STATE AUDIT INSTITUTION OF MONTENEGRO

1. STATE AUDIT INSTITUTION OF MONTENEGRO Audit of local self-government budget

2. Legal framework of the SAI • Constitution of Montenegro (article 144); • Law on SAI; • Rules of procedures, Methodology for financial and regularity audit etc.); • International auditing standards for public sector.

3. Audited entities and SAI task • Audited entities - authorities and organizations managing the budget or state property and of the local self-government units, the funds and other legal entities being founded by the state or in which the state is a majority shareholder or holds a majority stake. • SAI’s task – examine regularity, efficiency and effectiveness of the audited entity’s operation. • Subject matters to audit - financial statements aligned with the requirements of the ISSAI standards

4. Preparation and planning of the budget of local self-government units • Preparation process of the budget for local self-government units - Technical Instructions by the Ministry of finance including recommendations for approximate amounts of expenditures of local self- governments based on which the local self-government units independently plan their expenditures.

5. Funds for financing municipalities • Funds to finance municipal own affairs are provided in the Municipal Budget. • The Municipality acquires funds from: • Its own resources, • Revenues transferred by the law, • Equalization Fund; and • State Budget.

6. Adoption of municipal budget • The Municipal Budget is to be adopted for a fiscal year starting from January 1st until December 31st of a calendar year. • Planned revenues in the budget of the local self-government units are allocated on: • Current budget • Capital budget.

7. Current revenues and expenditures • The current revenues include: • municipal taxes, charges and fees; • transferred income and the Fund’s means, except for the fee for utility equipment of the construction land. The current expendituresinclude: • Gross salaries and benefits, other personal income; • Expenditures for supplies and services, current maintenance; • Interests; • Rents; • Other expenditures; • Social protection transfers and transfers to institutions, individuals, NGOs and public sector.

8. Budget Decision: • Normative part that more closely defines its implementation; • Estimation of revenues and expenditures listed according to economic and functional classifications; • Expenditures of spending units; • Use of surplus and deficit cover; • Current and permanent budget reserve.

9. Investment Policy • A decision of a Municipality Assembly on investment policy shall define the availability of unused funds, types of securities where unused funds may be invested, diversification investment policy, quality of instruments the means are to be invested in, and other issues significant for investments.

10. Borrowings of Municipality • A municipality may be indebted by issuing securities or taking out loans. • A Municipality may take long-term loans. • Contracts on borrowing shall be concluded by Mayor, on the basis of Assembly's decision. • A local administration body in charge of finance shall keep a record on the existing debt of a municipality, and short-term and long-term loans.

11. Borrowings of Municipality • A municipality may be indebted in a such way that the total payments of principal and interest, payments under a leasing contract, repayment of obligations for prior period and any other obligations that have the character of the debt may not exceed 10% of the realized current income in a year preceding the year of borrowing, with the previous approval of the Government. • The contract shall not be implemented on the municipal borrowing intended for the implementation of the Rehabilitation Plan for Overcoming Financial Difficulties.

12. Borrowings of Municipality • Public enterprises, institutions, and other legal entities founded by a municipality can be indebted only with the approval of the founder.

13. Regulations for drafting the Final budget statement of the local self-government units • Law on budget and fiscal responsibility; • Law on local self-government financing; • Law on local self-government; • Rulebook on Unified Classification of the Accounts of the State Budget, Budgets of Funds and Municipal Budgets of Montenegro; • Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments units; • Rulebook on the method of submission and content of data on the revenues, expenditures and budgetary borrowing of local self-government units.

14. Final Budget Statement of Local Self-government Units • Proposal of the final budget statement - by the end of May of the current year. • The final budget statement - delivered to the Ministry of Finance within 30 days from the day of its enactment. • The bills of profits and losses of public enterprises and institutions, permanent reserves and the balance of property dated on December 31st of the year the budget refers are submitted to the Municipal Assembly. • Public enterprises and institutions established by the municipality, as well as other legal entities in which the municipality has a majority stake submit their final financial statements to the municipal body in charge for finances for inspection within 30 days after adopting.

15. Structure of Final Budget Statement • Balance sheet; • Balance of incomes and expenditures; • Report on capital expenditures and funding; • Cash flow report; • Report on execution of the budget (difference between approved and executed funds); • Justification of significant aberrations; • Report on received donations and loans, and executed debt repayments; • Report on using current and permanent budget reserves funds; • Report on guarantees issued during the fiscal year; and • External auditing report.

16. External auditing report • Private auditors – audit of final budget statement of the local self government units; • External auditing report – financial audit

17. State audit institution Audit of the Final budget statement of the local self-government units

18. Audit of local self-government units • Audit of local self-government units includes: • Process of preparing, planning and adoption of the local self-government units budget; • Execution of the budget as well as • Legal consistency of internal acts of local self-government units with laws (Statute, Rulebook on organization and etc.); • Financial and regularity audit.

19. Type, subject to matters and audit scope • Criteria for auditing regularity of the transactions - laws and regulations which are relevant for the activities of the audited entity: Law on local self-government, Law on local self-government financing, Law on budget and fiscal accountability, Law on state property, Law on public procurement; • Criteria for determining objectivity and accuracy of financial statements - appropriate accounting principles and standards for public sector, accounting regulations, adopted accounting policies of the audited entity; • Within the Final budget statement, the SAI analyzes: municipal revenues, expenditures, realization of capital projects, records of state property in the municipality, borrowings, subsidies and arrears.

20. Planning of audit Planning of audit consists of: 1) preparatory phase of planning of an audit and 2) drafting a Detailed audit plan. Preparatory planning audit phase includes: 1) to identify and assess material risks; 2) to determine materiality; 3) to design audit procedures.

21. Inherent and control risks Understanding audited entity and its environment • Information on audited entity are gathered based on documents of the municipalities as well as additional information from the other sources; Understanding internal financial control system • Conducting tests of internal control;

22. Tests of internal control • Tests of internal control: process of revenue collection; process of borrowing and subsidies; planning process; reporting process, property, arrears; human resources; calculation and payment of incomes; public procurement; expenditures for business trips; expenditures for contract services; expenditures for maintenance of construction buildings and equipment; • Interview, reviewing documents etc.

23. Determining materiality Determining materiality threshold – between 0,5% to 2,0% in line with established methodology of the SAI.

24. Planning of audit Designing audit procedures Audit procedures are designed based on the assessed risk, in order to: 1) carry out an appropriate audit procedures; 2) obtain sufficient, relevant and reliable audit evidence and 3) reach the appropriate confidence level to support audit conclusions. The audit procedures consist of: test of controls and substantive procedures. The methods of sampling areused while performing audit procedures.

25. Planning and conducting audit Drafting a detailed audit plan After having performed the activities in the preliminary planning phase of audit and submitted working documents by the audit team competent for conducting the given audit, the Head of Sector drafts a Proposal detailed audit plan and submits it to competent Auditing Board for adoption. After adoption of Detailed audit plan, the conducting phase of audit starts – fieldwork, drafting and submission of the audit minutes, drafting Preliminary audit report, audited entity’s opinion on the conclusions and audit recommendations, drafting Final audit report.

26. External state audit of local self-government units • Sector V – auditing budget of local self-government units and public enterprises; • Limited human resources -1 member of Senate, 1 head of sector, 2 heads of divisions, 2 state auditors, 1 junior auditor; • From its establishment (2004), SAI conducted 16 audits of local self-government units • Follow up audits – 10 units of local self-government

27. Audit recommendations

28. The most common identified irregularities: Legal inconsistency: • Internal control and internal audit within the municipalities; • Assets; • Documentation; • Public procurement; • The Law on financing local self-government units is infringed Note: SAI was not consulted while drafting of the Law on local self-government financing.

29. The most common identified irregularities: Incomplete financial information : • The Treasury General Ledger; • Incorrect records of expenditures and payments; • The liabilities are not recorded upon theirs incurrence, but upon timing of their payment; • Non-financial assets; • Long term financial assets; • Ancillary books; • Borrowings.

30. The most common identified irregularities: Unreal planning: • Municipal budgets were increased in 2007 and 2008 due to great amount of revenues from the sales of assets and communal charges; • The comprehensive payment of own revenues is not achieved; • Cooperation between local and state bodies is not completely adequate; • The process of planning and adoption of the budget and final budget statement is not always performed in due time; • There are no long term investment plans.

31. Recommendations for local self-government units • Adjust current expenditures with current revenues; • Adopt the medium term plan for capital investment; • Increase the scope of population who pays taxes; • Establish or improve the work of internal control within the municipality; • Comply with the Law on budget when it refers to borrowings; • Improve state assets management at the local level which is the potential source of great revenues.

32. Thank you for attention! Head of Sector Vladan Perović