Select Committee on European Legislation Eleventh Report


COURT OF AUDITORS REPORT FOR 1995

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)
Annual Report of the Court of Auditors concerning the financial year 1995, together with the replies of the Institutions.
Legal base: Article 188c.

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:
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


 


© Parliamentary copyright 1997
Prepared 7 February 1997