3 2002 Annual Report of the European Court
of Auditors
| (25165)
OJ C 286 Vol 46
| European Court of Auditors — Annual report concerning the financial year 2002
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| Legal base | — |
| Document originated | 28 November 2003
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| Deposited in Parliament | 18 December 2003
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| Department | HM Treasury |
| Basis of consideration | EM of 7 January 2004
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| Previous Committee Report | None
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| To be discussed in Council | March 2004
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee B (together with the Commissions 2002 report on sound financial management and fighting fraud and related documents)
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Background
3.1 The European Court of Auditors (ECA) is responsible for the
external audit of the Communitys public finances. It examines
the legality, regularity and soundness of the management of all
the Communitys revenue and expenditure, and the revenue and expenditure
of any body created by the Community. The ECA publishes its Annual
Report on a particular financial year about 12 months after the
end of that year. In addition to the Annual Report, the ECA also
publishes, throughout the year, Special Reports on its audits
of particular areas of revenue or expenditure. We regularly report
on these Special Reports. The Annual Report includes the ECAs
Statement of Assurance for the financial year in question. It
also covers the Sixth, Seventh and Eighth European Development
Funds (EDFs) and a Statement of Assurance in respect of them,
as these funds are separate from the General Budget.
3.2 The Annual Report and Statements of Assurance
allow the Communitys Budgetary Authority (the Council and the
European Parliament) to consider the quality of Community budget
implementation, and whether the budgetary processes for the year
should be closed by the European Parliament granting, on the recommendation
of the Council, a discharge to the Commission. The Commission
is required to act on any comments made by the Council and the
European Parliament in granting the discharge, and to report back
on the actions it has taken in response, if requested.
3.3 While the ECAs Annual Report contains some material
relating to fraud and irregularities, it is not primarily concerned
with fraud against the EC budget. We reported on the Commissions
2002 Annual Report, Protection of the financial interests of
the Communities and fight against fraud, and related documents
in October 2003. We recommended that those documents should
be debated in European Standing Committee B, together with this
document, once available.[9]
The document
3.4 The document is the ECAs audit of the accounts
for 2002. It is almost 400 pages long. It is in three parts.
The first part is a general introduction, which this year includes
a description of changes in the format of the report (bringing
the General Budget Statement of Assurance into a more prominent
position) and highlighting two major developments (reform of the
Commission and enlargement) affecting the financial management
of EU resources.
3.5 This part of the report has some positive findings,
such as the steps taken to make the Commission ready to implement
certain provisions of the Financial Regulation from 1 January
2003. Favourable comments are also made about other recent reforms
of the Commission, for example the establishment and application
of internal control standards, the establishment of key performance
indicators, the undertaking of accounting reform and the introduction
of activity-based management.
3.6 But the ECA says that further progress is needed
on reform of the Commission and on preparing for the challenges
of enlargement. Issues include:
- the difficulty in recruiting
staff with the right financial experience and in promoting a risk
management culture;
- by the end of 2002, internal
control standards were still not being applied to the minimum
required level throughout all Directorates General;
- delays in setting up structures for financial
management and control in the accession countries meant that Community
funds were released more slowly than planned; and
- weaknesses in the new monitoring of the systems
have been detected.
3.7 The other two parts of the report are set out
in two columns with the ECA's observations and comments in the
first and the Commission's responses alongside in the second.
The second part of the Report, dealing with the General Budget,
has chapters on the Statement of Assurance and supporting information,
budgetary management (a new chapter bringing together and consolidating
information previously given in individual revenue and expenditure
chapters), revenue, each of the six main categories of expenditure
(agriculture, structural measures, internal policies, external
actions, pre-accession aid and administrative expenditure) and
financial instruments and banking activities. The third part
of the report deals with the European Development Funds and the
Statement of Assurance for them.
3.8 The report also lists the 13 Special Reports
published by the ECA in 2003.
3.9 In considering the document, we have been assisted
by the Explanatory Memorandum (EM) of 7 January 2004 from the
Financial Secretary to the Treasury (Ruth Kelly). As well as
providing the Governments views on the document, it contains a
useful summary of each of the subject-specific chapters. It also
lists references in the document to the UK, and we annex this
list.
The Statements of Assurance in the report
3.10 Both the Statements of Assurance delivered by
the ECA are qualified. Since the reasons for this are relevant
to the continuing need to improve the management and control of
the Communitys finances we think it useful to set out in some
detail the ECAs reservations. In relation to the reliability of
the accounts for the General Budget the ECA says "they faithfully
reflect the revenue and expenditure of the Communities for the
year and their financial [situation] at the year-end", subject
to four observations:
"in the absence of sufficient budgetary appropriations,
820 million euro of legal commitments are included amongst the
off-balance sheet commitments;
"the called-up part (240 million euro) of the
Commission's commitment (520 million euro) to the capital of the
Galileo joint undertaking does not appear as such on the assets
side of the balance sheet;
"the transitional accounts entered on the assets
side of the balance sheet in the sum of 91.1 million euro and
in the sum of 714.9 million euro on the liabilities side should
be redistributed amongst the various other balance sheet or revenue
and expenditure (operating) account headings according to the
nature of their individual components;
"in the absence of effective internal control
procedures for miscellaneous revenue and advances, the Court cannot
be certain that the transactions relating to the sundry debtors
item have been correctly and completely recorded."
3.11 In relation to the legality and regularity of
the underlying transactions of the General Budget the ECA says
that "taken as a whole, [they] are legal and regular in respect
of the revenue, commitments, administrative expenditure and pre-accession
aid". For other payments the ECA established that:
"in the case of EAGGF Guarantee Section, the
payments were, again, materially affected by errors. Arable crops
are less exposed to the risk of error than animal premiums, whereas
the other categories of expenditure, which are not subject to
the integrated administration and control system (IACS), are exposed
to greater risk, as well as being subject to less efficient controls;
"in the case of the structural measures, in
spite of an improvement in the supervisory systems and controls,
especially at Commission level, the same types of error occurred
at Member State level with the same frequency as in previous years;
"in the case of internal policies, the transactions
are still affected by significant errors in terms of legality
and regularity. In the case of the research framework programmes,
these errors are likely to persist if the rules governing the
programmes are not revised;
"in the case of the external actions, the irregularities
noted in the past are persisting at local level. As a result of
a process of management decentralisation that is still ongoing,
the supervisory systems and controls do not yet provide the Commission
with assurance of the legality and regularity of the payments
at the level of the bodies responsible for implementing development
projects."
3.12 In the Statement of Assurance for the accounts
of the European Development Funds the ECA says they "reliably
reflect the revenue and expenditure relating to the [funds] for
the financial year and their financial situation at the end of
the year", except in relation to the following problems:
"transfers of funds amounting to 184.5 million
euro are recorded as payments, overstating the level of implementation
of aid;
"budgetary aid committed (about 550 million
euro in primary commitments in 2002), paid and remaining to be
paid, is difficult to identify in the accounts as it is drawn
from several financial instruments;
"the level of aid committed but not yet paid
(8,385 million euro) is not reliable as an indicator of future
payments, as the accounts frequently continue to record commitments
when no further payments will be made;
"the accounts do not identify amounts due for
recovery;
"the amount of outstanding advances reported
in the accounts (1,070 million euro) is not reliable."
3.13 In discussing the legality and regularity of
the underlying transactions of the EDFs the ECA says that "it
cannot fully rely on the Commission's supervisory systems and
controls as a basis for its assurance" because of two problems:
"weaknesses relating to the terms of reference,
reporting and follow-up to audit reports carried out on EDF operations
on behalf of the Commission or national authorising officers have
not been sufficiently addressed;
"key controls on invoices in ACP States concerning
the reality of works, supplies or services provided and compliance
with contracts are not always reliably carried out."
3.14 The ECA adds in relation to the audit of transactions
that it identified the following problems:
"in the case of primary commitments, the period
of time allowed in the Lomé Convention for the adoption
of financing decisions was overrun;
"in the case of secondary commitments the interest
rates on some loans were irregular;
"in the case of payments, some payments were
made for works, supplies or services which, to a minor extent,
were not fully provided or for items not foreseen in the contract.
A limited number of cases were also identified where advances
were paid without the required justification, the sums deducted
as guarantees were repaid before the contractor had met all required
conditions and where agreed deductions were not made as guarantees."
3.15 Having made these comments the report concludes
that the ECA "is of the opinion that the revenue entered
in the accounts, the amounts allocated to the EDFs, the commitments
and the payments of the financial year are, taken as a whole,
legal and regular. However, in the absence of monitoring information
and of performance indicators on the evolution of the quality
of public finance management in ACP States, the Court cannot give
an opinion on the use of direct budgetary aid by the ACP States,
which is spent and controlled according to national, rather than
EDF, control procedures."
The Government's view
3.16 In her Explanatory Memorandum the Minister says:
"The European Court of Auditors' report on budget
implementation in 2002 again repeats criticisms of financial weaknesses
made in previous years. Although the Court notes many incremental
improvements, and praises progress, it is still unable, for the
ninth year in succession, to give a positive Statement of Assurance
for payments other than administrative expenditure and pre-accession
aid. However, errors detected are usually small amounts paid by
mistake — most of which are later recovered.
"The Court again criticises the Commission's
accounting systems. Nevertheless, it believes the accounts 'reliably
reflect the Communities revenue and expenditure'. The Council
has demonstrated its commitment to reform the accounting systems
by setting the Commission an ambitious deadline of 2005 for modernisation.
The Court is concerned that this timetable is over-ambitious —
the reforms are very complex and the Commission is trying to do
in 3 years what it took the UK 10 years to achieve. Nonetheless,
the Commission remains committed to that deadline.
"The Court also criticises the Commission's
management and control systems. Yet it acknowledges that improvements
continue to be made — for example in the key budget area
of Agriculture, where management of area payments and the Integrated
Administration and Control System (IACS) was shown to be more
effective in 2002. To improve management and control systems in
the longer term, the new Financial Regulation came into effect
on 1 January 2003 (and applies to all institutions, not just the
Commission). This regulation, in the setting up of which the UK
played a leading role, introduces clear lines of financial accountability,
modern, internationally-accepted, accounting practices and concepts
of objective-setting and evaluation. However, time will be needed
for these changes to embed themselves and for a culture of modern
good practices to grow within the institutions of the Commission.
"The Court notes that there was yet another
large budget surplus of €7.4bn (£5.2bn) in 2002. Nevertheless,
this is a large improvement on the substantial surpluses of the
previous two years (€15.0bn, or £10.6bn, in 2001 and
€11.6bn, or £8.2bn, in 2000). New financial rules should
continue to erode this budget surplus (which consisted mostly
of unspent Structural Fund monies) in future. The 2002 surplus
has resulted in reductions in Member State contributions to the
2003 budget. Finally, in the event that large surpluses return
in future, the UK agrees with the Court's opinion that the Commission
needs to use appropriate powers to ensure that surplus monies
are returned in-year.
"There are some criticisms of the UK in the
report, which required an official response (these are listed
in the attached Annex). A full response will be made by the UK
to the Commission as part of the normal follow-up procedure. Both
Houses will receive a copy in due course."
Conclusion
3.17 The document identifies some positive developments
in improving management of the EU's financial resources. However,
as in previous years, the European Court of Auditors (ECA) identifies
serious weaknesses in the procedures for financial control and
management, such as that for the ninth year in succession it is
unable to give positive Statements of Assurance. The need for
further improvements in financial management and control is clear.
3.18 It is customary for the annual report of
the European Court of Auditors to be recommended for debate.
On this occasion we recommend it for debate in European Standing
Committee B together with the Commissions 2002 Annual Report on
Protection of the financial interests of the Communities and
fight against fraud and related documents. Such a debate
will provide an opportunity to consider not only the continuing
weaknesses in financial management but also the need for further
improvement identified in the ECAs Report.
ANNEX
ECA ANNUAL REPORT 2002
SPECIFIC REFERENCES TO THE UNITED KINGDOM
Chapter Paragraph reference
3 3,7
3.12
3.13
3.23
3.27
3.31
Note 2
Note 5
Note 11
Note 23
4 4.32 a),b)
4.44
4.45
4,58 a)
4.64
Note 24
5 5.26
Note 47
Note 78
Note 79
9 (24811) 11954/03 and ADD1; see HC 63-xxxiii (2002-03),
para 3 (15 October 2003) and (24929) -; see HC 63-xxxv (2002-03),
para 1 (29 October 2003). Back
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