On the Results of Performance Audit

REPORT

on the Results of performance audit

of Project BG 0203.10 "Implementation of the National Schengen Action Plan in compliance with Schengen requirement" at CFCU Implementation Agency at the Ministry of Finance

On the grounds of Orders No.No. P-8 dated 28.01.2004 and P-31 dated 29.04.2004 of the BNAO president, a performance audit of Project BG 020310 under Phare Programme was carried out at the CFCU Implementation Agency for the period 01.01.2003 - 31.03.2004.

The audit report No. 0800000804 with the findings and conclusions has been handed over to the Minister of finance Milen Velchev on 20.05.2004.

No opinion concerning the results and conclusions of the report has been submitted to the NAO within the terms, stipulated by the BNAO Act.

The audit report has been adopted with a decision of NAO at a meeting on June 17, 2004.

1. General part

1. Project information

The main objective of Project BG 0203.10 "Implementation of the National Shengen Action Plan in compliance with Shengen requirement", is further development of the institutional capacity of the Ministry of the Interior in view of implementing the acquis in the field of justice and internal affairs. The project will be implemented through twinning and is focused on the overall establishment and putting into operation of an Automated information system (AIS) for search activities, based on the practice and standards of the Schengen Information System, as well as further elaboration of the criminal analysis system and development of software application for distance training of the Ministry of the Interior (MoI) officials. The achievement of this objective will contribute to the strengthening of border control, the internal security and will enhance the data exchange and co-operation with the EU member states and Europol, as well as the counteraction to cross-border organised crime.

1. Audit Objectives

The audit objectives audit are: 1. To present to the Legislature and the Executive, the management of the Implementing Agency "Central Financing and Contracting Unit" (CFCU) at the Ministry of finance, ECA, DEC in Sofia and the National Leader, an independent and objective assessment of the degree of effectiveness and efficiency with which Project BG 0203.10 is being implemented and the activities for its management; 2. To support the IA Management in improving the effectiveness and efficiency during the management and implementation of the Project; 3. To make the public aware of the improvement of the accountability and transparency with regard to the auditee.

1. Subject and scope of audit

The subject of the audit is the implementation of activities under Project BG0203.10 at the CFCU Implementing Agency at the Ministry of Finance and the Project beneficiary - the Ministry of the Interior (Co-ordination Information and Analysis Directorate). For the purposes of the audit, the activities for the period 01.01.2003 - 31.03.2004 have been covered.

The audit is focused on analysis and expressing opinion on:

1)The financial management system of the IA, in view of implementation of the project. Establishing the legality, reliability and regularity of accountability. The policy and procedures used, assuring validity and reliability of the accounted data. 2) Project implementation in compliance with the EC regulations, Phare, DIS and the national priorities in the pre-accession process. Observation of the acting laws, as well as the clauses of contracts and the Twinning Agreement. 3) The management and implementation of the Project in line with the main objectives, defined in the Financial memorandum; 4) The effectiveness and efficiency of the Project management. The policies and procedures applied by the IA and the beneficiary for guaranteeing the attainment of the objectives set; 5) The managerial control, monitoring and control environment in the IA and the beneficiary in view of the Project implementation. Comparison of the activities undertaken and the outputs achieved in line with the objectives set in the Financial Memorandum; 7) The public procurements procedures. The organisation and control of the tendering and contracting procedures; 8) The provision of staff and resources for the Project in view of the efficiency.

1. Findings

The following findings have been made as a result of the audit conducted:

1. Assessment of the Project management, control and monitoring systems

1.1. Legal framework of the financial management

The National fund at the Ministry of finance, managed by the National leader, manages the non-recourse funding under Phare in compliance with DIS. All disbursements under the Project are carried out through the National fund.

The CFCU Statute and the responsibilities for the financial management of funds under Phare and the National co-financing have been regulated.

A number of regulatory documents are available, which have been drawn up during different periods of time and this fact does not contribute to the clear and correct regulation of all CFCU functions, responsibilities and interactions. Despite this, conditions have been established, such as to assure the use of the granted funds in line with the financial regulations, applied to the general budget of the EC and the national rules.

1.2. Project management

The Project is managed in compliance with DIS of Phare Programme, considering the requirements of Annex No. 1266/99 of the Council of Europe. The tendering and contracting procedures for orders are executed in line with the Practical Guide for Phare, ISPA and SAPARD. A procedure has been started for ratifying the Annex for amendment of the Memorandum of understanding for setting up a National fund, between the government of the Republic of Bulgaria and EC, according to which " all contracts, necessary for the implementation of the Financial memorandum are assigned through the procedures and standard documentation for performing external activities, specified and published by the EC ".

In accordance with the Financial memorandum, all contracts should be signed until 30.11.2004. All disbursements should be maid by 30.11.2005.

The main participants in the Project management and implementation are: the National Aid Co-ordinator, the National leader, the National fund at the Ministry of finance, the Project leader of CFCU, IA CFCU, the Joint Monitoring Committee, the Sector monitoring sub-committee "Justice and home affairs" at the Ministry of Justice and the Ministry of the Interior, DEC in Sofia, Supervisory Board.

1.3. Project budget

The total amount of funds granted for Project BG 0203.10 according to the Financial memorandum amount to 2 400 000 euro. 2 000 000 euro of them represent support from Phare and 400 000 Euro are national co-financing.

According to the standard Project fiche the detailed budget in Euro is: a) for the Twinning project - 800 000 Euro from Phare, 10% of the Twinning budget will be from national co-financing; b) supply - 1 200 000 Euro investment support by Phare and 400 000 Euro national co-financing.

Upon beneficiary's request, a change of the standard Project fiche, concerning the supply component, has been demanded, envisaging combining of the supply component and the separate lots in one tendering Phare procedure.

1.4.Tendering procedures

The initial version for the implementation of the investment component envisages tendering procedures under Phare for the supplies, funded by the EC and procedures under the Public Procurements Act for the national co-financed ones.

The analysis carried out during the audit showed that the proposal made for the supplies under Phare procedures, decreases the risk of critical situations, which delay the implementation of the whole scope of the supply component ( design, supply of equipment, installation, testing, continuous and reliable operation), as well as a more effective and smooth implementation of all project related activities. The implementation of the supplies under Phare procedures is in line with the launched procedure on ratifying the Annex for amendments to the memorandum for setting up the National fund.

The tendering procedure is expected to be announced in June/July 2004.

1.5. Concluding contracts

On 23.07.2003 a Twinning covenant was signed between the administrative authorities of the Republic of Bulgaria (the candidate country), Spain (EU -member state and leading partner) and France (EU member- state and junior partner).

A service contract has also been signed (PAA assistant).

No contracts have been concluded under the investment component.

1.6. Transferring funds from the National fund

Money transfers from the National fund to the sub-accounts of the Implementing Agency are granted as limited amounts.

The audit team ascertained the availability of the funds requests and the respective written approvals by the National fund.

1.7. Disbursements, approval, bank accounts, authorised persons

It has been ascertained that CFCU makes disbursements only when contracts have been signed and approved by EC. Invoices, signed by the Project leader of the MemberState have accompanied all payment requests. The disbursements to contractors have been made after a careful compliance check of the invoice with the contract, with the Practical Guide requirements and the national regulations. All disbursements made have been immediately accounted for in Perseus.

As a result of the checks performed on the regularity of procedures carried out, the availability of approved budgetary limits, the grounds for payment and expenditure documentation, the audit team expresses a reasonable assurance that the disbursements made are in order.

CFCU makes disbursements under Programme BG 0203 from the sub-accounts, opened with Bulbank. The persons, authorised to deal with funds in bank sub-accounts during the audited period are selected in compliance with the regulated procedures. When working with bank accounts, the double-signature system is being applied.

1.8. Financial accountability

The Implementing agency draws up and submits to the National fund monthly financial reports and monthly progress reports in accordance with the standard format.

The expenditures, approved by CFCU concern disbursed sums and approved investments. The approved expenditures do not concern changes in the agreed parameters or activities outside the ones, described in the twinning and service contracts.

1.9. Financial status of the project

The financial status of the components of the project (for the funds under Phare) till 31.03.2004 is:

Component/contract / Total
budget / Agreed budget / % (3:2) / Absorbed
funds / % (5:3) / Balance
1 / 2 / 3 / 4 / 5 / 6 / 7
Component 1 (Twinning)
Twinning / 780 800 / 97.60 / 278 076.22 / 35.61 / 502 723.78
Service contract / 19 200 / 2.40 / 6 024.75 / 31.38 / 13 175.25
Total component 1: / 800 000 / 800 000 / 100 / 284 100.97 / 35.51 / 515 899.03

The funds from the national co-financing for component 1 are 76 183.31 Euro and 20 845,11 Euro therefrom have already been disbursed.

According to the standard fiche of the project, component 2 (supply of equipment) includes: IT equipment (hardware and software) , design, supply and building up a training system under sub-project 3. Design, supply and installation of a fire alarm and fire-extinguishing system, design, supply and installation of a clearance system, design, supply and putting into operation of a generating system. No funds have been agreed and absorbed.

1.10. Management and control system

During the audit, a periodic evaluation was made to the following key elements of the management and control systems, set up at the Implementing agency: a) drawn up regulatory framework; b) administrative capacity for implementing the project - availability of adequately qualified staff; c) conditions, created for financial management and control (first level of financial control), including division of financial and control responsibilities from those, concerning approval of disbursements; d) reliable accounting and implementation monitoring systems, set up for the whole duration of the project; e) available internal audit and control; f) audit manuals drawn up and approved; g) sufficient audit follow up.

The findings for some of these elements have been analysed under other items of the present report as well.

1.11. Internal control

1.11.1. Control environment

The overall assessment of the control environment, established at the CFCU Implementing Agency and the beneficiary is good and involves 6 factors: 1) code of ethics, 2) goals, set by the management and risk analysis, 3) management/organisational structure/ granting powers and responsibilities; 4) information and communication; 5) human resources/competency; 6) monitoring and control.

1.11.2. Control procedures

1.11.2.1. First level of financial control

The disbursement procedures and double signature system, set up at CFCU have been carefully observed.

The preliminary control of funds, granted under PHARE is carried out in compliance with an approved summary table for the officials and experts, responsible for the relevant projects, who fulfil control functions under different contracts. Depending on the development of the projects, the table is constantly being updated. The manual for financial management procedures is being observed.

A standard check list is being used and the Project financial manager, who is the person in charge for the second signature of sub-accounts, certifies with his/her signature the availability of funds. After that two experts check the payment document. The payment orders and accompanying documents are handed over to the financial manager for control and signature.

Two financial controllers have been appointed in the Ministry of finance, who perform ex ante control as from June 2003, only of the funds granted from the Republican budget as a form of national co-financing for projects in CFCU.

No financial controller has been appointed for funds, granted under Phare.

The manuals used have been drawn up in the period 1999-2002. A full set of manuals, has not been drawn up and approved, covering all CFCU activities (including different projects) with clearly drawn up actions for risk management during all stages of the project implementation; procedures for monitoring projects, managed by CFCU; updated procedures for ex ante financial control of EU funds; operational system for avoiding, detecting and reporting mistakes and irregularities, identified in the process of implementation; setting up and applying audit trail.

1.11.2.2. Second level of financial control

Two internal controllers have been delegated.

The Inspectorate at the Ministry of finance and the Inspectorate and Revision Directorates at the Ministry of the Interior have controlled the project.

1.11.2.3. Third level of financial control

The National Audit Office performs the independent public external audit. The report with audit findings is sent to the ECA.

The Financial memoranda, tendering procedures and contracts signed are subject to supervision and financial control by the EC and ECA. External auditors with whom EC has signed contracts can audit the accounts and operations of the National fund and CFCU.

CFCU has made efforts to set up the financial management and control systems and absorb funds in line with the principles of good financial management, in view of achieving the project objectives.

Despite the established procedures of ex ante control, the audit team considers that these circumstances do not diminish the need of appointing a financial controller in charge of funds under Phare.

It is necessary to make a precise distinction of functions of authorisation, disbursement and ex ante control, in view of avoiding conflict of interests.

The lack of detailed updated manuals is a reason for difficulties in the effective and efficient implementation of activities of various nature and from different sectors and also does not assist the work of recently appointed auditors, who often lack professional experience in the management of projects, financed by EU and the national budget. In regard to the concept for DIS - stage 2 - " filling up the gaps", the available manuals will be updated and new ones will be drawn up.

No audit trail has been set up and applied, allowing for follow up of each document, action or process.

The lack of a detailed risk analysis does not help the smooth implementation of the project related activities (especially with regard to the investment component).

1.12. Accounting system

The CFCU accounting system has been set up in line with the Accountancy Act, the National accounting standards and the EC regulations. Double-accounting system has been applied, using software ACCOUNT, having two separate modules, giving information on both, national co-financing and financing under Phare. All accounting operations have been registered chronologically, depending on the date when they have been performed and the entries in the ledgers are in line with the primary documents. Every month the data is filed on paper and as a hard copy. Four persons from the directorate have access to the system, each one having different access rights.

In order to present financial information to the EC concerning Phare programme, the Perseus financial accountability system is being used.

It is being planned by the end of May 2004 to introduce an experimental unified information system SAP R3 in the Ministry of Regional Development and Public Works and CFCU. For this purpose, the first training stage of the accountant, who will work with this system in CFCU has been carried out under a pilot project.

The audit team is convinced that a functioning financial accountability system regarding all payments has been set up in CFCU. No deputy for the accountant has been envisaged or trained to insure substitution.