2 2003 Annual Report of the European Court
of Auditors
| (26293)
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| European Court of Auditors — Annual report concerning the financial year 2003
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| Legal base | — |
| Deposited in Parliament | 19 January 2005
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| Department | HM Treasury |
| Basis of consideration | EM of 2 February 2005
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| Previous Committee Report | None
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| To be discussed in Council | March 2005
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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 Commission's 2003 report on the fight against fraud and related documents)
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Background
2.1 The European Court of Auditors (ECA) 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. 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 ECA's
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.
2.2 The Annual Report and Statements of Assurance
allow the Community's 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.
2.3 While the ECA's 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 Commission's
2003 Annual Report, Protection of the financial interests of
the Communities and fight against fraud, and related documents
in October 2004 and January 2005. We recommended that those
documents should be debated in European Standing Committee B,
together with this document, once available.[1]
The document
2.4 The document is the ECA's audit of the accounts
for 2003. It is over 380 pages long, and in considering the document
we have been assisted by the Explanatory Memorandum of 2 February
2005 from the Financial Secretary to the Treasury (Mr Stephen
Timms). As well as providing the Governments views on the document,
it contains a useful summary of the report's introduction and
of each of the subjectspecific chapters in the other two
parts of the report. It also lists references in the document
to the UK, which we annex below.
2.5 The first part of the document is a general introduction
in which the ECA notes:
- despite progress made in the
Institutions, further improvements are necessary in the management
of the EC budget, with further efforts to ensure the budget is
"implemented in a way which satisfies the legitimate expectations
of the citizens of the Union";
- a continued lack of assurance that supervisory
systems and controls of significant areas of the budget are being
effectively implemented so as to manage the risks concerning the
legality and regularity of the underlying operations;
- audit work has repeatedly shown that many irregularities
occur where the bulk of expenditure is managed in a shared or
decentralised way. This requires, either through good practice
or regulation, adequate control over EC funds, including improved
internal control systems in Member States; and
- continued high levels of outstanding commitments,
mainly through overly ambitious budgeting and a lack of capacity
for absorption in Member States. This means a requirement both
for realistic expectations of the timing of spending when budgeting
in the 2007-2013 Financial Perspective period and for liquidation
of commitments made in the current 2000-2006 period. Unless specific
measures are taken, under-spending in the new period would build
upon the problem, causing an even greater gap between budgeting
and spending in the future.
2.6 The ECA concludes its introduction by referring
to its own plans: an intention to build and improve its role as
the independent auditor of the Institutions, to streamline its
decision-making procedures, to improve its audit methodology and
tools and to train staff to fulfil its mission better.
2.7 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 — bringing together and consolidating
information from individual revenue and expenditure chapters;
own resources (i.e. 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. The report also lists the 15
Special Reports published by the ECA in 2003.
2.8 The ECA's Statement of Assurance (sometimes referred
to as the DAS, from the French declaration d'assurance)
for the General Budget is once again qualified. It says, subject
to one reservation, that the accounts "faithfully reflect
the revenue and expenditure of the Communities for the year and
their financial position at the year end". The reservation
is that in the absence of effective internal controls the ECA
cannot be certain that transactions relating to the sundry debtors
item were properly recorded. However, the ECA finds that the transactions
underlying the accounts, taken as a whole, were legal and regular
in relation only to revenue, commitments and administrative payments.
As for other payments, its sampling still found problems in relation
to agricultural guarantees, structural measures, internal policies
(including the research programmes), external actions and pre-accession
aid.
2.9 Other comments in this chapter include:
- the accounting system drawn
up to record the 2003 accounts was not designed to ensure that
assets were fully recorded. The Commission's new system is operational
from 1 January 2005, but full implementation of all the new rules
will take considerable effort by all the bodies whose accounts
are subject to consolidation;
- recognition of the progress made by the Commission
as regards reform of its internal control system and the positive
impact of this reform on the legality and regularity of transactions
subject to direct management by the Commission. But progress is
still required in terms of actual implementation; and
- the Commission has included for the first time
in its Synthesis of the 2003 Annual Activity Reports of the Directorates-General
and departments an analysis of the assurance provided by the supervisory
systems and controls as to the legality and regularity of the
underlying transactions. This analysis generally corroborated
the ECA's audit conclusions.
2.10 In the chapter on budgetary management the ECA
comments on the Commission's document, "Report on budgetary
and financial management: Financial year 2003".[2]
It acknowledges a significant improvement on previous years,
but says that an overall analysis could be made more useful by
including information on the cumulative state of implementation
of Community programmes and on the speed with which Member States
and other beneficiary states make payments to final beneficiaries.
2.11 This chapter reports an overall budget surplus
— that is, net underspending — of €5.5 billion
(£3.9 billion). Although still large in absolute terms, it
is a decrease compared with €7.4 billion (£5.2 billion)
in 2002 and €15 billion (£10.7 billion) in 2001. In
this chapter the ECA also observes:
- the Gross National Income (GNI)
resource element of own resources rose from €45.9 billion
(£32.5 billion) in 2002 to €51.3 billion (£36.3
billion) in 2003 — an increase of 11 %;
- the VAT resource element collected
fell from €22.4 billion (£15.9 billion) to €21.2
billion (£15 billion) — a decrease of 5%;
- payment appropriations for structural measures,
at €34 billion (£24 billion), increased by 0.4% compared
to 2002; and
- pre-accession aid payments totalled €2.2
billion — a spending rate of 80%, compared with 67% in 2002.
For PHARE,[3] payments
totalled €1.5 billion (£1 billion) — a spending
rate of 94%, compared with 69% in 2002.
2.12 In the chapter on own resources, the ECA says
that it reviewed the organisation of customs supervision in twelve
Member States (including the UK), the Commission's accounts for
traditional own resources and the underlying national accounting
systems in the same Member States. It also reviewed the work of
the Commission unit responsible for inspections of traditional
own resources matters, and, as in previous years, found its methodology
to be soundly based and the documentation of its work good. The
ECA repeats its recommendation of 2002 that the Commission should
increase control activity, in addition to existing checks on the
GNI-based own resource — the most important own resource
element. On agricultural tariff quotas the ECA identifies shortcomings
in the implementation of quota rules and in the controls related
to imports under quota arrangements in other Member States. It
invites the Commission to follow up these cases. Finally, the
ECA comments that VAT-based and GNI-based resources were being
correctly calculated by the Commission and entered into Community
accounts.
2.13 In the chapter on financial instruments and
banking activities the ECA notes:
- inaccuracies in the information
provided in the European Investment Fund reports to the Commission
concerning the Community's shares of financial participation;
- that consistent principles should be applied
in respect of guarantee benefits; and
- that the Community budget is particularly exposed
to credit risk as regards the guarantees for loans granted by
the European Investment Bank.
2.14 The remaining chapters in this part of the report
examine implementation of the general budget for each of the six
main categories of expenditure (agriculture, structural measures,
internal policies, external actions, pre-accession aid and administrative
expenditure) and report the detail of the problems uncovered by
the audit, including those noted in earlier audits.
2.15 In the third part of the report, dealing with
activities funded by the Sixth, Seventh, Eighth and Ninth European
Development Funds (EDFs), the ECA notes again that implementation
of the EDF remains very long. In most instances the official duration
is five years, but the actual duration is three to four times
as long. The Commission says in response that measures have been
taken to remedy matters and claims that budgetisation[4]
would solve the problem. Amongst further comments the ECA makes
are:
- efforts made to introduce the
new-style financial management report have marked an attempt to
improve the quality of information concerning management; however
further improvements could still be made; and
- given the high level of risk accepted by the
Community, the quality of the management of public finances in
the African, Caribbean and Pacific (ACP) countries is important
and requires careful monitoring.
In this part of the report the ECA also discusses
the follow-up to its previous observations about the EDFs, including
the possibility of budgetisation, and the main observations in
Special Reports on the EDFs it has published since the conclusion
of the last audit process.
2.16 As for its Statement of Assurance concerning
the EDFs, the ECA says that, subject to four comments, it is of
the opinion that the reports on implementation for the financial
year 2003 and the financial statements at 31 December 2003 reliably
reflect the revenue and expenditure for the EDFs for the financial
year and the financial situation at the end of the year. The comments
are:
- debt owed to the EDFs was not
shown as assets in the balance sheets at 31 December 2003, because
of the absence of internal control procedures. As a result the
ECA could not ensure that the balance sheet was complete;
- nor was the amount of advances recoverable as
debt ascertainable;
- the use by ACP States of Stabex funds[5]
can be established only partially; and
- as a large advance payment had not been recorded
the ECA could not ascertain the amounts that had already been
recovered.
2.17 As for the legality and regularity of the transactions
underlying the EDF accounts, the ECA notes a number of problems
but assesses them as not material to its opinion that the revenue
entered into the accounts and the EDF allocations, commitments
and payments for the year are, taken as a whole, legal and regular.
The Government's view
2.18 In his Explanatory Memorandum the Minister says:
"The ECA report on budget implementation in
2003 repeats criticisms of financial weaknesses which it has made
in previous years. Although the Court found that the transactions
underlying the financial statements were legal and regular in
respect of revenue, commitments and administrative payments, it
is disappointing that for the tenth year running it was unable
to give a positive Statement of Assurance. This was because of
the level of errors identified in a sample of payment transactions.
However, these errors are often relatively small amounts that
have been paid by mistake, and most of them are later recovered.
"The 2003 report is more informative than in
previous years in giving the reasons why the Court could not give
a positive Statement of Assurance. In response the Commission
has stated that it is fully committed to fill the gaps in irregularities.
The Government notes that the lack of a positive Statement of
Assurance, notwithstanding the positive comments in this report,
will continue to mask the efforts, which the Commission and Member
States have made to improve financial management of the Community
budget. The Government remains firmly committed to improving
the probity and effectiveness of EC spending, through both the
annual budget process and through measures to tackle fraud and
improve financial management. The Committee will be familiar
with reforms introduced over the past three years under former
Vice-President Neil Kinnock. Looking ahead, the Government is
taking an active interest in proposals to reform and strengthen
OLAF, the anti-fraud body; and is calling, with others, for further
reform to the way the Statement of Assurance is assessed. This
would provide a fuller and more informative picture of the state
of financial management in the Community budget, help pinpoint
sources of concern, and track progress over time.
"The Government is pleased to note the progress
made by the Commission as regards its internal control standards,
especially since the two Directorates-General responsible for
handling nearly 80% of the budget (DG AGRI and DG REGIO) received
an excellent report from the ECA. It is encouraging that the
Commission has taken steps to improve the efficiency of its budget
management.
"The Court criticised the accounting system
used to draw up the 2003 accounts as not being designed to ensure
that the assets were fully recorded. The Commission implemented
in January 2005 its ambitious plan to modernise the accounting
system and introduce full accruals accounting. This modernisation
is ahead of most Member States' own systems.
"The Government supports the Commission's efforts
to modernise the accounts in 2005, as this will go a long way
in enabling the Courts to give a positive Statement of Assurance
in the future. However, these changes are not likely to have
much effect on the ECA's report on the 2004 financial year.
"The Government welcomes the comments made by
the Court and would hope that this will have a positive effect
on both the Commission and Member States to look at their financial
management, in greater detail. The Government welcomes the steps
that the Court has taken to further improve its audit methodology
and tools, especially to take account of enlargement.
"There are some references to the UK in the
report (see Annex 2.1) which were the subject of an official response
to the Commission. Copies will be sent to the Committees as usual."
Conclusion
2.19 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
weaknesses in the procedures for financial control and management,
such that for the tenth year in succession it is unable to give
positive Statements of Assurance. The need for further improvements
in financial management and control is clear.
2.20 It is customary for the Annual Report of
the ECA to be recommended for debate. On this occasion we recommend
it for debate in European Standing Committee B together with the
Commission's 2003 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 ECA's
report.
2.21 The debate might also touch on the references
to budgetisation of the European Development Funds, which we presume
are unwelcome to the Government but to which the Minister does
not refer.
Annex 2.1
ECA ANNUAL REPORT 2003
SPECIFIC REFERENCES TO THE UNITED KINGDOM
Chapter
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Note/Paragraph reference
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3
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Note 3
Note 11
Note 16
Paragraph 3.13
Paragraph 3.28
Paragraph 3.40
Paragraph 3.43
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4
|
Note 1
Note 19
Paragraph 4.10
Paragraph 4.11
Paragraph 4.57
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5
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Note 49
Note 52
Note 53
Note 54
Note 57
Note 62
Note 67
Note 72
Note 73
Note 75
Note 79
Note 80
Note 81
Note 82
Paragraph 5.47
Paragraph 5.83
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| 10 |
Note 23
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1 (25891) 11890/04 (25925) 11981/04 + ADDs 1 and 2;
see HC 42-xxxii (2003-04), para 4 (13 October 2004) and (26136)
14549/04: HC 38-iii (2004-05), para 3 (12 January 2005). Back
2
http://europa.eu.int/comm/budget/pdf/infos/financial_mgt_2003_en.pdf. Back
3
A pre-accession programme to support institution building in candidate
countries. Back
4
The inclusion of EDF expenditure in the Community's General Budget. Back
5
For stabilising export earnings of recipient countries. Back
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