EXCERPT AUDIT REPORT ON ANNUAL FINANCIAL STATEMENTS OF THE JP RADIO TELEVIZIJA … from the Audit Report on... · 2012. 10. 2. · EXCERPT AUDIT REPORT ON ANNUAL FINANCIAL STATEMENTS

EXCERPT

AUDIT REPORT

ON ANNUAL FINANCIAL STATEMENTS OF THE

JP RADIO TELEVIZIJA CRNE GORE

FOR 2010 Type of Audit: General Audit Auditee: JP RADIO TELEVIZIJA CRNE GORE Subject of the audit: Annual financial statements for 2010 Duration of the audit: 90 working days Composition of the Board: Mr. Branislav Radulović (a member of the Senate - the Chairman of the Board)

and Mr. Miroslav Ivanišević (a member of the Senate - a member of the Board).

Excerpt Audit Report on Annual Financial Statements of the Ministry of Spatial Planning and Environmental Protection For 2010

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PART I - BASIC ELEMENTS OF THE AUDIT ON THE ANNUAL FINANCIAL STATEMENTS OF THE JP RTCG FOR 2010 1.1. LEGAL BASIS FOR THE AUDIT The legal basis for auditing the annual financial statements of the Public Enterprise Radio Televizija Crne Gore (hereinafter - the audited entity or RTCG) is contained in:

The Constitution of Montenegro, Article 144 ("Off. Gazette of MNE" No. 01/07); Law on State Audit Institution, Article 4 ("Off. Gazette of RM" No. 28/04, 27/06, 78/06 and 17/07); Annual audit plan of the State Audit Institution, passed by the Senate on 24 December, 2010 (No.

4011-06-01/10); Decision on the audit of the Board II of 14 April, 2011 (No.40113-02-170).

An audit has been performed in accordance with: • Rules of Procedure of the State Audit Institution ("Off. Gazette of RoM" No. 50/07) and • International Standards for Public Sector (INTOSAI). 1.2. SUBJECT OF THE AUDIT Since RTCG maintains its own accounting records and prepares financial statements in accordance with the Accounting and Auditing Law ("Off. Gazette of MNE" No. 06/95, 80/08 and 32/11) which prescribes the application of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) we have audited the annual Financial Statements of RTCG for 2010,as follows: - Balance Sheet; - Income Statement; - Cash Flow Statement and - Changes in equity statement 1.3. TYPE AND PURPOSE OF THE AUDIT State Audit Institution, in accordance with the annual audit plan, conducted the general audit in RTCG (regularity audit) in order to review the financial management. The goal of a general audit is to state an opinion on the reliability of presentation of the annual financial statements and compliance (legality) of transactions reported. The first goal is to state an opinion on the reliability and fair presentation of financial statements,

which implies the regularity of the data reported in the same. The second goal is the regularity of operations relating to the examination of financial transactions

and decisions related to income and expenditures, in order to determine whether the underlying transactions were effected in accordance with law, regulations, and the powers given for the planned purposes.

1.4. AUDIT METHODS IN THE DETERMINATION OF RISK AND MATERIALITY ASSESSMENT The audit was conducted in accordance with the internal audit planning document. The audit, in addition to the standard methods of audit, included examining, on a test basis, evidence supporting the amounts and disclosures in financial statements.

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Determination of the sample was performed using the methodology for determining the sample, in accordance with the Methodological guidelines for determining the sample in the audit process, where: - Inherent risk (Ri) is estimated with a coefficient of 21.73%, - control Risk (Rk) 54.40% - audit risk Assessment (RR) of 0.59%. - The risk of detection (Ro) derived from the formula Ro = Rr / (Ri x Rk) is 5%, which ensures the safety of the audit will be 95% accuracy in detecting errors and irregularities. In relation to the established materiality of 1.17% at the discretion of Head of the Sector, the sample was expanded to 82.51%, which means that of the total expenditure amounting to €12,498,627, the sample included expenditures in nominal amount of €10,312,116.12, by which with reasonable assurances we could detect errors or omissions in JP RTCG’s operations. 1.5. GENERAL INFORMATION ON THE AUDITED ENTITY The audited entity (RTCG) under the Company Law was registered in the Central Registry of the Commercial Court on 06 August, 2002, under registration number 8-0002993/001 as an INSTITUTION. The founder of the Public Enterprise Radio Televizija Crne Gore is the state. Rights in the name of the founder - the state shall be exercised by the RTCG Council, in accordance with the law. The abbreviated name of the public enterprise is RTCG. RTCG headquarters is in Podgorica, Bulevar revolucije 19 1.6. ACTIVITY Pursuant to the Law on Public Radio - Broadcasting Services of Montenegro ("Official Gazette of MNE" No. 79/08) public broadcasting services in Montenegro are: Radio Crna Gora and Televizija Crne Gore. RTCG shall perform its core business through production and broadcasting of: - Two programs of Radio Crne Gore, via terrestrial broadcast FM and ST transmitters at the national level, - Two programs of Televizija Crne Gore, via terrestrial broadcasting transmitter at the national level, and broadcast of their own radio and television programs via satellite. RTCG may in line with the law, produce and broadcast other radio and television programs and perform other activities that contribute to a fuller use of the capacity of the enterprise and create conditions for the provision of quality public broadcasting services to the citizens. It is due that with the application of the high standards of professional ethics and quality, without any discrimination or social differences, it produces and broadcasts programming. RTCG can broadcast Radio Crna Gora and Televizija Crne Gore programs over the Internet. Changing the basic activities and privatization cannot be performed without the consent of the Parliament of Montenegro (hereinafter: Parliament).

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1.7. ORGANIZATION AND SYSTEMATIZATION RTCG shall self-govern internal organization and working methods, in accordance with the law. There are two divisions and two organizational units: • Radio Crne Gore and • Televizija Crne Gore The common parts of the organization, serving the business units are:

o Marketing and o the Joint Technical Technology and General Services

The Act on internal organization and job classification shall be adopted by the RTCG Council, while the Collective agreement (No. 01-1379 of 09 April, 2010) regulates the rights, obligations and responsibilities of employees arising from the employment (hereinafter referred to as employees) and JP RTCG ( hereinafter the employer) and mutual relations between the signatories of the agreement. The signatories to the Collective Agreement are the President of the representative organization RTCG Union, CEO and President of the RTCG, which is not in accordance with Article 150 Item 4 of the Labor Law ("Off. Gazette of MNE" No.49/08, 26/09, 88/09, 26/10) by which the collective agreement with the employer being a public enterprise, institution or other public service, whose founder is the state, shall be concluded by the representative trade union organizations, the director and the Government. 1.8. MANAGEMENT AND ADMINISTRATION The bodies organized within the RTCG are: 1) RTCG Council and 2) The Director General of RTCG. The Council shall, no later than the end of June each year, make available to the public through the web-site of the RTCG: 1) Work Report of the RTCG for the previous year, with special emphasis on the implementation of program standards and the commitments laid down by law; 2) A report on the financial operations of the RTCG for the previous year, which specifically includes information on use of funds generated from the general budget revenues of Montenegro and the funds from the Budget of Montenegro for the implementation of programs; 3) independent audit report on financial operations of RTCG. At the Council meeting (held on 21 June, 2011) Independent Auditor’s Report on Financial Statements for 2010 has been adopted. At the meeting of the Council (27 June, 2011) the amended Reports on the implementation of the programs of Radio and Televizija in 2010 was adopted unanimously, while the report on the financial operations for 2010 was not adopted on the grounds that it will be considered after the completion of the control of the Tax Administration and the State Audit Institution. At the same meeting, the Council adopted the decision that the Report on the financial operations of the RTCG for 2010 should be published on the site until 30 June, 2011 (Minutes of the Council number 01-3702). Based on the Bylaws of the RTCG of 16 October, 2009 adopted by the RTCG Council art. 99 it has been determined that the following general rules shall be adopted, and the existing ones harmonized within 120 days from the date of entry into force of these Bylaws after its publication on the website.

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1) Rules of programming principles and professional standards; 2) The program documents; 3) Code of Ethics; 4) Rules on copyright and on performing rights and benefits; 5) Regulation on the planning, production, broadcasting and archiving programs; 6) Rules of the trade secret; 7) Rules on advertising and sponsorship programs; 8) Regulation on financial and accounting operations; 9) Regulation on internal organization; 10) Regulation on jobs classification; 11) Regulation on Safety at Work; 12) Regulations on fire protection; 13) Regulations on Compensation for travel and other expenses of employees; 14) Regulations on the use of motor vehicles; 15) Regulation on encryption of accounting records; 16) Regulation on Disciplinary and Material Responsibility; 17) Regulation on Housing Issues. Of these 17 (seventeen), the state auditor was delivered 11 (eleven) existing bylaws of which only the Regulation on internal organization, the Regulation on job classification and program documents, were harmonized. Regulation on compensation of travel expenses for official travel is aligned with the Branch Collective Agreement for the information, graphics and publishing business, but it was adopted by the Management Board, which requires compliance with the regulations and adoption of the same by the Council of RTCG. The same applies to the Regulation on the Safety at Work that is in accordance with the Law on Safety at Work, but has no formal legitimacy. Regulations adopted in earlier periods by the Management Board in relation to the time of the audit have not been complied with relevant laws and regulations, as follows: 1) Regulation on accounting policies; 2) Regulation on addressing the housing needs of employees; 3) Regulation on the powers, responsibilities and competent work in RTCG; 4) Regulation on the encryption of documents; 5) Rules on copyright and the performance rights and benefits in RTCG; 6) Rules on the use of motor vehicles in RTCG; From the above six regulations, the Rules on copyright and performance rights and benefits in RTCG is even based on the Law on Copyright and Related Rights "Official Gazette of Serbia and Montenegro", No. 61/04. 1.9. FINANCING According to Art. 15 of the Law on Public Broadcasting Services, RTCG generates assets: 1) out of general budget revenues of Montenegro; 2) the production and broadcasting of advertisements; 3) the production and sale of audiovisual works (shows, movies, series, etc.,) and of sound and images, which are in the public interest; 4) the sponsorship of programs; 5) organizing concerts and other events; 6) from the budget of Montenegro; 7) from other sources in accordance with the law.

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Part II - ESTABLISHED FACTS 2.1.1 ACCOUNTING POLICY AND FINANCIAL REPORTING Audited entity applies the Regulation on accounting policies enacted in 2005, which was adopted by the decision of the Management Board, under the Bylaws and in accordance with the Accounting and Auditing Law ("Official Gazette of RoM" No. 6/02), which was abolished by the enactment of the Law on Accounting and Auditing ("Off. Gazette of RoM" No. 69/05,"Off. Gazette of Montenegro", No. 80/08). Under Article 1 of the applicable law it has been stipulated that this Law shall not apply to entities that are funded from the budget and extrabudgetary funds. Accrual basis of accounting applied by the subject of the audit, is carried out over the old information system "COBOL", which is not an adequate solution in comparison to modern software solutions. Application of the Chart of Accounts is inadequate as compared to the new "Regulation on the Chart of Accounts and the contents of accounts of the companies and other legal entities," issued by the Institute of Certified Accountants of Montenegro on the basis of the Regulation on amendments to the Regulation on the assignation of affairs of state administration in charge of accounting and review ("Off. Gazette of RoM" No. 44/07 and 33/10). Since the state is the founder of the Public Enterprise Radio Televizija Crne Gore, and the Budget Law for 2010 allocated funds amounting to €7,797,027.59 and Budget funding through the Ministry of Culture in the amount of €1,400,000.00, the audited entity should apply:

Rulebook on Consistent Accounts’ Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets ("Off. Gazette of MNE" No. 35/05, 37/05, 81/05).

Regulations of Montenegro relating to RTCG as direct budget user since 2009 (except for funds that are transferred through the Ministry of Culture) do not stipulate the authority for overseeing the expenditure of funds approved, and therefore it has not clearly defined the way of submission of financial statements. Based on the analysis in the audit procedure it was established that the RTCG for 2008, 2009 and 2010 has spent budget funds totaling €38,105,245.68 and after all in 2010 in the Income Statement it recorded the loss with the amortization included (632,160) in the amount of €1,233,806.00. Of the total budget funds spent, on the basis of information about financial problems of RTCG, given by the Ministry of Culture, Media and Sport, the Government of Montenegro (No.03-13114 of 22 January, 2009) adopted a Resolution to write-off and assume responsibilities of the RTCG up to 31 December, 2008, as well as projected expenses for 2009, as given in the following tabular view:

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(Legend for the table above: Down: Written-off amount, amount Across: Taxes on income, Taxes on trade of products of services, Total, Contingent liabilities, Property taxes, Taxes on salaries paid to municipality, Debt to Equalization Fund, Fund PIO, Health Fund, Employment Agency, Obligations to suppliers, Loan liabilities, Debts to employees, Total)

Upon review of written off and contingent liabilities and based on arrears for 2008 with projections of costs for 2009 during the audit it was determined that the projected obligations assumed for 2009 relate to the expenses for suppliers in the amount of €1,316,986.00, for employees and members of management in the amount of €355,000.00. The audit procedure established the total arrears amounting to €130,818.58, which were recorded on 1 January, 2010 relate to the period since 2002 ending with year 2008, which means that information about the status of outstanding obligations issued to the Ministry of Culture, is not credible or that obligations assumed with the Conclusion of the Government of Montenegro were not written off:

(Legend for the table above: Down: supplier, accruals included 2008 Across: suppliers abroad, suppliers in the country, suppliers in the country for basic assets, total) 2.2 FINANCIAL OPERATIONS Financial operations of JP RTCG are carried out through commercial accounts with commercial banks whose balance based on bank statements as of 31 December, 2009 and 31 December, 2010 is provided within following table:

(Legend for the table above: Down: Name of the bank, bank account number, December 31,2009, December 31,2010) Balance given in the tables presents excerpts from commercial banks harmonized with the state of the database of the General Ledger of RTCG.

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In the process of auditing, in addition to the bank account transactions within the commercial banks, the following financial transactions have also been established: RTCG has made an Agreement for short-term loan with Atlasmont bank (No. 50513139556/10 of

18 October, 2010) for a short term loan of €858,256.00. The loan is granted for a period of 12 months with grace period of 6 months. Repayment will be made in 6 equal monthly installments in the amount of €143,042.67, from 18 May, 2011. According to Article 5 of the Agreement the purpose of the loan is not specified, and the statement by a responsible person in the audited entity is that the contract was concluded with the aim of settling debts from earlier periods with "FIESTA INVESTMENTS LTD" from Switzerland for the lease of satellite capacity for the transmission of RTCG programming. The contract was signed on 25 December 1998 for a period of 6 years. State Auditor was not submitted evidence of the extension of the contract and the decision to take out a loan with the Atlasmont bank was adopted by RTCG Council on the meeting held on 25 June, 2010. By the Agreement to assume debt. No. 08-2129/1 of 29 June, 2011 between the Government of Montenegro and RTCG, the Montenegrin government is undertaking the obligation to pay loans in Atlasmont Bank in the amount of €858,256.00.

The General Ledger with the audited entity in 2010 does not record the liabilities and assets in respect of the loan amounting to €858,256.00, which reflects the accuracy of the balance sheet and cash flow statement.

Between RTCG and UEFA Europa League an Agreement was concluded on 19 May 2009 for the transmission of football matches and related contents with an obligation of RTCG for 2009/10 season, 2010/11 and 2011/12 to make a Payment of €80,000.00 (a total of 240,000 euros). For the performance of contractual obligations RTCG entered into a contract providing a guarantee (No.17-01/3449 of 23 July, 2009) from PRVA BANKA AD Podgorica with the term of the warranty until 30 June 2012. Means of securing payment of this contract is an obligation of the contracting authority to provide a guarantor a seven blank bills with a monthly letter and 12 authorizations for issuing orders for payment. According to bank records of outstanding items it is evident that the guarantor for the customer has met the obligations for the season 2009/10 and paid €80,000.00. These transactions in RTCG are recorded off-balance. The contract between RTCG and UEFA is signed by the CEO RTCG without prior consent of the RTCG Council, which is not in accordance with Item 19 Article 34 of the Bylaws of the RTCG.

2.3 FINANCIAL REPORTING The Annual Financial Statements were developed for business year 2010: - Income Statement, - Balance Sheet, - Cash Flow Statement and - Changes in Equity Statement. Based on the Annual Financial Statements the financial controller of the entity made the Annual audit report on financial operations in 2010, which was submitted to the RTCG Council for consideration and adoption. Financial Statements for 2010 based on the Minutes of the RTCG meeting have not been adopted on the grounds that they will be considered after the completion of the control by the Tax Administration and the State Audit Institution. Unlike the annual report, the Council, based on the Minutes from meetings (No. 01-2728 and 01-6144), adopted a three-month, six month and nine-month report on the financial operations for 2010.

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2.3.1 INCOME STATEMENT

(Legend for the table above: Down: Account,Note,2010,2009 Across: Receipts, Receipts, Operating expenses, Expenditures for material, energy and services, Costs of salaries, fees and wages, Amortization costs, Profit from operations, Net financial effect, Profit before taxes, Income taxes, Net profit for the period) The audited entity made the Income Statement for the period between 01 January to 31 December 2010, which revenues amounted to €11,286,486, while operating expenses with the cost of amortization amount to €12,498,627.00, which means that (with the net financial effect which represents the positive and negative foreign exchange differences on translation of assets) losses have been registered in the amount of €1,233,806.00. 2.3.1.1 REVENUES Revenues in relation to the financial plan for 2010 are given in the following table:

(Legend for the table above: Down: type of revenues, execution in 2009, plan for 2010, execution in 2010, executed/planned Across: budget, general revenues of the budget, earmarked revenues of the Budget, total Budget, marketing, advisements, sponsorships, commercials, marketing radio, total marketing, other revenues, revenues from radio broadcasting subscription, technical services, revenues from damages, other revenues, total other revenues, Ministry of Labor and Social benefits, revenues from decrease of liabilities, total revenues) The share of income by sources in the overall structure is given in the following chart:

Red: Budget revenues, 81.49%, Blue: Own income 18.51%

Of the total revenues, revenues from its own marketing as core business activity of RTCG in 2010 amounted to €1,215,119.76:

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2.3.1.2 EXPENSES EXPENSES FOR GROSS SALARIES AND CONTRIBUTIONS PAID BY EMPLOYER The audit procedure established that the total number of employees in RTCG on 31 December, 2010 was 747 (seven hundred forty seven), by 63 (sixty three) more employees, which indicates the inconsistent application of the Regulation on job classification. Total expenditure for net earnings, contributions, taxes and surcharges in relation to the plan are given in the following tabular view:

(Legend for the table above: Down: Type of expenditure, executed in 2010, executed in 2010, executed/planned Across: net earnings, taxes on salaries, contribution, surcharges, total) NET PROFITS According to the General Ledger the total expenses for net earnings amount to €4,108,685.01 for employees, the number of which during the year varied from 736 to 749. The audit found following irregularities: The concluded contracts on employment for RTCG Director General and Director of Television,

Radio, Joint technical, technological and general affairs service and Marketing division is not in accordance with Article 23 of the Labor Law although in the Preamble to the contracts there is a reference to the same. According to paragraph 1, item 11 of the above Article of the Law, the basic elements of the contract have been established, except that the amount of base salary should include the amount of the coefficient and elements for the determination of performance, wages, increased salaries and other employee benefits. According to the Regulation on the systematization, the coefficients for these posts have been determined.

Net wage has been agreed for the Director General, Director of Television and Director of the Joint technical, technological and general affairs, that increases for seniority.

Wage for the Director of Radio has not been specified in the contract, but the calculation of personal income is based on the approved Report for the calculation of personal income for the corresponding month by the Director General.

The audit determined that the total amount of net earnings for the four members of the management team in 2010 was €138,672.00, while with calculated obligations for salaries, expenses of RTCG on these grounds amount to €202,067.00. The average monthly salary of the Director General is €3,429.00, €2,232.00 to the Director of Television, Director Radio receives €1,877.00, Operations director of the Joint technical, technological and general affairs €2,768.00 and Marketing Director€1,250.00. During the year, except in December, increased wages were paid (variable salary) in the amount of

approximately €787,000.00, with no general act passed on established standards and criteria for evaluation of results, quality and other criteria and standards based on which the achieved results are measured, which is not in accordance with Article 16 of the Branch Collective Agreement for information, graphics and publishing ("Off. Gazette of RM" no. 74/04 of 08 December, 2004). Under the same Article it has been provided that if norms and criteria for evaluation of results are not fixed, it is considered that an employee for the time spent at work, has achieved normal performance.

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The audit found irregularities relating to severance pay for termination by mutual agreement in the amount of €103,170.00, which is calculated based on the decisions made. In the preamble of the same a referral was made to Article 141 of the Labor Law that says that an employer may pay severance pay to employees for termination by mutual agreement, but since the amicable termination of employment implies no imperative legal basis for the exercise of severance pay, the same is fully subject to taxation.

Awards in the amount of 25,820 were paid by the Decisions for contributions in work. Personal income for these employees were not subjected to accrued liabilities according to the Law on Personal Income and Guidelines on the method of calculation and payment of taxes and contributions and personal income.

Expenses in the amount of €102,274.61 relate to: gift cards for the March Eighth, New Year gifts, payments for the birth of a child, support payments to mitigate the negative consequences of natural disasters, payments for housing, compensation for participation in the commissions, payments by court judgments in the amount of €47,033.78 relating to outstanding obligations to employees under: copyright fees, transportation fees for 2007, 2008 and 2009, pecuniary damages for the period of termination.

Payments for housing were made by the Decision no. 01-2965 of 06 July, 2010 in accordance with the Regulation on amendments to the Ordinance on addressing the housing needs of employees. Ordinance on addressing the housing needs of employees in the preamble refers to Article 6 and 7 of the Condominium Property Law, which by the entry into force of the Law on Property Relations ("Official Gazette" no. 19/09) ceased to exist.

For the compensations paid to participate in commissions in the amount of €11,240.00 representing personal income, liabilities have not been calculated according to the Law on Personal Income and Guidelines on the method of calculation and payment of taxes and contributions on and to personal income.

ACCOUNTS PAYABLE a) Foreign trade payables According to the General ledger total reported payables to suppliers abroad amounted to €1,501,329.12 inclusive of balance date amount of €180,808.45. Arrears of 31 December, 2010 were €801,470.98.

Of the total outstanding liabilities reported in the initial balance in the amount of €180,808.45, the period since 2002 up to 31 December, 2008 concerns €68,017.74. By the Conclusion of the Government of Montenegro in 2009, the obligations to RTCG suppliers have been assumed based on the information supplied on outstanding liabilities as of 31 December, 2008. The claim by the data of the General Ledger of the auditee of the existence of the debt for that period on 01 January, 2010, implies that the delivered information is unreliable or the that recorded liabilities are incorrect.

b) Suppliers in the country According to the General Ledger total reported accounts payable in the country amounted to €2,032,535.10 inclusive of balance sheet date amount of €224,123.51. Arrears of 31 December, 2010 were €496,335.89.

As with the previous group of suppliers, the presence of arrears as at 01 January, 2010 was established, which emerged in the period since 2003 ending with 2008 amounting to €57,553.67.

As part of the obligations arising under copyright and TV rights, on the basis of the audit sample, it was noted that in 2010 RTCG concluded two agreements with FSCG (Football Association of Montenegro), as follows:

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1) The contract for exclusive business relationship (No. 3374 of 12 August, 2010) which gives FSCG exclusive TV rights to broadcast matches of "A" team and youth team on RTCG. Based on these rights FSCG is entitled to use the advertising space that will be calculated according to price list of RTCG. In paragraph 5 of the Agreement it is stipulated that the contents of the agreed contract are treated as trade secret of third parties, except the representatives of the authorities carrying out statutory controls. 2) Agreement on Business Cooperation no. 3373 of 12 August, 2010 by which auditee was assigned TV rights for the transmission of the first league matches and FSCG cup. On 28 December, 2010 the Annex to this Agreement was signed which amends Article 10 in part of the obligations of RTCG.

These contracts do not contain precise financial commitments of contracting parties and the state auditor questions the justification that these types of contracts are declared confidential.

COMPENSATIONS CARRIED OUT According to the General Ledger following total compensation implemented were recorded:

(Legend for the table above: Down: Name of the supplier, Debt, Receivables, Name of the supplier, Debt, Receivables) Following this review, it is evident that a considerable part of RTCG compensations, by which marketing services obligations pay for obligations relating to the consumption of electricity, telephone services, insurance services, postal services. Compensations are used to pay carpeting, furniture, cars, drinks, food and chemical products, electrical appliances and services on various grounds subject to the application of the Public Procurement Law.

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2.3.2 BALANCE SHEET

(Legend for the table above: Down: Account, Note, 2010, 2009 Across: Assets, Fixed assets, property, plant and equipment, floating assets, receivables from buyers, cash equivalents and cash, prepaid expenses, accrued income, total assets, liabilities, capital and reserves, subscribed capital, revaluation reserves, retained profit/loss, long term liabilities, deferred income, short term liabilities, short term liabilities from operations, short term financing liabilities, liabilities for taxes, accrued liabilities, total liabilities) Evidence provided within the balance sheet as compared to the authentic record of the General Ledger. FIXED ASSETS The structure of the present value of fixed assets amounting to €40,522,676 as reported on the balance sheet is complied with the records of the General Ledger. The audited entity for 2010 conducted stocktaking and valuation of all assets. A report on the inventory and assessment of their assets and resources as at 31 December, 2010 was prepared by the Commission, whose members are appointed by the Decision No.01-4994 of 18 November, 2010. To estimate the market value of commercial buildings and land of RTCG, the Real Estate Directorate of Montenegro has been engaged, which submitted Assessment Report (No.958-101-846/2010 of 16 July, 2010) by which the total value of the usable space in the building RTCG is valued at €23,670,028.00, while land is valued at €13,122,400.00 (16,403 m2). The audit found that the inventory list and assessment of state property is not delivered to the Public Property Administration, which is an obligation under the Law on State Property. Based on the inventory report and the date of recording of fixed assets by the General Ledger the audit found that: Record of valuation value of office building is not made in accordance with IAS 16 "Property, Plant and Equipment" ,i.e. the book value adjustment with the assessment has not been performed. The goal of recording was to eliminate impairment in whole by reduction of the purchase price to the estimated fair value, but impairment was not eliminated from 1 January, 2010 to the date when the assessment was undertaken, which overstated the impairment.

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The same accounting standard was not applied either at fair value adjustment to the carrying value of equipment based on the assessment of the inventory committee, because elimination of impairment was not properly conducted, and this list of estimated value did not include equipment that was purchased in 2010, so the audit cannot determine the effect on the financial statements.

According to the submitted reports to the Commission, the audit finds that the valuation was not made for master violin "Guarneries" originating from 1762 and the paintings. The violin as antiquate, by the Agreement on Transfer - in November 2010, with the consent of the RTCG Council, was given to the Music Center to use for a period of two years.

The inventory list established music library stock consisting of vinyl records (20,871 pcs.), music tape (3.95 pc.), CDs (3,727 pieces), mini-disks (35 pc) and recorded video tapes (16,670 pcs.) which are kept off-balance sheet without determined financial value. According to the General Ledger records, housing premises list is maintained in the value of €17,520.94, for which the audit found not to be adequate, since based on the available documentation RTCG owns residential properties located in building 387-III Konik: - 18 (eighteen) two-bedroom, - 8 (eight) and one-bedroom - a studio. Considering that during the audit it was found that the RTCG has been renting housing apartments

in building in Konik and that in the Decision of the tax on real estate these apartments are titled on RTCG, the RTCG must establish the title of property, assess, make property registration in the Real Estate Administration and provide accounting records for those assets that are likely to be state-owned.

CURRENT ASSETS Receivables from buyers Trade receivables amounting to €1,612,225.00 based on the Balance Sheet are presented consistently with the records of the General Ledger. Of the total amount of registered claims buyers in the country owe €1,217,504.62. The audit has found that the claims of trade receivables amounting to €684,180.39 recorded on 01 January, 2010 relate to the period since 2003 ending with 2008. In the process of auditing, from receivables in this period in the amount of €684,180.39, the sample included receivables of RTCG from 22 (twenty two) legal entities whose participation in the specified value is 61.81% or in nominal statement €422,887.73. Management of RTCG regardless of the status of unpaid receivables until 2008 continued business cooperation with 12 (twelve) legal entities in 2009 and 2010. Receivables at the end of 2009 amount to €501,735.97, and at the end of 2010 €455,953.61, while the amounts of receivables collected are €207,082.76 of which the compensation implemented amounts to €97,729.59.

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The above facts indicate that the audited entity was required, due to reduced opportunities for debt collection, to act in accordance with IAS 39 "Financial Instruments: Recognition and Measurement" and to correct the value of these claims for which business results were overpriced.

The delay in settling the obligations is the most common reason that may lead to impairment of value. After the stocktaking of receivables, based on inventory list, it is necessary to access the recoverability of the carrying amount. For this assessment the Ordinance on the accounting policies with set criteria should be adopted.

CURRENT LIABILITIES FROM OPERATIONS Total RTCG outstanding obligations to suppliers as at 31 December, 2010 amount to €1,327,080.23.

(Legend for the table above: Down: Suppliers, Arrears in 2008, Arrears in 2009 and 2010, total Across: Suppliers abroad, suppliers in the country, suppliers in the country for basic assets, total) Management of the RTCG has not anticipated with the Bylaws the adoption of the internal

documents that would provide financial risk management policies, to ensure fulfillment of obligations in a timely manner, which is why it is exposed to high risk operations and increased costs due to interest payments and running costs of the possible litigation.

Income tax liability By the Conclusion of the Government of Montenegro of January 2009 contingent RTCG liabilities in the amount of €16,316,230.09 are written off. According to annual reports of the authorized amount the audited entity profited for 2008 year an amount of €9,714,695.00, in 2009 year amount of €5,355,819.00, for 2010 year an amount of €322,143.00 and on this basis showed gains for 2008 and 2009. Table of loss and gain per Income Statement in prior years:

(Legend for the table above: Down: Year, Profit, Loss) RTCG in 2007 recorded a loss of €1,238,648, which increased the loss of the previous period from

€6,769,345 to €8,007,993 (a loss in 2006 amounted to €3,631,025). With obligations written-off by the State in 2008 the RTCG registered a profit of €5,044,072, which

reduced the loss of the previous period from €8,007,993 to €2,963,921. With obligations written-off by the State in 2009, the operating profit of €4,287,493 was recorded,

which eliminated the loss of the previous period, but in 2010 even with written off obligations of €322,143.00 the loss of €1,233,806.00 was recorded.

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Tax return for 2009 with the determined liability of €305,568.00, was submitted to the competent tax authority with some delay because the opinion of the Ministry of Finance was expected to justify the obligation to pay income tax. According to the Ministry of Finance letter no. 04-3084/1 RTCG status is not defined as income tax payer. It is specified that: "if RTCG is a taxpayer pursuant to article 2 of the Income Tax Law of Legal Persons, it is obliged to pay tax on the profit. In this case the tax base includes extraordinary income. If RTCG has a tax status under the provisions of Article 6 of the Income Tax Law of Legal Persons and it performs nonprofit activities, then RTCG is not taxpayer in the sense of law, unless it performs profit or partly profitable business activity." The note stated that the tax authority, based on credible documentation of the taxpayer, determines its tax status. Treasury Treasury of RTCG in 2010 disposed of cash in the amount of €1,155,537.70. Of the available funds €1,150,186.04 were spent and the cash balance at year-end amounted to €5,351.74. The overall structure of the cash paid from treasury for official travel is 38.16%, while the participation of fees for meals, transportation, and allowance amounted to 45.04%. Travel orders covered by the sample reflected: - outdated justification of travel expenses, - Failure to file reports regarding official travel. 2.4. PUBLIC PROCUREMENT RTCG with the procurement plan for 2010 had foreseen the purchase in the amount of €3,081,300.00. According to the report on awarded public procurements €819,950.20 is implemented through public procurement procedures. The following table provides a structure of implemented procurements by type of public procurement procedure:

(Legend for the table above: Down: Implemented public procurement procedure, contracted value Across: open public procurement procedure, shopping method, direct agreement, total)

The value of realized procurements by direct agreement is € 281,885.48 or 34.38% of the realized total annual budget for the procurement. Article 78 of the Law on Public Procurements ("Official Gazette of RM" no. 46/06) provides that a procuring entity shall ensure that the total annual value of direct purchases implemented by direct agreement does not exceed 10% of its total annual procurement budget.

Compensations are carried out for the procurement of goods and services valued at € 81,403.70 while at the same the lawfully prescribed public procurement procedures were not applied.

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2.5. LAWSUITS Based on the report submitted by the competent RTCG service in 2010, before the competent courts, a total of 53 court cases were proceeded, in which a party to the proceedings was RTCG. Of this number, RTCG appears as a prosecutor in 12 cases. In 2010, there have been 40 court cases in which RTCG appeared as a defendant. Except in one dispute, pending before the Commercial Court in Belgrade (the amount in dispute is €85,354.00), all other disputes are civil and are in the jurisdiction of the basic courts in Montenegro. In most of these cases prosecutors are employed in RTCG. Disputes were conducted on various grounds: for damages, debt, payment of travel costs, meal, allowances, salary adjustments, housing allocation, ... Based on records from the General Ledger of the audited entity (account 743599) in 2010, based on the valid and enforceable court judgments, the employees of the RTCG were paid the sum of €47,033.78. The competent service and representatives leading litigation at this stage have not been able to assess the outcome of these disputes, so that financial statements do not contain provisions and corrections on that basis. 2.6. INTERNAL AUDIT Regulation on job classification, in the office of the Director General, prescribes the position of internal auditor, whose duty is to: review and monitor the implementation of legal regulations and internal company regulations, control the financial-material operations of RTCG, points to phenomena observed of negligent operation, provide reports on the established facts and points to the shortcomings and deficiencies, keep the documents in the field of internal auditing, and perform other tasks as may be assigned by direct supervisor. Internal auditor on 4 May, 2011 submitted a Work Report to the Director General on the performance of internal audits for 2010.The report states that the internal auditor's work was concentrated on making RTCG maintain its accounting records and preparing financial statements in accordance with the Accounting and Auditing Law of Montenegro and by the implementation of International Accounting Standards. On these activities written reports have not been made because all of the activities were conducted in direct collaboration with the head office of finance and chief accounting services. The internal auditor received Orders for control from the Director General. In the course of 2010, there were two specific requests by the Director General for the performance of the control, one of which is connected to the control of maintenance of cars, travel expenses and fuel consumption, and the other to check the mileage and data about specific individuals using official vehicles. The internal auditor in 2010 was hired as president of the Commission to assess the value of the equipment.

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Regulation on job classification in RTCG is not consistent with the Law on the internal financial control system in the public sector ("Official Gazette of MNE", No.73/08) concerning the following:

- Internal audit unit shall be functionally and organizationally independent from other organizational units of the entity. Functional independence is achieved through independent planning, implementation and reporting of completed internal audits. Head of Internal Audit and internal auditors may perform only internal audit tasks.

- Internal audit unit shall consist of at least three internal auditors with the Head of Internal Audit.

Because of the complexity of the tasks of the entity, an additional methodological guide for the conduct of internal audit shall be developed, which in more details describes the method used in the audit process.

Part III - OPINION, FINDINGS AND RECOMMENDATIONS On the basis of established facts and considerations of the Statement of the Audited entity on the preliminary SAI audit report (01-4292 of 16 September, 2011), and in accordance with Article 50 of the Rules of Procedure of the State Audit Institution, the relevant Board consisting of Mr. Branislav Radulović (a member of the Senate - the Chairman of the Board) and Mr. Miroslav Ivanišević (the President of the Senate - a member of the Board), at its meeting held on 20 September, 2011 adopted the following:

FINAL REPORT Audit of Annual Financial Statements

JP Radio Televizija Crne Gore for 2010 and issued the following:

OPINION

The audit has found that there are deficiencies in the application of legislation, lack of internal documents, or a mismatch, the system of internal controls does not work, variable salary is paid out without an adequate legal basis and the established norms and criteria for evaluation of results, there is a selective application of the Law on Public Procurements, there is no adequate accounting policy that would ensure financial risk management policy, there is a high debt and a large amount of unpaid claims, there is no list and assessment of property, the financial statements do not in all material aspects present reliably the financial position of the entity, and financial performance was not in all material aspects in compliance with applicable regulations and international accounting standards. For these reasons, the relevant Board of SAI expressed, regarding the audited entity - a negative opinion.

WITH PROPOSAL RECOMMENDATIONS AND MEASURES

1. JP Radio Telelevizija Crne Gore until 2009 was financed from the budget through the Ministry of Culture, Media and Sport, by concluding contracts for the implementation of special programming. Contracts prescribed mutual rights and obligations and the transfer of funds was made in equal monthly installments. For each of the funds transferred, RTCG delivered a report to the Ministry on expenditure of funds, which secured the control of spending.

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Since 2009 and the enactment of the Law on Broadcasting Services of Montenegro it was established that financing of the RTCG from the budget, except through the Ministry, shall be made from the general budget revenues of Montenegro by transferring funds annually in the amount of 1.20% of the current budget, established by budget law for the year. Changing the method of funding has not stipulated the amendments to the regulations that would provide a way of control of spending of public funds and the manner of submission of financial reports other than posting on a Web site. The audit has found that the RTCG continuously in the past operated at a loss, which, ended with 2007, reached the amount of €8,007,993. By the Conclusion of the Government of Montenegro in 2009 the debt was written-off and liabilities assumed in an amount of €16,316,230.09, which related to the debt ending with 2008 and projected obligations for 2009, and the financial problems of this period were resolved. 1. RTCG for 2008, 2009 and 2010 with regular transfers and with the commitments taken has spent the total amount of €38,105,245.68 of public money and made their own revenues of €7,414,127.32, and in doing so in 2010 again operated at a loss. These figures show that:

It is necessary with the procedure for amending the law to determine the precise mode of financing of RTCG from budgetary resources and in particular to standardize competence and responsibility in the process of reporting and control of spending.

2. Article 79 of the Bylaws of RTCG of 16 September, 2009 determines the obligation that 17 (seventeen) by-laws should be adopted, and under Article 99 of the Bylaws general acts are to be passed and existing ones are to be harmonized with the Bylaws within 120 days of its entry into force. The audit has found that of 11 by-laws only three were submitted to the state auditor.

It is necessary that under the new Bylaws enacted on 28 December, 2010 all general acts of the audited entity are made and complied with the law and other regulations.

3. Regulation on Job Classification of the RTCG prescribes jobs for 684 persons, while the audit found that on 31 December, 2010, 747 were employed, which means there are 63 more employees than the anticipated number. RTCG administration did not take into account that from their own revenues, which were realized in 2008, 2009, and 2010, only the net earnings could be financed (excluding employers' contributions payable), which on average per month per employee amounted to about 276 €.

Audited entity should, in cooperation with the competent ministry, systematically address the problem of redundancy, which would be one of the elements to create conditions for further financial sustainability of RTCG.

4. The audit found that the collective agreement of RTCG has no legal legitimacy as parties to the agreement are President of the representative trade union organization of RTCG, CEO and President of the RTCG Council, which is not in accordance with Article 150 paragraph 4 of the Labor Law, under which it is prescribed that the collective agreement of the public enterprise, institution or other public services established by the state, as the employer, should be concluded by the representative trade union organization, the director and the Government.

The audited entity should as soon as possible adopt a new collective agreement that would be in accordance with Article 150 of the Labor Law.

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5. The accounting records of the audited entity are regulated by the application of the Regulation on accounting policies enacted in 2005, by the decision of the Management Board, under the Bylaws, in accordance with the Accounting and Auditing Law ("Official Gazette of RoM" no. 6/02), which was abolished by the enactment of the Law on Accounting and Auditing ("Off. Gazette of RoM" no. 69/05,"Off. Gazette of Montenegro", no. 80/08). Law on Accounting and Auditing is not applicable to entities that are funded from the budget and extrabudgetary funds (Article 1, paragraph 3). The book records of RTCG are implemented using outdated "Cobol" system as an aggravating circumstance. It is necessary that the audited entity:

Provides a uniform application of Rulebook on Consistent Accounts’ Classification for the State Budget, Extra-Budgetary Funds and Municipal Budgets ("Off. Gazette of Montenegro", no. 35/05, 37/05, 81/05) and international accounting standards for the public sector;

Should ensure with the Financial Reporting the implementation of the Regulation on the method of preparation and submitting the financial statements of the budget, state funds and local government units ("Off. Gazette of Montenegro", no. 32/10).

6. The audit has identified unreliable accounting records, concerning the avoiding in recording loan debt in the amount of €858,256.00, which brings into question the accuracy of statements on the balance sheet and cash flow statement. It was also found that either the information that is submitted to the Ministry of Culture and Sport on the status of outstanding liabilities ended with 2008 year are unreliable or that writing off of obligations assumed by the Conclusion of State Government of Montenegro in the total amount of €16,316,230.09 was incorrectly recorded. According to the accounts as at 01 January, 2010 the accruals in the period since 2002 ending with 2008 year amounted to €130,818.58.

The audited entity was required to record the loans contracted with the full application of IAS 32 "Financial Instruments: Disclosure and Presentation". Applying this standard ensures that users of financial statements better understand the importance of balance and off balance sheet financial instruments for the presentation of financial position, performance and cash flows.

7. Employment contracts of RTCG Director General, and Director of Television, Radio, Joint Technical, Technological and General Affairs and Marketing Division are not in accordance with the Labor Law although the contracts refer to the same. Director General, Director of Television and Director of the Joint Technical, Technological and General Affairs, agreed that the net earnings increase for seniority. For the Director of Radio the wage is not specified in the contract, but the calculation of personal income is based on the approved report for the calculation of personal income for the corresponding month by the Director General. According to the Regulation on the job classification coefficients have been determined for these positions.

The audited entity is required to comply these contracts with Article 23 paragraph 1 item 11 of the Labor Law, which sets the basic elements of the contract, which, except of the amount of base wage, should contain coefficient and the elements for determining performance, wages, increased wage and other employee benefits.

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8. Employees of RTCG in a controlled period have been paid on several grounds, without compliance with applicable regulations. For all months except December, without passed by-laws, they were paid the increased wage (variable salary) in the amount of approximately €787,000.00. Severance payments were made for termination by mutual agreement in the amount of €103,170.00. Prizes amounting to €25,820 on behalf of the contribution in the work. Participations in commissions were paid in the amount of €11,240.00. Payments for housing were made based on the Regulation on amendments to the Ordinance on addressing the housing needs of employees. The Regulation refers to Article 6 and 7 of the Law on Condominium Property, which by the entry into force of the Law on Property Relations ("Official Gazette of MNE" No. 19/09) ceased to exist.

The audited entity shall be required to issue a general act for payments of the variable portion of wage which should be in conformity with Art. 16 of the Branch collective agreement for the information, graphics and publishing ("Off. Gazette of RM" no. 74/04), by which it is necessary to establish standards and criteria for evaluation of results, standards, quality and other criteria and benchmarks by which to measure results. (The same article stipulates that if you have not set the standards and criteria for evaluation of results, it is considered that an employee for time spent at work achieves normal performance).

According to Section 141 of the Labor Law, the employer may agree to pay severance pay to employees for termination, but since the amicable termination of employment has no imperative legal basis for achieving redundancy, the same is subject to taxation.

For personal income related to contributions made by employees and to the participation in committees, it is required to apply the Law on Personal Income and Guidelines on the method of calculation and payment of taxes and contributions on and to personal income.

To address the housing needs of employees it is necessary to adopt the Ordinance to address the housing needs which will be harmonized with the Law on Property Relations.

9. The audit found that the audited entity does not take appropriate actions to address debt collection and settlement of liabilities. Accounts receivable as of 31 December, 2010 amount to €1,612,225.00. According to records of the General Ledger, claims in the initial balance as at 1 January, 2010 of trade receivables amount to €684,180.39 for the period since 2003 ending with 2008. Balance of arrears from 31 December, 2010 was €1,327,080.23, of which the initial balance as at 1 January, 2010 amounts €130,818.58 which covers the period since 2002 ending with 2008.

The audited entity was required due to reduced opportunities for debt collection to act in accordance with IAS 39 "Financial Instruments: Recognition and Measurement" and to correct the value of these claims for which it overstated operating results. After the stocktaking of receivables, based on census list, it is necessary to access the recoverability of the carrying amount. For a given estimate the Ordinance of the accounting policies with set criteria, should be adopted.

Because of its debt, it is necessary to adopt an internal document that would provide financial risk management policies, to ensure fulfillment of obligations in a timely manner and avoid high-risk business and increasing costs due to interest payments and running costs of the possible litigation.

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10. Audit has found irregularities in the records and stocktaking of assets related to RTCG office building, housing and equipment. Valuation of office buildings and equipment is not recorded entirely consistent with IAS16 "Property, plant and equipment." Newly acquired equipment has not been evaluated, some parts of assets listed are not estimated, and apartments are neither listed nor estimated.

It is necessary to make an inventory list and evaluate all state assets, and comply accounting records with IAS16 "Property, plant and equipment."

It is necessary to submit the results of the carried stocktaking and valuation of all state property to the Property Administration in accordance with the Law on State Property.

11. The audit has found that the RTCG during 2010 spent cash in the amount of €1,150,186.04, of which the share of expenditures for meals, transportation and allowance is 45.04%.

The internal rules should be adopted to ensure the reduction of cash payments to meet the continuing financial needs, which cannot be effectively carried out through the usual payments system.

12. The audit has found the violation of the Law on Public Procurement ("Off. Gazette of RM" no. 46/06), concerning the following: The value of realized procurement by direct agreement represents 34.38% of the realized total annual budget for procurement, while Article 78 of the Law provides that a procuring entity shall ensure that the total annual value of direct purchases implemented by direct agreement shall not exceed 10% of its total annual procurement budget. Compensations during the year were carried out for the procurement of goods and services valued at € 81,403.70 while the lawfully prescribed public procurement procedures were not respected.

The audited entity is required to ensure consistent application of the Law on Public Procurements with the procurement of goods, works and services.

13. Reregulation on job classification of RTCG is partially aligned with the Law on Internal Financial Control in the Public Sector ("Official Gazette of MNE", No.73/08) concerning the establishment of working post for the internal auditor in the office of the Director General. The internal auditor in 2010 was engaged on the job of the annual listing of property which is contrary to the said Law.

It is necessary to comply the Regulation on Job classification with the Law, which stipulates that the internal audit unit must be functionally and organizationally independent from other organizational units of the entity. Internal audit unit shall consist of at least three internal auditors with the Head of Internal Audit.

Head of Internal Audit and internal auditors may perform only internal audit.

Because of the complexity of the tasks of the entity, an additional methodological guide for the conduct of internal audit must be made, which in more detail describes the method to be used in the audit process.

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The scope and nature of the irregularities and deficiencies requires: To familiarize the Parliament of Montenegro, Ministry of Finance and the Ministry of Culture with the

established shortcomings in the work of the audited entity, by submitting them the Final Audit Report.

That the audited entity within 6 months informs the State Audit Institution on measures taken based on the submitted recommendations.

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Documents

EXCERPT AUDIT REPORT ON ANNUAL FINANCIAL STATEMENTS OF THE JP RADIO TELEVIZIJA … from the Audit Report on... · 2012. 10. 2. · EXCERPT AUDIT REPORT ON ANNUAL FINANCIAL STATEMENTS