RepublikaeKosovësRepublikaKosova-RepublicofKosovoZyraeAuditoritGjeneral/Kancelarija Glavnog Revizora FINANCIAL AUDIT THE MUNICIPALITY OF ISTOG FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007 Prishtina, December 2008 This is trial version www.adultpdf.com OFFICE OF THE AUDITOR GENERAL GAZMEND ZAJMI No 59 PRISHTINA 10000 PHONE + 381 (0) 38 2535 121/217/221 FAX: + 381 (0) 38 2535 122 2 TRANSMITTAL LETTER Date: 26 December 2008 To: Mr. Fadil Ferati Dear Mr. Ferati, This is our final report on the results of the Office of Auditor General’s audit of the Istog Municipality financial statements for the year ended 31 December 2007. In accordance with UNMIK Regulation 2005/33, this audit report will be made public. Our report contains recommendations for your action. Regulation 2005/33, Section 1 B. (e) requires that within 30 days of publication of an audit report, you are required to submit a report indicating how your institution intends to implement these recommendations. Your report is due by 30 January 2009. I appreciate the cooperation and courtesies extended to my staff during the audit. The Office of the Auditor General looks forward t working with you on our audit of the 2008 financial statements. Sincerely, Linda Casella Auditor General This is trial version www.adultpdf.com 3 TABLE OF CONTENTS I. Executive Summary 5 II. Introduction 6 III. Status of Prior Years Audit Recommendations 7 IV. Audit Scope 13 V. Audit Opinion 14 VI. Audit Approach 16 VII. Key Audit Findings and Recommendations 18 Annexes I. Municipality of Istog Financial Statements for the year ended 31 December 2007 II. Municipality Management’s Comments This is trial version www.adultpdf.com 4 List of Abbreviations and Acronyms AG Auditor General AI Administrative Instruction EO Economic Operator IFAC International Federation of Accountants IPSAS International Public Sector Accounting Standards MFE Ministry of Finance and Economy MPS Ministry of Public Services OAG Office of the Auditor General PPL Law on Public Procurement PS Performance Security SRSG Special Representative of the Secretary General UNMIK United Nations Mission in Kosovo This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 5 I. EXECUTIVE SUMMARY The Office of the Auditor General has performed an audit of the Municipality of Istog (further referred “the Municipality”) financial statements for the year ended 31 December 2007. Due to the matters discussed in the Section V: Audit opinion we were unable to give and we do not give opinion on financial statements as of 31 December 2007. The findings and associated recommendation are presented within the Section VII of the report. The OAG would urge the Senior Management of the Municipality to take corrective action on these recommendations and first of all present its Action Plan for dealing with the recommendations 30 days from receiving the Final Audit Report. This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 6 II. INTRODUCTION UNMIK Regulation 2002/18, dated 4 October 2002, established the Office of the Auditor General (OAG) in Kosovo. According to Section 3.2 of this regulation, the Auditor General (AG) is required to conduct an annual regularity audit of all institutions in Kosovo to determine: • Whether the financial statements give a true and fair view; • Whether the financial records, systems and transactions comply with applicable statutes and regulations; • The appropriateness of internal controls and internal audit functions; • The probity and propriety of administrative decisions taken within the audited institutions or entity; and • All matters arising from or relating to the audit. In March 2003, the Kosovo Assembly approved Law No. 2003/2 “Law on Public Financial Management and Accountability” which was formally promulgated by the Special Representative of the Secretary-General (SRSG) on 12 May 2003 in UNMIK Regulation 2003/17. Section 42 of the Law states that the AG will prepare and submit to the Assembly and the SRSG a report on the financial statements of budget organizations for the previous year providing the AG’s opinion on whether or not the financial statements give a true and fair view of the finances of such budget organizations. This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 7 III. STATUS OF PRIOR YEARS AUDIT RECOMENDATIONS The OAG’s audit of Municipality’s financial statements for the year ended 31 December 2006 resulted in 6 audit recommendations. Our current audit determined that Municipality has not implemented any of those recommendations details of which are provided in the following table: No Findings Recommendation 1.a) Internal Control System Lack of written policies and procedures / instructions on different operations has resulted with un functional internal control system where legal provisions on the use of public money have not been Observed. The Management of the Municipality is recommended to create a functional internal control system so there is a proper segregation of duties and in order to prevent and detect potential misuse. 1.b) Internal Audit Internal Audit Unit of the Municipality of Istog in 2006 employed one licensed auditor. This unit for the fiscal year 2006 has issued only one report thereby auditors could not rely on its work for 2006 audit. We have found that Municipality has not established an audit committee to deal, among others, with the internal audit issue and implementation of audit recommendations. Since there is no such committee, Internal Auditor reports directly to the Chief Executive. Management of the Municipality is recommended to prepare an action plan with specific deadlines in order to implement internal auditor’s recommendations. - Internal auditors shall be given the opportunity to attend additional trainings in order to advance heir capabilities. - Internal Audit Unit shall prepare annual reports where a comparison between the planned and realized work and also the implementation of given recommendations shall be considered. - An audit committee shall be established who would hold Management responsible for implementing or not implementing the recommendations given by internal and external auditors. - Internal Audit Unit shall stretch its activity also in the Procurement Office and Budget and Finance Department. No.2 Own Source Revenues. 2.a) 2 b) Revenues from the Department of Economy Department of Economy budgeted revenue for 2006 was 52.906.00€ whereas 43,480€ or 82.18% of the budgeted amount was realized. The Department of Economy possesses no data about the number of work permits issued in 2006 and the number of illegal business entities exercising their activity having not obtained any work permit. This department was also not able to provide us with complete and accurate data in regard to the overall number of business entities exercising their activity within the Municipality, based on the business type. The unpaid obligation from business entities exercising their business having not paid their municipal fee for 2006 is 4,945.00€. Rent Revenues Budgeted revenue from rent of municipal property was 26,798€, whereas 10,163.92€ or 37% of the budgeted figure has been The Municipality of Istog is recommended the following: - Perform comprehensive, accurate and timely recording of all own source revenues. - Record all collected revenues against the correct economic codes established from Treasury Department (MEF) as well as perform monthly reconciliations between source data, deposited amounts and General Ledger in order to timely identify differences and undertake the necessary actions for correcting them if necessary. - Maintain comprehensive registers regarding the taxpayers’ unpaid obligations in order to know the amount and the age of debts for each This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 8 2.c) 2.d) 2.e) 2.f) collected. Municipality could have not provided us with the assets register for the rented property and the actual invoiced value for 2006. Furthermore, Municipality has no data about the amount of debt still to be paid from municipal property lease takers. Property Tax - Budgeted revenue for 2006 was 159,524.66€ whereas it was realized 84,605.97€ or 53%. Municipality has distributed 6,748 property tax invoices during 2006 with an approximate value of 159,524€. Number of invoices paid in 2006 is 4,071 with a total of 144,308€. This amount also includes debts from previous years paid in 2006 in the amount of 59,702 €. Citizens’ obligations for property tax are 61,171.13€. Collection of this category of revenues is made through cash-box even for amounts above 10 €. In a number of cases amounts collected through cash-box have been banked every two weeks. Co-payments in Main Family Medicine Centre -(MFMC) Budgeted revenue for 2006 was 40,000€ whereas the collected amount is 41,728€ or 4, 32% above the plan. According to MFMC there were 437 medical certificates for driving license issued from in this centre during 2006. In the main Cash Office of MFMC and in Dental Clinic, the collection of revenues is made in breach of the Law on Public Financial Management and Accountability. After the examination of a number of items we have concluded that revenues rose from distribution of medical certificates and other services, are kept in the cash-boxes of cash offices for seven days and have not been deposited into the main cashbox. Furthermore the Cashier of the Main cash office has not banked the amounts he received from cashiers of other cash offices. e.g. On 02.08.2006 he receives 48 € while he banks this amount only on 14.08.2006, e.g. On 02.02. 2006 he receives 62 € and he banks this amount on 09.02.2006. Revenues from the Department of Urbanism, Public Services and Environment Municipality’s Department for Urbanism has generated revenues from performing following activities: Originating verdict on technical-urban conditions, location, and construction of temporary constructions, verdicts on using the premise, construction land adjustment compensation and licenses for transport vehicles. A number of 19 temporary character premises within municipality use municipal property for exercising their business activity. The businesses operating in these premises have not settled their 2006 obligations in the amount of 1,340 €. Revenues from geodesy and cadastre Department for Geodesy, Cadastre and Property raised revenues from performing the following activities: revenues from distribution of different documents (possession paper, scheme plan, certificate on not using the property), field measurement activities, registration of real estate, as well as revenues from registration of property and transfers. When applying real estate registration fees Municipality has applied fees which are not in compliance with Administrative Instruction Nr.AKK2006/01. e.g. For item, protocol number of which is 2206/01, the fee of 250€ should have been paid whereas it was paid only 150€; For item with protocol number 363/06 a fee of 170€ was paid whereas it should have been paid 190€. In addition, this department has not provided us with any evidence on the number of executed transactions per revenue source within this department. debtor which would imply the execution of respective interest rate in cases of payment delays. - Keep records for all revenue generating transactions, keep all issued invoices during the financial year and extract statistical data about the number of recordings, and the number of documents and licenses issued during the financial year. Such data shall be analyzed against the respective fee, this to enable the comparison of expected revenue with the realized figure and to investigate important differences. - Terminate all lease contracts with irresponsible lease takers. - Amounts above 10 € must not be collected through Municipality’s cash box but according be collected in the bank to serve the purpose of proper control and management. - The Department for Geodesy and Cadastre is recommended to draft an internal regulation on Municipality’s taxes, where the part in regard to revenues from cadastral services, urgently needs to be harmonized with provisions of AKK Administrative Instruction no. 2006/01 This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 9 No.3 Expenditures – Wages and Salaries 3.a) Salaries The municipality employs a total of 955 staff members whereas the budgeted number of employees was 937. There is a total of 18 employees above the budgeted number. 15 additional staff members are employed in education department, administration 5, whereas the number of staff is smaller for one employee both in health and fire department. - Contract number 71, position number 71/00, position title – Tax Inspector in the Revenues and Administration Unit; This officer was employed outside regular employment procedures since there was no advertisement published We recommend to the Municipality of Istog, and particularly the Personnel Manager to announce the position of Tax Inspector in the Revenues and Administration Unit pursuant to Administrative Instruction No. 2003/2 Section 4, implementation of UNMIK Regulation No. 2001/36 on Kosovo Civil Service. 3.b) Wages – Per diems of Municipal Assembly members The disbursement of municipal assembly members. OAG concludes that some of the assembly members, who have not been present during Assembly sessions, nonetheless have been paid the amount of 25 Euro, this in breach of the regulation 3/2004. Assembly of Istog Municipality and particularly the Department for Budget and Finance as well as Payment Officer is recommended to disburse the Assembly members pursuant to Regulation No. 3/2004 approved by the municipal assembly. 4 Expenditures - Goods and Services 4.1 Phone Expenditures 4.1a) Land line, Vala scratch cards, and Roaming phone expenditure in the Municipality of Istog is 29,941.00 - Expenditures made for VALA scratch cards do not comply with decision 01 Nr. 55/04 and 01 Nr. 55/03.taken by the Municipal Assembly. There is a total of 21 land line telephones with access to Vala mobiles. Municipality Management did not act in accordance Kosovo Government instruction U/A 08/ 2006 which specifies the staff who may have access to mobile telephones. OAG recommends to the Municipality of Istog to use Vala scratch cards pursuant to decision 01 Nr. 55/04 and 01 Nr. 55/03 taken by Board of Directors and approved by Chief Executive. As for the use of land line telephones, Municipality Assembly shall make a decision on the limitation of phone calls for each Municipality land line number in order to save public money. 4.3 Expenditures for Repair and Maintenance and Supply with Office Material Recommendation applies to findings from (4.3a) up to (4.3g) 4.3a) 4.3b) 4.3c) Item -Extension of contract No.47/2005 for a one year period Invoice with no. 11/ 06 was paid 400€, whereas the same invoice should have been paid 155€, whereby it has been found that there has been an overpayment of 245€ or 61.25% above the total amount. The amount of the audited payment: 400Euros. here was no acceptance of work/service done by the receiving officer, Purchase order was signed after the invoice was received, Items have not been paid in accordance with the contract signed between the EO and the Municipal Assembly. Item – Expenditures for the repair of vehicles Invoice with No.773, has been paid 400€, while that same invoice had to be paid 249€. OAG identified there has been an overpayment due to inflated prices offered in the contract, in the amount of 106€ or 26.5% of total amount. There is no report on acceptance of goods and invoice is not signed by the receiving officer. Item - Expenditures for the repair of vehicles Invoice with No. 1374 has been processed for payment in the amount of 1,096 €, whereby the same invoice had to be paid in the amount of 814€. OAG found that the value of individual positions in the invoice is 1,000€. The overpaid amount due to an arithmetical mistake turns out to be 96€, whereas the result caused by the inflated price offered and the supply of goods not included in The Municipality is recommended the following: Improve internal control in relation to the certification of expenditures in order to prevent the certification of expenditures outside the contract and overstated amounts from the contractor. Improve goods acceptance control and prevent the acceptance of goods and services not in accordance with the technical specification and in breach of contract’s terms of reference. Implement Treasury’s Financial Rule and Instruction 02 on the use of public money and LPFMA No.203/2. This is trial version www.adultpdf.com Financial Audit Municipality of Istog for the year ended 31 December 2007 10 the contract’s technical specification is 186€. Total overpaid amount is (96+186) 282€ or 25.72% of total amount. 4.3d) 4.3e) 4.3f) 4.3g) Item - Supply of Office Material Contract with no.633/06/013/121, Invoice with no. K/ 30 dated 30.11.2006 in the amount of 3,896€. OAG found that goods not included in the technical specification have been received, total amount supplied outside contract is 246€ or 6.31% of total amount. It has also been noted that the request for supply of these goods, which should have been made in accordance with technical specification, is missing. Item - Purchase of Computers Contract with No.027/2006-Invoice with no.796865 has been paid in the amount of 1,783€, while the same invoice had to be paid in the amount of 1336€. OAG found that there has been an overpayment in the amount of 297€ due to inflated prices offered, and goods supplied outside the contract’s technical specification reach the amount of 150€. Total amount that has been overpaid for this invoice is 447€ or 25% of total amount. Item - Maintenance and repair of vehicles Contract with no. 01/ 47/2005. Invoice with no.02/06, in the amount of 1,490€, goods order form prepared and signed after invoice was received from the Economic Operator, and after the acceptance report of the receiving officer. Item - Repair of the Vehicles: Ford-Transit and Nissan Pick-up Invoice no. 05, amount of 523€, payment made without performing the acceptance of works by the receiving officer and having not signed the order form. 4.4 Capital Investment Expenditures 4.4 a) During the examination of the item “Construction of cemeteries for animals“, in the amount of 12,176€ OAG found that: The Economic Operator through an order form was asked to start with the works execution, this before the public announcement of the tender, thus before the signature of contract. Tender was evaluated one month after the signing of contract. The three members committee has selected the same economic operator, which was asked in advance, before the evaluation process, to start with the execution of works. This Economic Operator was technically irresponsive (it did not provide MTI’s Business License), a requirement by the entity for the completion of bid documentation. OAG recommends the following: Strengthen internal control in order to obtain a higher procurement unit transparency to prevent the use of public money without the execution of procurement activity in accordance with the law and also to prevent all possible deviations and errors. Procurement Unit to implement Law on Public Procurement No.2003/17. 4.4b) During the examination of the item “Plan for the Reconstruction of town centre“, we have identified the following: There were not three responsive operators despite the fact that the evaluation commission concluded that there were. It was noted that two out of three bidding operators did not provide the certificate indicating that they had paid their obligations to Municipality and that they had Municipality’s business license. The Procurement Unit is recommended that whenever three responsive bids have not been received, to cancel the procurement and retender the whole process. Section 30.3 of LPP No.2003/17 must be observed. 4.4d) Item - Supply of food items for Kindergarten During audit OAG identified the followings: • Partial commitment o funds prior to the signature of contract, • There are no three responsive bids • Goods not specified with the contract have been received, where the report on receiving the goods has been signed by goods receiving officer, this in breach of section 2 of the contract signed between the entity and Economic Operator. We recommend Istog Municipal Assembly to ensure compliance with Law on Public Procurement No. 2003/17, Law on the Public Financial Management and Accountability No. 2003/2, regulations and administrative instructions on the utilization of public money as well as with contracts signed between the Municipal Assembly and Economic Operators. This is trial version www.adultpdf.com . have been received, where the report on receiving the goods has been signed by goods receiving officer, this in breach of section 2 of the contract signed between the entity and Economic Operator execution, this before the public announcement of the tender, thus before the signature of contract. Tender was evaluated one month after the signing of contract. The three members committee. 400Euros. here was no acceptance of work/service done by the receiving officer, Purchase order was signed after the invoice was received, Items have not been paid in accordance with the contract