REPORT ON AUDIT PERFORMED IN A MINISTRY OF FOREIGN AFFAIRS

We performed an audit of financial statements and operations (including management’s decisions) in a MINISTRY OF FOREIGN AFFAIRS of Bosnia and Herzegovina (hereafter: Ministry) for financial year 2000. It is our responsibility to perform an annual audit of public accounts in accordance with generally accepted audit standards, and in accordance with Article 13 of Law on Auditing of Financial Operations of the Institutions of Bosnia and Herzegovina (Official Gazette number 17/99) inform of following:

It is a responsibility of a Ministry to fulfill its legal obligations in an effective way, and in accordance with existing laws and regulations. Management of the Ministry is also, responsible for financial statements.

Audit was performed in accordance with generally accepted audit standards and INTOSAI standards. These standards request that the audit has to be planned and performed in order to obtain reasonable grounds to estimate if the financial statements present a fair and true presentation of operations during the year and status at the end of the year. That is why audit has examined a sample of significant transactions and management’s decisions.

We did not perform an examination nor we have submitted a Report on audit of financial statements of the Ministry for year 1999. Data from financial statements for year 1999 present opening balances for year 2000, and due to the fact that they weren’t totally accorded with opening situation in the ledgers, we express reserve regarding the opening balances in financial statements for year 2000.

The scope of audit was limited in a part regarding the collection of revenues from consular fees, so we were not able to satisfy ourselves in a comprehensiveness of collection of these revenues. According to records available, they present an amount of 17.324.998 KM. The Ministry does not posses proper records of traveling documents issued, taken back or annulled.

It was not possible to get an insight into a turnover on a central account of the Ministry opened at Deutsche Bank Munich, because that account was not recorded in the ledgers of the Ministry, nor it was included into a financial statement of the Ministry for year 2000. We have established, through alternative ways that it was somewhere in a scope of 17.496.629 KM.

In Chapter 2, findings include unauthorized exceeding in expenditures and creating of liabilities bigger than the amounts stated in Budget.

In a Chapter 3, the findings include the unauthorized holding of revenues from consular fees and revenues from the leasing of facilities, which belong to a Budget.

As it was explained in a Chapter 4, paragraph 4.4., financial statements which were a subject of an audit, do not present a fair and true view of operations during the year, meaning that they do not show a real and objective financial situation and results of operations of the Ministry.

Because of the reasons stated in items 2. to 7. here, we cannot express, and we do not express an opinion that the financial statements for year 2000 are realistic and objective.

II. RESUME

Ministry has 48 diplomatic-consular missions all over the world (hereafter DCM), and an HQ in Sarajevo, which means, 49 organizational units in total. According to data from the financial statements of the Ministry, total expenditures are 37.277.655 KM.

Audit was planned based on sample measured by the height of expenditures made and consular fees collected. According to this, for a year 2000, audit was performed for A HQ and for 5 DCMs, and those are embassies in Washington, Canberra, London, and a mission in Geneva. Expenditures made in those parts that were subject to an audit are 12.926.778 KM or 35% of total expenditures of the Ministry.

Plan foresees an audit of additional 9 DCMs: embassies in New York, Berlin, Vienna, Zagreb, Bonn, consulates in Munich, Stuttgart, missions in Brussels and Vienna. Having in mind that these DCMs do not deliver their documentation into a Ministry’s HQ, it was not possible to verify their financial statements.

On several occasions, audit has requested for that documentation to be delivered into a HQ. Ministry has finally confirmed its point that they do not want to transfer that documentation from DCMs.

Even though this report relates to 6 organizational units for which the documentation was available to audit, in its entirety, it also encompasses some significant deficiencies at the level of the entire Ministry.

During performing of its mandate, audit has found significant weaknesses in a system of internal controls, which the management of the Ministry establishes.

Weaknesses were especially stressed in the areas of control of financial operations of diplomatic-consular missions, non-existence of proper records on traveling documents, control over the collection of revenues, and the lack of internal regulations.

Audit has also established that there was an exceeding of approved Budget on several occasions, as well as violation of existing regulations.

III. FINDINGS AND RECOMMENDATIONS

Findings that the Audit Office had stated and recommendations given are categorized into five areas. First area encompasses the weaknesses in a system of internal controls, which the Ministry’s management establishes, second one relates to budget and the irregularities found during its execution, third is focused to violations of laws and regulations, fourth consists main deficiencies in the area of accounting, and the fifth relates to the structure of financial-accounting functions and the work of internal inspection.

1. MANAGEMENT’S INTERNAL CONTROL SYSTEM

Audit office has found significant weaknesses in a system of internal controls that the management of the Ministry is obligated to establish.

Main weaknesses are, before all, bad control over the operations of DCMs, which do not deliver their documentation into a HQ, non-existence of proper documentation of traveling documents and the fact that the account in Munich has not been recorded in the ledgers. Also, we have perceived disrespect of internal regulations, unsolved problems regarding employment relations, etc.

According to the existing structure, 30 missions deliver their documentation into a Ministry HQ by an air-mail (DHL), and 18 retain documentation, which they do record into their ledgers within the mission, while monthly delivering their bookkeeping records on a disk.

Audit has established that there is no satisfactory system of internal controls, which would mean reporting, control, monitoring and timely recording of possible irregularities regarding the financial documentation that remains in the missions, and did not found the procedure of monthly comparison of planned and revenues really collected established.

Audit Office finds it necessary for the Ministry to reconsiders justifiability and possibility of delivering of documentation from some others or all DCMs. For those DCMs where the retaining of documentation is necessary, it is necessary to introduce strict procedures of monitoring through regular reporting to the HQ on monthly basis on the execution of budget, fees collected and traveling documents issued.

Monthly statements should be signed by persons in charge (ambassador, consul, chief of mission and accountant in charge), in order to increase their responsibility.

Ministry does not posses proper records of traveling documents, so the audit was not able to establish total number of traveling documents allocated to individual missions, total number of issued, repossessed, and traveling documents annulled, and the total number of traveling document forms that haven't been used.

That is why audit was not able to perform a control on comprehensiveness of the revenues from consular fees in relation to the number of traveling documents issued, and we estimate that there is a possibility of illegal retaining and misuse of these revenues within the DCMs.

We recommend to Parliament to oblige the Ministry to make and submit as soon as possible a report on traveling documents allocated, issued, taken away and annulled, and on the amount of fees collected in a period from 1998 to 2001.

Central account at Deutsche Bank - Munich, the total turnover of which was 17.496.629 KM, was not recorded in the Ministry's ledgers for years 1999 and 2000.

Audit was not able to verify this amount, or to perform its comparison with the data from DCM network regarding the acceptance of funds from Budget, and payments of consular fees collected in the DCM network by 30^th of April 2000, nor to check for what purposes these funds were used for.

During the audit we informed the Ministry that it should record this central account at Deutsche Bank - Munich for years 1999 and 2000 in its ledgers, and that it has to continue with regular recording of this account for year 2001.

Ministry has 69 employees whose status is "not allocated", and 10 of them have initiated lawsuits in relevant courts.

Final decision of court regarding the solution of legal status of "not allocated" employees can result with potential liabilities of the Ministry on these bases.

Audit has found that obligations regarding the pension fund for the employees of DCM network have not been paid. According to the stipulations of the Ministry, these obligations for years 1999, and 2000 goes to around 1.500.000 KM, which represents a liability of the Ministry that has not been recorded in its ledgers.

Audit has found that the employees in a Ministry HQ did not received decisions on salary ranks, and also that those decisions were not made.

Audit Office recommends that the Parliament charge the Ministry and the Council of Ministers to make the analysis and to deliver a proposal for solution of the problem of ‘non-allocated’ employees.

We also recommend that the Ministry should as soon as possible account the pension and other taxes and fees not paid for all the DCM network employees, and to find a solution for settling of these liabilities in cooperation with the Council of Ministers. Also, the decisions on salary ranks have to be made and delivered to the employees.

Audit has found that the Ministry does not have established written procedures for procurements nor the rulebooks on use of telephones, vehicles, representation, etc.

We recommend for the problem of public procurements to be solved, an urgent adoption of regulations on public procurements for all the institutions at the level of BiH, or by giving the instruction on use of Entities regulations on public procurements.

At the same time, we recommend that the Parliament provides that the regulations on use of telephones, vehicles, representation and other necessary regulations that would be applied by all the institutions at the level of Bosnia and Herzegovina are adopted.

2. BUDGET CONTROL SYSTEM¹

According to Budget for year 2000, total expenditures planned were 35.600.000 KM. Expenditures really made were 37.277.657 KM, meaning 1.677.657 KM or 5% more than planned.

In addition to the unsatisfactory budget control system, the Reviewed Budget for Year 2000, by which the funds belonging to this Ministry were reduced, and also weak control by the Ministry of Civil Affairs or later Ministry of Treasury might have had a significant influence regarding the exceeding of budget spending

Comparing to the actually planned reviewed budget for year 2000, Ministry exceeded certain expenditure items like: compensations to the employees (11%), PTT costs (20%), representation costs (10%), separation allowance (27%), fuel, maintenance of vehicles and car parts (32%), temporary work contracts (16%), other liabilities and costs (8%).

Also, Ministry had created without justification the expenditures regarding the procurement of equipment in an amount of 2.149.201 KM even though this item was not planned in a reviewed budget for year 2000.

Ministry had also taken the credit liabilities in the amount of 500.000 KM for building of Saudi Arabia Embassy, bigger than the amount planned in budget. 600.000 KM were planned in budget for this purpose, and for the regulation of building site up till now, 1.000.000 KM were spent.

This way the Ministry has, by exceeding and liabilities made, violated the provisions on Law on Budget for Year 2000.

Audit has found an insufficient budget control system within the Ministry, which caused significant exceeding in expenditures comparing to the revenues planned.

It is an opinion of an Audit Office that the reasons for exceeding should be thoroughly analyzed, in order to prevent this to happen in the future.

We also consider it necessary to strengthen the monitoring over the Ministry, as the biggest budget user, so that it would not take liabilities and make expenditures that were not planned without previous authorization, thus violating the basic budget principles.

It is necessary for the Ministry of Treasury to accord the structure of budget items with the structure of account framework, financial plans and statements of budget users.

3. APPLICATION OF LAWS

Ministry has violated the existing legal regulations by illegal retaining of fees, using of revenues from leasing, disrespecting the deadlines for delivering of reports, and other violations of internal regulations, on several occasions.

According to data available from the DCM network, Ministry collected revenues from consular fees paid in a total amount of 17.324.998 KM.

Out of that amount, 5.796.699 KM were transferred and retained at the Ministry account in Munich, and 6.132.351 KM were transferred to the budget account in Frankfurt.

Difference in an amount of 1.814.798 KM presents a liability of a Ministry towards the budget stated in the ledgers on 31^st of December 2000.

Ministry had also collected 63.150 KM from consular fees in the Ministry HQ in Sarajevo, which it also failed to transfer to a budget account.

Revenues collected by leasing of foreign embassies in Sarajevo, in an amount of 192.662 KM were not transferred to the budget account, but were used as ‘own revenues’ of the Ministry.

Ministry had greatly violated the provisions of the Law on Budget and the Law on Administrative Fees by retaining and using revenues from consular fees.

Audit Office recommends to Parliament to strengthen the survey over the collection of fees by introducing the practice of regular reporting on status in this area.

For this purpose, it is necessary that the Ministry in cooperation with the Ministry for Treasury accords and implements precise procedures for collection of taxes, which will prevent any possibility of misuse.

At the same time we recommend that the Parliament, while adopting Budget and the Law on Execution of Budget clearly define all the budget revenues, especially so-called ‘own revenues’.

4. ACCOUNTING

In the area of accounting records, lots of deficiencies were stated directly influencing fairness and truthfulness of financial statements.

Deficiencies perceived violate the provisions of accounting regulations, principles and standards, and they refer to:

Beside this, Ministry has wrongly stated in its balance sheet, following positions:

Taken in total, Ministry had incorrectly stated assets, liabilities, capital and expenditures in its financial statements for year 2000, which significantly influences financial status and the results of the Ministry's operations.

It is an obligation of the Ministry to perform appropriate corrections of the bookkeeping records in year 2001, for the items that were not properly recorded in the balance sheet, so that they would not influence the situation in financial statements for year 2001.

5. INTERNAL INSPECTION

Work of the internal inspection of the Ministry is directed to a control of DCM network, and every month it performs the financial control of certain DCMs.

The Ministry HQ was not a subject to internal inspection, and in our opinion it is an omission, regarding the significance of its financial documentation.

Audit evaluates that the work of internal inspection does not satisfy the audit criteria regarding the comprehensive control of financial documentation and relating to accounting standards and principles.

We think that the work of internal inspection should be focused to a financial control of the longer period of time (half of year, or a year), focusing to a control of the HQ as an organizational part, which encompasses the financial and accounting operations at the level of the entire Ministry.

We recommend for the Ministry to take steps in order to transform the internal inspection into an internal audit, and to reconsider the possibility of introducing the internal audit into certain more important DCMs.

¹ Attachment 1 - Comparative overview of planned and expenditures made

² Attachment 2 - Overview of fees paid and transferred in DCM network

I. AUDITORS OPINION