the system of dual entry bookkeeping in accordance with principles of accuracy and precision, stipulated by Art 6 point 13 of Law on Tax Administration and Art 7 and 8 of Rulebook on Tax Accounting. Žabljak Municipality should, in accordance with Art 56 of Law on Tax Administration, take measures of enforced collection for all taxpayers who have not paid their tax liabilities in prescribed deadlines. Collection of tax debt should be made from property of the taxpayer if monetary collection is not possible, especially in the case of non-resident taxpayers. Žabljak Municipality should keep records of taxpayers on the basis of accurate and complete documentation and data from real-estate registry, and it should refrain from changing taxpayers status, exemption from payment and other changes without legal grounds and necessary documentation. Žabljak Municipality should realistically plan revenues and it should take into account in its plans any unpaid liabilities from previous period that can be collected forcefully, as well as new debts for the year the plan pertains to. Žabljak Municipality should establish electronic records of taxpayers for tourist tax, through unique software for tax accounting, and it should keep records of taxpayers liabilities and payments, as well as take measures of enforced collection for taxpayers who have not paid their liabilities with legally prescribed deadlines. In the cases where contract liabilities on the basis of lease of land or reimbursements for communal furnishing of land are not paid in contractually defined deadlines, Žabljak Municipality should take legal action to enforce payment of debts through an authorized representative. Žabljak Municipality should keep records of received revenue in accordance with economic classification as per Rulebook on unique classification of accounts for budget of Montenegro, budget of non-budget funds and budgets of municipalities, and it should record revenue from Budget of Montenegro in the General Ledger of the Treasury in adequate accounts, so that these revenues could be accurately presented

435 Žabljak Municipality should, in accordance with Art 66 of Law on Local Self-Government Financing, manage all open accounts and sub-accounts as an integral part of consolidated account of treasury, and record all transactions on these accounts and sub-accounts in the General Ledger of the Treasury. Work relations The Municipality has not complied Rulebooks on interior organization and systematization of work positions with changes in the Law on Civil Servants and State Employees (in regards to vocation and necessary years of work experience) that stipulates that the document on interior organization and systematization of state bodies be aligned with the Law within 60 days of the first day of its implementation (the Law has been in force since 1 January 2013). It was determined that 9 employees did not fulfil necessary conditions defined in Art 30 of Law on Civil Servants and State Employees and rulebooks on interior organization that pertain to: years of work experience, age at the time of employment, license for work in protection and rescue, computer skills and foreign language skills. Communal inspector of Secretariat for spatial planning and inspector for collection of public revenues in Secretariat for finances and economic development have been employed for indefinite time, which does not comply with a provision of Art 38 Paragraph 2 of Law on Civil Servants and State Employees that was in force at the time of their employment and that stipulates that inspectors be named for the period of 4 years. In 2014, the Municipality employed 3 individuals without procuring necessary agreement from Ministry of Finance in accordance with Art 3 Paragraph 5 of Contract on financial reconstruction of Žabljak Municipality that states that Municipality cannot employ new officials and servants in local administration and public institutions and companies unless it procures the necessary agreement, Decisions on selection of candidates, employment, allocation and termination of employment are made by head of local administration bodies, which does not comply with Art 45 and 47 and Art 122 of Law on Civil Servants and State Employees that stipulates that those decisions be made by head of state administration bodies. Payrolls that include data on work hours (regular, overtime, night work ), sick leave, vacation, etc. can be submitted to the accounting only by Protection Service, Other expense units of the budget submit to the Secretariat of finances and economic development only the documentation on employees that need to have salaries corrected (remittances for leaves, terminations ), which does not comply with Art of Direction on work of treasury of local self-government. Žabljak Municipality should pass new rulebooks on interior organization and systematization of work positions for all local self-government bodies, that will be in accordance with Law on Civil Servants and State Employees (in regards to vocation, necessary work experience etc.) and Directive on official vocation of local servants and

436 employees, It should also pass a resolution for all employees that need to have their coefficient aligned with Law on Wages of Civil Servants and Employees. Žabljak Municipality should, in accordance with Art 30 of Law on Civil Servants and State Employees, gather evidence on necessary conditions stipulated by law and document on systematization when establishing new employment relations. Žabljak Municipality should, in accordance with Art 52 of Law on Civil Servants and State Employees (Official Gazette of the Republic of Montenegro No 39/11, 50/11, 66/12 and 33/14), establish employment relations for inspectors and authorized personnel for the period of seven years. Žabljak Municipality should not employ new servants and employees in units of local selfgovernment and public institutions and companies unless it procures necessary agreement from Ministry of Finance, in accordance with Art 3 Paragraph 5 of Contract on financial reconstruction of Žabljak Municipality. Decisions on selection of candidates, employment, allocation and termination of employment should be passed by President of Municipality, in accordance with Art 45, 47 and 122 of Law on Civil Servants and State Employees. Žabljak Municipality should use daily records of employee attendance to ensure compliance with Art of Directive of work of local self-government treasury that stipulate that authorized official from every expense unit should submit to the Treasury a complete payroll signed by head of the body, with data on employees in his domain. Other expenditures Law on Civil Servants and State Employees and Labour Law do not regulate application of service contracts, Law on Obligations defines service contract as a special contract that the employer signs with a certain individual who performs a job that falls outside of regular activities of the employer, that usually pertains to freelance actions or reparations of certain things, freelance performance of certain psychical or intellectual work, The audit has determined that some individuals are employed for performance of jobs that are within regular activities of local self-government bodies (archiver typist in Assembly Service, preparation of budget draft of Žabljak Municipality for 2015 and calculation of real-estate tax). Žabljak Municipality should regulate work positions for regular activities of selfgovernment bodies in accordance with Art of Law on Civil Servants and State Employees, while using service contracts only for those jobs that fall outside of regular activities of self-government bodies and jobs that are not included in rulebooks on interior organization and systematization of work positions

437 Capital expenditures Payment of fees to the Commission for estimation of assessment of environmental impact of transfer station and recycling yard construction was done on the basis of budget that was certified by president of commission which does not represent a valid document for payment of fees. Municipality should determine fees for work of commissions by a resolution on establishment of commission or a special resolution on payment of fees, certified by President of Municipality or other authorized individual, which would represent a valid document for payment of fees. Irregular records of expenditures The audit has determined that: 1. Account 4134 expenditures for energy, was used to pay the amount of 18,648,47 that pertains to liabilities from 2013, 2. Account 4191 other expenditures, was used to pay the amount of 14,075,45 that pertains to liabilities from 2013, 3. Account 4412 expenditures for local infrastructure, was used to pay the amount of 15, that pertains to liabilities from Said payments were to be made from budget position account 463 payment of liabilities from previous period, in accordance with Art 9 of Rulebook on unique classification of accounts in budget of Montenegro, budget of non-budget funds and budgets of municipalities. Žabljak Municipality plan and execute liabilities from previous period in accordance with Art 9 of Regulation on Unified Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, within group of accounts 463 payment of liabilities from previous period. Cash operations Žabljak Municipality did not pass a document that would define cash register and manner of control of cash register. Žabljak Municipality cash register was used to pay reimbursements based on service contract and reimbursements for one councillor. Žabljak Municipality should pass a document that would define rules and procedures of saving, record-keeping and allocating cash in cash register, manner of record-keeping of cash register documentation, as well as manner of cash register management and control. Žabljak Municipality should implement in totality Art 5 of Law on Prevention of Illegal Business Affairs and it should use accounts opened with business banks to transfer funds for personal incomes

438 Outstanding liabilities When indicating the state of outstanding liabilities of public companies, the Municipality did not present the debt of company Sewage and Water Supply Ltd, on the basis of tax and contributions for personal income, that amounts to 808, on 31 December 2014, in accordance with Protocol No 38 from 26 January 2015, concluded between Tax Administration and public company Sewage and Water Supply Ltd, Sewage and Water Supply Ltd submitted Report on outstanding liabilities (form 5) to the Municipality that indicated the state of liabilities in the end of 2014 at the amount of 97,239,94, so the Municipality failed to indicate the correct state of outstanding liabilities of Sewage and Water Supply in the amount of 808, Žabljak Municipality should, in accordance with Art 6 of Rulebook on the Manner of Submission and Content of Data on Revenues, Expenditures and Budget Debt of Local Self-Government Units, ensure regular submission of quarter and yearly financial reports of municipality expense units (public institutions, public companies, municipality firefighting unit, etc.) as an instrument of financial control. Records of assets in Žabljak Municipality Žabljak Municipality did not form a Commission for listing funds on accounts that are a part of consolidated account of treasury, cash register, or state of assets and liabilities of Žabljak Municipality on 31 December List does not include funds gained through donations, contracts and decisions on the assignment. List of property was not made using prescribed form PL. Žabljak Municipality did not submit date on movable and immovable property to the body of administration authorized for property affairs using prescribed forms: PS - 1, PS - 2, NS - 1 NS - 2, as stipulated in Art 9 of Directive on manner of keeping records of movable and immovable property and on list of assets in state ownership. General administrator service did not establish records of state property in a manner stipulated by Law on State Property and legislative acts passed on the basis of said Law. When passing Resolution on establishing commission for lists, Žabljak Municipality should define liabilities of commission and manner and deadlines for lists, it should create lists not only for movable and immovable property but also for monetary funds, securities, assets and liabilities on 31 December of the fiscal year, as well as funds gained through donations, contracts and decisions on assignment. Žabljak Municipality should, in accordance with Art 50 of Law on State Property, submit data on movable and immovable property to the body of administration authorized for property affairs using forms PS - 1, PS - 2, NS - 1 and NS - 2 prescribed in Art 9 of Directive on manner of keeping records of movable and immovable property and on lists of assets in state ownership

439 Žabljak Municipality should establish registry of movable and immovable property in accordance with Art of Law on State Property and legislative acts passed on the basis of this Law. Public procurements Municipality did not procure agreement of Ministry of Finance for yearly plan of public procurements, as stipulated by Art 3 Paragraph 4 Point 7 of Contract on financial reconstruction of Žabljak Municipality No from 30 December In form C, pertaining to public procurements allocated by direct agreement, there were noted procurements in the amount of 66,032.18, which makes 31.89% in relation to total executed yearly budget for public procurements. Municipality did not act in accordance with Art 30 Paragraph 2 Point, 2 of the Law that stipulates that total yearly value of public procurements allocated by direct agreement cannot be higher than 9% of executed budget for public procurements in previous year unless budget for public procurements is from 200,000 to 500,000. Comparing data from the General Ledger and data entered in form C (public procurements allocated by direct agreement), it was determined that the Municipality did not make records of all procurements that were allocated by direct agreement, which does not comply with Art 117 of Law on Public Procurements. In open procedures of public procurements (Procedure No 1 and Procedure No 2), record on public opening of bids was not signed by present authorized representatives of bidders, which does not comply with provision of Art 98 Paragraph 6 of Law on Public Procurements, that stipulates that the record by signed by members of commission for opening and evaluating bids and present authorized representatives of bidders. When applying Shopping method (Procedure No 1, Procedure No 2, Procedure No 3 and Procedure No 1), public procurement official did not make a record on public opening of bids which does not comply with Art 29 of Law on Public Procurements, that stipulates an obligation to create record on public opening of bids, signed by present authorized representatives of bidders. Municipality should, in accordance with Art 3 Paragraph 4 Point 7 of Contract on financial reconstruction of Žabljak Municipality No from 30 December 2011, acquire agreement from Ministry of Finance for yearly plan of public procurements. Municipality should, in accordance with Art 30 of Law on Public Procurements, ensure that total yearly value of public procurements allocated by direct agreement does not exceed legally prescribed limits in relation to execution of budget for public procurements. Municipality should, in accordance with Art 117 of Law on Public Procurements, keep records of public procurements and use form C to keep records of all procurements allocated by direct agreement

440 Municipality should, in accordance with Art 98 Paragraph 6 of Law on Public Procurements, ensure that the record on public opening of bids be signed by members of commission for opening and evaluating bids and present authorized representatives of bidders, Municipality should also, in accordance with Art 29 of Law on Public Procurements, ensure that the official for public procurements creates a record on public opening of bids signed by present authorized representatives of bidders. Litigations The Municipality does not regularly pay liabilities based on verdicts and other enforceable documents, which leads to an increase of expenditures for default interests and execution expenditures. Authorized individuals of the Municipality did not initiate any procedures for collection of payments from third parties. Municipality should regularly pay its liabilities so that an increase of default interests and execution expenditures can be avoided. Municipality should, in accordance with Law on Execution and Security and Law on Civil Procedure, submit suggestions for enforced collection in a timely manner it should file suits with authorized courts in order to collect outstanding liabilities from third parties, thus ensuring dynamic revenue in Municipality budget. Authorized Auditing Board of State Audit Institution has determined that the extent and character of established irregularities and deficiencies of the audited subject requires: that Ministry of Interior Affairs and Ministry of Finance (authorized for control of audited subject) be introduced to the contents of the Report, so they could take measures of monitoring responsibility in business of audited subject, that the Committee for Economy, Budget and Finance of the Parliament of Montenegro be introduced to the contents of the Report of SAI, that Žabljak Municipality notify State Audit Institution on measures taken to fulfil recommendations of this Report within six months from the day it receives the Report

441

442 EXCERPT FROM THE AUDIT REPORT ON 2015 ANNUAL FINANCIAL STATEMENT OF THE MINISTRY OF TRANSPORT AND MARITIME AFFAIRS Type of audit: Financial audit and regularity audit Audited entity: Ministry of Transport and Maritime Affairs Subject-matter of audit: Annual financial statement of Ministry of Transport and Maritime Affairs for 2015 Duration of audit: 90 auditing days Auditing Board members: Mr Nikola Kovačević, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, President of the Senate member of the Auditing Board

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444 BASIC ELEMENTS OF AUDIT 1. LEGAL BASIS FOR PERFORMING THE AUDIT Legal basis for performing audit of Annual financial statement of Ministry of Transport and Maritime Affairs is contained in the following: Constitution of Montenegro, Article 144 (Official Gazette of Montenegro No. 01/07, 038/13), Law on State Audit Institution, Article 4: (Official Gazette of Montenegro No. 28/04, 27/06, 78/06 and Official Gazette of Montenegro No. 17/07, 73/10, 40/11 and 31/14), State Audit Institution Annual Audit Plan for 2016, No from 22 December 2015, Decision on Conducting Audit passed by SAI Auditing Board No / from 21 April The audit of Annual financial statement of the Ministry of Transport and Maritime Affairs for 2015 has been conducted in line with the following: Rules of Procedure of the State Audit Institution (Official Gazette of Montenegro No. 03/15), Instruction of methodology for conducting financial and regularity audit (Official Gazette of Montenegro No. 07/15), International accounting standards (MRS), International Standards for Supreme Audit Institutions (ISSAI-level III). 2. GENERAL INFORMATION ON THE AUDITED ENTITY Ministry of Transport and Maritime Affairs (hereinafter: the Ministry), in accordance with Decree on State Administration Organization and Manner of Work, shall conduct administrative activities with regard to: railway, land, sea and air transport; safety of railway, land, sea and air transport; it determines indicators, it prevents and takes emergency measures in the cases of sea pollution; transport of dangerous materials in railway, sea and air transport and on internal sea roads in accordance with an appropriate law; internal and international transport of individuals and things; state roads;, railway infrastructure, infrastructure of civic-air transport and facilities of safe sea travel; railway, land and sea commerce; internal sea travel; safety of sea and internal travel; monitoring and studying conditions of production and economic situation of commercial subjects in these areas; suggestion of measures of current and developing policies and analysis of their impact on economic situation of commercial subjects in areas of state roads, transport, maritime affairs; homologation of passenger and transport vehicles including equipment and individual parts with adopted standards on levels of safety, economic and ecological criteria; monitoring of current and developing policies; monitoring and initiating activities in quality management; compliance of national regulations with EU legislation; administrative supervision in the areas which the Ministry has been established for; and other activities delegated to its competence. The Ministry supervises the lawfulness and expediency of the following administrative bodies: Port Authority, Maritime Safety Department, Transport Directorate, and Railway Directorate

445 According to the data submitted by the Ministry, it has 178 employees, 76 of them work in the Ministry, while 102 work in related bodies: Maritime Safety Department: 51, Transport Directorate: 35, Railway Directorate: 9, Port Authority: 7. Persons authorized to allocate the funds granted by the Budget, based on the specimen signature cards of the Ministry, are: Ivan Brajović, the Minister - Authorizing Officer Zoran Radonjić, Secretary of the Ministry - Certifying officer. Accounting of the audited entity is organized based on modified cash basis, that entails income and expenditures be recorded on a cash basis, i.e. in the moment of payment or collection of cash, while assets and obligations are recorded on the accounting basis, i.e. for the period that it pertains to, The Ministry uses SAP system of recording in the General Ledger of the Treasury, Budget accounting is done on a level of functional, organizational, economic and program classification. 3. OBJECTIVE, SUBJECT-MATTER AND SCOPE OF THE AUDIT The objective of audit is to express an opinion on whether financial statements provide true and fair information on financial structure and financial position, whether the reported transactions comply with the laws and other regulations (audit criteria), and whether the system of financial management and control is in compliance with the law and other legal documents. The State Audit Institution (SAI) has performed the financial audit and regularity audit in accordance with the State Audit Institution Annual Audit Plan and Decision on Conducting Audit. The Subject-matter of audit was the Annual financial statement and regularity of the business operation of the Ministry for The audit included current budget of the Ministry in the amount of 24,724, because the audit of Capital Budget that is also in the competence of the Ministry has been included in the audit of Final Statement of Accounts of the Budget of Montenegro for AUDIT CRITERIA The criteria based on which the SAI assesses whether the financial statements are true and fair are the relevant accounting rules, accounting principles and standards for the public sector and adopted accounting policies of the audited entity. The criteria for evaluation of regularity of transactions are the laws and regulations which are relevant for the activities of the audited entity, primarily Law on Budget and Fiscal Responsibility, Law on Public Internal Financial Control System, Law on State Property, Law on Public Procurement, Law on Civil Servants and State Employees, set of tax laws and others

446 OPINION AND RECOMMENDATIONS Based on the conducted audit and established facts, upon the consideration of the audited entity s statements (No /32 from 14,102016) and pursuant to Article 12 of the Law on SAI and Article 45 of the Rules of Procedure of the SAI, the competent Auditing Board of the SAI, consisting of Mr Nikola Kovačević (member of the Senate Head of Auditing Board) and Mr Milan Dabović, PhD (President of the Senate member of the Auditing Board), at its session held on 24 October 2016 adopted the following: FINAL AUDIT REPORT on Annual financial statement of the Ministry of Transport and Maritime Affairs for 2015 Responsibility of the Audited Entity The management of the audited entity is responsible for compiling and presentation of the financial statements, in accordance with the accepted financial reporting framework, as well as for compliance with legal and other relevant regulations. Responsibility of the State Audit Institution The responsibility of the State Audit Institution (SAI) is to express opinion based on the performed audit, on whether the financial statements of the Ministry of Transport and Maritime Affairs for 2015 are, in all material aspects, compiled and presented in accordance with the applicable financial reporting framework. In addition to responsibility for expressing an opinion on the financial statements, the SAI is responsible for expressing an opinion on compliance of financial and other operations of the audited entity with the laws, regulations and secondary legislation that have been identified as the criteria for the relevant audit. The audit was performed in line with the relevant International Standards of Supreme Audit Institutions (ISSAI-level III), The State Audit Institution adhered to ethics requirements. It planned and performed the audit in the manner which provided reasonable assurances that the financial statements of Ministry of Transport and Maritime Affairs were, in all materially significant aspects, compiled and presented in accordance with the applicable financial reporting framework and that business operations of the audited entity were in compliance with applicable laws and other regulations. The audit entailed implementation of procedures of procurement of adequate evidence on amounts disclosed in financial reports, Implemented procedures included estimates of interior system controls, estimates of implemented accounting policies, estimates of materially wrongful representation of amounts in financial reports and estimates of general presentation of financial reports. We consider the evidence gathered in the audit to be adequate and sufficient as a basis for expressing an opinion. FINANCIAL AUDIT has determined that the Annual financial statement of the Ministry for 2015 does not contain significant material errors and that it gives a fair and objective view of disclosed income

447 and expenditures on cash basis, with an exception of irregularities noted in comments of Report on outstanding debts for 2015, that pertain to the accuracy of report and manner of record-keeping, Accordingly, the Auditing Board expresses its UNQUALIFIED OPINION WITH EMPHASIS OF MATTER. BASIS FOR UNQUALIFIED OPINION WITH EMPHASIS OF MATTER REFERRING TO THE FINANCIAL AUDIT: Report on outstanding debts Form 5 for 2015 is not complete and accurate because it discloses outstanding debts in the amount of 718,697.57, while the audit found individual reports on outstanding debts of bodies within the Ministry from which it was concluded that the outstanding debts of the Ministry and its bodies are in the amount of 83, The Ministry and its bodies do not keep records on outstanding debts in class 2, so the state auditor could not determine that the data in financial reports is complete accurate, Maritime Safety Department and Transport Directorate keep assisting records of outstanding debts as Excel tables, The examination of book of incoming invoices of Railway Directorate it has been determined that the recorded accounts have not been disclosed in the Report on outstanding debts. The Ministry should adopt an internal regulation that would govern the manner of recording invoices and liabilities of the Ministry and its bodies, as well as a matter of keeping universal records on outstanding debts, a manner of gathering data and creating financial reports. In accordance with IAS 3 Accounting policies, the Ministry should change accounting estimates and errors and correct the Report on outstanding debts for The regularity audit has determined that the Ministry did not completely comply with laws and other regulations that govern its activities, The audit has identified deviations and non-compliance with the following regulations: Law on the Budget and Fiscal Responsibility, Law on Public Internal Financial Control System, Law on Civil Servants and State Employees, Law on Public Procurement, Law on State Property, Rulebook on Unified Classification of Accounts for the State Budget, State Funds and Municipal Budgets, Directions on State Treasury Operations, Accordingly, the competent Auditing Board expresses a QUALIFIED OPINION. BASIS FOR QUALIFIED OPINION REFERRING TO THE REGULARITY AUDIT: The Ministry has not performed an identification of risk, its estimate and monitoring and it did not adopt Annual strategy for risk management in accordance with Art 8 of Law on Public Internal Financial Control System, The Ministry has not made a list of significant business processes and activities that are implemented in the Ministry and its bodies and it did not adopt internal regulations and guidance for systems of financial management and controls in accordance with Art 13 Paragraph 12 of Law on Public Internal Financial Control System, Those actions were taken in 2016, The Ministry has demonstrated a weakness in the system of internal controls because it has approved the payments regardless of lack of documentation, which does not comply with provisions of Art 23, 25 and 26 of Directions on State Treasury Operations

448 The Ministry has failed to submit to Central harmonization unit an Annual report on implementation of planned activities in establishing and developing systems of financial management and control Form GI FMC, which does not comply with Art 15 of Law on Public Internal Financial Control System. The Ministry has not adjusted Regulation on internal organization and systematization with Regulation on the Establishment of Internal Audit in the Public Sector (Official Gazette of Montenegro No. 28/15), that stipulates, aside from cited work positions in Service for internal audit, a systematization of work position Manager of unit for internal audit. In the meantime, the Government adopted new Regulation on the Vocations of Internal Auditors in the Public Sector (Official Gazette of Montenegro No. 36/16), in accordance with Law on Wages of the Employees in the Public Sector. The Ministry should, in accordance with Law on Public Internal Financial Control System, establish a system of internal financial controls (at the level of the Ministry and its bodies), perform and identification and risk assessment, adopt a risk management strategy and implement Directions on State Treasury Operations and other internal documents. The Ministry should, in accordance with Art 15 of Law on Public Internal Financial Control System, submit to the Ministry of Finance Central harmonization unit, an Annual report on implementation of planned activities in establishing and developing systems of financial management and control Form GI FMC. The Ministry should adjust Regulation on internal organization and systematization with Regulation on Vocations of Internal Auditors in the Public Sector (Official Gazette of Montenegro No. 36/16). The Ministry has, for contractually based Consultant services, projects and studies, made payments to individuals and legal entities in the total amount of 46,174.00, namely for: creation of Program of reconstruction of critical points on state roads, preparation of bylaws or assistance in their creation, suggestions on amendments to laws, providing of legal consultant services and similar, Cited jobs are entailed in document on organization and systematization of work positions in the Ministry. The Ministry has employed, on service contracts, individuals that performed jobs of management of units although the Regulation on internal organization and systematization stipulates work position Port captain that pertains to management and coordination of zone units Port Authority of Bar and Port Authority of Kotor (Regulation No. 30 and 46). Although there are systematized work positions for accounting and financial jobs in Port Authority and Railway Directorate, the Ministry had employed individuals on service contracts, which does not comply with provisions of Law on Civil Servants and State Employees and Labour Law

449 The Ministry should fill the vacancies in regular authorities of administration in a manner stipulated by Art of Law on Civil Servants and State Employees, Service contracts should be signed for jobs that do not require specific skills and knowledge, up to 120 work days per year, as is defined in Labour Law (Art ), and with individuals that are on the lists in Employment Agency of Montenegro. Ministry of Finance, in cooperation with Ministry of Interior Affairs, should limit employment based on service contracts for jobs that are not in regular activity of the employer and it should increase control over all users of the Budget that abuse the act of service contract. The Ministry has not accounted for special contributions for professional rehabilitation and employment of persons with disabilities, which does not comply with Art. 22 of Law on Professional Rehabilitation and Employment of Persons with Disabilities that stipulates the employer has an obligation to, for every person he did not employ, make a monthly payment of contributions for professional rehabilitation and employment of persons with disabilities when accounting monthly salaries, Rate of special contributions is 20% of average monthly salary in Montenegro acquired in the year previous to payment of contributions. The Ministry should, in accordance with Art 22 of Law on Professional Rehabilitation and Employment of Persons with Disabilities, account for a special contribution for professional rehabilitation and employment of persons with disabilities. Decision of the Government on the appointment of acting Director General of Air Transport Directorate adopted on 27 June 2013 for the period after competition of public call for cited vacancy, and in accordance with information submitted by the audited entity, public call was not made for the cited vacancy, which does not comply with Art 38 of Law on Civil Servants and State Employees. The Ministry should fill the vacancies of high management in accordance with Art 38 of Law on Civil Servants and State Employees on the basis of public call. For payment of reimbursements on the basis of recognition of civil servants and state employees in the amount of 3, there was Decision on agreement from Ministry of Finance submitted during the audit, which does not comply with Art 114 of Law on Civil Servants and State Employees that stipulates that type and procedure of allocating recognition to civil servants and state employees is to be adopted by the Government on the suggestion of ministry. The Ministry should make disbursements from account 412 Other personal income in accordance with Art 20 of Law on Wages of Civil Servants and State Employees that stipulates, along with General collective contract, that Decision on reimbursements and other income is to be adopted by Minister of Finance. The audit determined that within account 4149 Other services an amount of 39,913,17 was recorded in the name of different types of assistance such as transfers to institutions, individuals,

450 NGO and public sector, These transactions should be disbursed from accounts 431 Transfers to institutions, individuals, NGO and public sector. The Ministry has made a payment from account 4149 in the amount of , i.e. 11, total to all employed servants and employees in the Ministry and its bodies, Cited amount should have been recorded within group of accounts 412 Other personal income. Account 4149 Other services was also used to make payments to various providers in the total amount of 33, These payments should have been disbursed from account 413 Expenditures for material and payments in the amount of 6, should have been recorded within group of accounts 417 Lease. The Ministry should keep records of expenditures in accordance with Rulebook on Unified Classification of Accounts for the State Budget, State Funds and Municipal Budgets, and it should make payments of other personal income comply with Law on Personal Income Tax by paying stipulated taxes. The audit of cash registry of the Ministry and its bodies has determined cases of unfilled vacancy cash register official, inaccurate management of cash registry books and improper cash expenditures. The Ministry should adhere to Directions on State Treasury Operations Chapter XII Advances, that regulates cash registry and it should ensure accurate management of cash registry books and records of expenditures in accordance with economic classification. Decision of establishing Commission for property inventory formed by the Ministry does not stipulate a deadline by which to make the inventory, it does not give an obligation to complete list of liabilities and cash (in registry and in the accounts), and it does not define person responsible for making inventory of properties owned by bodies within the Ministry. Inventory of property of the Ministry was not done using PL Form stipulated by Regulation on manner of inventory of movable and immovable assets in state ownership, and the lists do not have rows of prices, accounting states, inventory states and differences (deficits and deficits). Examination of submitted inventory determined that a part of transport funds (2 vehicles in Port Authority Bar, 2 vehicles in Port Authority Kotor, 1 vehicle in Port Authority, 6 vehicles in Transport Directorate, 13 vehicles of Maritime Safety Department) do not hold their current value and have not had their value estimated, which does not comply with Art 11 of Regulation on manner of inventory of movable and immovable assets in state ownership, Four Ministry vehicles are cited as gifts and have not had their value estimated, One vehicle is cited as borrowed, Part of the property disclosed in form for account of amortization of the Ministry and port authorities has not had its value estimated (out of 781 points of general resources, 41 point does not have value estimated). Commission for inventory of property formed by Transport Directorate has not submitted Report on inventory with inventory lists, which is stipulated in Decision, Electronic form of lists by offices was

451 submitted, which does not comply with submitted recapitulation, Commission did not comply with provisions of Art of Regulation on manner of inventory of movable and immovable assets in state ownership. Railway Directorate did not establish Commission for inventory of property and did not submit inventory lists which does not comply with provisions of Art 10 and 12 of Regulation on manner of inventory of movable and immovable assets in state ownership that stipulates that regular annual inventory be made concluding with December 31 by a commission formed by the head of the body. The Ministry and its bodies, aside from Maritime Safety Department, did not establish electronic records of general resources and do not keep records of property in class 0, which does not comply with Rulebook on Unified Classification of Accounts for the State Budget, State Funds and Municipal Budgets. The Ministry should make Decision on establishment of commission for inventory of property clearly define obligations of commission, manner and deadlines for inventory; it should also stipulate that aside from movable and immovable property, lists should be made of monetary resources as well as debts and liabilities in conclusion with 31,12 of the fiscal year. The Ministry should make inventory lists in accordance with Regulation on manner of inventory of movable and immovable property in state ownership on stipulated PL Form and it should establish electronic records of movable and immovable property that is in usage, All property should have purchase, recorded and current value assigned in accordance with Art 11 of Regulation, Vehicles in use that do not have accounting value should be evaluated, as well as those that are cited as gifts. The Ministry should keep records of property in class 0 in accordance with Rulebook on Unified Classification of Accounts for the State Budget, State Funds and Municipal Budgets. Plan of public procurements for 2015 No /1 from 17 March 2015 was not adopted in accordance with Art 90 of Law on Public Procurement that stipulates the deadline for adopting and submitting Plan until January 31 st. Report on procurements carried out on the level of the Ministry and its bodies does not include all procurements that were done during During 2015, the Ministry carried out two procedures of public procurement for services of graphic creation of templates and printing of maritime VINJETA for Port Authority Bar and Kotor (procedure 8/15-M and 11/15-M), Procedure 8/15-M was not recorded in Report on public procurements. The Ministry did not keep records of carried out procurements on prescribed forms. In Form C, there were not records of all payments made by direct agreement. The audit has found discrepancies in phases of implementation of procedures of public procurements: Statement of independence was not signed by all involved in one case. In one case, Commission for estimation of value was not complete

452 In Record on public opening of bids, in three cases there was no date and time of public opening of bids. In four cases with the Record, in two cases with Report on public procurement and in one case with Official notes on lottery, not all individuals signed the documents. In one case, accepted bid was not prepared in accordance with the Law on Public Procurement. In two cases, different documents were archived under the same archive number. The Ministry did not comply with Art 13 Paragraph 1 Point 12 of Law on Public Internal Financial Control System, and Art 30 Paragraph 3 of Law on Public Procurement and it failed to adopt a special act that would define procedure of public procurement by direct agreement. The Ministry should adopt a Plan of public procurement in accordance with Art 38 of Law on Public Procurement by January 31st of current year and it should submit it to the relevant authorities in a timely manner, so that it could be published on public procurement website. The Ministry should keep records of all contracts signed between 1 January 31 December in Report on public procurements and all procurements made by direct agreement should be recorded in Form C, The Ministry should ensure application of Law on Public Procurement in all phases of public procurements, and it should ensure complete documentation that will be kept and stored in accordance with Art 119 of the Law. The Ministry should adhere to Regulations for implementation of Directive on office affairs of state administration bodies and it should record documents pertaining to the same case in a manner that ensures that first document gets classification sign of the case and serial number, while every following document should only get a new sub number according to the order of record. The Ministry should, in accordance with Art 13 Paragraph 1 Point 12 of Law on Public Internal Financial Control System and Art 30 Paragraph 4 of Law on Public Procurement, adopt a special document that would define the procedure of public procurement by direct agreement and strengthen the system of internal controls ad monitoring of implementation of signed contracts on public procurements and payments based on them in quantitative and qualitative sense

453 EXCERPT FROM FOLLOW UP AUDIT REPORT OF THE OLD ROYAL CAPITAL OF CETINJE Type of audit: Audited entity: Subject-matter of audit: Audit duration: Auditing board members: Follow up audit Old Royal Capital Cetinje Control of the implementation of the recommendations contained in the Final Report on Audit of 2013 Final Statement of Budget Accounts of the Old Royal Capital Cetinje 45 auditing days Mr Branislav Radulović, PhD, member of the Senate Head of the Auditing Board Mr Milan Dabović, PhD, president of the Senate member of the Auditing Board

454

455 I GENERAL PART 1. LEGAL BASIS The legal basis for conducting the Control of the implementation of the recommendations contained in the Final Report on Audit of 2013 Final Statement of Budget Accounts of the Old Royal Capital Cetinje for 2013, No: /26 as of 29 October 2016, lies in: Constitution of Montenegro, Article 144 ("Official Gazette of Montenegro", 01/07, 38/13); Law on State Audit Institution, Article 4 ("Official Gazette of Montenegro", 28/04, 27/06, 78/06 and "Official Gazette of Montenegro", 17/07, 73/10, 40/11 and 31/14); Annual Audit Plan of the State Audit Institution for 2015, number of 22 December 2015; Decision on conducting the audit of the competent Auditing Board, number 40112/ as of 28 July The follow up audit of the Old Royal Capital Cetinje was carried out in accordance with: Rules of Procedure of the State Audit Institution ("Official Gazette of Montenegro" 03/15); Instruction on Methodology for Performing Financial Audit and Regularity Audit ("Official Gazette of Montenegro" 07/15); International accounting standards (IAS); International Standards of Supreme Audit Institutions (ISSA). 2. GENERAL INFORMATION ON THE AUDITED ENTITY Old Royal Capital Cetinje is functioning in accordance with the Law on Local Self-Governments ("Official Gazette of Montenegro" 42/03, 28/04, 75/05, 13/06 and "Official Gazette of Montenegro" 88/09, 3/10, 73/10, 38/12 and 10/14 ), the Law on the Financing of Local Self-Governments ("Official Gazette of Montenegro" 42/03, 44/03, and "Official Gazette of Montenegro" 05/08, 51/08 and 74/10 and 01/15 ), the Law on Budget and Fiscal Responsibility ("Official Gazette of Montenegro" 20/14), State Property ("Official Gazette of Montenegro" 21/09 and 40/11), the Law on the Old Royal Capital (("Official Gazette of Montenegro" 47/08 and 88/09) and the Statute of Cetinje ("Official Gazette of Montenegro"- Municipal Regulations 19/09, 37/10, 26/13, 39/14 and 12/16). The bodies of the Od Royal Capital are the Old Royal Capital Assembly and the Mayor, 3. TYPE, SUBJECT-MATTER AND OBJECTIVE OF AUDIT State Audit Institution performed a follow up Audit in the Od Royal Capital. The subject-matter of the audit was: Control of the implementation of the recommendations contained in the Final Audit Report on the Final Statement of Budget Accounts of Old Royal Capital for 2013, SAI /26 as of 29 th October The objective of follow up audit is to verify the accuracy of reports of the audited entity regarding implemented actions towards implementation of recommendations and to establish to what degree

456 have the recommendations been implemented and whether the identified irregularities were removed. II DETERMINED STATE OF FACTS 1. Recommendation 1 Finding of SAI: Before approving the Proposed Decision on the Budget, in accordance with Article 26a of the Budget Law, Old Royal Capital Cetinje obtained the opinion of the Ministry of Finance No /1 of 10 December 2012 on the Draft Decision on the Budget of Cetinje for The Ministry of Finance recommended the Royal Capital Cetinje to adjust capital expenditure (proposed in the amount of 1.38 million), in line with the estimated priorities in order to service outstanding debts of the Royal Capital, The Royal Capital Cetinje did not accept the recommendation of the Ministry of Finance and did not make the adjustment of capital expenditures for Recommendation: Pursuant to Article 35 of the Law on Budget and Fiscal Responsibility, before the adoption of the Decision on the Budget, the Old Royal Capital Cetinje should obtain the opinion of the Ministry of Finance and submit the opinion together with the Proposed Decision on the Budget to the Assembly of the Old Royal Capital for consideration and adoption. Report on the fulfilment of recommendation 1 : While preparing and adopting the Decision on the Budget of Cetinje for 2015, the Old Royal Capital Cetinje fulfilled all legal procedures and obtained an unqualified opinion from the Ministry of Finance to the Draft Decision on the Budget of Cetinje for 2015 (Annex: Opinion No /1 as of 05 December 2014). Follow up audit determined the following facts: The Old Royal Capital Cetinje, in accordance with Article 35 of the Law on Budget and Fiscal Responsibility submitted to the Ministry of Finance, the Draft Decision on the Budget of Cetinje for 2015, for the purpose of obtaining opinion on the proposed level and structure of spending, salary policy, capital expenditures, and sources of funding as well as the level of budget cash surplus, and/or deficit, In its opinion No /1 as of 05 December 2014, the Ministry of Finance agreed to the Draft Decision on the Budget of the Old Royal Capital Cetinje for Based on the abovementioned, the follow up audit found that the Recommendation 1 is implemented. 2. Recommendation 2 Finding of SAI: The audit found that the Final Statement of Budget Accounts for 2013 did not present all revenues and all expenses of the Royal Capital, The Final Statement of Budget Accounts did not include funds for the loan repayments (principal and interest), made by the Ministry of Finance instead of the Royal Capital, on the basis of contracts signed, from the Equalization Fund in the amount of 1,031, This amount was reflected neither as revenue of the Royal Capital in the form of payment of funds from the Equalization Fund, nor as expenditure (Account 461-Debt repayment and Account 416-Interest for residents). Old Royal Capital Cetinje presented as an expenditure in the 2013 Budget the amount of deposited funds ( 394,000.00) and as the receipt - the amount of the refund of the deposit of 628,744,77 and thus unrealistically increased expenditures and receipts of the 2013 Budget, Article 41 of the Law on the Financing of Local Self-Governments defines the current revenues and current expenditures of municipalities that include revenues from the Equalization Fund and the spending thereof, Also, Article 11 of the Budget Law stipulates that the budget receipts, commitments, expenditures, payments and withdrawals must be recorded in the Treasury General Ledger, Based on the above 1 Report on implementation of recommendations of the Old Royal Capital Cetinje No / as of 02 September

457 legal provisions, the Old Royal Capital Cetinje was bound to present in the financial statements all revenues from the Equalization Fund, as well as expenses related to loan repayments, For the same amount, it was necessary to implement the compensation in the Treasury General Ledger and thus record all receipts and expenditures of the Old Royal Capital, In 2014 Old Royal Capital Cetinje has made compensation for loan repayments from the Equalization Fund. Decision on the Budget of Cetinje for 2013 did not foresee position 751-Loans and credits, but the Final Statement of Budget Accounts for 2013 included the execution at this position in the amount of 842, Capital Cetinje did not make amendments to the Budget for 2013 in compliance with Article 45 of the Law on the Financing of Local Self-Governments despite the fact that receipts and expenditures during 2013 were higher than planned. Recommendation: Budget planning and execution must be done in accordance with provisions of the Law on Budget and Fiscal Responsibility (Official Gazette of Montenegro No 20/14) and the Law on the Financing of Local Self-Governments, and in cases when the planned revenues get decreased or the planned expenditures get increased, the budget must be revised following the procedures laid down for its adoption. Report on the fulfilment of recommendation: In 2015, due to the need to implement the Resolution plan for the Old Royal Capital Cetinje, which stands as a basis for a quality continuation of operation of the local government, as well as the start of implementation of significant infrastructural projects financed from the pre-accession funds, and in line with the Law on Budget and Fiscal Responsibility, the municipality of the Old Royal Capital Cetinje initiated the procedure for budget rebalancing for 2015, (Annex: Internal act No / as of 17 August 2015, submitted to the spending units of the Old Royal Capital Cetinje). Follow up audit determined the following facts: The Old Royal Capital Cetinje showed all receipts and expenditures in the Final Statement of Budget Accounts for 2015, Decision on the Final Statement of Budget Accounts of the Old Royal Capital Cetinje for 2015 planned funds in the account 7426 Transfers from the Equalization Fund in the amount of 3,000, and these funds were carried out in the amount of 2,924, Planned borrowings and loans from domestic sources in the account 7511 amounted to 11,440, and were carried out in the amount of 1,432,992.33, which is 98,19% compared to the plan, The Montenegrin Government has given its approval to the Old Royal Capital for borrowings covered by adequate guarantees, The Old Royal Capital Cetinje, in accordance with Article 8 of the Law on Budget and Fiscal Responsibility and Article 45 of the Law on the Financing of Local Self-Governments amended the budget in line with the procedures envisaged for its adoption. Based on the abovementioned, the follow up audit found that the Recommendation 2 is implemented. 3. Recommendation 3 Finding of SAI: The Mayor of Cetinje did not issue decisions on reallocation of funds by individual positions within the spending units in compliance with Article 51 of the Law on the Financing of Local Self-Governments despite the fact that the execution under individual budget positions was higher than planned. Recommendation: The Old Royal Capital Cetinje should execute the Budget by individual positions up to the amount planned by the Decision on the Budget, In case of lack of funds under individual budget positions, reallocations should be made based on the decision of the Mayor (up to 10%)

458 Report on the fulfilment of recommendation: The Old Royal Capital Cetinje carried out relocation of funds (up to 10%) based on the Decision of the Mayor (Annex: Decision on relocation and authorisation for relocation of funds). Follow up audit determined the following facts: By the adoption of the budget review, the Old Royal Capital Cetinje passed a number of decisions on the relocation of funds by individual budget positions in line with Article 51, Despite the adoption of the budget review, the Old Royal Capital exceeded a number of budget position in other personal income, expenses for services and other expenditures. Based on the abovementioned, the follow up audit found that the Recommendation 3 is not implemented. 4. Recommendation 4 Finding of SAI: The audit found that the Old Royal Capital Cetinje presented revenue from donations on Account Other revenues rather than on Account Donations, which is not in accordance with Article 10 of the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets. Recommendation: The Old Royal Capital Cetinje should record the receipts in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets. Report on the fulfilment of recommendation: Business operations of the Old Royal Capital Cetinje is marked by a significantly larger budget discipline of all budget users, recording receipts in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets in accordance with the recommendations from the final report. Follow up audit determined the following facts: The follow up audit found that the Old Royal Capital Cetinje presented revenue from donations on Account Donations, which is in accordance with Article 10 of the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets, Decision on amendments to the Decision on the Budget of the Old Royal Capital Cetinje for 2015 increased the plan of funds for donations, so that the final plan amounted to 990,000.00, while it was carried out in the amount of 715,243.06, or 72.25% compared to the plan. Based on the abovementioned, the follow up audit found that the Recommendation 4 is implemented. 5. Recommendation 5 Finding of SAI: The audit has found that the Old Royal Capital Cetinje recorded significant overruns on some budget positions in relation to funds that were planned by the Decision on the Budget for Recommendation: The Old Royal Capital Cetinje should ensure rational use of budgetary funds in accordance with the Decision on the Budget

459 Report on the fulfilment of recommendation: Operation of the Old Royal Capital Cetinje was also marked by a significantly higher budgetary discipline from all budget users. Follow up audit determined the following facts: The control of budgetary positions expressed in the Final Statement of Budget Accounts of the Old Royal Capital Cetinje for 2015 found that the Old Royal Capital Cetinje recorded overruns in relation to the planned funds on a large number of budget positions. Based on the abovementioned, the follow up audit found that the Recommendation 5 is not implemented. 6. Recommendation 6 Finding of SAI: Receipts and expenditures given in the Decision on the Final Statement of Budget Accounts for 2013 are not correctly presented. Recommendation: The Old Royal Capital Cetinje should be through an amendment to revise the Decision on the Budget Accounts for 2013, in line with actual receipts and expenditures, Report on the fulfilment of recommendation: The Assembly of the Old Royal Capital Cetinje adopted a Decision on amendments to the Decision on the Final Statement of Budget Accounts for 2013 (Annex: Decision No / as of 27 November 2014). Follow up audit determined the following facts: At a meeting held on 27 November 2014, the Assembly of the Old Royal Capital Cetinje adopted a Decision on the Final Statement of Budget Accounts for 2013 where it made appropriate changes to the positions of receipts and expenditures in line with the findings of the audit, The Decisions was published in the Official Gazette of Montenegro Municipal regulations, No 34/14 as of Based on the abovementioned, the follow up audit found that the Recommendation 6 is implemented. 7. Recommendation 7 Finding of SAI: The audit has found that the head of the body did not issue an order for the use of vehicles on the prescribed form (Form SF) to employees who used official vehicles and did not prepare and issue an order to control the use of official and other vehicles and fuel consumption (Form OK). The Old Royal Capital Cetinje adopted a set of internal rules and procedures, but did not prescribe and limit fuel consumption, phone and entertainment expenses, nor did it precisely determine the method and conditions for, as well as the powers and responsibilities in incurring such expenses. Recommendation: The Old Royal Capital Cetinje should amend the internal rules and procedures and determine the limits for fuel consumption, phone, entertainment expenses, precisely determine the conditions and manner of use of official vehicles, for any use of the means of transport issue an order for the use of vehicle (Form PN) and order for the control of the use of official vehicle and fuel consumption (Form OK) and should apply them. Report on the fulfilment of recommendation: In December 2014, the Old Royal Capital Cetinje adopted the Rulebook on the use of entertainment expenses, the Rulebook on conditions for the use of company phones and mobile phones, and the Rulebook on the conditions and the manner of

460 use of official vehicles of the Old Royal Capital Cetinje, (Annex: The above-mentioned Rulebooks rules). Follow up audit determined the following facts: In addition to the abovementioned rulebooks, the Mayor adopted a Decision on the allocation of official vehicles in the bodies of the local administration of the Old Royal Capital Cetinje No / /2 as of 10 December 2014 and amendments to this Decision as of 10 July 2015 which allocated official vehicles in possession or at disposal of the Old Royal Capital Cetinje to be used by the bodies of the local administration. The Mayor also adopted a Conclusion No / /3 as of 30 December 2014 which determines the allowed monthly fuel consumption for fuel purchases paid by the credit cards of the spending units, Heads of organisational units who were assigned these vehicles shall prepare and issue travel orders for travel vehicles, and include serial number, name of the employee using the vehicle, destination for the use of vehicle, licence plate number of the vehicle together with vehicle information and issuing date. The back of the travel order shall contain date of use, destination, departure and arrival time, travelled distance, distance meter status, and user signature. The Mayor also adopted a Conclusion No / /2 as of 6 December 2014, which determines the limits for phone calls of employees to be paid by the Old Royal Capital. In addition to limits for employees, it also determined the amount of telephone costs for services and bodies of the local administration that were given official telephones. After examining the paid receipts of entertainment expenditures it was determined that they were recorded and signed by the authorised person, and the payment request is accompanied by a document which explains the basis for incurred entertainment costs. Based on the abovementioned, the follow up audit found that the Recommendation 7 is implemented. 8. Recommendation 8 Finding of SAI: Spending units did not submit to the Secretary of Finance specimen signatures (deposited signatures) of officers in charge of finance. The finance officers in each spending unit are: authorizing officer and certifying officer. Recommendation: The Old Royal Capital Cetinje should appoint finance officers in each spending unit and establish a system of dual signatures and separation of duties, which prevents one person from being at the same time responsible for the authorization, implementation, recording and control. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje adopted an Instruction on the Local Government Treasury Operation which also established a system of dual signatures. Follow up audit determined the following facts: The Old Royal Capital Cetinje adopted an Instruction on the Local Government Treasury Operation ("Official Gazette of Montenegro - OP" No 06/15 as of 20 February 2015), where the Secretary of Finance appointed Chief Financial Officer in the Old Royal Capital, Spending units of the Old Royal Capital Cetinje submitted to the Secretary of Finance and Economic Development the specimen signatures of officers deployed to the job position of financial officer, Financial officer in each spending unit is the head of the spending unit and represents an authorised person for approvals for that spending unit, and the certifying officer is a person appointed by the head of the spending units, Invoices that submitted by spending units for payments are filed and signed by the authorised person and submitted with the Payment Requests which is signed by the persons authorised for verification and persons authorised to approve payment requests (head of the spending unit), After submitting the Payment Request, it is controlled by the Department of finance and the development of entrepreneurship and signed by the Secretary

461 of Finance and Entrepreneurship Development, which according to the instruction of stands as the authorisation officer. Based on the abovementioned, the follow up audit found that the Recommendation 8 is implemented. 9. Recommendation 9 Finding of SAI: Secretariat for Finance and Entrepreneurship does not possess payment requests of other spending units, nor payment requests of this Secretariat, because the requests were not being filled and submitted. Therefore the Secretary for Finance, who has been appointed chief financial officer of the Old Royal Capital in line with the Instructions on the Local Government Treasury Operation, was not acting in accordance with the authorities prescribed by the Law on Budget and the mentioned Instructions, i.e. was not authorizing payment requests. Spending units submitted documents based on which the payments were made from the Treasury General Account (bills, invoices, notices, contracts) in a number of cases: without any supporting act, unsigned by the head of the body, incomplete, without signature of the authorized person confirming that the service was provided or goods received; invoices were not recorded in the archives of the Old Royal Capital and the like. The audited entity did not act in accordance with the Instructions on the Local Government Treasury Operation (OGRM-Municipal Regulations 01/05), particularly Articles 8, 12, 13, 18, 28, 30, 41 and Part IV of the Instructions - Control of expenditure, The Instructions on the Local Government Treasury Operation are not in compliance with the Budget Law, Recommendation: The Mayor of Cetinje should exercise the powers prescribed by the Budget Law, adopt new Instructions on the Local Government Treasury Operation and ensure that the Secretary for Finance makes payments to the Consolidated Treasury Account only if a completed and signed payment request has been submitted as well as original documentation that is certified and complete. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje adopted an Instruction on the Local Government Treasury Operation which also established the system of dual signatures and enabled Secretariat of finance and development of entrepreneurship to perform payments from the Consolidated account of the treasury together with a filled in and signed payment request and complete documentation (Annex: Instruction on the Local Government Treasury Operation ( Official Gazette of Montenegro OP No 6/15), Follow up audit determined the following facts: Spending units file and submit payment requests to the Secretariat of Finance and Economic Development, and the Secretariat of Finance and Economic Development also prepares payment requests for expenses from its scope of operations. Payment requests are signed by authorized persons and approved by the authorization officers, Spending units submit documents used for payments from the Main Treasury Account together with supporting act, signed by the head of the body, with the signature of the authorized person indicating that the service was performed or goods received, and invoices are filed in the archives of the Old Royal Capital, Instructions on the operation of the Treasury of local self-government is in line with the Law on Budget and Fiscal Responsibility. Based on the abovementioned, the follow up audit found that the Recommendation 9 is implemented

462 10. Recommendation 10 Finding of SAI: The Old Royal Capital Cetinje did not act in accordance with Article 6 of the Rulebook on the method of preparation and presentation of financial statements of the Budget, state funds and local government units ("Official Gazette of Montenegro" 32/10, 14/11, 16/13) and did not submit quarterly reports to the Ministry of Finance, Also, the Spending units of the budget of Old Royal Capital did not submit their quarterly financial statements on Forms 3 and 5, on the basis of which quarterly financial statements of the Old Royal Capital would be prepared. Recommendation: The Old Royal Capital Cetinje should fully apply the provisions of the Rulebook on the method of preparation and presentation of financial statements of the Budget, state funds and local government units and submit reports on the prescribed forms and within the prescribed time limits. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje submits financial reports using prescribed forms and within defined deadlines in line with the Rulebook on the method of preparation and presentation of financial statements of the budget, state funds and local government units. Follow up audit determined the following facts: The Old Royal Capital Cetinje, in line with the Rulebook on the method of preparation and presentation of financial statements of the budget, state funds and local government units, submitted to the Ministry of Finance quarterly financial reports and annual financial report using prescribed forms and within defined deadlines. The Old Royal Capital Cetinje, in line with the Rulebook on the method of presentation and composition of the data on revenues, expenditures and budget borrowings of local government units composed and submitted to the Ministry of Finance quarterly reports on planned and executed budget revenues, planned and executed budget expenditures and budget indebtedness of the Municipality. Based on the abovementioned, the follow up audit found that the Recommendation 10 is implemented. 11. Recommendation 11 Finding of SAI: Funds in the amount of 54, as shown in the Decision on the Final Account of the Old Royal Capital Cetinje for 2013 are recorded as funds transferred from the previous year, The Old Royal Capital Cetinje should not have recorded these funds as revenue of the Budget of the current year, but show it as the starting balance of deposits in the Decision on the Final Account of the Budget. Recommendation: The Old Royal Capital Cetinje should not record financial assets carried forward as the starting balance in the accounts of the Consolidated Treasury Account as revenue of the budget for the current year, but to present them as starting balance of deposits in the Decision on the Final Account of the Budget. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje showed the financial assets transferred from the previous year in the Decision Amending Decision on the Final Statement of Budget Accounts for 2013, as well as in the Decision on the Budget for 2015 as the starting balance of deposits (Annex: Decision on the budget for 2015). Follow up audit determined the following facts: Financial assets transferred from 2014 in the Decision on the Final Account of the Old Royal Capital Cetinje for 2015 are presented in the amount of 3,206.70, while the balance of funds as at 31 December 2015 presented in the amount of 247,098.91, which corresponds to the balance determined by checking the accounts opened within the Consolidated Treasury Account of the Old Royal Capital Cetinje

463 Based on the abovementioned, the follow up audit found that the Recommendation 11 is implemented. 12. Recommendation 12 Finding of SAI: The audit has found that the Old Royal Capital Cetinje presented outflows and inflows of funds in the accounts within the Consolidated Treasury Account unrealistically as expenditures of the Budget for 2013 for the amount of deposited funds ( 394,400) and receipts for the amount of repayments from deposits ( 628,744.77). Recommendation: The Old Royal Capital Cetinje should not present outflows and inflows of funds in the accounts within the Consolidated Treasury Account as budget expenditure for the amount of deposited funds and as budget receipt for the amount of repayments from deposits. This should be recorded as an increase or decrease in deposits in the accounts within the Consolidated Treasury Account, for proper presentation of financial result - surplus/deficit. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje presented outflows and inflows of funds within the Consolidated Treasury Account as an increase or decrease in deposits in the accounts within the Consolidated Treasury Account. Follow up audit determined that the Old Capital Cetinje did not deposit funds in Based on the abovementioned, the follow up audit found that the Recommendation 12 is implemented. 13. Recommendation 13 Finding of SAI: Recognizing the fact that the Inspection Department began to work in 2013, the number of controls (8) and coverage (only state institutions were controlled, in the amount of 14,554,11) can be considered insufficient, especially in view of the fact that the controls covered a period of two years, from January 2011 to December 2013). Also, they have not checked the collection of revenues: local utility taxes, fee for preparing and constructing on buildable land, and fee for the construction and maintenance of local roads and other public facilities of municipal interest, which recorded a significant drop compared to the budget plan. Recommendation: The Old Royal Capital Cetinje should increase in the future the number and scope of controls of local public revenues, particularly revenues, which recorded a significant decrease compared to the budget plan of Cetinje, It is also necessary, in accordance with Article 56 of the Law on Tax Administration, to initiate enforced collection against the taxpayers which fail to settle their tax liabilities on time. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje conducted public invitation for systematised work position Head of division for inspection surveillance in the administration of local public revenues, thus significantly increasing the number and scope of controls. During the first six months of 2015, a total of 89 controls by authorised inspectors were conducted, with 20 controls during the corresponding period of The audited entity did not make statements in the part referring to implementation of conclusions on enforced collection. Follow up audit determined the following facts: Immovable property tax - During the reporting period, and in relation to the collection of real estate tax for 2015, the Administration of local public revenues passed a total of decisions for natural persons and 81 decisions for legal entities. The total tax assessment on this basis amounted to 665,428.85, of which 380, refers to natural persons, and 285, to the legal entities. In 2015, collection of revenues from

464 immovable property tax amounted to 308, A total of 33 procedures of enforced collection were initiated. For 2015, based on the enforced collection procedures, a total amount of 29, of immovable property tax was collected. Surtax on personal income tax - In the reporting period a total of were 4,745 applications of surtax on personal income tax were received and processed, During the reporting period, the total revenue on this basis amounted to 405,926.64, which represents % of the plan. Local administration tax The budget for 2015 envisaged an amount of 25, while the collected amount stood at 23,781.72, which is 95.13% of the plan, Local utility taxes Administration issued 240 decisions on fees for the use of public space, setting up billboards, and other taxes, which were used for borrowing in the amount of 59, In the reporting period, a total of 55, of local utility tax was collected ( 46, on borrowings from 2015 and 9, on borrowings from previous years). In the reporting period, a total of 60 procedures of enforced collection were initiated, whereas there were 2 complaints during the same period. Of the total determined amount of 16,025.08, an amount of 10, was collected based on the procedures of enforced collection of local utility fee. Fee for preparing and constructing on buildable land In 2015, the borrowing herein amounted to 87,782.40, which equals the collected amount, i.e. 100% in relation to borrowing. Fee for using municipal roads During the reporting period, on the basis of fees for using municipal and unclassified roads, the Administration passed 366 decisions and borrowing in the amount of 166, Collection amounted to 109,069.88, or 65.61% in relation to the borrowing, A total of 114 enforced collection procedures were initiated, In reporting period, 14 complaints to the decisions of this body were submitted, Of the total determined amount of 26, from the enforced collection fees for using municipal and uncategorized roads, a total of 12, was collected. Membership contribution of the Tourist Organization of Cetinje - A total of 144 solutions were adopted, which determined the amount of the membership fee of the Tourist Organization of Cetinje in the amount of 67,330.00, of which an amount of 50, or 74.58% of the set membership fees was collected, In reporting period, there were 24 enforced collection procedures, Of the total determined amount of 8,988.63, enforced collection from the membership fee amounted to 3, Sojourn tax - During the reporting period, there was a total of 125 monthly reports on the number of users of accommodation, and sojourn tax amounted to 4, In 2015, collection of sojourn tax amounted to 7, ( 4, relating to the borrowing from 2015 and 3, relating to borrowing from previous years). Inspection supervision - In 2014 and 2015 a total of 92 entities were supervised. All controls were carried out in accordance with the planned dynamics, or as per the inspection order, while the main criterion for control was the potential amount of the tax liability. Inspections dealt with the real estate tax, surtax on personal income tax, membership contribution for tourist organizations, sojourn tax and procedures in relation to complaints of taxpayers regarding the decision on the annual fee for the use of commercial facilities. In the reporting period, there were 143 orders for inspection supervision. The control of the above mentioned taxpayers established tax liabilities in the total amount of 66, Based on the abovementioned, the follow up audit found that the Recommendation 13 is implemented

465 14. Recommendation 14 Finding of SAI: The internal organization and systematization scheme of the Local Public Revenue Office of Cetinje envisage two employees for the work position of inspector for local public revenues, and only one person is employed. Recommendation: The Old Royal Capital Cetinje is recommended to fill the systematized work position of Inspector I for local public revenues and enhance the control of the collection of local public revenues. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje used a public invitation to fill the systematised work position Head of the division for inspection supervision in the administration for local public revenues. Follow up audit determined the following facts: After the adoption of the new internal organization and systematization scheme, pursuant to Article 35 of the Law on Civil Servants and State Employees and Article 82 of the Decision on the organization and methods of work of local government bodies of the Old Royal Capital, the Director of local public revenues of the Old Royal Capital Cetinje, passed a Decision on the start of the procedure for filling the job position Inspector of local public revenues for an indefinite period of time, No / as of 28 June The job position Inspector I for local public revenues for an indefinite period of time was filled by announcing an internal invitation within the body which employs the employee for an indefinite period of time at the job position Inspector I for local public, Based on the abovementioned, the follow up audit found that the Recommendation 14 is implemented. 15. Recommendation 15 Finding of SAI: The Local Public Revenue Office has not issued orders to taxpayers, legal entities and individuals, for the payment of a fee based on the applicable Decision on the Use and Fees for the Use of Municipal and Non-classified Roads and Road Land in the Territory of Cetinje, waiting for a new Decision to be adopted and take effect. Recommendation: The Old Royal Capital Cetinje should respect the principle of legality and resolve administrative matters based on applicable laws and subsidiary legislation. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: Pursuant to Article 22 of the Law on Roads ("Official Gazette of the Republic of Montenegro", No. 42/04, "Official Gazette of Montenegro", No. 54/09 and 36/11) and Articles 63 and 75 of the Statute of the Old Royal Capital ("Official Gazette of Montenegro - municipal regulations", No. 19/09, 37/10, 26/13 and 39/14), with the prior approval of the Government, the Assembly of the Old Royal Capital Cetinje, adopted the Decision on the Use and Fees for the Use of Municipal and Non-classified Roads and Road Land in the Territory of Cetinje ("Official Gazette of Montenegro - Municipal regulations" No. 48/15), Management of the local public revenues passed 366 solutions to taxpayers, legal entities, and individuals, for the payment of fees for using municipal and non-classified roads and road land in the territory of Cetinje. Based on the abovementioned, the follow up audit found that the Recommendation 15 is implemented

466 16. Recommendation 16 Finding of SAI: Of the total of 281 employees as on 31 December 2013, 216 were employed for an indefinite period, 62 for a fixed term, and 3 persons were on an internship. The audit has shown that some bodies had more employees during the year than provided for by individual Rulebook on internal organization and job systematization, while three bodies of local government did not have regulations on internal organization and job systematization. Recommendation: In accordance with Article 35 of the Law on Civil Servants and State Employees, the Old Royal Capital Cetinje should make a decision to initiate the procedure for filling a job position only if the position is foreseen in the Rulebook on Internal Organization and Job Systematization, if it is vacant and if financial resources have been ensured. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje filled vacant job positions only if it was established in the Rulebook on Internal Organization and Job Systematization and if the conditions in the area of providing funds were met. (Annex: Request of immediate supervisor, Decision on the need for employment and other supporting documents for the employment of an employee). Follow up audit determined the following facts: In October 2015, the Old Royal Capital Cetinje adopted a new Decision on the organization and methods of work of local administration. Also, in April 2016, amendments were made which regulated carrying out of activities under the jurisdiction of the Old Royal Capital, except for the Assembly Service, and 14 local administration bodies were formed: four secretariats, one department, two directorates, four special and three expert services. On the basis of that decision, in the first half of 2016, rulebooks on internal organization and job systematization of local administration bodies were adopted, which brought systematization of jobs for 190 employees. The Old Royal Capital Cetinje has significantly reduced the number of employees in local administration bodies and performed harmonisation of the number of employees with the rulebooks on internal organization and job systematization. Based on the abovementioned, the follow up audit found that the Recommendation 16 is implemented. 17. Recommendation 17 Finding of SAI: From a total of 5 systematized positions in the Internal Audit Service, the positions of the Director of the Service and Independent Officer - Technical Secretary have been filled, but not the positions of internal auditors. Recommendation: The Old Royal Capital Cetinje should use an internal or public announcement to fill the positions for internal auditors to speed up the activities stipulated in the Law on Public Internal Financial Control and the Strategic Plan of Internal Audit of the Old Royal Capital Cetinje. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje has implemented and filled the job position of internal auditor (Annex: Decision on employment for an indefinite period - Senior Internal Auditor No /14-34 as of 04 August 2014). Follow up audit determined the following facts: Decision on the organization and methods of work of local administration of the Old Royal Capital envisages a Special Service for Internal Audit. The Service for Internal Audit has two employees, as follows: Director of the Service for Internal Audit, and Senior Internal Auditor. The examined records show that during 2016, the job position of the Head of service was filled but has since remained vacant, with the Decision on the appointment of the director of the service prescribes mandatory tests for the certified internal auditor in the public

467 sector within a year, which is not in accordance with Article 34 of the Law on internal financial controls in the public sector. Based on the abovementioned, the follow up audit found that the Recommendation 17 is partially implemented. 18. Recommendation 18 Finding of SAI: IOPPD Forms (Report on calculated and paid taxes and contributions), which are submitted under the identification number of the Old Royal Capital (TIN Number ) do not include employees of the Protection Service. The Protection Service performs calculation of salaries independently and delivers their IOPPD Forms under special identification number (Protection Service TIN ). The audit has found that the Protection Service is not responsible for the calculation of salaries and that, pursuant to the Decision on the Organization and Functioning of Local Government, the calculation and payment of salaries is the responsibility of the Secretariat of Finance and Entrepreneurship Development. Recommendation: The Old Royal Capital Cetinje should consolidate and harmonize with the law payroll for all the bodies of local government through the Secretariat for Finance and Enterprise Development which is responsible for the tasks of calculation and payment of salaries and submit one IOPPD Form that will involve all employees in local government bodies in the future. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje consolidated and harmonized the calculation and payment of salaries with the Law, which is done through the Secretariat for Finance and Enterprise Development, with a single IOPPD form that includes all employees. Follow up audit determined the following facts: The Old Royal Capital Cetinje acted in line with the recommendation and consolidated all salaries of employees in the Old Royal Capital Cetinje, A single IOPPD form with a single identification number of the Old Royal Capital is submitted to the Tax Administration. Based on the abovementioned, the follow up audit found that the Recommendation 18 is implemented. 19. Recommendation 19 Finding of SAI: During 2013, the Old Royal Capital performed payment of eight net salaries for the period January-August, while the corresponding taxes and contributions on this basis were not paid, which is contrary to the Law on Personal Income Tax and the Law on Compulsory Social Insurance Contributions and the Agreement on Financial Restructuring signed with the Ministry of Finance, whereby Cetinje committed itself to perform the calculation of the fixed part of the salary on the basis of the accounting values of the coefficients applied to civil servants and public employees (Article 3, paragraph 3,4 of the Agreement). Recommendation: During the calculation and payment of salaries, the Old Royal Capital Cetinje should also pay appropriate taxes and contributions in accordance with the Law on Personal Income Tax and the Law on Compulsory Social Insurance Contributions and the Agreement on Financial Restructuring concluded with the Ministry of Finance, especially the section referring to the obligation of Cetinje to regularly pay all future tax and non-tax obligations (Article 2, paragraph 2.5 of the Contract)

468 Report on the fulfilment of recommendation: Starting from January 2015, the Old Royal Capital regularly meets its obligations arising from taxes and contributions and has started to meet its obligations arising from the Contract on restructuring of tax debt (Annex: Bank excerpt and Restructuring Agreement from 2015). Follow up audit determined the following facts: In 2015, an amount of 2,569, was paid from the account Gross salaries and contributions paid by the employer, of which net salaries for the period January - December amounted to 1,491,772.58, and pertaining taxes and contributes amounted to 1,077, In addition to the above, the Old Royal Capital used the account Repayment of Liabilities from Previous Period for payments of earnings from the previous year in the amount of 533,840.98, as well as taxes and contributions under the Agreement on restructuring of tax debt in the amount of 44, (6 instalments), which corresponds to the total liabilities of the Old Royal Capital for After examining the analytical card for 2016, it has been established that the Old Royal Capital continued to regularly meet its tax liabilities arising from restructuring and executed payments in the amount of 66, Based on the abovementioned, the follow up audit found that the Recommendation 19 is implemented. 20. Recommendation 20 Finding of SAI: The contracts relating to the provision of consulting services did not specify the work assignment (job description). At the conclusion of employment contract with the person who will perform a particular assignment, it is necessary to specify the tasks for the engaged person, the completion deadline and the obligation for the engaged person to prepare a report on the work done to confirm that the work is done, and then to allow payment of the relevant fee. Recommendation: At the conclusion of employment contract with the person who will perform a particular assignment, the Old Royal Capital Cetinje should specify the tasks for the engaged person, the completion deadline and the obligation for the engaged person to prepare a report on the work done to confirm that the work is done, and only then to allow payment of the relevant fee. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: The planned amount of Expenditures for consulting services, projects and studies - positions 4147 amounted to 164,000.00, while they were implemented in the amount of 184, or 12.67% more than planned. Reallocation of funds was not performed for exceeding the plan. In 2015, the Old Royal Capital did not enter into contracts for consulting services. When it comes to consulting services and development of projects and studies, the Old Royal Capital entered into contracts with legal persons. After examining documentation, it was determined that the contracts specified job description, completion date, and that reports on completed supervision were submitted. Based on the abovementioned, the follow up audit found that the Recommendation 20 is implemented. 21. Recommendation 21 Finding of SAI: The Old Royal Capital did not follow the Internal Instructions for the Calculation and Payment of Salaries which, among other things, define procedures for the appointment of persons on the basis of service contracts relating to: obtaining the consent of the mayor, recording the

469 contract in the files, as well as data that a contract must indicate. The Instruction was issued in January 2013 and is an integral part of the book of procedures. The Old Royal Capital concluded service contracts for the jobs that are, according to the Decision on the Organization and Functioning of Local Government of the Old Royal Capital Cetinje, the jurisdiction of local administration bodies. Recommendation: The Old Royal Capital Cetinje should enter into contracts with third parties only for operations that are not in the competence of the local administration. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje concludes temporary service agreements with third parties for operations that are not in the competence of the local administration, while making payment based on the submitted report on completed work. (Annex: Service Contract No / as of 22 July 2015, and the Report on Completed Work as of 21 July 2015). Follow up audit determined the following facts: Contracts between the Old Royal Capital Cetinje and 13 natural persons were controlled. After analysing the contracts it was established that: - Contracts with eight natural persons were concluded during or after the completion of services for which they were hired. - Contracts with two natural persons, non-residents, were concluded on 20 August while they were registered in the archives on 4 December The attached service contracts have reports on the completed work. Based on the abovementioned, the follow up audit found that the Recommendation 21 is partially implemented. 22. Recommendation 22 Finding of SAI: The Old Royal Capital Cetinje should have presented the payments recorded on the accounts: taxes, contributions and municipal surtax, within the line item to which the payment relates specifically (payments for committees on Account Other personal income, and payments under the service agreement to Account Other expenditures). For payments based on other personal income, the Old Royal Capital exceeded the planned amount by 28,000.79, and they did not act in accordance with Article 51 of the Law on the Financing of Local Self-Governments, which provides for possible reallocation of funds. The Entertainment Account 4142 also recorded hotel services, which according to the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets, do not represent an expense that is recorded on Account 4142-Entertaiment. Interest for residents account did not record interest in the amount of 33, that the Old Royal Capital Cetinje paid in accordance with loan and interest repayment schedule, and the interest was recorded in Account Repayment of Liabilities from Previous Period. Also, the mentioned account did not record interest expenditures that are an integral part of monthly instalments paid by the Ministry of Finance, on the basis of a contract, from the Equalization Fund in the amount of 238, On Account Current budget reserve, realized expenditures exceeded those stated in the Plan for 2013, and thus the Old Royal Capital acted contrary to Article 66 of the Law on the Financing of Local Self-Governments, which specifies that no payments can be made the Consolidated Treasury Account unless approved in the budget. The Mayor of the Old Royal Capital has not issued a reallocation decision for the overrun on the mentioned position

470 Recommendation: The Old Royal Capital Cetinje should ensure that of expenditure payment correspond to the purposes laid down in the budget, with the obligation of the Old Royal Capital to ensure fiscal discipline and spending for earmarked purposes through the control of the payments. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: Decision on the Budget of the Royal Capital Cetinje for 2015 planned position Other personal income in the amount of 1,508,090.00, and it was recorded in the amount of 1,280, or 84.88% compared to the plan. The largest expenditure in this position related to Severance payments that were planned in the amount of 1,383,000.00, and recorded in the amount of 1,280, or 82.86% compared to the plan. Based on the Decision on determining the amount of severance pay of employees in the bodies and services of the local administration as of 16 November 2015, the Old Royal Capital Cetinje issued a public invitation for amicable termination of employment with severance payment (No / , as of 16 November 2015), to be granted to employees employed on a permanent basis in the bodies and services of the local administration, services of the local government and employees of public services. After examining the records, it was determined that the employees requests were submitted in due time, that the Agreement on termination of employment was concluded between the employee and the head of the body, while the Decisions on the severance payment were signed by the Secretary of Finance. Expenses for material - position 413, were planned in the amount of 128,360.00, and recorded in the amount of 135,541.09, or 7, or 5.59% more than planned. Expenses for material for special purposes, expenses for energy, expenses for fuel and other expenses for material were recorded in the amount higher than planned, and funds were not redirected for exceeding the plan. The amount of 1, refers to the acquisition of spare parts for maintenance of motor vehicles of the Old Royal Capital and should have been recorded within the account current maintenance of equipment. The amount of 1, applies to printing services that should have been recorded as part of the account Other services ( printing services). In the Decision on Budget for 2015, the Old Royal Capital Cetinje planed an amount of 100, for the Account current budget reserve, and it also made payment in the total amount of 18, For each payment there is regularly received request and the Decision of the Mayor of the Royal Capital. Based on the abovementioned, the follow up audit found that the Recommendation 22 is partially implemented. 23. Recommendation 23 Finding of SAI: Other services were planned in the amount of 45, and realized in the amount of 82,932.02, or 81.07% more than planned. For this overrun, the Old Royal Capital did not perform the reallocation of funds. Payments to suppliers in some cases were not supported by full documentation. For certain maintenance services there were no concluded service contracts, which was not in accordance with Article 6 of the Law on Public Procurement, and the payments were made in the amounts for which procedures pursuant to Article 20 of the Law should have been launched and implemented. Other expenditures were planned in the amount of 95, and were realized in the amount of 193,980.84, or % of the plan. For this overrun, the Old Royal Capital did not perform

471 reallocation of funds. The payments of taxes and contributions were carried out from Account Gross salaries and contributions payable by the employer rather than from Account Expenditures for payments under service contracts. Recommendation: The Old Royal Capital Cetinje should realize expenses in accordance with Article 66 of the Law on the Financing of Local Self-Governments within the limits established by the Decision on the Budget of the Old Royal Capital. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: Expenses for services - position 414, were planned in the amount of 438,000.00, and recorded in the amount of 454, or 3.67% more than planned. Expenses for banking services and foreign exchange losses, expenses for consulting services, projects and studies as well as expenses for other services are recorded in the amount higher than planned, and funds were not redirected for exceeding the plan. Other expenses - position 419, were planned in the amount of 209,000.00, and recorded in the amount of 212, or 1.50% more than planned. Expenditures for payment of temporary service contracts, insurance, utility charges, and other expenses were recorded in the amount higher than planned, and funds were not redirected for exceeding the plan. Based on the abovementioned, the follow up audit found that the Recommendation 23 is partially implemented. 24. Recommendation 24 Finding of SAI: Audit of capital expenditures has found that: - The Old Royal Capital Cetinje did not act in accordance with Art. 34 of the Law on State Property and did not make decisions on procurement of equipment; - Payments of expenses for equipment were in some cases made in advance, without submitted invoices, but based on pro-forma invoices or offers of individual suppliers, in the amount of 28, Also, the person authorized to receive the equipment has not signed the receipt of equipment from one supplier and there are unsigned invoices for one supplier. - Supplier payables were settled in amounts exceeding 5, without following the procedure and conclusion of contracts in accordance with the Law on Public Procurement; Recommendation: Pursuant to Article 34 of the Law on State Property, the Old Royal Capital Cetinje should procure equipment on the basis of a decision to purchase, and should not make advance payments, but only against full and correct documentation. The procurement of goods and services or capital maintenance should be carried out in accordance with the Law on Public Procurement and any procurement of such goods or services exceeding 5, must be carried out through the prescribed public procurement procedures; Report on the fulfilment of recommendation: The Old Royal Capital Cetinje conducts prescribed procedure for all procurements exceeding 5, (goods and service). Follow up audit determined the following facts: As part of the account Other capital expenditures, there was a purchase of real estate for which a contract was concluded on 29 December 2015 between the Old Royal Capital Cetinje and A.D. "Montenegro modern shoes" Cetinje, in order to purchase real estate (building with an area of 1300m 2 ) with an estimated value of 91,000.00, VAT included. For this procurement, the Assembly of the Old Royal Capital reached a Decision on the participation in the process of buying and selling part of the assets of A.D

472 "Montenegro Modern Shoes" in bankruptcy. The Assembly authorized the Mayor to sign the contract on the sale of real estate, if the price reaches 70 /m 2. The Public Procurement Administration approved implementation of negotiation procedure without prior publication of the public procurement invitation. The said procurement was recorded in the Report on awarded public procurement at the contracted value of 81, Based on the abovementioned, the follow up audit found that the Recommendation 24 is implemented. 25. Recommendation 25 Finding of SAI: Payments to a supplier related to snow removal were made from Account 4416 Investment Maintenance in the amount of 9, The payment should have been made from Account Current maintenance: - Expenditure in the amount of 10, for payments to suppliers refers to the previous period and should have been paid from Account Repayment of Liabilities from Previous Period; - Expenditure in the amount of 3, for payments to suppliers refer to the liabilities from 2012 and should have been recorded in Account Repayment of Liabilities from Previous Period; - Account Other Capital Expenditure was not planned for the Old Royal Capital Cetinje Budget for 2013, and it was realized in the amount of 141, without passing an amendment to the Budget Decision; Recommendation: The Old Royal Capital Cetinje should plan receipts and expenditures by economic classification in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets and realize expenses and maintain records in the General Ledger of the Treasury in accordance with the planned budget, without realizing expenses during the year from the accounts which were not planned. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: On the account Capital expenditure, the Old Royal Capital Cetinje recorded consumption in the amount of 1,273, After examining the documents, it was found that the Old Royal Capital recorded expenditure in this position in accordance with Article 48 Paragraph 2 of the Law on Budget and Fiscal Responsibility. Based on the abovementioned, the follow up audit found that the Recommendation 25 is implemented. 26. Recommendation 26 Finding of SAI: The Old Royal Capital Cetinje has assumed and paid liabilities of PE Sports Centre (JP Sportski centar) in the amount of 9, and the Water Supply and Sewage Company of Cetinje in the amount of 10, without proper legal basis. Recommendation: The Old Royal Capital Cetinje should regulate the financing of public companies in accordance with the Decision on the Budget of the Old Royal Capital and should not assume and pay any liabilities of public enterprises to suppliers without proper legal basis. Report on Municipality on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation

473 Follow up audit determined the following facts: After examining the database and documentation it was established that the Old Royal Capital failed to record payments to public enterprises as part of capital expenditures. Based on the abovementioned, the follow up audit found that the Recommendation 26 is implemented. 27. Recommendation 27 Finding of SAI: The Old Royal Capital did not provide supervision over the execution of works: - During the audit, the Old Royal Capital Cetinje did not make available a report of the Supervisory body on the stage of completion of works on: the reconstruction of the green market and the reconstruction of the Russian mission, while when it comes to the Beautiful Cetinje Project there is only a report on the supervision exercised by the UNDP; Recommendation: The Old Royal Capital Cetinje should monitor the implementation of capital projects, regardless of whether they are the only investor or the works are executed in cooperation with the UNDP, and provide supervision by professional staff over the execution of the works, as well as reports on the stage of completion of the works. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje established a comprehensive method of reporting and submitting documents in the part referring to implementation of capital and other expenditures achieved through cooperation with the UNDP, In addition to this, it provides professional supervision of every investment. Also, when it comes to implementation of projects, it provides direct participation of representatives of the Directorate of Investment and Development. (Annex: Documentation for implementation of the project Hospital Danilo I, Contract with supporting invoices and interim payment certificates). Follow up audit determined the following facts: In 2015, the most important payments within capital expenditures referred to: - Expenditures for local infrastructure amount of 638, and - Investment maintenance amount of 532, Expenditures for local infrastructure (sewerage and collector construction) - item 4412, the amount of 638, refers to payments to suppliers: - On 24 September 2014, the Old Royal Capital concluded a Contract on supervision of works and audit of Main projects referring to the construction of sewers network with the consortium Hidroinženjering, with contracted value of 230, without VAT ( 273, VAT included). After examining documentation it was established that in the period from September 2014 until the end of 2015, Hidroinženjering submitted six interim payment certificates with a total value of 221,697.00, VAT included, and in 2015 the payments amounted to 177, On 23 December 2014, the Old Royal Capital concluded a Contract on the construction of missing and reconstruction of the existing faecal and atmospheric sewerage network in Cetinje with the consortium "PNP Perošević", with a contracted value of 696,283.00, VAT excluded. After examining the record, it was determined that in 2015, the consortium "PNP Perošević" submitted one advance, four interim and one final payment certificate with a total value of 685,704.70, while the Old Royal Capital made payments in the amount of 460, Investment maintenance - item 4416, amount of 531, includes payments to suppliers:

474 Bombeton in the amount of 4, for the account number 10/2014 as of 17 October 2014 for the purchase of materials for the construction of public toilets, according to the Grant agreement number / as of 17 October UNDP in the amount of 526, includes the transfer of funds for investments in local infrastructure and investments in buildings. Investing in local infrastructure in 2015, the Old Royal Capital transferred the funds to UNDP in the amount of 348, on the basis of reconstruction of a monument to fallen soldiers from Ljubotinj in NOR, in the amount of 44, and on the basis of reconstruction of streets in the amount of 303, The reviewed documentation also includes reports made by the supervisory body following the presented situation. Investment in buildings The Old Royal Capital transferred funds in the amount of 178, Documentation which enables justification of expenditures was presented during the audit procedure. Based on the abovementioned, the follow up audit found that the Recommendation 27 is implemented. 28. Recommendation 28 Finding of SAI: The Old Royal Capital Cetinje was obliged, pursuant to Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets, to record on Account Debt Repayment all expenditures incurred from repayment of loans and credits performed by the Old Royal Capital itself ( 127,396.49), as well as expenditures arising from loan repayments (principal) performed based on an agreement by the Ministry of Finance from the Equalization Fund ( 792,865.62). Recommendation: The Old Royal Capital Cetinje should make loan repayments for the current year from Account Debt Repayment, and not from Account Repayment of Liabilities from Previous Period. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje records repayment of loans in the position 461 Debt repayment. Follow up audit determined the following facts: Debt repayment - Account 461, was planned in the amount of 4,380, and was recorded in the amount of 4,427, or 1.08% more than planned, In 2015, the Old Royal Capital Cetinje recorded all expenditures relating to the repayment of liabilities from repayment of loans from the Equalisation Fund and loans (principal) for the current year on the Account Debt Repayment. The records covered debt repayment performed by the Old Royal Capital and repayment of principal performed by the Ministry of Finance based on the Agreement on Cession and Assignment. Based on the abovementioned, the follow up audit found that the Recommendation 28 is implemented. 29. Recommendation 29 Finding of SAI: The audit has found that the level of debt under loans (including debt to Erste Bank of 399,807.41) amounts to 5,837, and exceeds the debt balance indicated in the BUZ Form by 359,

475 Recommendation: The Old Royal Capital Cetinje should keep records of loans taken, their repayment, as well as outstanding debt under those loans and, when drafting and presenting the financial statements, include in them all the loan repayments, regardless of whether they are repaid by the Old Royal Capital or the Ministry of Finance. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje records loan repayment at the position Debt Repayment and properly keeps track of the loans and their repayment and status. In addition, the same form is used during the preparation and presentation of financial statements for all loans, regardless of whether they are repaid by the Old Royal Capital or by the Ministry of Finance. (Annex: Form for establishing debt portfolio as at 30 June 2015). Follow up audit determined the following facts: In 2015, the Old Royal Capital Cetinje borrowed an amount of 13,278,000.00, from the following institutions: - Ministry of Finance under the Agreement on the transfer of loan funds No /1 as of 6 July 2015, provided by the European Investment Bank for the Water supply and waste water removal project in the amount of 2,628, The Old Royal Capital, according to the signed Agreement, is obliged to transfer the funds to the company "Vodovod and kanalizacija" Cetinje, with which it defined rights and obligations by a special agreement. In 2015, the withdrawn funds amounted to 677, Erste banka A.D under the Agreement No as of 20 October 2015 in the amount of 7,000, for the refinancing of financial obligations towards other financial institutions for the implementation of social programme, payment of outstanding salaries and settlement of matured obligations to suppliers. In 2015, the total amount of funds under the Agreement was withdrawn. - Hypo Alpe-Adria-Bank a.d. Podgorica/Adiko Bank under the Loan Agreement No AA L30 as of 31 July 2015 in the amount of 3,000, for refinancing - settlement of all obligations under the Agreement on long-term loan No KR-835/11 as of 16 August 2011, with contract value of 1,500, In 2015, the total amount of funds under the Agreement was withdrawn. - Investment and Development Fund under the Factoring Agreement No /15-104/2 as of 13 February 2015 in the amount of 650, After the conclusion of the said agreements, the Old Royal Capital Cetinje entered into cession agreements with the Ministry of Finance, whereby the Old Royal Capital Cetinje instructs the Ministry of Finance to repay the loan and the pertaining interest on its behalf, from the funds of the Equalisation Fund belonging to the Old Royal Capital Cetinje. During 2015, the Old Royal Capital Cetinje repaid the loan amount of 4,122,467.33, of which an amount of 4,019, relates to the repayment of liabilities from loans for 2015, while the amount of 102, refers to the repayment of outstanding liabilities from the previous period. Debt status of loans reported in the Statement on budget borrowings - Form BUZ matches the data on the status of loans determined during the audit procedure, as well as the debt from borrowings, which was confirmed by the Ministry of Finance in the amount of 540, The report on the budget indebtedness of the municipality at the end of the fourth quarter does not contain liabilities arising from issued guarantees in the amount of 20, relating to the Sports Centre Cetinje, but are instead recorded as the amount of debt of the public enterprise Sports Centre Cetinje

476 Based on the abovementioned, the follow up audit found that the Recommendation 29 is implemented. 30. Recommendation 30 Finding of SAI: By the Agreement on the Financial Restructuring, the Ministry of Finance has committed itself, in case that the Old Royal Capital Cetinje fails to execute obligations under this Agreement, to suspend the funds that Cetinje receives from assigned revenues and Equalization Fund, and that if the Old Royal Capital fails to meet the obligations under the Agreement, the Ministry of Finance will reimburse itself from the Equalization Fund. Recommendation: The Old Royal Capital Cetinje should observe the provisions of the signed Contract with the Ministry of Finance and settle its tax and other obligations under the Plan of Restructuring of Fiscal Obligations, and should act in accordance with the Law on Personal Income Tax and the Law on Compulsory Social Insurance Contributions and pay emerging tax and other obligations. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje started to repay liabilities in accordance with the Restructuring. Follow up audit determined the following facts: On 7 April 2015, the Old Royal Capital Cetinje and the Ministry of Finance signed an Agreement on rescheduling of tax debt from taxes and contributions for salaries of employees, No /15-350, where the total debt arising from taxes and contributions as at 31 December 2014 amounted to 8,855, with a repayment period of 20 years, starting from 1 July The amount of tax debt in the said amount was determined based on the Protocol verified by the tax authority (Act No / as of 5 February 2015). The aforementioned debt includes outstanding liabilities of the Old Royal Capital, companies, public institutions and one football club. The rescheduling also prescribed the obligation of regular servicing of all current tax liabilities, including payment of the gross salaries to employees. In 2015, the Old Royal Capital Cetinje settled liabilities for gross salaries and contributions paid by the employer for 2015 in the amount of 2,569, (net salaries for the period January - December in the amount of 1,491, and pertaining taxes and contributions in the amount of 1,077,824.98). In 2015, the Old Royal Capital also settled tax obligations in accordance with the timetable and annuities established in the Plan for rescheduling of tax debt in the amount of 44, (6 instalments), which corresponds to the total obligations of the Old Royal Capital for In 2016, the Old Royal Capital continued to regularly settle tax liabilities based on rescheduling and it paid tax liabilities in the amount of 66, Based on the abovementioned, the follow up audit found that the Recommendation 30 is implemented. 31. Recommendation 31 Finding of SAI: The Ministry of Finance has not taken actions to reimburse itself for the payment of obligations under the Plan and newly emerging obligations, regardless of the fact that the Old Royal Capital Cetinje did not observe the provisions of the Agreement, and, above all, did not pay tax and other obligations

477 Recommendation: Ministry of Finance should apply fully the provisions of the Contract and suspend the payment of funds that Cetinje is receiving from assigned revenues and the Equalization Fund, and begin with the collection of established claims. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: On 7 April 2015, the Ministry of Finance and the Old Royal Capital Cetinje signed a new Agreement on the rescheduling of tax debt, which stipulates that the Old Royal Capital is obliged to settle the tax liabilities in accordance with the Plan for rescheduling of tax debt, which is an integral part of the Agreement, Pursuant to the Agreement, the Old Royal Capital Cetinje is obliged to submit to the Tax Administration, as a means of securing the rescheduling of tax debt, a bill of exchange as well as a draft authorization, and the Tax Administration is obliged to monitor the implementation of liabilities of the Old Royal Capital and report to the Ministry of Finance on a quarterly basis. In case the Old Royal Capital fails to fulfil contractual obligations, the Rescheduling Agreement shall be terminated and Tax Administration shall collect the tax debt in accordance with law. Following the signing of the new Agreement on the rescheduling of tax debt, the Old Royal Capital Cetinje exercised regular payment of tax liabilities in accordance with the Plan, as well as the payment of the current tax liabilities, including salaries to employees. Based on the abovementioned, the follow up audit found that the Recommendation 31 is implemented. 32. Recommendation 32 Finding of SAI: Decision on undertaking inventory taking and the Decision on appointing the Inventory Commission were made in 2014, i.e. much later than the deadline for submission of data on movable and immovable property to the administrative body in charge of the property. The deadline for submission of data is the end of February of the current year for the previous year - Article 50 of the Law on State Property. The Old Royal Capital Cetinje has not prepared and delivered an inventory of balances of gyro (transfer) accounts of Cetinje, which are an integral part of the Consolidated Treasury Account, and the balance of payables and receivables as of 31 December Recommendation: The Old Royal Capital Cetinje should make a Decision on the formation of an inventory taking commission before the end of the fiscal year, precisely defining the obligations of the committee, method and time of conducting an inventory, and the obligation to inventory not only movable and immovable property, but also cash, securities, payables and receivables as of 31 December of the fiscal year. Report on the fulfilment of recommendation: The Old Royal Capital Cetinje appointed an Inventory Commission and established an electronic records of movable and immovable property. Follow up audit determined the following facts: On 14 October 2014, the Mayor of the Old Royal Capital Cetinje adopted a Decision on the appointment of the Inventory Commission for assets and liabilities of the Old Royal Capital Cetinje for 2014 (No / ). The Commission was obliged to make an inventory of assets and liabilities in accordance with the Rulebook on the method and time of inventory and the harmonization of the bookkeeping situation with the actual situation. The Inventory Commission submitted a Report on the state of assets, receivables from leasing and office space, receivables from taxpayers, receivables from workers, state of the treasury and gyro accounts and liabilities as of 31 December The Inventory served as a basis for harmonization of the actual state of assets with the bookkeeping situation (property records that

478 have been entered into the Software for records of the property of the Old Royal Capital, which is kept at the Secretariat of Finance and Economic Development) as well as calculation of depreciation for The Mayor of the Old Royal Capital Cetinje adopted a Decision on implementation of inventory of assets as at 31 December 2015 (No / as of 11 November 2015), which called for the conducting of an inventory of assets, fixed assets and inventory, liabilities and receivables of the Old Royal Capital as well as funds (treasury and gyro accounts). Also, the Mayor of the Old Royal Capital passed a Decision on the appointment of the Inventory Commission No / /2 as of 17 November The task of the Commission, in accordance with the Decision, was to make an inventory of assets and liabilities of the Old Royal Capital for 2015 in accordance with the Rulebook on the method and times of the inventory and the harmonization of the bookkeeping situation with the actual situation. By the end of September 2016, the Commission failed to conduct an inventory and submit a Report on the state of assets, receivables and liabilities, the state of treasury and balances in the gyro accounts, and also failed to harmonise the bookkeeping state of assets with the actual state of assets as at 31 December Recommendation: The Old Royal Capital Cetinje should, in the part referring to keeping records of the property under its property rights, act in accordance with Articles 44 and 50 of the Law on Property and Articles of the Regulation on keeping records on the movable and immovable property and inventory of things in the state property, and submit the information to the authority in charge of the property affairs in electronic form by the end of February of the current year for the previous year. Based on the abovementioned, the follow up audit found that the Recommendation 32 is partially implemented. 33. Recommendation 33 Finding of SAI: The property inventory was not prepared on the prescribed PL Form, and most of the assets were presented in their physical form only (without the cost, depreciated and present value): - Inventory lists were delivered only on paper and not in electronic form; - Calculation of depreciation for the assets with specified value, was carried out manually, and Article 7 of the Instructions prescribes the obligation to calculate depreciation and revaluation in the accounting through electronic data processing. Recommendation: The Old Royal Capital Cetinje should establish an electronic records of movable and immovable property it uses, define cost, depreciated and present value, assess the property that is uses but has no book value and perform depreciation calculation using the prescribed form (OA Form). Report on the fulfilment of recommendation: The Old Royal Capital Cetinje appointed an Inventory Commission and established an electronic records of movable and immovable property (Annex: Decision on the appointment of the Inventory Commission No / as of 14 October 2014). Follow up audit determined the following facts: The Old Royal Capital Cetinje established an electronic records of movable and immovable property (software for recording movable and immovable property), whereby it failed to evaluate the property it uses and which has no bookkeeping value. Data on property are entered and processed in the software for recording movable and immovable property and electronic calculation of depreciation was performed on the prescribed form (Form - OA) for 2014 and 2015, which includes the purchase value, the adjustment

479 value and the present value. However, the audit did not obtain evidence that inventory data were harmonized with the accounting data for 2015 because the Inventory Report has not been made and approved by the competent authorities. Based on the abovementioned, the follow up audit found that the Recommendation 33 is partially implemented. 34. Recommendation 34 Finding of SAI: The calculation of depreciation for newly acquired assets was checked and it was determined that depreciation calculation is not correct, because it has not been done from the first month following the date of acquisition; - The Old Royal Capital Cetinje has not prepared and delivered an inventory of cash in hand, office supplies and small supplies; Recommendation: The Old Royal Capital Cetinje should record equipment on the belonging account in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets and newly acquired equipment should be recorded in the books of users, it should be inventoried, and the depreciation should be calculated from the day of its procurement; Report on the fulfilment of recommendation: The Old Royal Capital Cetinje performs inventory of equipment at the corresponding account in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets. Follow up audit determined the following facts: The Old Royal Capital Cetinje keeps records of property on a modified basis, the class 0, in accordance with the Rulebook on Uniform Classification of Accounts for the Budget of Montenegro, Budgets of Extra-Budgetary Funds and Municipal Budgets. The Old Royal Capital recorded property it acquired in 2015 (construction facility in the amount of 81,600.00) at the class 0 and in the Software for records of the property of the Old Royal Capital. Also, depreciation calculation was carried out from the first day of the month following the procurement date, through the Software for records of the property on the basis of the procurement data of movable and immovable property, the date of procurement and depreciation rates. Report on the annual inventory as at 31 December 2015 was not made in accordance with Articles 44 and 50 of the Law on State Property and Articles of the Regulation on keeping records on the movable and immovable property and inventory of things in the state property and changes in the state of movable and immovable property (which should be determined in the annual inventory) are not submitted to the Property Directorate as the body responsible for property management. Based on the abovementioned, the follow up audit found that the Recommendation 34 is partially implemented. 35. Recommendation 35 Finding of SAI: The Old Royal Capital Cetinje has not provided data on movable and immovable property to the municipal authority in charge of the property, i.e. the Property Directorate on the prescribed forms: PS-1, PS-2, NS-1 NS-2 (Article 9 of the Regulation on the method of keeping records of movable and immovable property and taking inventory of things owned by the state). Recommendation: The Old Royal Capital Cetinje should submit data on movable and immovable property to the municipal authority in charge of the property, in accordance with Article 50 of the Law on State Property and Article 9 of the Regulation on the method of keeping records of movable

480 and immovable property and taking inventory of things owned by the state on the prescribed forms: PS-1, PS-2, NS-1 NS-2; Report on the fulfilment of recommendation: Data about movable and immovable property are submitted on the prescribed forms to the local administration body in charge of the property affairs. Follow up audit determined the following facts: The Old Royal Capital Cetinje failed to submit data on movable and immovable property for 2015 to the municipal authority in charge of the property, in accordance with Article 50 of the Law on State Property and Article 9 of the Regulation on the method of keeping records of movable and immovable property and taking inventory of things owned by the state on the prescribed forms: PS-1, PS-2, NS-1 NS-2. Based on the abovementioned, the follow up audit found that the Recommendation 35 is not implemented. 36. Recommendation 36 Finding of SAI: The Property Directorate has not established a record of state property in accordance with the Law on State Property and has not submitted data on movable and immovable property, pursuant to Article 51 of the Law on State Property, to the Ministry of Finance by the end of March of the current year for the previous year. Recommendation: Property Directorate of the Old Royal Capital Cetinje should establish a registry of movable and immovable property of Cetinje under the Law on State Property and submit such information to the Ministry of Finance within the prescribed deadlines. Report on the fulfilment of recommendation: Property Directorate of the Old Royal Capital Cetinje established a Registry of movable and immovable property of the Old Royal Capital Cetinje under the Law on State Property. Follow up audit determined the following facts: Property Directorate of the Old Royal Capital Cetinje failed to establish a Registry of movable and immovable property of the Old Royal Capital Cetinje. Property Directorate has a records on immovable property in the part referring to information about the immovable property (cadastral municipality, cadastral parcel, area and place), but has no details on the value or estimated value of the property or the basis for acquisition, Property Directorate of the Old Royal Capital Cetinje failed to submit data on movable and immovable property for 2015 to the Ministry of Finance by the end of March of the current year for the previous year, In the document No / as of 27 September 2016, the Secretariat of Finance and Economic Development informed the State Auditor that the Inventory Commission failed to submit a Report on property inventory for 2015 and that, consequently, it was not possible to submit the required reports to the Property Directorate of the Old Royal Capital Cetinje as the body in charge of the property. Based on the abovementioned, the follow up audit found that the Recommendation 36 is partially implemented. 37 Recommendation 37 Finding of SAI: Significant discrepancies have been found in relation to the amount of planned and realized value of public procurement. The Procurement Plan for 2013 planned procurements in the amount of 763, and six procedures were carried out for total contracted value of 202, (26% of the plan). These amounts do not include purchases that were implemented by applying direct agreement

481 Recommendation: The Old Royal Capital Cetinje should prepare procurement plan based on an assessment of the real needs, in order to avoid the existence of significant discrepancies between the planned and executed public procurements. Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: The Old Royal Capital Cetinje, pursuant to Article 38 of the Procurement Law, adopted Public Procurement Plan for 2015 No / as of 02 February 2015, with a total value of goods, works, and services of 441, During 2015, five amendments to the Public procurement procedures were made, which brought changes in terms of the number, type, and value of public procurement procedures. Amendments to the plan were carried out in accordance with Article 38 of the Law on Public Procurements, and were signed and published on the portal of public procurements, After the amendments were completed, the number of public procurement procedures in relation to the original plan has been increased by 18, so the final plan envisages the implementation of 65 procedures with a total value of 612, Comparing the Public Procurement Plan for Reports on awarded public procurements in 2015, and audited documentation, it was determined that the Old Royal Capital recorded procurement of goods, works, and services in the amount of 266,530.13, carried through 149 public procurement procedures, of which 5 were carried out through open public procurement procedures, 8 through shopping method and 136 through direct agreement procedures. The above shows that the Public procurement plan of the Old Royal Capital is not based on an assessment of the actual needs and contain significant discrepancies between the planned and the executed public procurement procedures, both in terms of type and value. Based on the abovementioned, the follow up audit found that the Recommendation 37 is not implemented. 38. Recommendation 38 Finding of SAI: The Procurement Plan for 2013 did not envisage procurements that would be carried out by applying direct agreement as a public procurement procedure. The Report on Public Contracts Awarded by Direct Agreement did not encompass all suppliers that were engaged during 2013 through the application of this procurement procedure, so that the report is not aligned with Article 117 of the Law on Public Procurement and Article 5 of the Rulebook on the Records of Public Procurement Procedures. The contracting authority is bound to keep records of all procurements carried out through direct agreement via Form C pursuant to Article 117 of the Law on Public Procurement and the Article 5 of the Rulebook on the Records of Public Procurement Procedures. Recommendation: The Old Royal Capital Cetinje should respect the basic principles of public procurement, by reducing public contracts reached by applying direct agreement to a minimum, and those contracts should be presented realistically in the Report on Public Contracts Awarded by Direct Agreement (Form C). Report on the fulfilment of recommendation: The audited entity failed to give a statement on the given recommendation. Follow up audit determined the following facts: The Old Royal Capital, in the Form C for submitting information on awarded public contracts by applying direct agreement, expressed procurement of goods, works, and services worth 83, through 136 public procurements. Also, the Form C shows that the contracted value of public procurements carried out by direct agreements amounted to 83, which makes 3.94% of the total executed budget for public procurement (VAT included). However, the Report on Public Procurement stated that the total value of the recorded

482 annual budget for public procurements amounted to 266, Accordingly, the amount of public procurement carried out by direct agreement amounted to 83, which makes 31.33% of the total recorded annual account for public procurements for After examining the database, it has been established that in 2015 the Old Royal Capital made payments in a higher amount than shown in the Report on Public Procurements recorded through direct agreement - Form C, in the amount of 44, Based on the abovementioned, the follow up audit found that the Recommendation 38 is not implemented. III EVALUATION OF DETERMINED STATE OF FACTS Based on the conducted Follow up audit, minutes of the State Auditors, and analysis of the Statement of the audited entity (No / as of 21 October 2016) to the Preliminary Report of Follow up Audit of the Old Royal Capital Céline, in accordance with Article 12 of the Law on State Audit Institution (SAI) and Article 48 of the Rules of procedure of the State Audit Institution, the competent Auditing board of SAI: Branislav Radulovic, PhD, (member of the Senate Head of the Collegium) and Milan Dabovic, PhD, (President of the Senate member of the Auditing Board), at its session held on 24 October 2016, adopted the following: Final report of the follow up audit of the Old Royal Capital Céline During the audit of 2013 Final Statement of Budget Accounts of the Old Royal Capital Céline, the State Audit Institution made a total of 38 recommendations. Follow up audit performed during the third quarter of 2016, found that: - 25 recommendations were implemented; - 8 recommendations were partially implemented; - 5 recommendations were not implemented (recommendation 3, recommendation 5, recommendation 35, recommendation 37, and recommendation 38). The follow up audit found that when it comes to implementation of previously made recommendations, the Old Royal Capital Céline achieved significant results, but that there are still shortcomings in the following areas: public procurement, budget planning and execution (which results in the exceeding of the budget positions), and submitting reports on the state of the property to the competent authority. The Old Royal Capital Céline shall, within 6 (six) months, implement partly implemented and unimplemented recommendations and notify the State Audit Institution on the degree of implementation, within the specified timeframe

483

484 V OTHER ACTIVITIES OF THE STATE AUDIT INSTITUTION

485 Cooperation with the Parliament of Montenegro, the Montenegrin Government, state authorities and civil sector In the reporting period, the State Audit Institution of Montenegro continued good cooperation with the Parliament and the Government of Montenegro. In December 2015, the Committee on Economy, Finance and Budget of the Parliament of Montenegro reviewed the Report of the State Audit on the audit of the Proposed Law on the 2014 Final Statement of Accounts of the Budget of Montenegro and Annual Report on performed audits and activities of the State Audit Institution for period October October The Parliamentary Committee on Economy, Finance and Budget supported the findings and recommendations of the State Audit Institution arising from the audit of the Proposed Law on the 2014 Final Statement of Accounts of the Budget of Montenegro and individual audits included in the Annual Report on performed audits and activities of the State Audit Institution for period October October 2015 and proposed it to the Parliament for adoption. Through the conclusions of the Parliament of Montenegro 2 it is planned that the Montenegrin Government intensively continues to monitor the implementation of all recommendations of the State Audit Institution in order to eliminate irregularities in the audited entities and to improve their work and report quarterly to the Parliament of Montenegro. The Parliamentary Committee on Economy, Finance and Budget, in line with the Conclusions of the Montenegrin Parliament, held a control hearing of entities, which are covered by the Report of the State Audit Institution: Registry of Concession Contracts; Public Enterprise for National Parks of Montenegro for 2014; Public Institution Montenegrin Music Centre for 2014 and the Efficiency of the Tax Administration in the implementation of measures for collection of tax debt. The representatives of the State Audit Institution have participated at the discussion during the review of the Draft Law on Budget of Montenegro for 2016 and submitted in writing summaries of their findings on this document pursuant to the Article 6 of the Law on State Audit Institution of Montenegro. In September 2016, pursuant to the Article 51 of the Law on State Audit Institution of Montenegro the Committee on Economy, Finance and Budget of the Parliament of Montenegro unanimously established the Draft budget of the State Audit Institution for In the reporting period, the State Audit Institution has also collaborated with other parliamentary committees competent to discuss issues within the scope of operations of the Institution. The Parliamentary Committee on Health, Labour and Social Welfare held a consultation hearing regarding the report on the performance audit "The efficiency of the use of funds from the contribution for professional rehabilitation and employment of persons with disabilities" and the report on the performance audit "Expenditures from the budget of Montenegro for litigations on the basis of labour relations". Representatives of the State Audit Institution of Montenegro attended meetings of the Working Group of parliamentary dialogue for preparation of free elections, in which they presented the activities of the Institution in terms of the audit of the annual financial reports of political parties, with particular emphasis on deficiencies in the implementation of electoral legislation and proposals for improving the Law on financing political entities and election campaigns. In the reporting period, the State Audit Institution continued to cooperate with state authorities, particularly the Ministry of Finance, the State Prosecution, the Commission for Public Procurement 2 ("Official Gazette of Montenegro ", no. 078/15 as of 31 December

486 Control, Human Resources Administration, Administration for prevention of corruption, Tax Administration and other state authorities. In November 2015, the representative of the State Audit Institution of Montenegro attended the round table "TAIEX expert mission on the control of financing of political entities and election campaigns", organized by the Agency for prevention of corruption. During the round table, participants discussed the preparation of secondary legislation in the field of control of financing political entities and election campaigns, and especially emphasized the positive trend of development of the State Audit Institution of Montenegro in the area of auditing annual financial statements of political entities. In the reporting period, the State Audit Institution of Montenegro continued cooperation with civil sector through participation in conferences and projects. In February 2016, representatives of the State Audit Institution of Montenegro participated in the conference "Cooperation of the State Audit Institution and the Public Prosecution Office", organized by NGO "Institut alternativa" and the British Embassy in Podgorica. During the conference, participants discussed the mechanisms for enhancing cooperation between the State Audit Institution and the Public Prosecutor's Office, with a view to achieving a more efficient use of the findings of the State Audit Institution in the investigations and increase awareness about the operation and cooperation of these institutions. In March 2016, representatives of the State Audit Institution of Montenegro attended the National Conference "For Fair Elections 2016: Political dialogue and the implementation of electoral legislation in Montenegro", organized by the Centre for Monitoring and Research (CEMI). During the conference, participants focused on irregularities identified in the audit of the annual financial statements of political parties and the recommendations and suggestions that the State Audit Institution pointed out during the process of amending the Law on financing of political entities and electoral campaigns. In the reporting period, cooperation with the civil sector was realized through the regular disclosure of information on the basis of the Law on Free Access to Information. With the aim of providing transparent information to the public about its work, the Institution is continuously cooperating with representatives of the media through press releases and other forms of briefing. The State Audit Institution of Montenegro, in the reporting period, has established a close cooperation with the Institute of Accountants and Auditors of Montenegro through the signing of Cooperation Agreement, aimed at raising the quality of professional skills in the field of accounting and auditing. In this respect, representatives of the State Audit Institution of Montenegro attended conferences organized by the Association of Professional Accountants and Auditors of the Republic of Azerbaijan and Moldova. In October 2016, representatives of the State Audit Institution of Montenegro attended the celebration of the jubilee - 60 years since the establishment and operation of the Institute of Accountants and Auditors of Montenegro. Activities on the implementation of the Strategic Development Plan of the State Audit Institution for the period In the reporting period, the State Audit Institution of Montenegro continued its activities on the implementation of activates defined by the Strategic Development Plan of the Institution for the period The framework for implementation of strategic objectives and activities has been specified through the updated Action Plan for the implementation of the Strategic Development Plan of the Institution

487 for the period , with planned activities for the implementation of strategic objectives and activities, deadlines, holders of activities, as well as the necessary financial resources for their implementation. In the reporting period, the State Audit Institution of Montenegro has conducted the following activities from the Strategic development plan for development of SAI: performed the upgrading of internal procedures through the adoption of internal documents as follows: The Rulebook on vocations in SAI; amendments to the Rulebook on internal organization and classification of job positions in SAI and the Rulebook on addressing the housing needs of employees in the State Audit Institution of Montenegro; prepared draft Guidelines for auditing the final statement of accounts of the Budget of Montenegro and Guidelines for the evaluation of the implementation of the fiscal responsibility criteria. Through cooperation with the international organization SIGMA 4, the adoption of these guidelines is planned for 2016; in the draft budget of the State Audit Institution for 2017, it planned the necessary resources for solving spatial conditions for the work of the SAI in order to increase the auditing capacities; continued with the activities of professional training of employees through training on the subject of evaluating the credibility of the system of internal controls, amendments to the Law on Public Procurement, advanced use of information tools; implemented a professional cooperation with the Institute of Accountants and Auditors of Montenegro through the signing of the Cooperation Agreement, aimed at raising the quality of professional skills of auditors in the field of accounting and auditing; continued to implement international cooperation through participation in international conferences, seminars and thematic workshops; continued to implement the information system for document management; enhanced cooperation with civil sector through an active participation of the State Audit Institution of Montenegro in conferences organized by non-governmental sector. The Action Plan for the implementation of the Strategic Plan for Development of SAI provides activities which will be implemented through the project IPA II These activities include: improving the methodology for performing financial audits and audits of regularity; improving the methodology for carrying out performance audits; establishing procedures for monitoring the implementation of recommendations from audit reports; making strategic documents for the human resources management and the establishment of communication with the media and nongovernmental sector; improving training programmes and the use of IT tools (IDEA software). Guidelines for auditing the final statement of accounts of the Budget of Montenegro and Guidelines for the evaluation of the implementation of the fiscal responsibility criteria will be implemented through cooperation with SIGMA. In the future, the State Audit Institution will pay attention to the realization of strategic objectives and activities in order to successfully achieve its mission. Activities related to the implementation of the obligations of the State Audit Institution from the negotiation process Through their representatives, the State Audit Institution of Montenegro participates in the work of four working groups for negotiations with the European Union for Chapters V (Public Procurement), XXIII (Judiciary and Fundamental Rights), XXXII (Financial Control) and XXXIII (Financial and Budgetary Provisions). 3 The Senate of the State Audit Institution adopted the innovated Action Plan in June Support to governance and management - a joint initiative of the OECD and EU

488 In the reporting period, the State Audit Institution has continued to actively participate in the process of Montenegro s accession to the European Union and in the process of further progress in fulfilling the final benchmarks from the Chapter XXXII (Financial Control). Chapter XXXII of the 2015 Montenegro Progress Report of the European Commission states that: Constitutional and legal framework of Montenegro ensures the independence of the State Audit Institution (SAI), in line with INTOSAI standards. The institutional capacity of SAI remains a reason of concern. Limited business space prevents hiring of new employees. SAI improved implementation of the Strategic Development Plan for and adopted new rules of procedure in January. The SAI improved the quality of audit work in January by adopting new methodologies for financial and regularity audits and for performance audits, in line with the international standards of the Supreme Audit Institutions (ISSAI) and the guidelines on audit quality control. It is shortly expected to adopt a revised code of ethics. It has started to assess the internal control environment of audited bodies and has provided recommendations. The SAI's first performance audit was published at the end of However, its capacity to conduct performance audits needs to be significantly strengthened and coverage increased. On the impact of audit work, SAI reports are public and its cooperation with media and non-governmental organisations is improving. However, the implementation of its recommendations needs to improve. In October 2015, in order to realize the obligations from the negotiation chapter XXXII, the State Audit Institution of Montenegro, drafted a Code of ethics for state auditors and other employees of the State Audit institution in line with international standards of Supreme Audit Institutions - ISSAI 30. The State Audit Institution of Montenegro, in the reporting period, has implemented activities towards strengthening the auditing capacities for conducting performance audits through further recruitment and training of audit staff. The State Audit Institution of Montenegro has improved the capacity of the Sector II - Department for performance auditing, by appointing 1 head of department 1 and 2 state auditors. By employing audit staff in the implementation of two parallel performance audits "The efficiency of the public procurement system" and "Energy efficiency of institutions in the public sector", the State Audit Institution of Montenegro will further strengthen its auditing capacity and improve the methodology and practice for performance auditing. Suitable offices are essential for quality work of the State Audit Institution. The number of new employees primarily depends on ensuring the adequate space capacities of SAI, which are currently limited and prevent SAI from hiring the necessary auditing staff. The State Audit Institution of Montenegro also cooperates with the European Union through the regular preparation of Annexes to the Annual Montenegro Progress Report of the European Commission, which provides an overview of the implemented activities of the State Audit Institution of Montenegro from negotiation chapters XXIII (Judiciary and Fundamental Rights) and XXXII (Financial Control) for the reporting period. In September 2016, with regard to the negotiation chapter V (Public Procurement), representatives of the State Audit Institution of Montenegro took part in the meeting of the expert mission dedicated to public procurement in Montenegro. At this meeting, the representatives of the State Audit Institution of Montenegro informed the experts of the European Commission about their previous work in the area of audit of public procurements. In December 2015, in the context of the implementation of obligations under the Stabilisation and Association Agreement, representatives of the State Audit Institution of Montenegro participated in the fifth meeting of the Stabilisation and Association Council

489 International cooperation Obligations which arise from the memberships in INTOSAI 5 and EUROSAI 6 require participation of the State Audit Institution of Montenegro in the activities of these organizations and their working groups, aimed at improving practices in the field of public sector auditing and strengthening professional capacities of Supreme Audit Institutions. The State Audit Institution of Montenegro, in the reporting period, continued intensive international cooperation, which has been realized through participation in international conferences, working groups, seminars and workshops within the activities of INTOSAI and EUROSAI. The State Audit Institution pays great attention to cooperation with the European Court of Auditors, which is realized through membership in the Network of Supreme Audit Institutions of the candidate countries and potential candidates for the EU membership. In February 2016 in Sarajevo, the representatives of the State Audit Institution of Montenegro attended the meeting of Liaison officers of the Network of Supreme Audit Institutions of candidate countries and potential candidates for membership in the European Union and the European Court of Auditors. Participants discussed the results of the implemented activities of the Network in 2015 and the implementation plan of future activities for the period from In November 2016, the representative of the State Audit Institution of Montenegro participated in the workshop of the Network of Supreme Audit Institutions of the candidate countries and potential candidate countries of the EU on "Determining materiality in financial auditing" organized by the State Audit Institution of Albania and the National Audit Office of Sweden. During this workshop, participants discussed the use of different methods of sampling and establishing materiality in accordance with international standards of supreme audit institutions. In April 2016, the representatives of the State Audit Institution of Montenegro actively participated in the workshop "Audit Opinions", which was organized under the auspices of the Network of SAIs of the candidate and potential candidate countries of the EU and supported by the National Audit Office of Sweden and SIGMA in Belgrade. During the workshop, participants exchanged experiences on the formation of a well-founded opinion on the financial audit and regularity audit, the issue of materiality, drawing attention and repetition of audit recommendations. Under the auspices of the Network of SAIs of candidate and potential candidate countries of the EU and the European Court of Auditors, a round table on the Independence of Supreme Audit Institutions was held in September 2016 in Sarajevo. The round table was organized by the Office for Audit of Institutions of Bosnia and Herzegovina and SIGMA. Representatives of the State Audit Institution of Montenegro attended the round table where they talked about the challenges that the institution faces during the process of selection of audit entities through the implementation of the annual audits of financial statements of political parties. Representatives of the State Audit Institution of Montenegro attended, as active observers, annual meeting of liaison officers of the supreme audit institutions of the European Union, held in April 2016 in Riga. The aim of the meeting of liaison officers was to prepare for the upcoming meetings of Contact Committee involving the presidents of. In the context of this meeting, there was a meeting of liaison officers of the Network of Supreme Audit Institutions of candidate countries and potential candidates for membership in the European Union and the European Court of Auditors. As a result of a successful implementation of the project "Parallel performance audits - PPA I", members of the Network of Supreme Audit Institutions of the candidate countries and potential candidates for membership in the EU have agreed to support the initiative to implement another 5 International Organization of Supreme Audit Institutions - SAI has been a member since 2007; 6 European Organization of Supreme Audit Institutions - SAI has been a member since

490 project "Parallel performance audit - PPA II" during the period This was done at the opening meeting in February 2016 in Luxembourg, which was attended by representatives of the State Audit Institution of Montenegro. The meeting focused on: the importance and impact of performance audits, establishing a performance audit within the supreme audit institutions, the reporting of performance audit findings to mutual stakeholders and follow-up of recommendations given in the report on the performance audit. Unlike the previous project, the State Audit Institution of Montenegro together with representatives of the supreme audit institutions in the region took an active part in this project, while expert support to the members of the Network comes from the National Audit Office of Sweden and the European Court of Auditors in Luxembourg. The project consists of five workshops, and the topic of parallel performance audit is the efficiency of the public procurement system. In April 2016, the State Audit Institution of Montenegro hosted the first workshop from this project in Podgorica. During the reporting period, the representatives of the State Audit Institution of Montenegro participated in the second workshop in Priština which was held in June 2016, and the third workshop held in Stockholm in October The representative of the State Audit Institution of Montenegro actively participated in the Fourth Scientific Conference "Risk Analysis" which was held in June 2016 in Tirana, and gave a presentation titled "Risk assessment, materiality and sampling in the audit planning stage". At the invitation of the President of the National Audit Office of the Slovak Republic, representatives of the State Audit Institution of Montenegro were active observers and attended the meeting of the Contact Committee of Presidents of the Supreme Audit Institutions of the European Union in October 2016, in Bratislava. The meeting concentrated on the issue of energy and climate policies of the EU, as well as the activities of the Contact Committee and professional partners as well as audits of the Contact Committee that are conducted in relation to the European Union. Regional cooperation The State Audit Institution, in the reporting period, continued to strengthen its cooperation with supreme audit institutions in the region. In March 2016, in the context of regional cooperation, representatives of the State Audit Institution of Montenegro and the State Audit Office of the Republic of Croatia held an introductory meeting on the implementation of the project of parallel performance audit on "Energy efficiency in the public sector institutions." During the meeting, participants discussed the dynamics of the implementation of parallel audit, audit work schedule, detailed plan design, methods of auditing and the possibility of making a joint statement. At the invitation of the General Auditor of the National Audit Office of Kosovo, representatives of the State Audit Institution of Montenegro paid an official visit in June 2016 in Pristina. During the meeting, participants discussed the possibilities for the development of regional cooperation between the two institutions through the organization of annual meetings with the presidents of supreme audit institutions in the region. Cooperation with international organizations The State Audit Institution of Montenegro, during this reporting period, continued to cooperate with the international organization SIGMA. The State Audit Institution of Montenegro realized a series of activities in cooperation with SIGMA aimed at drafting Guidelines for evaluating the application of the criteria of fiscal responsibility in accordance with the Law on Budget and Fiscal Responsibility of Montenegro, as well as at drafting Guidelines for audit of the Final Account of the Budget of Montenegro. In July 2016, the State Audit Institution of Montenegro prepared draft Guidelines for evaluating the application of the criteria of

491 fiscal responsibility and Guidelines for audit of the Final Account of the Budget of Montenegro, and in this regard organized a meeting with experts of SIGMA. With the support of SIGMA experts, the State Audit Institution of Montenegro plans to adopt the above mentioned documents by the end of Representatives of the State Audit Institution of Montenegro attended the Fourth Regional Conference "Internal financial control in the public sector in the enlargement countries", organized by the Ministry of Finance and SIGMA, in September 2016 in Budva. Human Resources Management The Rulebook on internal organization and systematization of job positions regulates internal organisation, competences and management of organisational units, systematisation of job positions, number of officers, professions and conditions for employment. For the execution of tasks within the competence of the Institution, five sectors with departments were formed, Secretariat for administrative and professional services and Internal Audit Unit. In October 2016 there were 62 employees in the Institution, of which 60 persons were employed on a permanent basis, while 2 persons were employed for a specified period of time. Overview of the structure and number of employees is given in the following table 7 : During the reporting period, the State Audit Institution employed the following three persons: two state auditors; one Head of the Internal Audit Unit; while there is an on-going invitation for the following job positions: Independent advisor III advisor for public procurements in the Secretariat for administrative and professional services; Senior officer courier driver in the Secretariat for administrative and professional services, Through continuous training, the institution wants to improve the knowledge and skills of its employees. In this regard, the State Audit Institution continued activities on implementation of the Training Plan, as well as cooperation with the Human Resources Administration by attending its trainings. It also organized examinations for acquiring the title of State Auditor. 7 Data in the table refers to permanently employed employees