1.     INTRODUCTION

1.1.     According to the authorities given by the Law on Auditing of Financial Operations of the Institutions of Bosnia and Herzegovina (‘Official Gazette of BiH’ no. 17/99) The Office for Auditing of Financial Operations of the Institutions of Bosnia and Herzegovina (hereinafter: Audit Office) has performed an audit of financial statements (including the management’s decisions), and financial operations of THE PRESIDENCY OF BOSNIA AND HERZEGOVINA (hereinafter: Presidency) presenting the status on 31st of December 2001.

1.2.           Audit was planned and performed in a period from November 12, to November 23, 2001, (previous audit) and from April 15, to May 3, 2002, (audit of final account) according to generally accepted audit standards, as well as standards of International Organization of Supreme Audit Institutions – INTOSAI (‘Official Gazette of BiH’ no. 05/01).

Audit activities were aimed on obtaining of reasonable ground to estimate if financial statements of Presidency represent a fair and true view of operations during the year and of the status at the end of the year. Management of Presidency is responsible for financial statements. The responsibility of Audit Office is to express the opinion about financial statements of Presidency, and based on audit performed, to report about the following:

• if the accounts have been made according to the valid legislation;
• do the annual accounts represent a fair and true view of operations during the year and the status at the end of the year;
• on economy, efficiency and effectiveness with which the institutions have been using public funds for performing their functions. 

1.3.       We consider that the audit we performed gives a reasonable basis for expressing our opinion.

2.         AUDITOR’S OPINION

Audit Office is not in position to express its opinion, because the Presidency did not make neither collective nor consolidated reports for 2001, and report delivered by the Presidency to the Ministry of Treasury can not be a ground for expressing the opinion, since it was made with no internal relations agreed.  

However, according to INTOSAI standards (page 178), we have performed the audit of individual reports for which we also do not express the opinion, but we give the following detailed report on our notices. 

3.         FINDINGS, NOTICES AND RECOMMENDATIONS OF THE ACCOUNTS FOR 2002 

3.1.      Internal control system

Audit Office has established a certain weaknesses in management’s internal control system, in a part regarding to managing, monitoring over the planning and execution of budget, and finally, nonexistence of rules and procedures regulating the spending of individual budget items. We would like to stress the following:

• In a period audited, (till November 2001), expenditures have been made and have been approved without previously integral analysis on availability of budget funds, separately performed, for each organizational unit of the Presidency. At the same time, financial operation were organized and functioned through two subsystems.   
• The Presidency, as the institution, has no completely worked out and precisely defined management’s internal control system, which, as a group of activities and measures, provides accuracy and regularity of recording of financial transactions, and their full accordance with laws and regulations, as well as protection of the property. This fact, in auditor’s opinion, has an influence on managing and controlling of spending of budget funds, regarding to their purpose and amount established by adjusted budget. That is why we support activities aimed on promotion of monitoring over the operation, and, through organizational modifications, modifying of the internal structure of the Presidency, new appointments, and strengthening of control measures originated during the last two months of 2001.  

It has been recommended to the Presidency to provide such a managing system that enables continuously monitoring of purposed spending of assets in comparison with amounts approved by the budget, as well as qualitative monitoring over the realization of expenditures, both, by total amount and by organizational units and budget items.  

3.1.1. Missing rules and procedures

Audit has established that, in a period audited, the Presidency had not neither the written rules regulating the approval of expenditures made, instruction on inventory of property and liabilities nor an internal accounting policies adopted. Bringing the rules mentioned and monitoring of expenditures realized, together with comparative analysis of amounts approved and assets realized, as well as estimation in comparison with assets remained (both, by items of each sub-user of assets of the Presidency and by total amount for the Presidency) will make a reasonable ground for establishing of more efficient monitoring over the budget execution.

It has been recommended to the Presidency to adopt and apply qualitative procedures of reporting on execution of the budget, both, entirely and by individual items, and to bring internal rules to temporarily regulate individual expenditures until the time these rules are brought by the Ministry of Treasury.   

3.2.    Execution of budget

Budget of the Presidency for 2001, was 2.488.908 KM. Additional amount of 1.660.845 KM was approved by an adjusted budget, so total amount was 4.149.753 KM. During the financial year, total amount of assets donated to the Presidency was 3.951.438 KM, which means 95,22% of budget.

The audit has established that management of the Presidency had not the consistent system that would enable the managing structure to perform an adequate control over expenditures during 2001. Bearing in mind that the budget of the Presidency was approved as one subject, while assets were separately used and recorded within the individual financial reports (that are not consolidated) Audit Office was not in a position to make a comparison of expenditures the Presidency made to the items of budget for 2001. 

3.2.1. Procedures of procurement

• The audit has established that expenditures on procurement of materials in Sarajevo, during 2001, were 39.148,00 KM. For an individual procurements of materials for yearly needs, and in an amount above 10.000 KM, it has been established that procedures of public announcements and public selection of best bidder were not performed (for example: expenditures for forms and paper - 14.753,63 KM; other administrative materials 15.048,48 KM).
• Vehicles repair and maintenance costs and spare parts costs that were made in Banja Luka, in 2001, in an amount of 87.753 KM relate to vehicles of the Presidency and two other vehicles of the Government of Republika Srpska given to the Presidency to make use of them. The audit has established that services stated were continuously offered by service house (Service ‘Vidovic’) from 1998. based on the Contract no. 24/98 from November 20, 1998.
• By procuring under improper procedures, public institutions could cause favoritism of one bidder in comparison to other ones; procurement of goods/services at noncompetitive prices; eventually misuse of authorities and corruption and other consequences.     

It has been recommended to the Presidency to summarize annual needs for procurements of fixed assets, materials and services, and, if theirs annual value is under Law’s authority, to obligatory perform the procedure of public announcement and public selection of the best bidder.  

3.3.    Financial-accounting operation

By performing the audit, we have established that, based upon individual reports, consolidated financial report of the Presidency, for 2001, was not made. Individual reports stated has been delivered separately to different institutions: one of them was delivered to the Ministry of Treasury of BiH (March 2002) and the other one to the Tax Office – APIF in Banja Luka (February 2002).

The report delivered to the Ministry of Treasury of BiH contains the data on assets allocated in 2001 to the Cabinet of member of the Presidency from Republika Srpska, because the Ministry of Treasury was transferring assets to the one transactional account of the Presidency, from which assets were further transferred to sub-account in Banja Luka. Within the report, this is shown as ‘Grants to other levels of government’ and it is presented in total, annual amount.  

By not going into internal procedures on distribution of assets and the claim of the Presidency on usage of assets, it is an opinion of the Audit Office that the Presidency has a status of one budget user in accordance to the budget and according to provisions of the Law on Execution of Budget and International Liabilities of Bosnia and Herzegovina. Moreover, according to provisions of the Article 1. of the Law on Treasury of the  Institutions of BiH, it is the obligation of the Presidency to make one financial report.

It has been recommended to the Presidency to, in its financial reports, present all incomes and expenditures within its income statements, as well as all assets and property in a Balance sheet, both, in their total amount and individually, framed by type of income and expenditures for the Presidency as one subject.  

By performing the testing (based on sample) of financial operations of organizational units of the Presidency, which were functioning in a way described, as well as financial reports available, we have found a certain weaknesses about which we report in the following parts of this chapter. 

3.3.1. Annual accounts and financial operations of organizational units in Sarajevo

Income statement

Total amount of incomes presented in Income statement (3.003.074 KM) was shown as lower for 948.364 KM in comparison with entirely incomes allocated on the basis of transfers of the Ministry of Treasury, meaning that total income stated in financial reports was undervalued for an amount mentioned. In addition, total expenditures shown in an amount of 3.905.699 KM are higher for 460.510 KM than expenditures presented in the ledger (3.545.189 KM).

The way incomes have been presented is not in accordance with an Instruction of the Ministry of Treasury (01/I-692/02), saying that incomes allocated after December 31, 2001, and based on request from the same year should be included and recorded as incomes in 2002.

Because of mistakes in presenting of total incomes and total expenditures, as it is stated, surplus of expenditures over the incomes in an amount of 902.625 KM has been incorrectly presented and does not present real financial status. By allocation of assets by the Ministry of Treasury, based on request from 2001, and in accordance to the Instruction mentioned, the status shown should be considerably changed.   

Fixed assets

The audit has established that funds from donations (for example: computer equipment) were not recorded in the ledgers, that have an influence on calculating of depreciation and real and objective statements of assets and property in annual financial report.

3.3.2. Annual account and financial operation of organizational unit in Banja Luka

Income statement

Within the item ‘other incomes’, in the frame of an amount of 152.601 KM, it has been presented an amount from 141.645 KM recorded as a ‘Incomes from rescission of unused long-term reserving for risks’. Annual account presented to auditors has been made on the basis of regulations and Plan of account of Republika Srpska that relates to ‘other legal persons’ (‘Official Gazette of RS, no. 40/99)

3.3.3. Accounting

The audit has established that during 2001, in the Presidency were existing two separate accounting subsystems, so such accounting was not updated and was not offering precise, clear and reliable information on expenditures amount, both, by items and for total expenditures of the Presidency. 

Audit Office has recommended to the Presidency to organize managing of its accounting in a way to be able to make one annual account, bearing in mind that it is a question of one legal subject which has only one transaction account. If it is necessary, such an accounting could include individual managing of sub-balances, for each organizational unit. Besides, it would create better conditions for more efficient monitoring of expenditures, both, by types and by their entirety, by organizational units and for the Presidency entirely.  

By testing the system of salaries and the reimbursements for employees, the audit has found that account of salaries was not properly documented with verified lists on arrival to work place and its leaving. Considering that evidence on presence on work represents one of the authentic documents for account of salaries, this problem could cause, as a practical influence, irregularities on accounting and payment of salaries and reimbursements, as well as non-objectiveness of data within financial reports.    

Audit Office has recommended to the Presidency to urgently introduce the practice of evidencing of presence on work, considering that it is the question of significant data for accounting of salaries and reimbursements for employees. 

3.4.         Special purpose program

Special purpose programs conducting in the Presidency relate to Permanent Committee for Military Issues and to Offices of the liaison officers for relation with International Criminal Tribunal for the Former Yugoslavia in Hague (three separated Offices). We would like to stress the following findings and recommendations: It was established by the audit that assets used by three Offices in Hague were not adequately justified to the Presidency during 2001. Namely, reports on expending of assets that were really made, showing the expenditures by type and theirs purpose have not been delivered to the Presidency. Performing of operations in this way is not sufficiently transparent and does not provide conditions for monitoring of the level of budget funds use, and if they were used for the purpose intended.

It has been recommended to the Presidency that there should be requested from the Offices in Hague to make the Financial plan and to report on budget funds use, by type and by the purpose.  

3.5.    Information system

• Considering that the Presidency did not make an integral plans for developing of information system nor the IT Strategy that would provide the procedures leading into efficient organizational managing, the Audit Office has recommended to adopt precise responsibilities for managing and developing of information system, as well as written standards for system analysis, maintenance of the system’s software and control of the data, as a precondition for establishing of administrative and organizational control. 
• It has been recommended to the Presidency to adopt internal regulations on keeping and protection of the data, to make copies of data, and to take care of regularly making of copies and data’s safety.  
• It has been established non-existence of adopted written standards on managing of IT projects and feasibility study, neither the existence of developing plans for informatization of the Presidency. Lack of such a written regulations and developing plans on informatization (IT strategy) could cause a disproportion of needs and resources, meaning the procurement of less adequate/needed equipment to other more needed equipment that were not planned at the right time.  

4.        CORRESPONDENCE 

After the audit has been performed, in June 14, 2002, the Draft of Report on Audit was delivered to the Presidency. No written reply was delivered by the Presidency.  

5.      SUMMARY 

The Audit Office did not audited or delivered Report on audit of financial reports of the Presidency for 2000. During the audit of accounts for 2001, Audit Office has found that:  

• Internal control system that management establishes is not on the satisfactory level, considering that set of procedures and measures that provide accuracy and regularity on recording of financial transactions, their full accordance with laws and regulations, as well as protection of the property is not developed enough.
• The Presidency has made, for 2001, two individual annual reports. According to these individual reports, a consolidated financial report of the Presidency was not made. Report delivered to the Ministry of Treasury presents report of the Presidency in Federation of BiH in which the Office of member of the Presidency from RS has been recorded under the item ‘Grants to other levels of authorities’.
• Within the Income Statement (of organizational unit in Sarajevo) surplus of expenditures over the incomes shown in an amount of 902.625 KM does not reflect and does not present actual financial status.
• In the Balance sheet (organizational unit in Banja Luka) within the item ‘Other incomes’ it was shown an amount of 141.645 KM (incomes from rescission of unused long-term reserving for risks) for which, evidences on its origin were not given to the audit.
• The Presidency did not establish rules regulating certain expenditures, nor the procedures on approval of expenditures made.
• During procurement of material and services, legal procedures were not consistently respected in all cases.

Audit Office wants to thank to the management and to employees of the Presidency for cooperation and help offered to auditors during performing the audit.