Select Committee on European Scrutiny Fourth Report


COM(00) 461

Draft Regulation on the Financial Regulation applicable to the General Budget of the EC.

Legal base: Article 279 EC; consultation; unanimity
Department: HM Treasury
Basis of consideration: Minister's letter of 27 September 2001
Previous Committee Report: HC 23-xxxi (1999-2000), paragraph 11 (29 November 2000) and HC 28-xiii (2000-01), paragraph 5 (2 May 2001)
To be discussed in Council: No date known
Committee's assessment: Politically important
Committee's decision: Cleared


9.1  The Financial Regulation is the instrument that 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.

9.2  On 29 November 2000, the previous Committee left the draft Regulation uncleared, pending answers to its questions from the then Economic Secretary to the Treasury (Miss Melanie Johnson). The Committee also took the opportunity to ask the Committee of Public Accounts (PAC) for its opinion on the document. The Committee considered these replies on 2 May 2001, but, in leaving the document uncleared, commented that:

    "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."

The Minister's letter

9.3  The Economic Secretary to the Treasury (Ruth Kelly) replied to our questions in her letter dated 27 September 2001. We reproduce the letter below but highlight a number of points here.

— changes in the procedure for virement:

9.4  The previous Committee asked for further information on the effect of the changes in the procedure for virement, specifically the proposal that the Commission could transfer operating costs within the same title, up to a maximum of 10% of the initial appropriations, without first seeking approval of the budgetary authority. The Minister informs us that according to a summary of transfers made in 2000, some 58% of all virements would still have required prior approval. The Minister adds that

    "I believe this shows that the new proposal would give the Commission more flexibility, while retaining the need for the budgetary authority's consultation on more than half of the virement proposals, which involve more significant sums".

— inclusion of establishment plans:

9.5  As regards the proposal that the budget should include the establishment plans for each agency, the Minister says:

    "The UK, along with other Member States, is pressing the Commission on the rationale for this, and are currently not in favour of including the agencies' establishment plans in the general budget (Council conclusions paragraph 12)."

— Government's response to the opinion of the Committee of Public Accounts

9.6  Below we summarise the Government's response to the opinion of the Committee of Public Accounts (PAC):

    —  The Government agrees with the importance that the PAC attaches to making each director-general responsible for its own expenditure and that the establishment of an independent internal audit service within the Commission during 2000 and the requirement for Directors General to produce by 2002 annual activity reports covering the objectives of the directorate general, an assessment of results achieved with resources allocated, an analysis of activities, an analysis of internal control systems and a declaration signed by the director general giving undertakings concerning the proper operation of his or her department and in particular the reliability of the internal control system put in place.

    —  Like the PAC, the Government favours a situation where separate accounts are produced for each major area of Community expenditure or each directorate-general, but recognises that this is a matter for the Treaties rather than the Financial Regulation.

    —  The Minister says that, like the PAC, the Council has also identified the delegating of non-core activities to executive agencies as an area that needs close examination to ensure that the Commission retains some budgetary control.

    —  Like the PAC, the Government welcomes the fact that the draft proposal seeks to simplify and clarify the Regulation so as to reduce the risk of error and irregularity that arises from the number and complexity of Regulations.

    —  The Government agrees with the PAC on the importance of creating within the Commission a culture intolerant of fraud and irregularity and will continue to support the independence of OLAF and to scrutinise the reports of the Director and of the supervisory committee.

— Government's response to the opinion of the European Court of Auditors

9.7  The Government notes some favourable comments made by the Court on certain aspects of the draft proposal. However, the Government also has sympathy for the Court's disappointment with the proposal, especially the failure by the Commission to include the proposals drawn up by a group of experts for the Commission on the keeping and presentation of the accounts. The Government comments that the Commission has been working to a tight timetable, which is linked to the Commission's administrative reforms. The Government comments that it would support a separate exercise to deal with the keeping and presentation of the accounts.


9.8  When the previous Committee considered the draft Financial Regulation it concluded that, while the draft Regulation moved financial management in the right direction, further improvements were necessary. The Council, which broadly welcomed the Commission's proposals, has asked the Commission to submit an amended proposal, accompanied by a draft of the implementing rules so that they can be considered for adoption as soon as possible. We will consider these documents when they are available. Meanwhile, we clear this document.

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Prepared 14 November 2001