Anda di halaman 1dari 34

REPUBLIC OF BULGARIA

NATIONAL AUDIT OFFICE

REPORT

ON FINANCIAL MANAGEMENT AUDIT


OF BEAUTIFUL BULGARIA II PROJECT FUNDS

December 2001
2
REPUBLIC OF BULGARIA
NATIONAL AUDIT OFFICE

REPORT

ON FINANCIAL MANAGEMENT AUDIT

№ 0600020801 / 28.12.2001

In accordance with BNAO President Orders NoNo P-


208 of 18.07.2001, P-256 of 11.10.2001 and P-263 of
17.10.2001, an audit on the Financial Management of the
Beautiful Bulgaria II Project Funds, BG 9914: Temporary
Employment and Vocational Training has been carried out
in the Central Finance and Contracts Unit (CFCU) at the
Ministry of Finance and the National Project Office located
in the Ministry of Labour and Social Policy for the period
01.09.1999 to 30.06.2001.

The audit has been carried out by:

1. Stoyanka Arangelova –Auditor and Head of audit


team, Ministries and Agencies from Non-Economic
Domain Department
2. Kirilka Misheva –Auditor, Ministries and Agencies
from Non-Economic Domain Department
3. Dolores Nejkova-Chobanova –Auditor, Legal Resource
and Development of Legal Framework of Audit
Activity Department
4. Julia Penovska –Auditor, Organization, Development
and Analysis of the Audit Activity Department
5. Roumiana Tchoukova – Auditor to the President
6. Iskra Belovska – Auditor, European Integration and
Funds from EU and other International Organizations
Department
7. Nikolai Chernev – Auditor, European Integration and
Funds from EU and other International Organizations
Department
8. Auditors from sectors Sofia, Plovdiv, Varna, Rousse,
Veliko Turnovo, Stara Zagora, Yambol, Vidin, Vratsa,

3
Razgrad and Silistra from BNAO Regional Offices -
Sofia District, Plovdiv, Varna, Rousse, Lovech,
Haskovo, Bourgas and Montana.

The report includes results from audits performed by


auditors from BNAO regional offices’ sectors in the
municipalities included in the project (Sofia, Plovdiv,
Varna, Rousse, Veliko Turnovo, Stara Zagora, Yambol,
Vidin, Vratsa, Razgrad and Silistra).

CHAPTER ONE. GENERAL PART.

І. Legal framework for the audit


Legal framework for carrying out the audit:
• Constitution of the Republic of Bulgaria;
• National Audit Office Act;
• Memorandum of Understanding between the
Government of Bulgaria and the European
Commission on the Establishment of the
National Fund, ratified with an Act by the XXXVIII
National Assembly on February 11 1999.

Provisions for the project activity and financial


management are laid down in over 20 regulations and in a
number of internal directives and rules, the most relevant
being as follows:
• Financing Memorandum between the European
Commission and the Government of the
Republic of Bulgaria on projects: BG 9907 to BG
9914, 1999 Bulgarian National Phare
Programme;
• Memorandum of Understanding between the
Ministry of Finance through the CFCU
(Implementing Agency), the United Nations
Development Programme (UNDP), the Ministry
of Labour and Social Policy (MLSP) (party to the
agreement through endorsement) and the
Commission of the European Communities
(party to the agreement through endorsement),
signed on March 24, 2000 and endorsed by the
European Commission on June 14, 2000, with
Annex A - Operations Manual of Project BG 9914
Beautiful Bulgaria II: Temporary Employment

4
and Vocational Training, and Annex B, Project
Document signed by the MLSP, the eleven
beneficiary municipalities and the UNDP on
September 1 1999;
• UNDP Programming Manual;
• UNDP Finance Manual;
• PHARE Decentralized Implementation System
Manual.

ІІ. Applicable audit standards


The audit standards adopted by the Bulgarian National
Audit Office, as well as the INTOSAI Auditing Standards
and the European Implementing Guidelines for the
INTOSAI Auditing Standards were followed in carrying out
the audit.

ІІІ. Audit objective and scope


The audit objective is:
• To analyse and evaluate the system of financial
management and control of the project funds
through examination of management decisions
on following the principles for their effective and
expedient use;
• To find out the legality, the reliability and the
regularity of the accounting;
• To submit information for the audit results to the
Minister of Finance, the Minister of Labour and
Social Policy, the Minister of Foreign Affairs, the
UNDP, the European Court of Auditors, the
European Commission, and the Mayors of the 11
beneficiary municipalities, included in the
Beautiful Bulgaria II Project;
• To give recommendations for the elimination of
the shortcomings found, in view of improving
the management of funds for other similar
projects.

The audit includes funds received from donors, as well as


expenditures related to carrying out project activities for
the period September 1 1999 to June 30, 2001.

5
The expenditures on the budget lines (International
Personnel, National Project Office Personnel and
Equipment) under which UNDP has made direct payments
on behalf of the project, are not within the scope of this
audit.

ІV. Criteria and main tasks of the audit


The audit team has applied the following criteria for
the assessment of the financial management of
Beautiful Bulgaria II Project funds:
• Compliance of the revenue and the
expenditures with the regulations of laws,
secondary legislation, and internal rules, signed
contracts and powers given;
• Expedience of project expenditures;
• Objectives achievement level;
• Compliance of financial accounting and
documentation with the rules and regulations
approved.

The main tasks of the audit are as follows:


• Analysis and evaluation of the internal financial
control effectiveness and of the accounting
information system reliability;
• Analysis and assessment of the compliance with
UNDP rules and procedures for the budget
drafting, distributing, executing and reporting;
• Finding out revenue legality;
• Finding out legality, expedience and
effectiveness of expenditures;
• Evaluation of the publicity and transparency
achieved in the project implementation.

V. Materiality, audit risk, audit approach,


methods and techniques
1. Materiality
Based on the Materiality Threshold and Audit Risk
Standard, adopted by the National Audit Office, the audit
team determined and applied a materiality by value
threshold of 2 per cent of the total revenues and
expenditures of the project budget. This is the maximum
acceptable level of errors and irregularities allowing the

6
auditors to express reasonable assurance that they do not
prejudice substantially the information for the users,
contained in the audit report.
The cases of infringement of legal provisions concerning
financial management of the funds are considered as
materiality by nature.

2. Audit risk
In compliance with BNAO audit policy in financial
management auditing, the audit team has determined an
audit risk of 3 per cent, which ensures an acceptable
assurance level (97 per cent).
Inherent risk
The audit team has analyzed the activities related to the
project implementation and the financial management
system and identified the following main inherent risks
and measures undertaken for their minimization:
MAIN INHERENT RISKS RISK CONTROL MEASURES
Existence of different donors Operations Manual
– a large variety of rules and developed, containing the
procedures. A large number administrative and financial
of different kinds of guidelines for the project
regulations. implementation.
A large number of actors in Mechanisms created for
the project. project coordination at
central and local levels:
• Meetings for technical
coordination and
meetings of the National
Steering Committee
held;
• Regional Advisors
coordinated activities
between the different
Municipal Project
Offices;
• Municipal Project Offices
coordinated the
participation of the
actors through meetings
of the Local
Management

7
Committees.
Lack of sufficient • Preliminary training of
management experience on all main project actors
central and local levels in relation to the
objectives, strategy,
legal framework,
project procedures
and donors
requirements.
• Continuous training
performed in the
process of
implementation and
resolution of arising
problems.
• Special software
developed for
facilitating financial
and accounting
activities of the
project.
Lack of sufficient personnel in The municipalities included in
municipal administrations the project have been
and in the other local involved in view of
structures participating in the participation of municipality
project. personnel.
Different donors – a large Operations Manual
variety of rules and developed, containing all
procedures administrative and financial
guidelines for the project
implementation
Technical issues related to: • Involvement of a
• The seasonal large number of
character of the skilled personnel,
construction works on having participated in
the project; “Beautiful Bulgaria I”
• The lack of necessary Project.
skills in unemployed • Development of
people for certain calendar work-
types of work; schedules for
• The specific construction works.
requirements for • Memorandum signed

8
restoration of with the National
buildings-monuments Institute for the
of culture; Monuments of
• Non-keeping of the Culture, “Technical
occupational safety specifications and
and health rules and requirements for the
lack of sufficient restoration of
control. buildings –
monuments of
culture” developed,
approval of technical
projects and control.
• Checklist for control
on the
implementation of the
safety and health
rules developed.

Control risk
The analysis of the control environment, the accounting
system and the control procedures foreseen, allowed the
audit team to determine a low control risk.
Detect risk
After the evaluation of inherent and control risk, the
results reported from the internal control system tests and
the direct substantive tests undertaken, the audit team
determined a low detect risk. The undetected errors or
omissions would not affect significantly the opinion on the
financial management of the project funds.

3. Audit approach, methods and techniques


A combination of the two main types of audit approach
was applied in carrying out the audit: the Systems Based
Approach and the Direct Substantive Testing Approach.
The testing of the internal control system has proved that
it is reliable enough, which allowed mainly the Systems
Based Approach to be used.
The audit team carried out a direct substantive testing in
order to receive evidences for: completeness of the
payment document with primary documentation;
compliance of the financial record with the amounts in the
primary documents; existence of the necessary payment
confirming signatures.

9
Six audit samples have been formed using non-
statistical methods: random selection and selection on a
determined example, including a total of 2 661 sampling
units. 431 units of them are on payments and 2 230 units
on documents annexed to the main works contracts.
The audit samples on a determined example and
their scope are indicated in the following table:

N AUDIT SAMPLES TYPE PAYMENTS/DOCUMENT


o ON A OF S
DETERMINED SAMPL (NUMBER)
EXAMPLE E
Expenditures
under
categories
1. Designing Rando 33
m
2. Works Rando 59
m
3. Training of Rando 30
unemployed m
4. Operational Rando 32
costs m
Payments
made in a
period
5. From 1.09.2000 Block 277
to 30.09.2000
Type of
document
6. Works contracts Rando 2230
and supporting m
documents
Total sampling 2661
units

The following methods and techniques for obtaining and


analysis of audit evidences have been applied:

10
• Interviewing key personnel – director,
administrator, chief engineer, chief accountant,
etc.;
• Examining and checks of documents;
• Evaluation of the materials related to project
publicity;
• Audit of samples selected on a determined
example for revenue, expenditures, and
contracts by types of works and sites, etc.;
• Following of the conformity to implementation
and monitoring procedures;
• Analysis of the financial reports and reports
from the municipal project offices in terms of
their completeness, regularity, measurability,
reliability, timeliness and legality of
expenditures;
• Analysis of labour/material expenditure ratios
for construction works.

VІ. Responsibilities of the auditees


The MLSP has implemented the project with UNDP support
on behalf of the CFCU. The UNDP Resident Representative
for Bulgaria, Mr. Antonio Vigilante, has been responsible
for the sound financial management of the project. The
Programme Director, Mr. Hachemi Bahloul, has supported
the project management.
Bank accounts have been operated on the basis of a
double signature system: by a designated UNDP
representative and a designated MLSP official. The
National Project Director Mrs. Tsveta Nanyova and the
Project Administrator Mrs. Audrey Paterson have been
authorized to sign payments on behalf of the UNDP, and
Mrs. Danka Shopova, Head of Protection Against
Unemployment Department, later replaced by Mr. Mihail
Bachvarov, Head of Employment Promotion Department,
and Mr.Vlado Halachev, Head of sector in Employment
Promotion Department on behalf of MLSP.

VІІ. Results from previous or other audits

11
The National Audit Office has not carried out an audit of
the project funds.
An audit of the financial operations has been carried out
by KPMG for the period September 1 1999 to December
31, 1999. The audit conclusion is concerning only funds
from municipalities and from UNDP, as well as central
UNDP Office expenditures, as EU funds became available
at a later stage. The audit report states that expenditures
are made in compliance with UNDP financial regulations
and with generally accepted accounting principles.
An audit of the financial operations has been carried out
by PriceWaterhouseCoopers for the period January 1 2000
to December 31, 2000. No violations of UNDP financial
regulations and of generally accepted accounting
principles have been found.
A team of international and Bulgarian experts has
performed in the end of 2000 an independent evaluation
of the expedience of the funds disbursed on the project for
the period September 1999 to December 2000. A positive
estimation has been given to the implementation of the
project objectives and recommendations have been made
for the use of gained experience in the management of
other international programmes and projects.
The European Court of Auditors has checked 20 financial
transactions of EC to Bulgaria for the year 2000 in April
2001, including transactions on the Beautiful Bulgaria II
Project. By the end of November 2001, the CFCU and the
National Project Office had received no information on the
audit.

CHAPTER TWO. FINANCIAL MANAGEMENT.

The audit team defines financial management of funds as


a system of policies, decisions and activities of the
auditee, related to the organization, planning, disbursing,
reporting, monitoring and control of funds provided by
donors.

І. Financial management system


1. Sources of funds

12
The sources of financing and the total budget in Euro
according to the project fiche, approved by the EU, are as
follows:

European Union 4 500 000 euro


Municipalities 724 000 euro
UNDP 633 500 euro
Total amount 5 857 500
euro

The budget structure by sources of project funds


according to the project fiche is represented in the
following chart:

Chart 1

With the additional funds provided by the private owners


of refurbished buildings, amounting to Euro 206 000, the
total project budget amounts to Euro 6 063 500. Its
structure is represented in the following chart:

Chart 2

2. Management structure
The management structure of the project has actively
engaged different actors on international, national,
regional and municipal levels.

13
In accordance with the Memorandum of Understanding
between the Government of Bulgaria and the European
Commission on Establishment of the National Fund,
ratified with an Act in 1999, the funds allocated by the EU
are transferred to the Recipient through the National Fund
as a central treasury entity at the Ministry of Finance.
A Central Finance and Contracts Unit (CFCU) has been
established as an implementing body under the
responsibility of the Minister of Finance with a
Memorandum of Understanding between the Government
of Bulgaria and the European Commission, approved with
Council of Ministers decisions No 328 of 09.07.1998 and
No 551 of 16.10.1998. The CFCU is in charge of tendering,
contracting and payments on PHARE Programme projects.
The CFCU has been designated as an Implementing
Agency for the BG 9914 project with a Financing
Memorandum between the Government of Bulgaria and
the European Commission signed on December 30, 1999.
With the Memorandum of Understanding between the
Ministry of Finance through the CFCU, the UNDP and the
MLSP, signed on March 24, 2000 and endorsed by the
European Commission on June 14, 2000 the CFCU has
delegated its responsibilities to the UNDP.

The decision-making body of the Beautiful Bulgaria II


Project on the national level is the National Steering
Committee. It is an inter-agency consultative and decision-
making body, consisting of the Minister of Labour and
Social Policy, the Head of the National Employment
Service, the Head of the EU Delegation in Bulgaria and the
Resident Representative of the UNDP. The National
Steering Committee has monitored the overall progress of
the project, has approved the financial reports of the
disbursements made by the National Project Office, has
analysed and approved reallocation of funds if necessary.
A National Project Office has been established within the
MLSP with the support of UNDP, staffed with Bulgarian and
foreign personnel and responsible for the timely
implementation of activities and had combined technical
and financial management responsibility for the project.
The National Project Office has been responsible for the
overall financial management and reporting of the project,
including financial planning, elaboration of requests for

14
funds as required by the CFCU and UNDP, payments and
monitoring of payments according to the budget. The
organizational structure of the National Project Office has
included a National Project Director and 9 consultants
appointed by the UNDP.

Three international Regional Advisors, located in Sofia (for


Sofia, Vratsa, Vidin and Plovdiv), Veliko Turnovo (for Veliko
Turnovo, Yambol and Stara Zagora) and Russe (for Russe,
Silistra, Razgrad and Varna) have assisted the National
Project Office. They have been responsible and reported
to the National Project Director for the implementation and
the monitoring of the activities in the cities in the
respective region.
A Local Management Committee has been established in
each of the 11 cities included in the project. The Local
Management Committee had the responsibility to select
contractors, monitor and control the progress of works at
the local level and initiate the financial expenditures. Local
Management Committee members are the Municipality
Mayor or his/her representative, an UNDP representative,
the chief architect of the municipality, a representative of
the National Employment Service, a representative of the
regional employment office and a representative of the
National Institute for Monuments of Culture as an
observer. The Local Management Committee has approved
and awarded works contracts, training contracts, has
monitored and controlled the progress of activities at the
local level and approved financial expenditures.
Eleven Municipal Project Offices have also been
established and headed by local managers. The Municipal
Project Offices have been responsible for conducting
biddings and supervision of the implementation of works
and training activities and have reported to the respective
Local Management Committee. They have submitted
monthly reports to the National Project Office and
quarterly plans for works.

The organizational structure of the project is logical and


complete, the functions of each actor being clearly
formulated and defined on each level.

15
3. Funds planning, spending and accounting
A budget of the project in US dollars is drafted in
accordance to the UNDP financial rules and procedures,
consisting of separate budget lines. In order to comply
with EU requirements the budget in Euro is drafted,
consisting of categories of expenditures, each of them
including several budget lines. A budget in Leva is
prepared for operative purposes and day-to-day
monitoring of expenses.

Project payments have been made from three bank


accounts: UNDP account in USD, project account in Euro
and project account in Leva.
UNDP has effected direct payments from its account on a
limited number of budget lines (international personnel,
National Project Office personnel and equipment) with the
signature of the Resident Representative, after
consultation with the MLSP.
The CFCU has transferred funds in Euro to UNDP. The
UNDP replenished the project account in Euro (as a CFCU
sub-account). Based on a quarterly report for the activities
progress and financial reports CFCU has set a quarterly
limit for the project expenditures from this account. UNDP
has provided all relevant information on the account to the
CFCU.
Municipal funds have been received by UNDP in its Leva
account and have been converted in USD at the UN
exchange rate. The private owners contributions have
been channeled through the municipalities and transferred
to the UNDP bank account. The municipal financial
contributions and the UNDP contribution have been
integrated in one pool of funds.
UNDP has replenished the project account in Leva on a
quarterly basis with its own funds, including funds from
municipalities and private contributions. The
replenishment of the account has been effected on the
basis of the financial report and transfer of funds requests,
prepared by the National Project Office and approved by
the MLSP. No separate reporting has been provided for
municipality funds.
All project payments have been effected at the central
level on the basis of original set of documents submitted
to the National Project Office. Payments have been

16
initiated locally but effected at the central level. Each local
payment request has been signed by the Local Manager
and by the authorized representative of the municipality.
The project has been reported in USD to the UNDP, and in
EURO to the CFCU (for EU funds only).
The following reporting system has been established:
• Quarterly reports for project activities and
disbursed by National Project Office funds are
submitted at National Steering Committee
meetings to UNDP, EU Delegation in Bulgaria,
MLSP and National Steering Committee;
• Financial reports, from National Project Office to
UNDP and requests for transfer of funds for a
maximum period of three months;
• Monthly reports from Municipal Project Offices to
National Project Office;
• Consolidated monthly reports of the Regional
Advisors;
• Quarterly reports from the National Project
Office with requests for transfer of funds to the
CFCU;
• Monthly reports to the CFCU for EU funds.

No submission of report to the Ministry of Finance for


all funds (from EU, UNDP and municipalities) has been
foreseen in the Memorandum of Understanding and in the
Operations Manual annexed to it, in view of overall budget
accounting and in compliance with the requirements for
complete including of funds irrespective of source.

II. Internal control and monitoring


The audit team has studied the three elements of internal
control: the control environment, the accounting system
and the control procedures, in order to evaluate policies
and activities giving reasonable assurance that the system
operates correctly on national and local levels, and that
the project objectives have been achieved.
1. Control environment
The audit team has considered the legal framework,
regulating management of projects co-financed by the
Republic of Bulgaria, the European Union and other
international organizations, as well as the Beautiful

17
Bulgaria II Project financial management system, and has
obtained assurance that relevant policies and effective
internal control procedures have been put in place.
The management team has administered the project
according to UNDP and EU rules and procedures and has
been aware of the significance and the role of the internal
control. The project complexity and the inherent risks of
the system have been assessed in advance. The risk for
omissions and errors have been minimized through
adopting of policies and financial management and
reporting procedures. The Operations Manual has
regulated activities and responsibilities concerning
preventive, ongoing and subsequent control.
Competences of the decision-making bodies have been
differentiated on all management levels and project
implementation stages.
The division of rights and responsibilities on the national
and local levels, (between the National Steering
Committee and the National Project Office, the Local
Steering Committees and the Municipal Project Offices, the
Local Evaluation Committee) as well as the assuming of
responsibilities by the regional advisors have created a
reliable control environment. The use of approved formal
job descriptions, the double signature system and
standard documents for initiating payments and approving
effected disbursements have limited the risk for errors in
the funds management.

2. Accounting system
A system of accounting procedures, providing information
for the project, has been put in place in view of the legal
and expedient disbursement of project funds and of
preparing reliable reports.
The accounting and the document flow management allow
the application of control on the project revenue and
expenditures.
The individual project chart of accounts has been drafted
in accordance with the budget lines, as defined in the
UNDP Programming Manual and the categories according
to EU requirements. The information has been organized
analytically in different levels on 8-digit accounts and
consolidated by category types according to UNDP
requirements, with segmentation by sources of financing.

18
The software product has completed accounting
operations automatically, according to the previously
defined budget lines.

The audit team expresses reasonable assurance that the


established accounting system ensures sufficient
information for preparing reliable financial reports and
allows taking correct management decisions.

3. Control procedures
The management has determined control procedures in
accordance with good European practice, in order to
secure the achievement of project objectives. The
preliminary assessment of the signed preventive, ongoing
and subsequent control procedures has proved that
prerequisites have been created for the achievement of
the determined objectives and tasks. The control system
seems reasonable and risks have been adequately
addressed.
In order to give a final evaluation of the level of
effectiveness and reliability of the internal control system,
the audit team has performed an extended substantive
testing, as well as other techniques: interviews,
conversations, written statements by the relevant officials.

The analysis of the key types of control within the internal


control system has proved that a considerable part of the
laid down control policies and procedures have operated
effectively and consistently in the audited period.
Through controls compliance testing the team has found
out the following:
 An organizational and management structure has
been created with the Operations Manual,
determining and segregating duties for the overall
monitoring and supervision on national and local
levels.
The management of the National Project Office and
Municipal Project Offices had undertaken measures,
beyond day-to-day activities, which have secured
complete monitoring of the project activities on the
different levels. On a signal from the Municipal Project
Office for problems arisen, the National Project Director,

19
the Project Administrator, the Chief Engineer and the
Regional Advisors have visited the respective sites;

 The National Project Office had performed


organizational control, made changes in the work
schedule if necessary, and reallocated funds after
National Steering Committee approval, in
accordance with the responsibilities signed in the
Operations Manual;
 The responsibilities and duties of the respective
officials have been segregated in such way that a
single operation is not performed and recorded by
the same person. The Operations Manual has
specified the following requirements: the operating
of project funds to be effected on the basis of
double signature system; the contracts on the
local level to be signed by the local manager and
the relevant municipality official; the members of
the Local Evaluation Committee are not allowed to
be members of the Local Management Committee.
These requirements had been kept with some
insignificant divergences, i.e.:
• The check of the contracts in the municipality of
Stara Zagora has shown that the municipality as a
contracting party has not signed the Annex 2 for
additional works and the agreement between the
private owners and the local office for façade
repairing;
• In Yambol, the local manager has signed Annexes 2
and 3 to the works contracts for the investor only.
 The requirements for an original set of documents
in initiating payments and the built-in software
controls allowed securing of continuous operative
control. The testing of this control has showed an
insignificant irregularity in the Veliko Turnovo
municipal office - a Xerox copy attached instead of
an original document for receiving training
allowances.
 Security measures have been put in place,
restricting access to information for authorized
personnel only. Measures have been undertaken
for control over accounting and use of equipment.

20
 The relevant officials have kept the procedures for
expenditures confirmation. Municipal Project
Offices have been authorized to make certain
types of operational expenditures with the funds
collected from selling bidding documents, in
accordance with a Directive on the management of
funds collected from selling bidding documents.
Lack of signatures for cash payment certification
and disbursement of operational costs from the
relevant National Project Office and MLCP officials
has been found in Yambol municipality, below the
materiality threshold.
 Procedures for selection, training and qualification
have been established which guaranteed
compliance between the personnel skills and
responsibilities. The personnel have been selected
through open competition, based on the principles
of competitivity and transparency and training has
been provided for new-coming personnel.
 The works supervisors, the job creation and safety
consultants, health and safety consultants and
representatives of the National Institute for
Monuments of Culture have performed a
specialized ongoing control and monitoring. The
results of these controls have been as follows:
• A performance bond has not been reimbursed in
Silistra and Yambol for two sites, due to bad
works quality;
• Performance bonds have been retained in Sofia,
Veliko Turnovo, Razgrad and Stara Zagora, due to
bad works quality. They have been reimbursed
after eliminating of faults;
• Insignificant reductions of contracted sums have
been made in Stara Zagora, Veliko Turnovo and
Vidin, because of non-fulfillment of contracted
man/months and bad quality of works;
• The works in Sofia, Stara Zagora, Varna, Plovdiv,
Yambol and Vidin have been temporary
interrupted, because of non-keeping of health
and safety requirements. The instructions for
their eliminations given have been fulfilled in due
time.

21
Unpaid student allowances with an amount below the
materiality threshold have been recovered as a result of
the supervision on courses attendance made by
educational institutions and job creation and health and
safety consultants.
The respective Labour inspections have been informed for
non-keeping health and safety requirements. As a result
they undertook the following measures:
• Four infringement acts have been drawn up and
penal ordinances have been issued against
subcontractors in Razgrad municipality;
• Fifteen labour legislation infringement acts have
been drawn up in Veliko Turnovo municipality.

The testing of the internal controls and procedures put in


place on the national and local levels has confirmed the
opinion of the audit team from the preliminary study,
stating that the system has operated in a good way. The
main risks have been detected and control measures have
been effective. The internal control system has allowed
prevention concerning legality of management decisions
and the reduction of the risk for errors and irregularities.
The audit team expresses reasonable assurance
concerning the level of reliability of the control system.
The specific assessments of the types of control are
represented in a table, annexed to the audit report.

4. Monitoring
The UNDP, MLSP, CFCU and EU Delegation in Bulgaria
have carried out the project monitoring on the national
level.
The project management and monitoring support from the
UNDP has been provided by the Programme Director, Mr.
Hachemi Bahloul.
The MLSP has appointed two officials for the day-to-day
monitoring of the project and for approving of all
payments from bank accounts. The Minister of Labour and
Social Policy has directly monitored project activities
through his participation in the National Steering
Committee meetings.

22
The CFCU has monitored the following of the procedures
under the Memorandum of Understanding and Operations
Manual for the management of funds granted by EU.
On behalf of the EC Delegation in Bulgaria, the monitoring
of the project has been carried out by an Advisor.
The end beneficiaries of the project results have
participated directly in the monitoring.
The audit has found out that the Ministry of Foreign
Affairs, MLSP and UNDP have performed no tripartite
overview of the project every six months in accordance
with the requirements of the Project Document. The
opinion of the UNDP Resident Representative that this
would lead to doubling the quarterly National Steering
Committee meetings has been accepted. A representative
of the Ministry of Foreign Affairs had not participated in
the National Steering Committee meetings, which did not
allow the Ministry of Foreign Affairs to participate in the
monitoring.

The performed review and analysis of the project


monitoring have shown that the rules of the DIS Manual,
the instructions by the European Commission and the
Operations Manual and have been followed.

ІІІ. Information system


A special software product had been developed for the
Beautiful Bulgaria II Project, aiming at helping the financial
management of the project, preparing of reports,
information keeping and aggregation for the local and
national levels and measuring of the social effect from the
project activities.
The software allows automatic generation of financial
reports in different currencies, helps financial control and
monitoring of commitments according to the updated
budget. The system monitors progress towards
achievement of the project objectives, giving information
on the results of the employment created in man-months,
segmented by sex and ethnicity.
The payment mechanism is centralized in order to
facilitate financial reporting, monitoring, transparency and
accounting. This mechanism combines decentralized
decision-making and responsibility (payments are initiated

23
by the local offices) with centralized payments, allowing
better control and shared responsibility.
When entering a payment, the system performs an
automatic check of the available funds under relevant
budget line compared with the last budget revision
approved in order to avoid payments exceeding. The
software gives information about the payments effected to
date, and total sums contracted in the three currencies –
Leva, USD and Euro:

Budget revision A…n LEVA USD EURO


Budget allocation
Previous disbursements
Amount
Year-to-date disbursement
Budget availability disbursement
Commitments
Budget availability (Com)
Total commitments
Total budget available

The software allows exporting of data to other


applications, facilitating the processing of central level
information about established payment obligations.
Payments are effected through electronic banking systems
– INGBank’s MultiCash for Leva payments and Bulbank’s
Telebank for payments contracted in Euro.

The information system allows preparing of the following:


• Works progress reports: works schedule, works
calendar scheme, reports by sites, general status
of contract implementation;
• Financial reports to UNDP. The following tables are
automatically generated by the system: Funds
from UNDP and municipalities in Leva; EU funds in
Euro; aggregation of both tables for the project
needs with a possibility to choose the currency;
Financing from UNDP, municipalities and from EU
in USD;
• Informations facilitating preparation of reports to
the CFCU. The information is aggregated within the
seven categories approved, as per EU
requirements. The approved budget by categories

24
is compared with the contracted sums and the
payments effected on them;
• Informations concerning bank account flows,
budget revisions, etc.

The performed audit has found that the system reflects


the project specifics, aggregating information flows from
the 11 Municipal Project Offices. The information input and
output flows created at the local and national levels have
guaranteed possibilities for taking adequate management
decisions both by Municipal Project Offices and Local
Management Committees, and by the National Project
Office and National Steering Committee as well. This has
contributed to the good collaboration with central bodies
and partnering organizations. The aggregate accounting
information is in compliance with the standard
requirements of UNDP and the EU and has allowed the
performance of audit, internal control and monitoring.

The software product developed for the project is reliable


enough. Special measures have been put in place to
restrict access to the system that have secured the
integrity and the confidentiality of the information.

ІV. Budget procedure


The Beautiful Bulgaria II Project budget has been drafted
in compliance with the provisions laid down in the UNDP
Programming Manual. The budget is in USD, using the
standard UNDP format and includes budget lines for the
different categories of expenditures.
Six budget revisions have been made in accordance with
the progress of project activities and reflecting Euro/USD
exchange rate differences for the relevant period. The
UNDP Representative, in accordance with UNDP
Programming Manual Chapter VI, item 6.6.4, has approved
the revisions. Two budget revisions have been made for
the reallocation of funds from 1999 to 2000 and from 2000
to 2001, and the MLSP representative has approved them
respectively. As a result of the budget revisions made, the
project budget as compared to the project fiche budget
has been broken down as follows:
(US Dollars)
Sources of funds Project Project Difference

25
fiche Budget as per s
budget May 23, 2001
UNDP 700 000 680 000 - 20 000
Municipalities (including 772 947 985 267 + 212 320
private owners of buildings)
European Union 4 804 3 978 066 - 826 282
348
TOTAL REVENUE 6 277 5 643 333 - 633 962
295
UNDP Project administration 195 205 173 718 - 21 487
and management
expenditures
TOTAL AMOUNT 6 472 5 817 051 - 655 449
500

As compared to the Project fiche, the total amount of


project revenue and expenditures has been decreased by
USD 655 449, due to: decrease in the EU contribution as a
result of Euro depreciation; increase in the contribution of
municipalities as a result of private owners contributions;
decrease of UNDP contribution as a result of savings on
project management and administration expenditures.

The actualizations made in the budget do not substantially


amend immediate project objectives, results and
activities, and reflect management flexibility in the
financial management of the funds.
The analysis of the project budget drafting, distribution,
execution and reporting has shown that UNDP rules and
procedures had been kept.

V. Legality and regularity of revenue and


expenditures
1. Revenue
The financial contribution of the project participants has
been determined in the Project Document, signed on
September 1, 1999 between the UNDP, MLSP and the
eleven municipalities.
The municipal administrations of the cities participating in
the project have transferred their share amounting to USD
800 000 equal to Leva 1 486 724 into the project budget.
The transfers have been effected with insignificant
differences from the agreed deadline, September 15,
1999.

26
The project activities from September 1999 to July 2000
have been carried out with the UNDP and the
municipalities’ funds only, as the EU funds have been
made available early in August 2000. This has led to
difficulties in the division of work and the activities have
been carried out within five months (from August to
December 2000) instead of the agreed nine months (from
April to December 2000).
Despite the delay in EU funds, the project management,
following the advice of the EU Delegation in Bulgaria, has
started tendering procedures in June 2000 and has
continued with contracting according to the procedures.
This has allowed effecting of advance payments on the
signed contracts and start of works in due time,
immediately after receiving of the funds.
In the process of the project implementation, the owners
of private buildings have been involved in all
municipalities with the exception of Varna. The relevant
Local Management Committees have taken the decision
for the involvement of private persons in the project
implementation, as well as the amount of their share. The
funds agreed with the private owners amount to Leva 397
597.
The audit has found that housing co-operative “Tsarevets”,
Sofia, has transferred an amount lesser than contracted,
which is below the determined materiality threshold.
Revenues have been generated in the local offices,
coming from the sale of tendering documents to
interested works companies. They have been managed
and reported in accordance with the written Directives
given by the National Project Office.
A doubling of the numbers of credit orders issued in the
Municipal Project Office Yambol has been found, with a
total amount not exceeding the materiality threshold.
Based on a proposal by the National Fund and with the
approval of the Ministry of Foreign Affairs and the EU
Delegation in Bulgaria, the interests on the PHARE funds
for the year 1999, amounting to Euro 91 086 have been
transferred to the Beautiful Bulgaria II Project. At a
National Steering Committee meeting on June 19, 2001
the proposal of the National Project Director for allocating
the funds to subprojects in Sofia has been approved.

27
The audit of the legality and regularity of revenues has
proved that the total amount of the omissions found does
not exceed the determined materiality threshold.

2. Expenditures
The project expenditures as per June 30, 2001 amount to
5 613 453 USD equal to Leva 11 863 050, being 95.6 per
cent of the available funds under the last budget revision.
The expenditures are broken down in the following
category types:

No. Expenditure Disbursed Relative


category funds in share in per
Leva cent
1. International experts 467 994 3.95
2. National consultants 952 925 8.03
3. Operating costs 288 780 2.43
4. Works 8 729 408 73.59
5. Other contracts 158 819 1.34
6. Training of unemployed 813 106 6.85
7. Equipment 157 151 1.32
8. UNDP project 294 867 2.49
management costs

TOTAL: 11 863 100.00


050

The works have the highest relative share – 73.59 per cent
and the expenditures for training unemployed people
engaged in the project (6.85 per cent from the total). The
other expenditures have a total share of 19.56 per cent
from the total.
A conclusion may be drawn that 80.84 per cent from the
funds have been disbursed for achieving the project
objectives: to reduce unemployment and to restore the
urban environment.

2.1. Works
The main part of the works expenditures (90 per cent)
have been financed with EU funds; the UNDP and
municipalities contribution in the works expenditures was

28
5.5 per cent, and the contribution of the private owners
was 4.5 per cent.
A total of 179 contracts have been signed in the 11
municipalities included in the project, with 128
subcontractors, for the refurbishment and repair of 221
sites, half of which being monuments of culture. Tendering
procedures for subcontractor selection have been followed
and bidders with proven capacities have been allowed to
participate, together with new companies.
A total of 6 184 construction workers have been engaged
in the project,
5 080 of which being registered long term unemployed. A
total of 24 199 man/woman-months of temporary
occupation have been created under works sub-projects,
which is 13 per cent more than the planned 21 400
man/months.

The contracts have been awarded according to UNDP and


EC procedures, as well as in accordance with the
Operations Manual. The bid evaluation and the contract
awarding processes have been strictly monitored.
It has been found that the proposal of the Evaluation
Committee for subcontractor selection for one site has not
been accepted by the Local Management Committee in
Russe, and the final decision has been taken by the UNDP
and the National Project Office in accordance with the
Directive for offer evaluation.
The bills of quantities drawn up during the preliminary
estimates of sites in Plovdiv have not been complete,
which imposed the signature of additional agreements
(annexes) for additional works for 11 of a total of 14
subprojects.

The payments for the performed works have been effected


on the national level under the conditions and procedures
laid down in the Operations Manual and in accordance
with the signed contracts. No irregular payments have
been found.

One of the project objectives is the introduction of the


European occupational safety and health standards. A
training has been organized for the occupational safety
and health for subcontractors. Provisions have been

29
included in the contracts, upon insistence of the European
Commission, for refunding of occupational safety and
health expenditures subject to certain conditions:
instructions to the unemployed, lists of personal safety
equipment distributed, etc. Insignificant irregularities have
been found during the checks performed by the Labour
inspectorates on the project sites, and they had been
eliminated in due time.

2.2. Training of unemployed


The total amount of the project funds disbursed for
training of unemployed by June 30 2001 is 813 106 Leva,
80 per cent of which having been a UNDP and
municipalities contribution.

The training under the project has been organized in the


following areas:

№ Training area Number of


trainees
1. Vocational training with monthly 2 548 workers
allowance of 70 Leva for 2 months
2. Start Your Own Business 526 unemployed
3. Improve Your Construction Business 159 company
managers and
employees
4. Occupational Safety and Health 228 company staff
Training
5. Training of personnel and 64 personnel
representatives of municipal bodies 70 representatives
and institutions
Total: 3 595

The training programme has been accomplished within the


different areas. Interviews made with contractors
representatives have shown that the necessary level of
unemployed vocational training and has not been reached
and the skills and qualification obtained by them were not
in compliance with the contractors’ requirements. The
reasons are of different nature: insufficient duration of the
courses for certain qualifications; insufficient number of
licensed training institutions creating prerequisites for

30
decreased competitiveness; insufficient motivation and
lack of appropriate trainees.

2.3.Operational costs and expenditures on other


commitments
Operational costs and expenditures on other commitments
have been made, amounting to Leva 447 599, which is
3.77 per cent of the total project expenditures.
It has been found that the project management has
undertaken measures for the minimization of these
expenditures through: centralized limited delivery of
sundries; fixed amount for duty travels and their
supervision.

The applied analytical procedures during the auditing of


expenditures spending and accounting on legality,
regularity, completeness and reliability have not shown
divergences from the rules. Payments have been made
according to the project financial regulations.
The direct substantive tests of expenditures
documentation made and the analysis of monthly and
quarterly reports for the UNDP and the CFCU have proved
that the reported information is complete,
comprehensible, comparable and timely.

Despite the complexity of its management structure, the


Project Beautiful Bulgaria II has been managed in a good
way throughout all project stages: planning, execution,
monitoring, reporting and evaluation. The financial
management of the project as a system of policies and
procedures created and introduced by the management in
accordance with the Memorandum of Understanding, the
Operations Manual and the Project Document has ensured
that:
• Project activities have been in compliance with the
UNDP and EU regulations and with internal
regulations;
• Irregularities and errors have been prevented and
detected in the process of project implementation;
• Timely and reliable information in view of making
correct managerial decisions has been provided.

VІ. Project publicity and transparency

31
One of the project objectives is its popularization as a
social model for employment promotion policy. A Public
Relations Strategy has been developed and approved by
National Steering Committee. This Strategy is addressed
to the following groups: the society as a whole; citizens of
the beneficiary municipalities; actors directly involved in
the project (unemployed, small and medium enterprises);
state institutions; donors’ organizations (national,
international and EU member-states).
The information strategy activities have been
implemented through:
• Different media appearances: monthly press
releases, over 800 articles and publications, press-
conferences, over 200 TV and radio transmissions,
photo exhibitions, questionnaires on investigation
of the public opinion, Internet website, film made.
• Preparing advertising materials: З 000 calendars, 2
000 photo albums, billboards, plaques, sites
posters providing information for donors and
contractors, project business organizers, labels,
etc.

The project has been managed with a maximum


transparency and with the active participation of all
project actors. The public has been informed about the
project objectives and funds received. As a result of the
effective campaign, citizens had obtained information
about the project development and had the possibility to
communicate with the project participants.

A high level of publicity and transparency has been


achieved. This has influenced positively the project
financial management through mobilizing additional
private sector funds.

CHAPTER THREE. CONCLUSIONS AND AUDIT


OPINION

The audit team has considered the efforts made and


the results achieved in Beautiful Bulgaria II project funds
financial management and arrives at the following
conclusions and gives the following opinion:

32
1. A complicated inter-institutional framework
ensuring good interaction between the project
parties and the participants has been established
with the UNDP support.
2. Budget drafting, distribution, execution and
accounting have been made in compliance with
the UNDP rules and procedures.
3. All revenue has been received in accordance with
the Financial Memorandum, Memorandum of
Understanding and Project Document regulations.
4. Project funds expenditures have been made in
compliance with the laws, secondary legislation,
internal rules, contracts signed and the powers
given to the respective officials.
5. The organization established for distribution,
contracting, payment and expenditures control
has ensured the funds use for the objectives they
have been granted only.
6. The financial reporting and the documentation
are in compliance with the UNDP and EU rules
and regulations approved. Consolidated reports
on the funds disbursed have not been envisaged
and prepared according to the Bulgarian
legislation.
7. The established internal control system allowed
an effective preventive, on-going and subsequent
control and monitoring to be carried out.
8. During the project implementation and after its
finalization the unemployment in the
municipalities has been temporary reduced.
9. A high level of publicity and transparency on
project activities has been achieved.

As a result of the audit performed the audit team


expresses an opinion that during the audited period
conditions and prerequisites for project objectives
fulfillment have been created. The project management
team has ensured a good and effective financial
management of the funds. The principles of sound
financial management in decision-making on financial
transactions organization, planning, executing, reporting
and control have been kept.

33
The total amount of omissions and errors found does not
exceed the determined materiality threshold. This allows
the audit team to express reasonable assurance that the
omissions and errors in the management of Beautiful
Bulgaria II project funds do not prejudice substantially the
decisions of the users of report information.

The present report is drawn up in two originals, of


which one is handed to the MLSP and one is handed to the
Bulgarian National Audit Office. Twelve annexes shall form
an integral part of this report.

December 28, 2001 Audit team:

1. St. Arangelova – head of the


audit team
2. K. Misheva
3. D. Nejkova-Chobanova
4. J. Penovska
5. R. Tchoukova
6. I. Belovska
7. N. Chernev

34