Select Committee on European Scrutiny Thirteenth Report

ACTION PLAN FOR IMPROVING FINANCIAL MANAGEMENT AND PROCEDURES

(22259) 7138/01 COM(00) 246

Commission Communication:Action Plan for Improving Financial Management and Procedures in response to the Court of Auditors' 1999 recommendations.

Legal base:	—
Document originated:	5 March 2001
Forwarded to the Council:	6 March 2001
Deposited in Parliament:	28 March 2001
Department:	HM Treasury
Basis of consideration:	EM of 4 April 2001
Previous Committee Report:	None
Discussed in Council:	12 March 2001
Committee's assessment:	Politically important
Committee's decision:	Cleared

Background

  15.1  The European Court of Auditors (ECA) produced its report on the management of the 1999 European Community Budget in December 2000. We reported on it on 7 February 2001. The Commission has now produced its response to the ECA's recommendations. The Commission's response takes the form of an Action Plan, which identifies budget sectors that are prone to error and specifies action to remedy the problems.

  15.2  On 11 February 2000, Commissioner Michaela Schreyer circulated an Action Plan which we considered in our report of 19 April 2000.[26] At that time, the Commission promised to provide an update or progress report after six months. However, despite pressure from the Council, the update was never produced. In its follow­up report to the Council on the 1998 budget, which we considered in our report of 13 December 2000,[27] the Commission proposed an annual Action Plan to improve financial management and procedures. This document is the first of these annual Action Plans and includes an update on the Action Plan drawn up in February 2000 and also an outline of additional corrective action in preparation.

The document

  15.3  The Action Plan reflects the fact that the error rates vary widely between the different policy areas covered by the EU budget. The Action Plan therefore sets out sector-by-sector review, including comments on errors identified by the ECA, action taken on earlier observations, organization of the management and control systems, corrective action that has been taken and is in preparation, and a summary including the likely date when the changes will feed through to the Statement of Assurance.

  15.4  The following extracts indicate the main features of the document:

"—  In respect of own resources, the Court of Auditors notes in the Annual Report that the audit did not reveal a material incidence of error, within the limits of the DAS [Statement of Assurance].


"—  As far as EAGGF is concerned, the Commission will continue its efforts to improve payment and control procedures in the Member States...


"—  For the structural funds, the Court considers that the number of anomalies occurring in the declarations of expenditure co-financed by the Community is still high, even if most of the substantive errors found in the expenditure declarations do not, in themselves, necessarily have an impact on the amount of the Commission's payments. For the new programming period (2000-2006) an improved regulatory framework (including eligibility rules, payment procedures, financial control requirements and financial corrections) will apply.


"—  In the internal policies area, the Commission has strengthened many contractual provisions related to the definition and eligibility of costs, it has also clarified the contractual penalties by incorrect cost declarations or serious financial irregularities....


"—  As far as external actions are concerned, the Commission has introduced a manual of harmonised procedures for external aid contracts, a standard contract for subsidies has recently been introduced and a major package of reforms aimed at improving the speed, quality and profile of EU external aid has been adopted....


"—  The Commission is aware that it must take a variety of practical measures to improve the reliability of the accounts, in particular to lay down new accounting rules that comply with international standards. [The Commission is taking] action on matters such as the accounting management of fixed assets, the practice of depreciation and value adjustments and better identification of off-balance sheet commitments, and it intends to continue ... its action. ..."

Government's view

  15.5  In her Explanatory Memorandum of 4 March 2001, the Economic Secretary to the Treasury (Miss Melanie Johnson) says:

"The Government welcomes this Action Plan, but regrets that it has taken so long for the Commission to provide an update to the plan submitted by Commissioner Schreyer on 11 February 2000. The Government will press the Commission to keep the Council better informed of progress.


"The Government appreciates that the different sectors of the Community budget give rise to differing problems and is pleased that the Commission's analysis of the Court of Auditors' observations has led to proposals for sector-specific remedial measures. The provisional Treaty of Nice refers to the Statement of Assurance and says that the Statement may be supplemented by a specific assessment for each major sector of Community activity. Should the Court of Auditors take this route, the Commission's annual Action Plan will complement this.


"Remedial measures which result in proposals for new or amended Regulations will be considered carefully by the UK Ministry or Department responsible."

  15.6  The Explanatory Memorandum also sets out some useful tables summarising specific measures in the February 2000 Action Plan, its update and corrective actions in preparation. Some of these are set out in table 1 below.

Conclusion

  15.7  We welcome the publication of the Action Plan and the update, but like the Government we regret that it has taken the Commission so long to produce the update to a plan that was submitted 13 months earlier. We have no further questions to ask and clear the document accordingly.

UPDATE TO FEBRUARY 2000 ACTION PLAN AND ADDITIONAL CORRECTIVE ACTION

Sector	Existing and new measures proposed in February 2000 Action Plan	Update on progress from March 2001 Action Plan	Additional corrective action in preparation
Own resources	Levy of compensatory interest. Infraction and infringement proceedings.	Has been initiated against Germany and the Netherlands. To be considered against Austria, Belgium and Denmark.	Proposal to amend Customs Code has been adopted.
	Amend Regulation 1552/89 to strengthen procedure for "writing off" irrecoverable debts.	In progress.	Various measures to reduce VAT fraud — new regulation, funding for seminars on risk analysis.
	Accounts to include comments on over-estimation of own resources debts.	Completed.	New regulation to adopt ESA 95 for determining the VAT base for the third resource.
EAGGF Guarantee	Recoveries during clearance of accounts procedures.	Recoveries amounted to 600 million euro in one year.	Infringement proceedings have been initiated on the failure to recover supplementary levies due where milk quotas have been exceeded.
	Accreditation of paying agencies and IACS[28] system.	Completed.	Reform of the common market organisation for wine (Regulation 1493/1999 entered into force on 1 August 2000).
	Improve Member States' inspection systems and controls.	Commission proposes adoption of geographical identification systems and further refinement of the animal identification system.	Monitoring and analysis of aid scheme for skimmed milk.
			Proposal to charge interest on financial corrections.
			Development of a new computerised system to include a database of payments to final beneficiaries.
Structural Funds	Draft regulation on Financial Corrections.	Regulation 448/2001 adopted on 2 March 2001.	See previous table.
	Eligibility datasheets.	Have started to produce improvements in expenditure declared in 1999 and 2000.
	Closure statements under Regulation 2064/97.	Detailed guidelines adopted by the Commission to supplement existing provisions.
	Draft regulation on eligibility for 2000-2006 programming period.	Regulation 1685/2000 adopted on 28 July 2000.
	Control procedures in Member States.	Commission to carry out audit in 2001.
Internal Policies	Definition of eligible costs.	Commission has strengthened many contractual provisions related to the definition and eligibility of costs.	Use of Activity-Based Budgeting will introduce more clarity to presentation of staff allocation.
	Clarification of contractual penalties and new standard contract.	Contractual penalties have been clarified. New standard contract has been adopted.	Time period for which a contractor may be audited after each payment has been increased from two to five years.
	Ex-post audit stepped up.	Ex-post audit has been intensified, and a contract has been signed with an external audit firm. Target of 10% of DG Research population to be audited.	Management rules for the 5th Framework Programme will be simplified.
	Checks on financial position of contractors.	Checks have been stepped up.
External Actions	Fundamental review ofmanagement structures and procedures.		Each contract over 100,000 euro will be audited by an external auditor.
	Clearance of backlog of invoices.	Cleared during 1999. All valid invoices are now paid within the normal 60-day period.	Management of external actions will be progressively devolved to the Commission's delegations from 2001-2003.
	Harmonised manual of procedures.	Manual approved by the Commission on 10 November 1999.	Improved procedure for the preparation of country strategy papers will be introduced.
	Standard contract for subsidies.	Standard contract has recently been introduced.	Procurement procedures will be revised in the new Financial Regulation.
	Independent monitoring of aid programmes.	Standard monitoring system for active projects in the ACP, ALA and MED regions was designed and tested in 2000 and will be extended during 2001 and 2002.
Administrative Expenditure	Internal control procedures introduced 1999.	Internal control measures have been introduced for checking the entitlements of regular staff.	See previous table.
	Various improvements to be introduced during 2000.	Improvements in presentation of off-balance sheet commitments and adoption of a clear contractual position concerning expenditure on immovable property.
Financial instruments and banking activities			Evaluation for and audit of Growth and Environment scheme.
			Various controls to be introduced.
			High level contracts between the Commission, European Investment Bank and European Investment Fund to be maintained.
Reliability of the Accounts	Recasting of the Financial regulation.	Ongoing.	Methodical analysis of the accounting framework.
	Harmonised presentation of accounts.	Commission has drafted a manual of accounting and consolidation procedures.	Improved presentation of financial statements.
	Clarification notes on debts. Consistent treatment of advances and payments on account.	Detailed rules will be drawn up on the basis of the new Financial Regulation.
European Development Fund	Harmonisation of tendering procedures.	Will be approved by ACP Council of Ministers in 2001.	Standard procedure to deal with cases of misuse of funds in recipient countries is being developed.
	Independent monitoring and auditing procedures.	Standardised, independent monitoring procedure is being established for all regional programmes.
	Develop procedure to deal with misuse of funds.	Standard procedure to deal with cases of misuse of funds in recipient countries is being developed.

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26  (21116) -; see HC 23-xv (1999-2000), paragraph 9.  Back

27  (21812) 13104/00; see HC 23-i (2000-01), paragraph 5. Back

28  Integrated Administration and Control System. Back

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Prepared 14 May 2001