FINANCIAL REGULATION APPLICABLE TO THE
Draft Regulation on the Financial Regulation applicable to the General Budget of the EC.
||Article 279 EC; consultation; unanimity
|Basis of consideration:
||Opinion from the Committee of Public Accounts of 29 March and Minister's letter of 4 April 2001
|Previous Committee Report:
||HC 23-xxxi (1999-2000), paragraph 11 (29 November 2000)
|To be discussed in Council:
||No date known|
||Not cleared; further information requested
5.1 The Financial Regulation is the instrument
which lays down rules for all aspects of the budget of the European
Communities. It covers the establishment of the budget, the implementation
of revenue and expenditure, the definition of the role and responsibility
of those involved in implementation, and the monitoring and control
of implementation. The present Regulation was adopted in 1977,
and has been amended piecemeal on numerous occasions. The current
document seeks to replace it.
5.2 On 29 November 2000, we left the document
uncleared, pending answers to our questions from the Economic
Secretary to the Treasury (Miss Melanie Johnson). We also took
the opportunity to ask the Committee of Public Accounts (PAC)
for its opinion on the document.
The Minister's letter
5.3 The Minister replies to our questions
in her letter dated 4 April 2001.
5.4 First, we asked if the Minister was
satisfied that the Commission had got the balance right as between
areas which should be included in the Financial Regulation and
those which can be left to implementing Regulations. She replies:
"I can confirm that
it is my opinion that the Commission has got this right. I believe
that the Council should resist the temptation to micromanage
the Commission's financial administration. The Financial Regulation
should cover the broad principles of financial management and
control, but leave the detailed rules to the Commission. I am
further reassured by the fact that article 172 of the proposal
requires that the implementing rules must be adopted by the Commission
'in consultation with the European Parliament and the Council'.
I assure you that the government will be vigilant in ensuring
that only appropriate rules are adopted."
5.5 Secondly, we asked the Minister whether
the Commission had made an adequate case for the proposed increase
in its powers to vire appropriations within the adopted budget.
"The main change in
the Commission's power to vire appropriations is the freedom to
transfer operating costs between chapters within the same title,
up to a maximum of 10% of the initial appropriations on the line
from which the transfer is made. Previously, transfers between
chapters, except as regards staff and administrative expenditure,
required the prior approval of the budgetary authority.
"I am not in principle opposed to giving the
Commission greater flexibility to manage its budget but I do think
that any increase must be clearly justified. For this reason the
UK has requested further information from the Commission in the
course of official level discussions, including a summary of the
transfers in recent years which would have been affected by such
5.6 Thirdly, we asked about new responsibilities
of Member States in respect of shared management of community
funds. The Minister says:
"The proposed new Regulation
introduces a new procedure whereby member states will be informed
of the Court of Auditors' observations on the management of community
funds for which they are responsible while the annual report is
in draft form. The member states will be required to respond to
these observations and the Commission must transmit them, accompanied
by its comments, to the Court by 31 October.
"This seems to be a worthwhile proposal. It
underlines the responsibilities of member states and makes it
clear that the Court may comment on individual member states'
fulfilment of these responsibilities, while still acknowledging
the Treaty responsibility of the Commission for implementation
of the budget, since member state responses are transmitted to
the Court via the Commission. However, we must look carefully
at how the proposal will work in order to ensure that any change
to the procedure for dealing with the European Court of Auditors
report fully respects the Treaty requirements related to discharge.
"In addition to this I would like to draw to
the Committee's attention the fact that there has been considerable
progress in clarifying the responsibilities of member states in
recent years, both through the EAGGF clearance of accounts procedures
and the new Structural Funds Regulation. These are reflected in
the fact that article 50 of the proposed new Financial Regulation
clearly states that where shared management applies the Commission
shall apply clearance of accounts procedures and appropriate financial
5.7 Fourthly, we asked whether the Minister
considered the extension of the role of the Budgetary Authority
under the proposed Regulation is appropriate, specifically the
requirement for the budget to include the establishment plans
for each agency set up by the Communities. She replies that her
officials are seeking further information from the Commission
as to the reason for this proposed change.
5.8 Fifthly, the Committee asked whether
the proposals relating to the European anti-fraud office (OLAF)
will give the Director-General of OLAF and its Supervisory Committee
the freedom to manage its resources in the way it wishes in order
to make the most effective use of them. The Minister replies:
"The proposals are limited
to the budgetary and financial aspects of the management of the
office, as is appropriate to the Financial Regulation. In this
context, I believe the proposals to be appropriate to the institutional
structure of OLAF."
The opinion of the Committee of Public Accounts
5.9 We are grateful to the Committee of
Public Accounts (PAC) for providing a detailed opinion. We reproduce
its opinion below but highlight a number of points here:
- For some time the PAC's view has been that improvements
in the standards of financial management and accounting are long
- A number of the PAC's recommendations were reflected
in the strategy for reforming the European Commission, which was
developed by Commission VicePresident Neil Kinnock and approved
by the Commission in March 2000.
- A crucial element of the Commission's reforms
will be making each directorate-general responsible for its own
expenditure by replacing the present centralised checking of expenditure
with systems of internal control integrated within directorates-general.
- The PAC would favour a situation where separate
accounts are produced for each major area of Community activity
or each directorate-general, but recognises that this is matter
for the Treaties rather than the Financial Regulation.
- The PAC notes that the Commission's proposal
aims to clarify arrangements where management is shared, including
making provision for Member States to be more involved in the
discharge process, for example by requiring them to reply to comments
on shared management in the European Court of Auditors Annual
- As regards delegating certain noncore activities
to executive agencies, the PAC comments that the arrangements
should ensure that the Commission retains some budgetary control
and that lines of accountability for Community funds are clear.
- The PAC notes that the lack of an adequate accounting
framework has resulted in transactions of the same kind not always
being treated in a consistent and appropriate manner, but that
the Commission intend to clarify the concept of a commitment in
the draft Regulation.
- The PAC notes that the number and complexity
of the regulations governing Community schemes have served to
increase the risk of error, irregularity and fraud, but is pleased
that the Commission has identified simplification as one of its
aims in revising the Regulation.
- In 1999 the PAC expressed serious concern that
the Commission had failed to create a culture that was intolerant
of fraud and irregularity, and it considers it important that
the Commission does all it can to make the arrangements for investigating
fraud effective and to secure the fullest transparency in the
work of OLAF.
5.10 The draft Regulation moves financial
management in the right direction, but as the comments from the
Public Accounts Committee make clear, further improvements are
necessary. We also understand that, while the European Court of
Auditors broadly backs the proposal, it too would like to see
more radical changes. We call upon the Minister to continue to
press for improvements, especially in enhancing personal accountability,
and we ask the Minister to comment on the specific reforms advocated
by the Committee of Public Accounts and the European Court of
Auditors that are not reflected in the draft Regulation. We thank
the Minister for responding to our questions and look forward
to receiving the information that the Minister has requested from
the Commission. Meanwhile, we leave the document uncleared.
Opinion from the Chairman of the Committee
of Public Accounts (Mr David
Davis) to the Acting Chairman of the Committee
(Mr Jim Marshall)
Following my letter of 12 December, I can now provide
a full reply to your letter of 29 November about the European
Commission's proposal for a new Financial Regulation applicable
to the General Budget of the European Communities. My Committee
is grateful for the opportunity to contribute to the consideration
of the draft Regulation, in the light of reports by ourselves
and the Comptroller and Auditor General on European matters.
This Committee has reported four times since 1996
on the management of the Community Budget, most recently in August
1999, following our factfinding visit to the European Institutions
responsible for the management and oversight of Community funds.
During our visit we were told that there were failings in personal
accountability, problems with budgets and controls, a focus on
inputs rather than outcomes, and a need for greater transparency
and communication overall. We concluded that fundamental changes
were needed to bring about long overdue improvements in the standards
of financial management and accounting and reduce the levels of
waste, error and fraud in Community programmes.
We viewed with satisfaction the extent to which our
recommendations were reflected in the strategy for reforming the
European Commission, which was developed by Commission VicePresident
Neil Kinnock and approved by the Commission in March 2000. The
reform strategy proposed a radical overhaul of financial management
and control systems and a number of the key changes will require
modification of the Financial Regulation before they can be implemented.
Therefore I welcome the Commission bringing forward a proposal
for recasting the Regulation. I regard this as of fundamental
importance to modernising the Communities and improving standards
of financial management and accounting. My observations on particular
aspects of the draft Regulation are set out below.
Sound financial management needs a clear allocation
of responsibilities. In our 1999 report, we expressed concern
at the lack of clarity about who was accountable to whom and for
what. It must be a priority for the Commission to create a culture
where managers take responsibility for their actions and where
individuals are fully accountable for the budgets they manage.
A crucial element of the Commission's reforms will be making each
directorate-general responsible for its own expenditure by replacing
the present centralised checking of expenditure with systems of
internal control integrated within directorates-general. The proposals
in the draft Regulation to redefine the functions of the "financial
actors" are therefore welcome, in particular those for extending
the role of authorising officers. For these changes to be successful
in practice, it will be important for them to be accompanied by
robust systems of internal control and for managers to be supported
with appropriate guidance and advice.
In 1999 this Committee concluded that the lack of
financial information made it difficult to hold individuals to
account for their performance in managing the Community Budget.
In the United Kingdom, Accounting Officers affirm their personal
responsibility for financial management by signing the accounts
of the departments for which they are responsible. The Commission
prepares a single revenue and expenditure account and balance
sheet covering the General Budget as a whole. The draft Regulation
however provides for activity based budgeting which should generate
useful information about expenditure on specific programmes and
objectives. I would be in favour of moving towards a situation
where separate accounts are produced for each major area of Community
activity or for individual directorate-generals, but I recognise
that this is matter for the Treaties rather than the Financial
Although the Commission is responsible for implementing
the Budget, over 80 per cent of expenditure is, of course, managed
by authorities within the 15 Member States. In our 1999 report,
this Committee concluded that the division of responsibility between
the Commission and Member States should be clarified. In particular
there needed to be a much stronger accountability in the Member
States for payments made from the Structural Funds. I note that
the Commission's proposal aims to clarify arrangements where management
is shared, including making provision for Member States to be
more involved in the discharge process, for example by requiring
them to reply to comments on shared management in the European
Court of Auditors' Annual Report.
The draft Regulation also provides for the Commission
to delegate the management of certain noncore activities
and to set up executive agencies for this purpose. In the United
Kingdom, Next Steps Executive Agencies now carry out many of the
executive functions of government, while operating within a policy
and resources framework set by their sponsor department. It will
be important for the Commission to design its arrangements in
such a way that ensures that it retains control of activities
in accordance with its ultimate responsibility for implementing
the Budget and that it is clear who is accountable for the management
of the Community funds involved.
Improving financial reporting
In recent years both this Committee and the Comptroller
and Auditor General have repeatedly called for improvements in
the quality of the Communities' financial statements, in the light
of the serious presentational errors highlighted by the European
Court of Auditors. The lack of an adequate accounting framework
has resulted in transactions of the same kind not always being
treated in a consistent and appropriate manner. One particular
area of concern identified by the Court has been the different
way in which different parts of the Commission have defined commitments,
with the result that the figure shown in the accounts has been
inaccurate and has failed to include all legal obligations. The
Commission's intention to clarify the concept of a commitment
in the draft Regulation is much needed, as are more general provisions
designed to improve the quality of the Communities' financial
statements and bring them into line with agreed accounting standards.
It is clear that the number and complexity of the
regulations governing Community schemes have served to increase
the risk of error, irregularity and fraud. In our 1999 report,
this Committee concluded that Community funds would be better
managed if the regulations were simplified. I was pleased to note
that the Commission has identified simplification as one of its
aims in revising the Regulation. In a similar vein, it would seem
sensible for the Regulation to seek to focus on high level principles
and fundamental rules, leaving the detailed provisions to be covered
in lower level rules which can be more easily updated.
In 1999 this Committee expressed serious concerns
that the Commission had failed to create a culture that was intolerant
of fraud and irregularity. The setting up of OLAF, the European
Anti-Fraud Office, was a move in the right direction and I note
that the draft Regulation makes provision for OLAF's budget. But
of course, OLAF is not fully independent of the Commission and,
as your Committee referred to in its report, there is concern
that OLAF may not have the autonomy it needs. It is important
that the Commission does all it can to make the arrangements for
investigating fraud effective and to secure the fullest transparency
in the work of OLAF.
I hope you will find my comments helpful as you proceed
with your consideration of the Commission's proposal. Please let
me know if I can help in any further way.
I am copying this letter to Jimmy Hood, as Chairman
of the European Scrutiny Committee.
29 March 2001