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 and operations of THE MINISTRY OF TREASURY INSTITUTION OF BOSNIA AND HERZEGOVINA (hereinafter: Ministry) and an audit of the budget of institutions of Bosnia and Herzegovina (hereinafter: Budget) presenting the status on 31st of December 2001.

1.2.           Audit was planned and performed in a period from November 12, to November 28, 2001, (previous audit) and from March 18, to March 29, 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 the Court represent a fair and true view of operations during the year and of the status at the end of the year. Management of the Ministry is responsible for financial statements. The responsibility of Audit Office is to express the opinion about financial statements of the Ministry, and based on the performed audit, 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 Ministry has been using funds for performing its functions.

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

2.      AUDITOR’S OPINION

In our opinion, the Ministry’s financial statements do present, in all significant aspects, a real and objective view of operations during the year and of the status at the end of year, but having no intention to further give qualified opinion we would like to stress the items 2.1, 2.2. and 2.3.

Consolidated report on the budget of Bosnia and Herzegovina has not been made so we are not in a position to express an opinion for report stated (see Chapter 4.5.).  

2.1.    Audit Office was not present at inventory of assets and their resources performed by the Ministry on December 31, 2001.

2.2.       The audit has found that the Ministry was not applying Article 16. of the Law on Budget Execution regulating the issue of procurement of fixed assets, materials and services.

2.3.           The audit has found that accounting of the Ministry during the audit period was not updated as accounting regulations and procedures foresee it.  

3.       RETROSPECTIVE OF AUDIT’S FINDINGS AND RECOMMENDATIONS FOR 2000 

Audit office has performed an audit of operations of the Ministry of Treasury for 2000, on which was made the Report. Within the Report have been stated weaknesses found and were given recommendations for their removal. It has been suggested to the Ministry to analyze and to remove weaknesses mentioned.

The audit of operations for 2001 has found that in a certain cases recommendations given by the Audit Office were partially respected, while in an individual cases behavior in accordance with recommendations given was not found. 

Recommendations realized:

• It has been brought unique classification of expenditures for all budget users related to creating of budget projection for 2001.

Current activities:

• Creating o Internal Structure Rulebook;
• Establishing of financial management information system (ISFU).

Unrealized recommendations:

• Regulations and procedures for certain categories of expenditures have not been adopted;
• Internal Structure Rulebook made by Economic Institute has not been put into practice;
• Procurements in 2001 have been performed without public announcement;
• The Ministry did not accord entirely the expenditures with amounts approved that caused the exceeding on item of expenditures for material costs;
• Within the audited period, an accounting of the Ministry was not updated that is not in accordance with accounting regulations.  

4.      FINDINGS, NOTICES AND RECOMMENDATIONS OF THE AUDIT OF ACCOUNTS FOR 2000

4.1. Introduction

Audit findings has been classified by most important weaknesses, and they relate to: management’s system of internal controls found by management, monitoring over the budget planning and budget execution, slow implementation of obligations imposed by the law, and non-updated accounting.

The Budget of institutions of Bosnia and Herzegovina and international obligations of Bosnia and Herzegovina for 2001 have been regarded as a separate system which is presented in a separate Chapter, while servicing of foreign debt will be the subject of separate audit.

4.2. Internal control system

Audit has found that the Ministry did not develop in a sufficient amount, and did not precisely define management's internal control system, as a set of procedures and measures that provide the accuracy and regularity of recording of financial transactions and their full accordance with the laws and regulations and the protection of the property.

Those measures encompass making of internal regulations and procedures regulating a certain types of expenditures like PTT costs, representation, the employee's accommodation costs, transportation costs, vehicle maintenance costs etc.

Non-existence or insufficient development of internal control system could cause irrational budget funds use and do not provide an adequate protection of the public property.

Audit Office has suggested to the Ministry’s management to provide such an internal control system that would enable continuously monitoring, by purpose intended, over usage of funds approved by the budget (for the Ministry as a budget user), consistent respect of existing regulations and full protection of public property and public funds.

4.2.1.  Implementation of laws and regulations 

The Ministry’s task is managing of budget funds which includes budget planning and budget execution, making of regulations and procedures related to financial operations for all institutions of Bosnia and Herzegovina, internal monitoring, servicing of foreign debt, managing and other jobs that are in accordance with laws and regulations among which the Law on Treasury, the budget and Law on Budget Execution are the most important.  

Up to the present, the Ministry has made a certain improvements within the issue related to financial operations of institutions of Bosnia and Herzegovina even though, in our opinion, the Ministry has not succeed to establish, in a sufficient measure, efficient system of public funds management.

During the audit, we have found that the Ministry has not implemented entirely provisions of Law on Budget Execution for 2001 (‘Official Gazette of BiH’ no. 09/01 and 32/01) as well as provisions of Law on Treasury of institutions of BiH (‘Official Gazette BiH’, no. 27/00). This, first of all, relates to the following:

• Law on Budget Execution

An individual users have obtained an approval for modification of purpose’s structure within budget funds approved, however further procedures were not implemented meaning that modifications approved were not issued in ‘Official Gazette’ (Article 11. was not implemented entirely).

Articles 19. to 24:

Even though the Ministry has found control of requests for assets transfer, it has not been performed entirely supervision of in-flow of assets, financial and accounting operations of budget users, and lawful and purposefulness use of budget funds (Articles 19. to 24 were not fully applied).

The Ministry has not adopted Rulebook on bookkeeping, nor the content and way of financial reporting for all ministries and budget users, but has brought Lines of procedures on creating of ‘Adjusted budget for 2001’ stating that budget users should apply federal regulations related to this issue (Article 25. was not entirely and consistently respected).

• Law on Treasury

Chart of accounts and accounting regulations have not been adopted even though the Ministry of Treasury is responsible for adoption mentioned, according to provisions of this Article (Article 11.)

Consolidated accounts have not been made nor an internal supervision of budget users in accordance with law was found, even though the Ministry is responsible for this task (Article 12).

One part of law provisions such as an introducing of Main Ledger is in the phase of implementation so we have taken into consideration the difficulties and problems existing, which are unavoidable while introducing new information systems and operation in a way differently from existing.

It is our impression that the Ministry does not have sufficient number of experts on this area. Persons momentarily engaged on performing of these tasks are overtaxed, especially taking into consideration that during the year, they were spending their resources on creating of an adjusted budget and several draft versions of the budget for 2002. On the other hand, the nature of current changes makes demand upon motivated personnel with ability to accommodate to changes and with tendency toward acquisition of new knowledge.

We have suggested to the Ministry to strengthen the structure of its personnel, which could be done according to Internal Structure Rulebook existing and, in accordance with the Ministry’s ability, to establish unit of an internal audit that would perform permanent supervision over internal control system’s functioning.

Moreover, we draw the Ministry’s attention to consistently respect Law on Treasury and Law on Budget Execution and, according to Articles stated, to make adequate documents regulating the financial and financial issue. Taking into consideration the direct influence on the other budget users we consider that the Ministry has to find a way and resources to fulfill this obligation as soon as possible.

4.2.2.    Procedures on procurements

Weaknesses within internal control system have caused disrespect of regulations during procurement of goods and offering of services. We have found that during procurement of stationery (in 2001 it has been procured 41.295,70 KM), as well as making of temporary service contracts on expert services (major part of an amount of 72.694,44 KM relates to contracts on succession of former Yugoslavia) the legislation was not respected nor an invitation to public tender was announced.

Weaknesses stated are not in accordance with Article 16. of Law on Budget Execution that prescribes implementation of public advertising procedures as well as the selection of best bidder. This way of procurement of assets, goods and services is not transparent and could result with procurements at non-competitive market prices causing the favoritism of certain bidders.

We have draw attention to the Ministry that it has to summarize annual needs on procurement of fixed assets, materials and services, and if their annual value is under authority of provisions of Article 16. of Law on Budget Execution for 2001,  it is obliged to implement the procedure of public advertising.

4.3.    Budget control system

The audit has found that within the Ministry was not entirely provided an efficient supervision over budget execution, which includes regularly monitoring of expenditures by type and by purpose in comparison with assets approved by the budget.

4.3.1.   Planning and execution of the Ministry’s budget

According to changes and amendments on Law of Budget Execution for 2001, it has been approved the budget of the Ministry in an amount of 2.085.134 KM. For the same period, the Ministry has realized the expenditures in an amount of 1.907.887 KM, that is 177.247 KM less than planned, or 91% of expenditures approved by the budget.  

COMPARATIVE OVERVIEW OF EXPENDITURES PLANNED AND EXPENDITURES REALIZED IN 2001

By analyzing the execution of the Ministry’s budget for 2001, we have found that the budget was not realized entirely both, in its total amount nor by individual budget items like salaries of the employees which, in original budget, were planned for 83 employees, in the budget modified – for 64 employees, while real number of employees was 51. We found that the Ministry did not exceed total expenditures approved by the adjusted budget. However, there were exceeding on the item ‘Material and services costs’ which was realized in an amount of 436.293 KM, which is 163.224 KM or 59,77% more than amount approved. For exceeding mentioned the Ministry has subsequently provided approval of the Council of Ministers (Decision no. VM 64/02 from May 12, 2002).

Audit Office considers that it should be paid more attention on planning process, both, within the Ministry and on higher levels on which adoption is being performed, in order to provide more real and qualitative budget planning.

We have draw attention to the Ministry that it should respect consistently the provisions of Law on Budget Execution of institutions of BiH, and should accord expenditures with amounts approved, meaning to use funds in an amount and for purposes found by adjusted budget of institutions of BiH.

We have also reminded the Ministry that should timely express its opinion on requests of budget users related to the Article 11. of the Law mentioned, so the Council of Ministers could make a decision before the end of financial year (before annual statement).

4.4.     Financial-accounting operations

4.4.1.   Financial statements

The financial reports the Ministry has made in a form of annual statement for 2001 according to its own Instruction no. 01/692/02 form March 4, 2002.

Inventory of fixed assets

During the audit and by testing of reports on inventory of fixed assets, we have found that an inventory does not encompass all fixed assets of the Ministry. This first of all relates to the fixed assets which status was not solved through the partition with the Ministry of Civil Affairs and Communications, and to the fixed assets, which the Council of Ministers has transferred to the Ministry of Treasury according to its Decision no. 06-111-703/5-00. The Ministry has not recorded fixed assets in its ledgers, but it has made minutes on establishing of fixed assets origin, which were not signed by authorized persons.

This influences on financial report’s reality and accuracy (Balance Sheet), and if the control over the Ministry’s property wouldn’t be found, it could make possible for fixed assets not to be encompassed by inventory during next years, that considerably increase the risk on stealing of property.

We have suggested to the Ministry that should perform inventorying of all assets, liabilities and receivables after solving of all pending questions related to fixed assets together with the Council of Ministers and the Ministry of Civil Affairs and Communications.

Statements of surplus of income and return according to own Instruction

In accordance with Instruction, which the Ministry has prescribed for all budget users, an amount of incomes has been deduced on amount of expenditures recorded. Within the Balance Sheet, under the item ‘non-allocated surplus of income over the expenditures’ it has been stated surplus of income in an amount of 5.483,00 KM, however, the liability on return of assets to the budget for an amount stated was not created. This does not present consistent application of the Ministry’s Instruction.

We have recommended to the Ministry to perform statement and return of surplus of assets to JRT (Unique Treasury’s Account) in accordance with consistent application of Instruction mentioned.  

4.4.2. Accounting

The audit has found that the Ministry’s accounting, during the year audited, was not updated and that certain operational changes were not recorded in the ledgers in a way as it is foreseen by accounting regulations and principles.

In addition to non-updated accounting we found the following irregularities:

• Documentation added to the requests for transfer of assets was not orderly verified by the control (for example: payment of separate living reimbursements); 
• costs of accommodation of drivers on business trip were also recorded on account of ‘reimbursements for costs of officials’ – the costs mentioned should be recorded on ‘travel cost’s’ account;
• related to payments by temporary services contracts, all taxes on temporary services contracts were not accounted (except 30% of taxes on additional income 10% of taxes on turnover of services should also be accounted);        

We have suggested to the Ministry to remove weaknesses stated and to keep its ledgers in a way as it is regulated and prescribed by accounting regulations and principles.

4.5.         Information system

Introduction

By the nature of its operations, the Ministry is mainly based on usage of information system. During the audited period, it has been initiated the project of informatization of budget users public sector by which all budget users would be linked into one unique information system. USAID and the Ministry would perform this task. After the Project has been finished main part of business operations related to budget operations would be performed through this information system.

Administrative and organizational control

The Ministry had not clear responsibilities related to information system’s management and development on the level of entire Ministry that could cause discordance and incompatibility among different information subsystems within the Ministry.

Moreover, the Ministry did not create IT development strategy, that was also recommended in the previous report, which would be base for informatization on the level o entire Ministry. Non-existence of IT strategy, in addition to above-mentioned potential problems, could cause procurement of needless equipment to detriment of something more needful to the Ministry.

We have suggested to the Ministry’s management to prescribe clear responsibilities on management and development of information system on the level of entire Ministry, as well as an IT strategy that would encompass needs for entire Ministry.

Data protection and copy making

The audit has found that the Ministry did not prescribe internal regulations on data protection and making of data’s copies, and that those copies were not made regularly nor they were made in an organized way.

Non-existence of these regulations and carelessness toward copies increase the risk for important information to be lost, which could have remarkable influence on efficiency of the Ministry’s operation.

We have suggested to the Ministry that it should make internal regulations on data keeping and protection, as well as making of copies, and to take care for regulations mentioned to be implemented regularly and in a proper way.

4.6.         Budget of institutions of BiH

4.6.1. Introduction  

The Ministry did not make consolidated annual reports on budget of institutions of BiH for 2001 in a form prescribed by the Law on Treasury, Law on Budget Execution and accounting standards and regulations. Instead of annual reports mentioned, it has been made Report on execution of the budget of institutions of BiH for 2001 and international obligations of Bosnia and Herzegovina for 2001, which was presented to the Parliament of BiH and to the Presidency of BiH. For making of this report was partly used data from the accounting department of the Ministry, while one part of data was taken from annual statement of budget users.  

We found that, in the audited period, accounting was neither neat nor updated as it is foreseen by an accounting standards and principles (recording of business changes and financial transactions have been also performed during the audited period, while the conclusive recordings were performed subsequently). Furthermore, data that was presented within report was not completely accorded with accounting data.  

Taking into consideration all objective circumstances, Audit Office considers that, on the level of institutions of Bosnia and Herzegovina, financial reporting, for the most part, has not been found in a way regulated by laws and regulations from this issue.

That is why we have suggested to the Ministry to urgently undertake all necessary activities in order to establish, as soon as possible, accounting recording on which basis could make financial reports in accordance with standards related to this issue.

We have also suggested to the Ministry, basing on reports audited of all budget users, to make consolidated balances, which could be used as an opening balances in a process of establishing of Treasury’s Main Ledger.

4.6.2.  Weaknesses of budget management system

Weaknesses in preparing the budget           

We have found that needs of budget users for 2001 (based on financial plans delivered) were in a considerably higher than budget disposable. Funds allocated to the budget users were decreased linearly in accordance with funds available. Such a decreases very often did not reflect real priorities on budget users’ spending. 

We would like to stress that adjusted budget has been adopted finally, on December 30, 2001, when budget users have already realized the main part of expenditures in 2001.

We have draw attention that the Ministry is obligated to create standardized budget classification and common budget procedures that foresee analytical approach to budget preparing as well as higher comprehension of budget users in decreasing of needs presented because of budget limitations.  

5.     CORRESPONDENCE

After the performed audit, on July 24, 2002, Report on audit was delivered to the Ministry. On July 30, 2002, the Ministry has delivered written reply informing us on justifiability of audit’s remarks and proposals of possible solutions given by report’s chapters. In addition, the Ministry has informed the Audit Office about special plan of activities and measures which should remove the deficiencies, and which encompass establishment of internal control system for all budget users, application of information system, as well as establishment of the Main Ledger’s system which all should provide more efficient management and monitoring over the public funds.  

6.     SUMMARY

We have performed the audit of the Ministry, which includes auditing of financial statements and operations of the Ministry as a budget user and the auditing of Annual Statement of the institutions of BiH.

In a audited period, the Ministry has not exceeded total expenditures approved by the budget adjusted, except exceeding on item ‘Material and services costs’, which was realized in an amount of 436.293,00 KM, that is 163.224,00 KM or 59,77% higher than amount approved. Later on, the Ministry has obtained approval for redistribution of expenditures by type and within total amount of expenditures.

Within the Balance Sheet, on the item ‘non-distributed surplus of income and expenditures’ it has been stated surplus of income in an amount of 5.483,00 KM, however, for an amount mentioned, the liability on return of assets to JRT (Unique Treasury’s Account) was not created. According to its own Instruction, the Ministry was obliged to present the liability mentioned.

The Ministry’s accounting during the year was not updated, meaning that certain business/financial changes were not recorded in the ledgers in a way foreseen by accounting regulations. This way of accounting could influence on comprehensiveness of financial transactions and business/financial changes, and to recording of expenditures in accordance with the principle of modified accrual basis of accounting which all could influence on financial reports.

The audit of the Ministry for 2001 was performed additionally because financial ledgers in accounting department were not balanced till the moment of audit. A certain recordings of financial transactions were also performed during the audit while balancing of individual accounts on December 31, 2001 was not performed.

Even though we have interrupted the audit several times so the Ministry could perform the balancing of its ledgers, the Ministry did not make a consolidated balance of the budget for 2001.

Audit Office wants to thank to the Ministry’s management and employees for cooperation and help offered to auditors during performing the audit.