An analysis conducted regarding three ministries and two public enterprises in Kosovo showed that internal audits were not able to prevent systematic mistakes and influence improvements in the performance of budgetary organizations. Many of them, the analysis found, suffered from a lack of effective examinations of internal audits in order to ensure that management systems are in line with financial management principles.

Auditing is created to help budgetary organizations be held accountable towards the public and increase the efficiency of their actions. However, despite improvements in comparison to last year’s audit, the level of implementation of recommendations for these organizations remains a challenge as it is unsatisfactory, and the weak support for auditing committees is another challenge.

At the Ministry of Infrastructure, the internal audit unit did not conduct any audits in the fields of budget and expenditures, salary lists and management of assets – although these were planned in the annual audit plan. This institution even applied the bad practice of appointing members of the executive branch in auditing committees.

At the Ministry of Health there was a lack of audits conducted in high-risk fields, such as medication from the Essential List, unjustified advances for official trips and the overall management of assets. Irregularities have been noted in the appointment of the internal auditor, as the transfer of legal officers in the position of internal auditor did not occur in compliance with the Regulation of Transfers of Civil Servants.

Low productivity was shown from the Internal Audit Committee in the Ministry of Environment and Spatial Planning. This institution has not yet compiled its statute as stipulated in the Administrative Directive, while two audited units had not prepared the action plans for the implementation of recommendations for two of the reports. Another finding was the big difference in salaries between internal auditors.

In public enterprises, it is the competence of the board to engage an internal auditor. Apart from this, the Board also establishes an audit committee composed of three members from the board of directors, who are responsible for reviewing the reports of the internal auditors. At the Kosovo Energy Corporation, KEC, they said that they plan to restructure the organizational scheme of the audit unit, advancing the role of the Office of the Internal Auditor, where annual plans audits are initiated in different fields of the enterprise. This will be done with the purpose of eliminating the identified risks and to improve the performance.

As one of the most profitable public enterprises in Kosovo that brought the state budget millions of euros every year, the Kosovo Telecom is facing a financial crisis, not being able to cover even its own expenses. During 2017, the internal auditor of the Telecom conducted 17 audits resulting in about 70 recommendations.

High-risks fields at the Ministry of Health remain unaudited

The low level of implementation of the recommendations at the Ministry of Health caused problems highlighted in the reports of the National Audit Office to be repeated every year.

The Internal Audit Unit at the Ministry of Health drafted the strategic plan for 2016-2018, as well as the annual plan approved by the minister and the auditing committee. 17 regular audits and one ad-hoc audit were conducted during 2017. 14 of the audits conducted were according to the approved plan, and the other three were conducted upon the request of the management. At the end of the year, the internal auditing unit, IAU, also compiled a report on the implementation of the recommendation provided.

During the examination, the National Auditing Office, ZKA, identified a series of shortcomings in the management of IAU.

Although this unit has implemented a considerable number of reports, according to the ZKA, ministry did not focus on conducting audits in the key systems and those with high risk during 2017, such as expenses of medication in the Essential List, unjustified advances for official trips and overall management of assets.

Additionally, according to the ZKA, the audits do not provide enough assurance and contribution for the improvement of internal examinations because only partial systems were audited.

The ZKA says that the management of the ministry was not provided with advice on the elimination of mistakes regarding annual financial statements. Furthermore, no audited unit had prepared action plans on the implementation of recommendations and, as a result, recommendations of the IAU were not implemented.

However, the IAU of the Ministry of Health said that the conclusions of the National Auditor were inaccurate.

“The opinion of ZKA that the internal auditing uint was not focused on conducting key and high-risk audits during 2018, such as expenditures for medication of the Essential List, unjustified advances for official trips or the overall management of assets, is ungrounded and the auditing of these issues was not lacking”, the response of this unit said.

According to them, management of medication in the Essential List, and management of assets are well-covered fields “through which sufficient assurances were given on the existence and functioning of examinations and the same time this contributed to improving processes through recommendations provided”.

Out of four completed audit in the fields of Essential List medications and assets during 2017, according to this office, there were overall 17 recommendations provided and agreed upon with the responsible officials during joint discussions.

According to them, these scopes of work were also touched upon in the 2016 reports.

“Scopes of work with no lesser risk and as foreseen in the Work plan for 2017 but also in the Strategic Plan (frequency foreseen according to the level of risk), is also the field of procurement and in particular the implementation of activities according to the foreseen dynamics and the management of contracts,” said the Ministry of Health.

Out of four completed activities, there were overall 13 recommendations provided in order to address these issues.

As for the advances and petty cash, the Ministry of Health said that it was always treated in the scope of the expenditures of the organisation and depending on the level of risk grade (which also depends on the judgement of the auditor), the frequency of revision of foreseen “which for this specific case we had including the annual plan for 2016 and lately in the Work plan for 2018 that was delivered on October 26 2017”.

According to IAU, in the scope of these reports when referring to the selected samples under review that vary on the population of the samples which may go up to the level of 100%, from the financial reports/information provided by the budget organisation according to the legal obligation they have for cooperation and their accuracy, there were findings noted and recommendations provided accordingly.

“It is unacceptable for the situation created lately with the issue of advances to be qualified as challenging according to the opinion of the Internal Auditor of the Ministry of Health and for the Treasury of the Ministry of Finances (SIMFK) as a control mechanism for expenditures of budget organisations (BO) and issues that could be reviewed in many dimensions from the NAO itself (which was not noted in the years) – was qualified/addressed as a key high risk audit, by going back after the audit was completed and retaking additional samples for verification. All of this was done after undertaking actions by the Ministry and initiation of a case in the prosecution with the engagement of the IAU upon the request of the General Secretary,” says the response of the Ministry of Health.

This case was referred to the prosecution mechanism.

According to the Ministry of Health, the managing policies employed in preparation of annual financial statement is more comprehensive in terms of accountability, “by appointing a professional Committee composed of financial officials from the depended units under the Chief Financial Officer – Ministry of Health.” According to them, in spite of this, the activity of the internal audit has been and is in support of development in all fields upon requests for cooperation and advising.

In terms of completing the action plan, which audited units are obligated to do, the Ministry of Health insisted that this is not done for all units “as some of them have been responsible in this direction”.

“However, regardless of this, the monitoring of the progress in implementing the recommendations was not affected, which can be proven with the report on the implementation at the end of the year and the quarterly follow-up of issues qualified as being late in implementation, due to time limits. From the management of the Ministry of Health, actions have been undertaken to increase responsibility in completing the annual monitoring plan on the implementation and full responsibility in its implementation,” the response reads.

However, the National Audit Office found that the recommendation for the Ministry of Health to ensure a revision of steps undertaken by the management regarding the recommendations of the internal audit remain unimplemented. The Minister was requested to cooperate more closely and to have a more effective communication between this unit and the management as well as “to impact the prevention/elimination of the many shortcoming that follow this ministry”.

Irregularities have also been noted in the appointment of Internal Auditors. Thus, the transfer of the legal officer in the position of the internal auditor, according to NAO was done in violation of the Regulation on the Transfer of Civil Servants, as the grade and pay were not the same between the positions. Furthermore, the official that was transferred until November 2017, also exercised the role of the Acting General Secretary.

A low productivity was also found in regards to the meetings of the audit committee. Only three meetings were held. In the last three months, the audit committee was not functional due to two members leaving.

“In terms of the functioning of the Audit Committee from the Ministry of Health actions were undertaken to make it functional by issuing the decision to complete it with the required number of members that had presented conflict of interest and that according to legal deadline meetings were held to review the reports every quarter,” noted the response of the office of the Internal Auditor.

In conclusion, they said that the Plan of engagement of the IAU compiled in compliance with the Annual Work Plan cannot be contested upon the judgement of other by justifying that it goes through many filters of discussion at the level of the Committee and the senior management as well as the priorities in the interest of reviewing by the respective managers.

“The contribution of the Internal Audit has been and continues to be on providing close cooperation in preventing and eliminating shortcomings and strengthening internal controls in the organisation”, concludes the response of the MoH.

Ministry of Infrastructure, lack of auditing of budget and expenditures

At the Ministry of Infrastructure as well there are problems with the IAU. Lack of coverage of the current period through IAU audit, is a weakness that continues to be repeated at the Ministry of Infrastructure. According to the National Audit Office, the internal audit conducted during 2017 primarily dealt with activities of 2016.

According to the NAO, this practice impacted the decrease of assurances that need to be provided to the management in regards to the functioning of financial systems. Furthermore, as the National Audit Office has noted, this can result in unidentified weaknesses and with the continuation of inefficient practices, which can end up with financial losses for the Ministry.

Nevertheless, the NAO assesses that the reports of the IAU are good and contain concrete recommendations for further improvements. NAO recommended actions that must be undertaken by the Minister, to cooperate with the Audit Committee. It was requested to conduct a critical revision of internal audit plans in order to ensure that they are based on processes of the current year and the management need to provide the required assurances.

The internal audit unit for 2017 had planned nine audits and four audits upon request. During 2017, this Unit conducted 13 audits. The Ministry of Infrastructure prepared a plan of implementation of recommendations of the IAU and is in the process of implementing then. Also, the IAU prepared quarterly reports on its activities for the Central Harmonisation Unit of the Internal Audit of the Ministry of Finances. The Internal Audit Unit of the Ministry of Infrastructure is composed of the director of the Internal Audit Unit and three auditors.

More shortcomings in the functioning of this unit were concluded during 2016. There was no audit in the fields of budget and finances/expenditures, for the lists of salaries or the management of assets, although they were planned with the annual action plan of the audit. Additionally, the management of income and payable accounts was not included in the annual audit plan. The recommendations of the internal audit for the management were not implemented.

The Ministry of Infrastructure applied a practice that was not good when it came to the appointment of the composition of the Audit Committee, where one member was also the chief of division of budget and finances. The Audit Committee with a member of the executive in its composition may not be objective in treating the issues raised on the activities of the executive in the internal audit reports.

“The Audit Committee must be objective, ensure that the composition of the Committee does not include personnel that is not involved in executive work in the fields of budget and finances. It should also review actions undertaken by the management in regards to the implementation of internal audit recommendations”, states the report.

According to the assessment of the National Audit Office, these results reflect the lack of readiness of the management in acknowledging and maximising the benefits of the internal audit to demand safety for the effective functioning of controls.

This also shows the need for a better planning and management of the internal audit plan.

“An incomplete audit plan that does not include the risks encountered in the management of income and expenses affects the lack of identification and addressing weaknesses in controls, resulting in operational efficiency and financial loss,” states the report, referring to the assessment for 2017, one of the recommendations of the National Audit Office implemented by the Ministry of Infrastructure.

The Ministry of Infrastructure did not respond to the questions of the newspaper in regards to the functioning of the Internal Audit Unit and the Audit Committee.

Lack of contribution in the Audit Committee at the MESP

The Audit Committee of the Ministry of Environment and Spatial Planning gave a low contribution. The Internal Audit Unit of this ministry operates with three staff members – the Director and two auditors. The IAU has its annual audit plan approved by the Minister and the Audit Committee. For the 2017 year there were seven audits planned in high or medium risk fields. Until the end of the year, the IAU managed to complete all the foreseen audits. Despite this, their audit plan has a visibly lower number of completed audits compared to other ministries.

But, the General Auditor concluded that the finding consists with the weak functioning of the Audit Committee. During 2017, the AC held only two work meetings out of four requested in the Administrative Directive 11/2010 on the establishment and functioning of the Audit Committees. The National Audit Office said that according to the minutes of the meetings it may be noted that the work of the IAU was reviewed but it was very generalized. The Audit Committee has also not compiled its statute yet, as requested by the Administrative Directive 11/2010 article 4, point 1.14 on the establishment and functioning of this Committee in the sectorial subject. While for two reports of the Internal Auditor, the audited units had not prepared action plans for the implementation of recommendations.

The National Audit Office recommended the Committee to review the results of the internal audit and the actions undertaken by the management in regards to the recommendations provided. Additionally, it was requested to ensure that all action plans for the implementation of recommendations have been compiled.

“The lack of contribution by the Audit Committee (AC) decreases the efficiency of the Internal Audit system as a whole. Additionally, the lack of compilation of the statute of the AC enables lack of clarities in defining duties, authorities and reporting procedures in order to provide support for the management. Further, the lack of an action plan for the implementation of recommendations by the audit units may result in the continuation of weaknesses identified,” concludes the report of the General Auditor.

Many weaknesses have been concluded in the report for 2016 as well. Only 43 out of the 62 recommendations provided by the IAU were completely fulfilled by the management.

Furthermore, there is particularly highlighted difference between the salaries of internal auditors. One auditor gets paid per the coefficient of 16, while the other gets paid with the coefficient 7.

According to NAO, these shortcomings in the internal audit systems result in lack of addressing the weaknesses in controls thus generating a lack of operational efficiency and potential financial losses for the MESP. In order to avoid this, the General Auditor recommended the Minister to ensure an effective communication with the Audit Committee in order to achieve maximal benefits from the internal auditing activity. While from the Audit Committee it was demanded to review in a critical manner the plans in order to confirm that they are based in the risks and to provide the required assurances to the management. Revision was also requested also on the reasons that lead to differences in the salaries of the auditors.

The Ministry of Environment and Spatial Planning did not respond to the questions of the newspaper on the functioning of the Internal Audit Unit.

Internal Audit at KEC, oriented in three directions

The Internal Audit Unit at KEC functions according to the Law on Public Enterprises and the Law on Internal Controls of Public Finances where the Audit Committee has exclusive competences over the Internal Audit Unit and the latter serves the Audit Committee. The AC is composed of three members of the Board of Directors appointed by the shareholder – this time the Government of the Republic of Kosovo. The Audit Committee is composed of Fllanza Beqiri Hoxha – Chairwoman, Gjelosh Vataj – Member, Izet Ibrahimi – Member. The Chairwoman Hoxha spoke about the manner this unit functions and the actions undertaken in the past two years. She said that the Internal Audit Unit at KEC functions as a division and in its structure it has three levels – the Internal Audit Officer (Director), Main Auditors (Managers) and Senior Auditors. Such a structure contains two levels of quality control of the reports. Senior Auditors compile the audit reports and its always two auditors engaged in an audit. According to chairwoman Beqiri-Hoxha, the main auditor control their reports and after approval submit it to the Internal Audit Officer for approval. The Internal Audit Officer reviews the report and after approval sends it back to the auditor for delegation to the audited unit for a meeting.

“Bearing in mind the needs of the company and the structure of the Internal Audit that was adapted to these needs, the entire audit unit is focused in three main directions: Operational, Financial and Compliance”, said Hoxha.

The Audit Committee started functioning on December 2017 and since then according to Hoxha has held 17 meetings including extraordinary meetings.

The Internal Audit Unit during the last two years has conducted 92 audit in various fields at KEC. Hoxha said that for all the audits, reports have been compiled and addressed to the management.

“Based on practices, each audit initiated results with a report. The report is then sent to the management for a conciliatory meeting. At the conciliatory meeting, the recommendations are addressed and with the signature of the report by the management an action plan with timelines for implementation of recommendations is compiled”, stated the Chairwoman of the Board.

She added that before the monitoring of implementation of recommendations was done at the end of each calendar year, “while now we have changed this practice and we monitor the implementation of recommendations continuously, depending on the set timelines in the conciliatory meeting”.

She added that “During the monitoring we get back information in regards to the implementation of recommendations. As a result of this practice we have noted an advancement in the implementation of the recommendations”. As the chairperson of the Audit Committee Fllanza Beqiri stated that they plan to restructure the organisational chart of the audit unit, advancement of the role of the Internal Audit Office at the enterprise where through the approval of the Annual Plan they will initiate audits in different fields of work of the company.

She noted that “This will be done with the purpose of eliminating identified risks and enhancing the performance of the enterprise,” and added that they will continue monitoring with more attention the implementation of the recommendations issued by the Internal Audit Office. She also warned that through the Board of Directors they will demand from the senior management of KEC responsibility for the lack of implementation or delays in implementation of recommendations.

“The priority is to continuously guarantee the independence of the Internal Audit Office in order for them to conduct audits independently in various fields in the scope of the enterprise,” concluded Hoxha.

KEC is a company that spends most of its public money through procurement activities. For this reason, it has always been a continuous request also from civil society organisation for KEC financial statements to be audited by the National Audit Office (NAO).

The lack of the financial audit at KEC, was previously justified by NAO with lack of human resources. However, this office has said that they plan to conduct audits at the public enterprises in the next three years.

The Independent Audit Report for the year ended December 31, 2017, provides a short explanation on internal controls but did not provide an opinion on their efficiency.

The report noted “we understand relevant internal controls for the audit with the purpose of drafting audit procedures that apply to specific circumstances, but not for the purpose of expressing an opinion on the efficiency of internal controls of the company.”  

Internal Controls at Kosovo Telecom

The Internal Audit Department at the PTK was established in 2005 by a decision of the Board of Directors. During 2017, this company functioned without a Board of Director as in the end of December 2016, the mandate of the members of the Board had expired. The shareholder (Government of the Republic of Kosovo) had not selected the members of the Board of Directors until the end of 2018.

The spokesperson of the Telecom, Arsim Bilalli said that the Internal Audit is an activity “that provides reasonable independent assurances, is objective and an advisory activity designed to bring an added value to the operations”. During 2017, the Internal Auditor of the Telecom overall conducted 17 audits containing about 70 recommendations.

When talking about the mission of the Internal Audit Department, Bilalli said that it consists in providing assistance to the Telecom in implementing the objective of the management “by bringing a systematic and disciplined approach in assessing and improving the efficiency in risk management, internal controls and other management processes.”

He listed the engagements of the Internal Audit in a few main categories of activities.

“Audits are comprehensive reviews of controls and procedures that include tests and transactions. After each audit conducted, an Internal Audit report is issued. Internal Audit reports contain findings, risks and recommendations. The revisions are less formal than audits, and include following the implementation of the recommendations of the Internal Auditor. Projects & Analysis overall include the work but do not result in opinions or suggestions for improvement, the results of the work conducted may or may not generate a written report,” said Bilalli.

According to him, for all the conclusions, remarks and recommendations that come out from the audit activities are reported to the unit that is subject of the audit, to the executive management and to the Audit Committee.

“Audit Reports are thoroughly discussed in the meetings of the Audit Committees. The implementation of recommendations are requested continuously in the meetings of the Executive Management where the Internal Audit Officer takes part in the capacity of an observer.”

According to Bilalli, financial reports of the company are analysed by the Audit Committee on monthly, quarterly and annual basis.

“The remarks and recommendations coming out of these analysis are addressed to the executive management,” said Bilalli.

Kosovo Telecom is a joint stock company where the business activities of the company including provision of telecommunication services, mobile and fix telephone, mail services and internet services.

But a company that was once one of the most profitable public companies in Kosovo, that brought the state budget millions of euros a year, now cannot cover even its own expenses.

In 2011, then PTK had paid 80 million euros dividend to the budget of Kosovo. In 2012, this company paid 45 million euros dividend. 40 million were paid in 2013 while during 2014 and 2015 years, 15 million euros were paid to the state budget.

Since then, the Telecom has not paid any money to the budget of the state, while it closed the 2017 financial year with losses. The expenditures of the company were 85 million euros, while income was 71 million. The main burden on the Kosovo Telecom are its employees. 26 million euros a year or 30% of expenditures go for the salaries of the 2300 employees of the enterprise.

16 million euros are operational expenses, including rents of buildings used.

In order to escape bankruptcy, Kosovo Assembly adopted a resolution with a few measures for the Government on July this year.

But, very few actions have been taken. This resolution calls upon the Government to start implementing all obligations coming out of the Law on Public Enterprises by cancelling every decision that violates this law. Apart from obliging it to create a crisis management team, according to the Resolution, the Government is obliged to freeze all leading positions at the Telecom. While the National Audit Office has been requested to conduct an audit at this enterprise.

Another request was for the Government of Kosovo as the main shareholder to withdraw from the “abusive agreement” of the former director of the Telecom with the Z-Mobile company.

The difficult situation at the Telecom was concluded in the Performance Report of the Public Enterprises for 2016, which says that the Telecom closed the year with a 31 million euros loss.

This enterprise is audited by an Internal Auditor. But in the last report for the Financial Statements, there are not remarks for the internal audit.

“We understand relevant internal controls for the audit with the purpose of drafting audit procedures that apply to specific circumstances, but not for the purpose of expressing an opinion on the efficiency of internal controls of the company”, noted the Auditors report for the period ended on December 31st 2017. But this talks about the losses that the company suffered in the amount of 13,904 thousand euros.

Meanwhile, the losses accumulated are the amount of 18,448 thousand euros. Apart from this, on December 31st 2017, the obligations surpassed the current assets by 39,671 thousand euros, while on 2016 by 38,553 thousand euros. The biggest portion of losses occurred during 2017 comes from the trend of decreasing income.

According to the report, these issues show material insecurity that can shed considerable doubts on the abilities of the company to complete the principle of continuity.

“Based on these events and conditions, a material insecurity exists that may shed considerable doubts on the abilities of the company to continue with the principle of continuity and as a result for it not to be able to realise its assets and complete its dues in the normal flow of business,” says the Audit report.

Taking into consideration the financial situation, the Board of Directors had prepared a strategic plan and on June 7, 2018, presented a comprehensive document for the shareholder – Ministry of Economic Development.

The proposed measures were unfolded, initially including the emergency needs for restructuring the company, emergency capital investments, the action plan for the action plan for debt collection and decreasing expenditures in some categories.

Securing financing for capital investments would be done through a 30 million euro loan, funds that would be oriented towards implementing the +383 code. According to the report, the implementation of these emergency measures will have immediate effect in decreasing maintenance expenditures, increasing income and providing better quality services and products.

In the exit strategy the decrease of operation expenses to about 7.1 million euros was also discussed.

During the privatization process, out of the PTK two companies were created, the Telecom and Kosovo Mail. The latter was created as a new public enterprise (established on December 21st 2011, with the Government decision 16/53), which will continue remaining at public ownership, while Kosovo Telecom (including the sectors of fix and mobile phones) will be privatized. Nevertheless, the privatization process had failed.