MONTENEGRO STATE AUDIT INSTITUTION SAI no.: 40111/18-011-112/166 Podgorica, 15th October 2018 AUDIT REPORT OF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2017 (final) Podgorica, October 2018 Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 OPINION AND RECOMMENDATIONS Based on Article 9 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board responsible for the audit, number 40111/18-011-112/2 of 22nd January 2018, the State Audit Institution conducted a financial audit and regularity audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017. The financial audit covered the Report on Consolidated Public Spending for 2017, Statement of Cash Flows for 2017 prepared according to the economic classification, Statement of Cash Flows for 2017 prepared according to the functional classification, Statement Arrears as of 31 December 2017, financial records system. The regularity audit was performed to control the compliance of business activities and financial transactions with the laws and secondary legislation. Responsibility of the Management for Financial Statements According to Article 39 of the Law on Budget and Fiscal Responsibility, the Minister of Finance shall be responsible for the execution of the state budget. According to Article 40 paragraph 4 of the Law on Budget and Fiscal Responsibility, a budget executor shall be responsible for the legality of use of funds approved to a spending unit. This responsibility shall include designing, implementing and ensuring internal controls relevant for the preparation and presentation of financial statements without material misstatements due to fraud or error. Responsibility of the State Audit Institution The responsibility of the State Audit Institution is to express its opinion about the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 on the basis of the audit it performed and to express its opinion on whether the business activities, financial transactions and information given in the financial statements are, in all material aspects, in compliance with the current applicable legislation. The audit was performed according to the Law on State Audit Institution, Rules of Procedure of the State Audit Institution, and Instruction on Methodology for Performing Financial and Regularity Audit. Adhering to the International Standards of Supreme Audit Institutions (ISSAI), the State Audit Institution complied with the requirements of ethics; it planned and conducted the audit in a way which provided reasonable assurance that there were no material misstatements of disclosed data. The audit included procedures for obtaining audit evidence about the amounts disclosed in the financial statements, including the assessment of risk of material misstatements caused by fraud or error. The risk assessment dealt with internal controls relevant for the preparation and fair presentation of financial statements, with a view to designing audit procedures that are appropriate in the given circumstances, but not with a view to expressing an opinion about the effectiveness of the internal controls. The audit included the assessment of the applied accounting policies and the assessment of the general presentation of financial statements. We believe that the audit evidence obtained in the audit is sufficient and appropriate to provide a basis for the expressed audit opinion. Based on the conducted audit and established facts, the Auditing Board composed of Milan Dabović, PhD, President of the Senate - Head of the Auditing Board, and Zoran Jelić, member of the Auditing Board - Senator, at its session held on 12th October 2018 adopted the following: page 2 of 81 Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 AUDIT REPORT OF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2017 A) FINANCIAL AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, which ends on 31 December 2017, established that the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 was prepared in compliance with the Law on Budget and Fiscal Responsibility and the Rulebook on the Manner of Compiling and Filing Financial Statements of the Budget, State Funds and Local Self-Government Units. Revenues, expenditures, cash balance and outstanding liabilities are presented in a true and fair manner in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 and they do not contain any materially significant errors and deviations. Based on the facts established during the audit, the competent Auditing Board expresses its UNQUALIFIED OPINION WITH EMPHASIS OF MATTER. BASIS FOR THE EMPHASIS OF MATTER 1. Financial statements and accounting accuracy According to the data from the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, deficit on cash basis is expressed in the amount of 236.862.400,90€ and an increase in cash in the amount of 23.567.997,86 €, which were financed by net borrowings in the amount of 254.239.283,53 € and by the sale of assets in the amount of 6.191.115,23 €. The audit established that the cash budget deficit along with inflows from the sale of assets should be increased by 22.612,52 €. After adjustment, the cash deficit was reported in the amount of 236.885.013,42 € and inflows from the sale of assets were reported in the amount of 6.213.727,75 €. The adjusted cash deficit reported in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amounted to 250.855.628,18 €. After the performed audit, outstanding liabilities are reduced by 669.905,40 €, so that the net changes in arrears amounted to 13.323.321,88 € and the adjusted deficit amounted to 250.208.335,30 €. The Ministry of Defence shall be obliged to adjust the data in the Statement of Arrears reported at the position 4630 - Repayment of arrears from the previous period in the amount of 669.905,40 € and to inform the Ministry of Finance about the performed adjustments. B) REGULARITY AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 established that the spending units' business activities were not in all material aspects in compliance with the legal and other regulations which govern budget operations in Montenegro. Therefore, the competent Auditing Board expresses its QUALIFIED OPINION. page 3 of 81 Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 BASIS FOR EXPRESSING QUALIFIED OPINION 2. Statement of Outstanding Liabilities The audit of the Statement of Outstanding Liabilities of 31st December 2017 identified irregularities related to: a) Liabilities reported as outstanding liabilities from 2016 and previous years which remained outstanding on 31st December 2017 It was established that out of the amount of 1.370.849,87 €, which is related to outstanding liabilities from 2016 and previous years, the amount of 246.791,17 € was not planned by the Law on Budget for 2017. b) Liabilities arising from legal regulations and concluded contracts, for which no funds were planned by the Law on Budget of Montenegro for 2017, and which were reported as outstanding liabilities on 31.12.2017 in the amount of 3.133.913,43 € The Ministry of Transport and Maritime Affairs did not plan funds for contribution costs for membership in international organisations in the amount of 73.583,31 € and the Health Insurance Fund for allowances for sick leave of over 60 days in the amount of 3.060.330,18 €. c) Outstanding liabilities related to contracting liabilities above the level of funds defined by the Law on Budget of Montenegro for 2017 in the amount of 48.155,03 € The Judiciary in the amount of 15.541,45 €, Ministry of Justice in the amount of 15.769,87 € and Ministry of Economy in the amount of 16.843,71 € contracted the commitments above the limits determined by the annual Law on Budget. d) Current outstanding liabilities expressed in the Statement of Outstanding Liabilities which could not be confirmed as outstanding liabilities during the auditing process Outstanding liabilities expressed for the spending unit Judiciary in the amount of 390.546,87 € could not be confirmed as current outstanding liabilities. It was established that some of these liabilities were paid in 2017 by means of enforced performance from position 463 – Repayment of arrears from the previous period. e) Inaccurate presentation of outstanding liabilities in the Statement of Outstanding Liabilities on 31 December 2017 In the Statement of Outstanding Liabilities as of 31 December 2017, the Ministry of Defence presented outstanding liabilities on accounts of group 463 - Repayment of arrears from the previous period in the amount of 669.905,40 €. The audit established that there is no documented basis for the presented current outstanding liabilities. The spending unit Judiciary is obliged to harmonize, together with the Protector of Property and Legal interests, the balance of outstanding liabilities and inform the Ministry of Finance about the amount of outstanding liabilities which should make adjustment of current outstanding liabilities reported on 31st December 2017. Spending units are obliged to act in accordance with Article 48 paragraphs 2 and 3 of the Law on Budget and Fiscal Responsibility, which prescribes that unpaid contracted commitments in the current business year shall be realized from the funds approved for the next fiscal year and have priority in terms of payments of obligations.