10. We consider that the
following raises questions of political importance, but make no
recommendation for its further consideration at this stage:-
H M TREASURY
(17750)
OJ No C340
(12 Nov 96)
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Annual Report of the Court of Auditors concerning the financial year 1995, together with the replies of the Institutions.
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Legal base:
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Article 188c.
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Background
10.1 The European Court
of Auditors is responsible for the external audit of the Community's
public finances. It examines the legality, regularity and soundness
of the management of all the Community's revenue and expenditure,
and the revenue and expenditure of any body created by the Community.
Any observation which the Court may make as a result of its audits
is recorded in its Annual Report which also, in its published
form, includes the replies of the Community Institutions to such
observations.
10.2 The Court is also
required to provide the European Parliament and the Council of
the European Union with a Statement of Assurance on the reliability
of the accounts and the legality and regularity of the underlying
transactions.
10.3 The Annual Report,
the Statement of Assurance and its accompanying Special Report
are taken into account by the European Council and the European
Parliament in the procedure for the discharge of the budget, together
with any other Special Reports which the Court may have made in
the preceding 12 months[37].
10.4 In considering the
Report, we have been assisted by an Explanatory Memorandum dated
17 December 1996 submitted by the Exchequer Secretary to the Treasury
(Mr Oppenheim).
The Annual Report
10.5 As before, the report
is in three sections:
An introduction
describing the principal findings of the 1995 audit;
Part I, in
which the Court sets out its observations on the Commission's
revenue and operating appropriations and on the European Development
Funds - together with the Commission's replies to those observations;
and
Part II,
in which the Court comments on the administrative budgets of the
Institutions - together with the Institutions' replies.
10.6 The following paragraphs
provide a brief summary of significant parts of the Report. We
also commend the Minister's helpful Explanatory Memorandum and
the information note provided by the Court of Auditors in November
1996, which summarises the 1995 Annual Report and the three special
reports mentioned above[38].
The introduction
10.7 The Court says that
the Report and the Statement of Assurance provide numerous illustrations
of unsatisfactory accounting and financial management, in many
cases identical, or closely similar, to those reported in previous
years. It welcomes the launch of the Commission's new financial
management improvement programme (SEM 2000) but also acknowledges
that rapid results are not to be expected. However, we have noted
that the emphasis this year is not on fraud but on financial management;
and that many of the shortcomings in the Report are not solely
those of the Commission, but of the Member States who administer
the greater part of the Community's funds.
Part I
10.8 Chapter 1 of Part
I is concerned with the Community's own resources[39].
The report mentions failure to collect several millions of ECU
of own resources because of weak application of legislation and
variations in methods and frequency of customs checks. It points
to the dangers for the VAT resource arising from the abolition
of internal frontiers, requiring appropriate control measures
and co-operation between Member States. The Court also expresses
its worries about the quality of national statistics and methods
for calculating national GNP figures.
Agricultural Guidance and
Guarantee Fund, Guarantee Section (EAGGF- Guarantee) - Chapters
2 and 3
10.9 The EAGGF guarantee
section finances agricultural market intervention, compensatory
aid and CAP reform measures, refunds on exports of agricultural
products, rural development and the operation of the guarantee
fund for fisheries. It accounts for about 50% of all Community
expenditure. Chapter 2 is concerned with budgetary management
and direct expenditure. The Court reports that the Commission
infringed the principal of budgetary annuality by paying in 1995
an advance of the ewe premium which should have been paid in 1996.
The audit conducted in four Member States showed that failure
by the Commission or the States to conduct rigorous monitoring
or checking cost the Community 16.6 million ECU (£14.1 million)
from direct expenditure to combat fraud and irregularities, because
ineligible expenditure had been included or eligibility was poorly
justified. The Commission does not agree.
10.10 The Court points,
not for the first time, to the anomalies of the agri-monetary
system which over-values the ECU for the purposes of CAP transactions
so that beneficiaries of CAP transfers receive more compensation
than from market rates. The Court suggests that the introduction
of a single currency will require these payments to be revised.
10.11 Chapter 3 is concerned
with the organisation and management of agricultural markets.
The Court looks at a number of particular areas: emergency measures
to combat swine fever in Germany and Belgium from 1993 to 1995,
where it identifies weaknesses in the control of the compensation
system; and the export of feta cheese from Denmark, where the
criticism is on the application of quality controls and eligibility
for export refunds.
10.12 There are also
follow-up comments in other areas on which the Court has commented
previously. Areas of concern on which the Court remains critical
include:
-- lack
of progress in improving the controls on aid for production of
olive oil;
-- continued
absence of a register for rice-producing areas;
-- serious
abuses in the cotton market, for which new regulations have now
been introduced by the Commission;
- overproduction
of flax, arising from the high level of aid for fibre flax.
10.13 The Court also
questions the continued justification of EU subsidies for whisky
distillers in respect of cereal exported in the form of spirit
drinks.
Fisheries (Chapter 4)
10.14 On fishing, the
Court observes that, while Community co-financing has improved
surveillance, it has not had a significant effect on illegal fishing;
and that there was little assessment of the cost effectiveness
of the investment in certain high cost equipment for surveillance,
such as aircraft. The Court is also concerned about inconsistency
and the standards of scrutiny of aid for investment in processing
fishing products.
The regional sector (Chapter
5)
10.15 In this part of
its report, the Court comments on the use of the Structural Funds.
It says that more than 50% of the Community's population is now
eligible for structural aid of some kind, and suggests that statistical
deficiencies are preventing the proper targeting and evaluation
of the use of the funds. It argues that loans, rather than grants,
are more appropriate for income- generating projects, and calls
for better co-ordination at the programming and implementation
steps to ensure optimum use of funds.
10.16 The Court expresses
concern at lack of clarity in contractual relations, and says
that the lack of precise rules and procedures for implementing
and monitoring projects which are financed on the basis of the
European Regional Development Fund regulation means that the transparency
and effectiveness of the expenditure cannot be guaranteed. These
are projects, the management of which is generally delegated to
other bodies, whose primary purpose and administrative structures
are not always appropriate, according to the Court.
The social sector (Chapter
6)
10.17 This part of the
audit covered the closure of the European Social Fund for the
1990-93 funding period and the implementation of the reforms and
new programmes for the period 1994-1999. The Court finds that
some old operational programmes have not been closed and that
Member States have carried out few or no evaluations on which
the Commission could have based new programmes. Criticism is
directed at lack of management capacities in Member States, lack
of emphasis on the carrying out of objectives, and failure to
establish reliable accounting and information systems or monitoring
and control arrangements. The Court suggests that, if Member
States fail to make moves to correct these deficiencies, the Commission
should make no further payments to Member States which consistently
make payments contrary to the regulations. The Court also makes
similar observations on some specific programmes.
EAGGF Guidance Section (Chapter
7)
10.18 The Court criticises
the lack of strict eligibility, enabling certain measures to be
financed indiscriminately from different structural funds under
the 1990-93 LEADER[40]
initiative and calls for ineligible expenditure to be recovered
from financial beneficiaries. The LEADER II (1995-1999) was approved
and implemented without evaluation of its predecessor.
Financial instruments and
banking activities (Chapter 8)
10.19 In this chapter
the Court examines the wide range of instruments available to
the EU to make loans, to participate directly in projects and
to issue loan guarantees. It criticises the quality of information
contained in the financial statements for joint venture programmes,
and the absence of access to information essential for the audit
of the European Investment Fund.
Research and technological
development (Chapter 9)
10.20 The Court confines
its comments here to monies provided in connection with the development
of advanced television services, which have failed to take off.
The current action plan is due to end in June 1997 and the Court
considers that continuous funding should be avoided.
External action (Chapters
10 & 11)
10.21 Chapter 10 deals
with measures in favour of the countries of Central and Eastern
Europe, the newly independent states of the former Soviet Union,
and Mongolia. The Court considers that, in the light of the deficiencies
it highlights, the Commission should urgently
-- improve
its definition of, and fully discharge its responsibilities in
the authorisation of expenditure;
-- stop
delegating to third parties tasks that should be performed by
a public service body;
-- clarify
the role of external experts and in-house service providers; and
-- ask
the political and budgetary authority for the resources it believes
it needs to implement the programmes in a satisfactory manner.
10.22 On aid for developing
countries in other parts of the world, the Court suggests that
the concentration of the Commission's management resources on
drawing up new projects so as to be able to commit appropriations
probably hinders improvements in the implementation of existing
projects. The Court suggests that there is an imbalance between
the volume and diversity of the programmes that the Commission
is required to implement, and the resources available to carry
them out in a satisfactory manner. The Court also makes a number
of specific suggestions for improvement of these programmes.
The European Development Fund
(Chapter 12)
10.23 This is an area
where the Commission manages funds provided by Member States jointly
with the European Investment Bank and in co-operation with international
financial institutions such as the International Monetary Fund
and the World Bank. The Court observes that the support programmes
generally adhered fairly closely to the Council's guidelines on
the co-ordination and concentration of aid in the social sectors.
However in the regional dimension of adjustment and the protection
of the environment, the programmes audited fell short of their
original objectives. The Court suggests that, because budgetary
aid is of only limited value in a country where budgetary procedures
are unsound, the Commission should as a rule concentrate its verification
work on the budgetary discipline of the recipient state as a whole.
Commission administrative
expenditure (Chapter 13)
10.24 The Court reports
that, following criticisms in the 1994 Annual Report, the Commission
started amending its routines for the management of inventories
and procedures for responsibility of property, but that the improvements
made to its management systems were limited and still inadequate.
It noted that the Commission's payment of taxes and other charges
(in particular property tax) due from the owners of the buildings
was both open to criticism in terms of sound financial management
and contrary to the provisions of the Protocol on the privileges
and immunities of the European Communities. Similar criticisms
are directed at the Economic and Social Committee and the Committee
of the Regions in Chapter 15 of the Report.
Particular references to the
United Kingdom
10.25 In paragraph 57
of his Explanatory Memorandum, the Minister lists the references
by name to the United Kingdom (not all criticisms) which appear
in the Court of Auditors 1995 Report. These are reproduced below.
The Government's view
10.26 The Minister says,
in his Memorandum of 18 December:
"The ECA[41]
report on budget implementation in 1995 repeats criticisms of
financial weaknesses made in previous years. The Government considers
that it is neither acceptable or inevitable that financial irregularities
occur to the extent identified by the ECA, and continues to give
high priority to action intended to strengthen financial management
systems and procedures in Community Institutions. In particular
the Government welcomes SEM 2000 (Sound and Efficient Management)
which the Commission launched in 1995 to improve resource management
and financial accountability.
"However, the
Government recognises that the Commission is only directly responsible
for less than 20% of Community expenditure, being dependent on
national and local administrations in Member States playing their
parts effectively in the rest. In the case of co-financed projects
under the Structural Funds, it can be particularly difficult to
police the system and follow through concerns about administration.
The Government therefore fully supports the work of the Commission,
supported by a group of personal representatives of finance Ministers,
in developing measures which can be taken to improve co-ordination
between the Commission and Member States in general and in particular
on incentives on Member States to comply with and vigorously enforce
regulations governing the use of the Structural Funds. The Government
welcomes the emphasis which has been given in this work to clarifying
the regulations determining eligibility and the circumstances
in which net financial corrections will be applied where ineligible
spending is identified. The report of the personal representatives
group has been deposited for scrutiny separately[42].
There are no significant
concerns about UK control procedures emerging from the ECA's annual
report. The Government will, as in respect of the report on 1994,
make a detailed response to the ECA on the observations it makes
about the UK in 1995."
Conclusions
10.27 There is a recurring
theme in the Annual Report of the Court of Auditors for the year
1995. It is not, on this occasion, about deliberate fraud. It
is much more about effective financial management. It is about
the setting of clear objectives for financial programmes, appropriate
delegation of responsibility for carrying out those programmes,
effective supervision and monitoring, followed by proper evaluation.
The results of that evaluation should be used to influence the
course of subsequent projects and programmes. In all these areas,
the report reveals that both the Commission and the Member States
(and some other organisations used as intermediaries) are less
efficient that than they should be. There is an implication (more
than an implication in the case of Community initiatives under
the Structural Funds) that the Commission does not have the administrative
resources to make adequate assessment of the projects which it
endorses. This appears to present a choice between more resources
and fewer, but more effectively administered, projects.
10.28 We have no hesitation
in saying that this report raises matters of political importance.
We defer any decision on a debate recommendation, however, until
we have received the Court's Statement of Assurance and a further
Explanatory Memorandum from the Exchequer Secretary.
37 The relevant special reports in 1995 were:
- Signature of the contract for the construction of the European hemicycle in Strasbourg without the prior approval of the Financial Controller (Special Report no. 5/95: OJ No. C 27, 31.1.1996);
- The MED programmes (Special Report no. 1/96: OJ No. C 240, 19.8.1996); and
- Accounts of the administrator and the administration of Mostar by the European Union (Special Report no. 2/96: OJ No. C 287, 30.9.1996. Back
38 Information note on the Annual Report of the Court of Auditors concerning the financial year 1995. A copy has been placed in the Library. Back
39 The Community's own resources comprise agricultural duties; sugar and isoglucose levies; customs duties; a VAT-based resource; and a GNP-based resource. In the case of the last two resources, the annual levels were determined by the Edinburgh European Council in 1992. Back
40 A French acronym meaning links between actions for the development of the rural community. Back
41 European Court of Auditors. Back
42 A copy of this report was sent to us on 10 December under cover of a letter from the Exchequer Secretary. It has now been formally deposited, but we have not yet received an Explanatory Memorandum and so have not yet reported on it. Back
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