EXCERPT FROM AUDIT REPORT OF ANNUAL FINANCIAL REPORT OF RED CROSS OF MONTENEGRO FOR 2013 Type of audit: Audited entity: Subject matter of audit: Audit duration: Auditing Board members: Financial audit and regularity audit Red Cross of Montenegro Annual Financial Report of Red Cross of Montenegro for 2013 50 auditing days Mr Milan Dabović, PhD, President of Senate Head of Auditing Board Mr Dragiša Pešić, member of Senate member of Auditing Board
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GENERAL INFORMATION The State Audit Institution, in compliance with Article 4 of the Law on the State Audit Institution and the Decision of Audit Board no. 40113 03 429, as of 28 March 2014, conducted financial audit of the Annual Financial Statement, including the Balance Sheet, Profit and Loss Statement and Statistical Annex on 31 December 2013 and for the year ended on that date, and the regularity audit, which implies compliance with legal and other relevant regulations. General information on the audited entity According to the Law on Red Cross of Montenegro 1, the Red Cross, is an independent and voluntary humanitarian organization, which operates on the basis of the principles and mission of the International Federation of Red Cross and Red Crescent Societies. The Red Cross is a legal entity with rights, commitments, and responsibilities stipulated by the Law and the Statute. The audit has found that the Red Cross did not align the Individual Collective Agreement with the General Collective Agreement. Individual collective agreement, which has been in force since 1999 should be in line with the General Collective Agreement. The Statute of the Red Cross, adopted on 27 April 2007, has been compliant with the remarks and suggestions of the Joint Commission, ICRC / IFRC for the statutes of national societies. Amendments to the Statute of the Red Cross of Montenegro were adopted at the session of the Assembly of the Red Cross of Montenegro, held on 30 April 2014. The Statute of the Red Cross of Montenegro determines the possibility of termination of operations of the Red Cross of Montenegro, should any reason established by law arise. In this case, the assets of the National Society belongs to the new national society which continues to operate under the Law on Red Cross of Montenegro, in accordance with the Geneva Conventions. The Law on Red Cross of Montenegro does not envisage the possibility of termination of operation, as established by Article 103 of the Statute of the Red Cross, Chapter XVIII Termination of work. The Red Cross organization is composed of the municipal Red Cross organizations and the Red Cross organization of the capital. In accordance with Article 9 of the Law on Red Cross of Montenegro, Red Cross performs tasks and activities of the public interest. While conducting the activities referred to in paragraph 1 of this Article, the Red Cross has the status of the organization which assists to the state authorities. In addition to activities of the public interest specified in Article 9, and tasks under Article 10 of the Law, the Red Cross also implements specific programmes stemming from the principles and mission of the International Red Cross Movement. The funds for financing activities of the public interest, specified in Articles 9 and 10 of the Law, are allocated from the budget of Montenegro and the budgets of the local governments. In accordance with Article 16 of the Law on Red Cross, for the implementation of special programmes, funds shall be provided for from the following: membership fees; compensation for performing activities delegated to the Red Cross by state bodies; service fees for the execution of agreed programmes and projects; contributions, grants, subsidies, donations and legacies; revenues collected from property and property rights, income from the games of chance in accordance with the criteria established by the Government; income from property and property rights. Objective of financial audit of the Annual Financial Statement of Red Cross of Montenegro for 2013 is expressing an opinion on whether the financial statements are true and fair, i.e. reliability and accuracy of financial statements according to the current legislation. Objective of regularity audit of the Annual Financial Statement of Red Cross of Montenegro for 2013 is to express an opinion on the regularity (compliance) in the implementation of laws and other regulations, i.e. whether the funds were obtained and used in accordance with the law, subordinate legislation and the approved financial plan. Subject matter of audit is the Annual Financial Statement of Red Cross of Montenegro for 2013, encompassing financial statements as follows: Balance Sheet (Statement of financial position) as of 31 December 2013, Profit and Loss Statement (Statement of performance results) in the period from 1 January 2013 to 31 December 2013, Statistical Annex as of 31 December 2013, internal acts and procedures of the Red Cross. 1 Sl. list CG br. 28/06, 73/10 i 40/11 Page 3
Opinion and Recommendations A) The financial audit of the Annual Financial Statement of Red Cross of Montenegro has established that the annual Financial Statement, including Balance sheet, Profit and Loss Statement and Statistical Annex, provide, by all material aspects, a true and fair presentation of the financial position of the assets and liabilities as of the day and the year ending on 31 December 2013, in accordance with the accepted financial reporting framework, except for the reserves stated in the Report as follows: 1. In Chapter II Established facts, under item 3.1 Balance Sheet; 2. In Chapter II Established facts, under item 3.2 Profit and Loss Statement; and therefore the competent SAI Auditing Board is expressing a QUALIFIED OPINION. According to the presented reserves in the Report, the State Audit Institution delivers the following recommendations: 1. As stated in Chapter II Established facts, under item 3.1 of the Report, Balance Sheet: Net present book value of assets recognized in the Balance Sheet amounts to 3,654,923.00, which is by 15,400.00 less value compared to the data recorded in the sub ledgers of fixed assets. Transportation means obtained from donations and recorded in subsidiary ledgers are not recognized in the General Ledger of the Red Cross, and thus the present book value of fixed assets is underestimated by 15,400.00. The insight into the real estate folios has shown a different grounds for the right of disposal, and according to RF no. 189 as of 24 September 2014 KO Podgorica, there is a different holder of property rights on the plot (land) and the building. Red Cross of Montenegro appraised the value of property (of buildings) in 2008. Appraisement of property value was carried out by the Commission for appraisement, whose members are not on the list of licensed appraisers. The Red Cross does not run the Central Registry of movable and immovable property in accordance with Article 84 of the Statute. It is necessary to define the holder of property rights, to appraise the value of assets by an authorized appraiser and establish a registry of movable and immovable property as determined by Article 84 of the Statute. It is necessary that the Red Cross reconcile the actual balance of fixed assets with the balance recorded in the business books before delivering its final statement of accounts. 2. Fixed assets depreciation calculation does not comply with the established depreciation rates. Control of the applied depreciation rates did not result in an appropriate depreciation calculation in all the cases. After examining the documentation on the inventory, it has been found that not each page of the inventory list was signed by the Commission members and the chief accountant, and that there were no data in the inventory lists about the difference between the actual fixed assets balance and the balance in material accounting. In addition, the Report on the inventory of intangible assets, property, plants and equipment and the stock on 31 December 2013, dated 20 January 2014, does not include data on the actual and book balance. In order to calculate depreciation, it is necessary to estimate the useful life of fixed assets and recognize depreciation costs for the current and previous years and enter data in the relevant fixed assets impairment accounts. Inventory report and inventory lists should contain the details on actual value, book value and the established differences. 3. Audit has established that the Red Cross did neither calculate nor record the effects of exchange rate differences in 2013. Therefore, the costs in the amount of 330,69, arising from the foreign exchange losses in 2013, were not recorded. The amount of 7.390,00 was paid out from the petty cash as financial assistance approved upon the requests for financial assistance and decisions of the Secretary General of the Red Cross (amounting from 40.00 up to 1,500.00). Red Cross transferred these funds to the Investment and Development Fund and Solidarity Fund in the total amount of 396,485.81. The operation of the said Funds was not supported by the corresponding legal documents defining the sources and amount of financial assets, assets management and disposal in accordance with Article 81 of the Statute of the Red cross. Retained profit in the amount of 238,104.79 was not recognized in the Balance Sheet at the position Retained Profit, but at the position of Reserves. Page 4
It is necessary that the Red Cross pass necessary legal acts defining the purpose of funds, the sources and amounts of funding, financial assets management and disposal and enter the data on retained profit into the correct position in the balance sheet. It is also necessary to carry out the calculation of exchange rate differences in accordance with the daily nominal effective rate of exchange on the day of conversion. 4. As stated in Chapter II Established facts, under item 3.2 of the Report, Profit and Loss Statement: Red Cross made double posting of the Invoice (no. 148 as of 28 November 2013) issued for provision of the first aid training to the customer UNHCR, and thus the outcome recorded in General Ledger and Profit and Loss Statement was overestimated by 420.00 A cross posting revenues, simultaneous reduction of liabilities to deferred revenue on account 430,803 Deferred income under the Project "Program activities for displaced Roma in Konik", in the amount of 32,281.78, while the costs have been posted, to which level should reduce the obligations of deferred income amounted to 30,639.46, that income is posted (reduced obligation of deferred revenue) in a higher amount of 1,642.32 from the actual costs. Red Cross posted revenues, while simultaneously reduced payables from deferred revenue in the account no. 430803 Deferred revenues under the Project Program activities for displaced Roma population in Konik in the amount of 32,281.78, while the post expenditures amounted to 30,639.46, which was the actual amount by which the payables from deferred revenue should have been reduced. The posted revenues (reduced payables from deferred revenue) exceeded the actual expenditures by 1,642.32. It is necessary that the Red Cross make adjustment to their records, so as to reduce deferred revenue in the amount equal to the costs incurred in the specified period. It is also necessary to reverse the Invoice which was double posted by 420.00 and adjust the records entered in the General Ledger and the Profit and Loss Statement. 5. The social humanitarian programme includes activities in providing aid in food, clothes and hygienic items to socially vulnerable groups through municipal Red Cross organizations. After examining the available documentation, it has been found that procurement and distribution was carried out through a warehouse for supplies, where supplies were recorded by quantity, but not by their value. Regarding business trips and representation expenses, which are recorded in accordance with the Regulations on the Chart of Accounts and Content of Accounts for Corporate and Other Legal Entities in account 529 Other Expenses and Remunerations, the reimbursement of transportation, accommodation and food costs during business trips, as well as reimbursement of accommodation and food expenses during the field work, should be analytically recorded. It order to improve control over the stored supplies and efficient utilization of available resources, it is recommended that the Red Cross comply its warehouse management with the Regulation on Financial and Business Procedures, Chapter VIII 3 Warehouse Management and to record expenses in analytical accounts by type, location and cost bearers. B) The regularity audit of the Red Cross complied its operations, by all material aspects, with legal and other regulations, except for the following, as stated in the Report: 1. In Chapter I General Part, under item 2. of the Report; 2. In Chapter II Established Facts, under item 2. Plan and Execution; 3. In Chapter II Established Facts, under item 3.2. Profit and Loss Statement; 4. In Chapter II Established Facts, under item 4. System of Internal Financial Controls; 5. In Chapter II Established Facts, under item 5. Public Procurement; 6. In Chapter II Established Facts, under item 6. Property, and therefore, the relevant Auditing Board has expressed QUALIFIED AUDIT OPINION. 6. As stated in Chapter I General Part, under item 2 of the Report:, Profit and Loss Statement: Audit has found that the Red Cross did not align the Individual Collective Agreement with the General Collective Agreement. Individual collective agreement, which has been in force since 1999 should be in line with the General Collective Agreement. Page 5
Pursuant to Article 9 of the Law on Red Cross, the Red Cross shall submit the Annual Work Report, i.e. the annual report on the performed tasks and activities of public interest, to the Government of Montenegro, by March 31 of the current year for the previous year. The audit has established that the said report should contain information on implemented budget funded projects, which are considered to be of public interest of Montenegro, funded from the budget. It is necessary that the Red Cross align Individual Collective Agreement with the General Collective Agreement. According to Article 9 of the Law on Red Cross of Montenegro, it is necessary that the Red Cross of Montenegro compile a more comprehensive annual report on the performed tasks and activities of the public interest, with detailed information on implemented budget funded projects which considered to be of public interest. 7. As stated in Chapter II Established Facts, under item 2. of the Report, Planning and Execution: The Financial plans, financial statements and work reports of the Red Cross do not express data on the planned and executed utilization of funds at the central organizational level of the Red Cross, at the level of organizational units and by projects. The reports do not include comparative figures of the budgeted and actual costs in the reporting period, as well as the actual expenditures from the previous period. Financial Statement of the Red Cross for 2013 does not recognize expenditures by type, as well as by organizational units and projects. It is recommended that the Red Cross improve financial planning and reporting and comply with the Regulation on Financial and Business Procedures in all organizations of the Red Cross of Montenegro. 8. As stated in Chapter II Established facts, under item 3.2 of the Report, Profit and Loss Statement: In 2013 the Red Cross Red Cross in 2013 increased salaries of employees by 10% to 110% on various grounds. Salaries have been increased on the basis of additional jobs, coordination and activities in the implementation of projects, based on performing duties and activities that do not fall within the scope of work assignment stipulated by the Systematization act, based on covering tasks and duties assigned to other workplace, based on carrying out tasks that fall within the scope of public interest, without clear demarcation of the mentioned activities, which, by their nature, may be classified as additional jobs. Decisions on salary increase were adopted on the basis of approval obtained from the Managing Board of the Red Cross Assembly, and on the basis of Article 60 and Article 70 of the Individual Collective Agreement for employees engaged in the work of Professional Service of the Red Cross Assembly. Based on the submitted documentation, there is significant noncompliance with the legal basis for salaries increase, given that no agreements on additional work were concluded in 2013 neither was any overwork recorded. Having examined the Report on paid personal incomes, accrued and withheld income taxes and contributions from and to personal income ( IOPPD Form), it has been established that the stated forms have not been submitted to the tax authority within the set deadline, which is not in line with the Regulation on Form, Content, Manner of Filling and Submission of the Unified Report Form on Accrued and Paid Personal Income Tax and Contributions for Social Insurance. It is recommended that the Red Cross pass internal procedures and acts as legal basis for increasing salaries, and fill and submit the Report on paid personal incomes, accrued and withheld income taxes and contributions from and to personal income (IOPPD Form) in line with the Regulation on Form, Content, Manner of Filling and Submission of the Unified Report Form on Accrued and Paid Personal Income Tax and Mandatory Contributions for Social Insurance. 9. Transfer of funds from the Budget of Montenegro in 2013 in the amount of 275,000.00 for financing activities of public interest was carried out from the budget position 431 Transfer to institutions, individuals, NGOs and public sector. The structure of allocations by programmes, as well as by activities planned under the programmes, was not recognized in the Financial plan. The Red Cross does not have analytical records by type, locations and cost bearers, i.e. by budget Page 6
funded projects, and therefore the auditor was unable to verify the purposeful use of budgetary funds. Red Cross did not appoint project coordinators who would develop detailed financial plans of the projects and monitor their implementation, in order to enable Red Cross bodies to quarterly keep track of appropriated budget funds usage and the implementation of public interest projects funded from the budget of Montenegro. It is recommended that in the forthcoming period Red Cross draw up a financial plan based on planned activities and expenditures for activities of public interest, in accordance with the Law on Red Cross, as well as programme activities established by the annual Budget Law. 10. As stated in Chapter II Established Facts, under item 4 of the Report, Internal financial control system: the Red Cross has neither appointed a person responsible for the establishment, implementation and development of financial management and control, nor adopted the FMC framework which contains internal rules and procedures. The audit has found that separation of duties in the Finance and Accounting Department was not done for the positions of an accountant, a treasurer and a liquidator. As a beneficiary of the budget of Montenegro, the Red Cross of Montenegro is obliged to establish and develop a system of financial management and control and internal audit function as stipulated by the Law on Public Sector Internal Financial Controls and secondary legislation. In accordance with Article 9 of the Law, it is necessary that the Red Cross establish control activities in order to meet the set objectives and reduce business risk to an acceptable level. 11. As stated in Chapter II Established Facts, Item 5 of the Report, Public procurement: Audit of the system of public procurement has found irregularities in adherence to the provisions of the Law on Public Procurements. It is recommended that the Red Cross of Montenegro consistently adhere to provisions of the Public Procurement Law. 12. As stated in Chapter II Established Facts, under Item 6 of the Report, Property: Audit of assets and the inventory list of assets, payables and receivables has found minor irregularities. It is necessary that the Red Cross carry out inventory of assets, receivables and payables in line with the Regulation on the manner and deadlines for inventory and reconciliation of book balance with the actual state, and through an internal act (accounting policies) establish criteria for defining fixed assets and small tools. Page 7