14 Financial management
| (27230)
5509/06
+ ADD1
COM(06) 9
| Commission action plan towards an integrated internal control framework
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| Legal base | — |
| Document originated | 17 January 2006
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| Deposited in Parliament | 25 January 2006
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| Department | HM Treasury |
| Basis of consideration | EM of 7 February 2006
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| Previous Committee Report | None
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| To be discussed in Council | March 2006
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| Committee's assessment | Politically important
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| Committee's decision | Cleared, but relevant to the forthcoming debate on the European Court of Auditors 2004 report and other documents related to financial management
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Background
14.1 For eleven years the European Court of Auditors has been
unable to give a positive statement of assurance (frequently referred
to as a DAS, from the French "déclaration d'assurance")
on the Community budget. The present arrangements for financial
control and audit of Community spending are not working. The Commission
is formally responsible for the whole budget, though in practice
some four-fifths of expenditure is managed by Member States. Their
systems are diverse, and do not provide a consistent and reliable
set of data about internal controls on which the European Court
of Auditors can reach a judgement.
14.2 In April 2004 the European Court of Auditors
issued an Opinion[43]
on a "single audit" model, which would be designed to
address the difficulties arising from the present diversity of
systems, and on a proposal for a Community internal control framework.
The Commission and Member States have broadly agreed with the
Court's conclusions. In its Recommendation on discharge for the
2003 Budget the Council invited the Commission to propose an initiative.
The European Parliament (in its Resolution on discharge for the
2003 Budget) called for the Council to work with it and the Commission
on the creation of a comprehensive control and audit framework.
In October 2005 we considered a Commission Communication which
proposed a new integrated approach to internal control systems,
which would involve action by the Commission itself, by Member
States and by the European Court of Auditors. The aim was to achieve
over four years a positive statement of assurance. The Commission
claimed that in the process the new system would improve both
the quality of financial management and the quality of information
about financial management. We cleared the document but noted
that it would be relevant to the next debate, which we recommend
annually, on the current report of the European Court of Auditors
and related documents.[44]
14.3 In November 2005 the ECOFIN Council adopted
Conclusions, consequent on the Commission's Communication and
the report of a panel of experts the Council had set up to examine
the Commission's proposals, which contained a number of requests
to the Commission on carrying forward an integrated internal control
framework.
The document
14.4 This Communication from the Commission responds
to the Council by identifying the main actions to be undertaken
and the roles that the Commission, the Council, the Member States
and the European Parliament should play. The action plan proposed
is summarised by the Commission under four headings:
- simplification and common control
principles;
- management declarations and audit assurance;
- single audit approach: sharing results and prioritising
cost-benefit; and
- sector-specific gaps.
We annex the Commission's 16 summarised action points.
14.5 In the addendum to the Communication the Commission
reviews progress since its earlier Communication, gives an analysis
of the "gap assessment" (between the current internal
control framework in the Commission's services and the control
principles set out in the European Court of Auditors' "single
audit" Opinion) and sets out an action list specifically
for the Commission itself. These actions are in five main categories:
common internal control principles and common
benchmarks
- introduction of a common principle
of internal control (related to Action 2 in the Annex);
- promotion of the use of management declarations
and statements (Action 5);
- promotion of the "Contract of Confidence"
(agreed between the Commission and a Member State and specifying
an audit strategy for the management of funds) and its principles
(Action 15);
- preparation of guidelines for establishing control
strategies, for criteria for certification auditors, for reducing
the administrative burden and for the adoption of common approaches
with regard to non-compliance, sampling techniques and correcting
and identifying the overall incidence of errors;
a common method for presenting the control strategy
at service level
- adoption of a series of common
templates for Commission Directorates-General (DGs) to describe
their internal control structures;
- presentation of an overview of the internal control
strategy at DG or service level;
sharing of audit and control results and recording
of follow-up
- between DG "policy families"
(DGs working in the same budget sector);
- structuring a Commission-wide approach and exchange
of information around the sharing of control and audit information;
implementation of a cost-benefit approach
- provision by each Commission
service to provide an initial estimate of the cost of controls
(Action 10); and
actions addressing inter-institutional issues
- as described in Actions 1,
3, 4, 10 and 13.
The Government's view
14.6 The Economic Secretary to the Treasury (Mr Ivan
Lewis) tells us that the Government welcomes the Communication,
commenting that it is a comprehensive document which demonstrates
that the Commission has listened to the Council's views and that
it is keen to take the actions demanded by the Council. He says
the Government will monitor progress carefully and will work closely
with the Austrian and succeeding Presidencies to keep up the momentum
on this important issue.
14.7 The Minister says that many of the action points
listed are relatively easy to achieve — he cites, for instance,
defining a new "principle of internal control" in a
revised Financial Regulation (Action 2). But he adds that some
of these actions are more important than others in terms of their
ultimate impact, noting for instance that Action 4, where the
Commission will launch an inter-institutional dialogue on the
risks to be tolerated in underlying transactions, could have a
great impact on future DAS audits by the European Court of Auditors.
The Minister notes the Court itself acknowledged in its "single
audit" Opinion that it is the role of the budgetary authority
(the Council and the European Parliament) to rule on what is acceptable
in terms of the risk of error to be tolerated and says that the
Government intends to play a full role in this inter-institutional
dialogue.
14.8 The Minister says also that the Government believes
that there is much to be gained from the contribution of Member
States' highly-respected and independent Supreme Audit Institutions
and that it is working closely with the National Audit Office
about the feasibility of a greater involvement in giving assurance
on Community expenditure as proposed in Action 8.
Conclusion
14.9 This Communication is an important element
in the continuing attempts to improve management of the Community's
finances. We clear the document but note that it is relevant to
the forthcoming debate on the Floor of the House we have recommended
on the 2004 annual reports of the European Court of Auditors,
the Commission's 2004 annual report Protection of the financial
interests of the Communities and fight against fraud and related
documents.[45]
Annex
SUMMARY OF ACTION PLAN AND REQUESTED SUPPORT FROM
OTHER INSTITUTIONS
Simplification and common control principles
1. Simplification review of proposed 2007-13 legislation.
The Commission will keep under consideration the simplification
of the regulatory framework during the negotiations on all the
2007-2013 legislation. Council and the European Parliament are
considered to support such initiatives. June 2006.
2. Integrate common internal control principles in
the proposal for the revised Financial Regulation. The Council
and the European Parliament should use the opportunity of the
consultation on the revised Financial Regulation to give their
opinion on the need to insert a budgetary principle on effective
and efficient internal control providing a common standard. February
2006.
3. Establish and harmonise better the presentation
of control strategies and evidence providing reasonable assurance.
The Court of Auditors should be able to develop its DAS-methodology
so as to rely effectively on the Annual Activity Reports of the
Commission services and the related synthesis report at Commission
level, focussing on the management of the risk of error in the
legality and regularity of the underlying transactions. End 2006.
4. Initiate inter-institutional dialogue on risks
to be tolerated in the underlying transactions. The Commission
will initiate an inter-institutional dialogue in March 2006 on
the basic principles to be considered regarding the risks to be
tolerated in the underlying transactions. On this basis, the Council
and the European Parliament should reach an initial agreement
regarding these risks by end 2006. December 2006.
Management declarations and audit assurance
5. Promote operational level management declarations
and synthesis reports at national level. Member States should
designate a national coordinating body per policy area which can
for example provide all stakeholders with an overview of the assurance
available in respect of Community actions under shared and indirect
management in their Member State. The cooperation of Member States
is necessary when ensuring such a provision in forthcoming legislation,
and steering its implementation via implementing rules and guidance,
adapted to the arrangements for providing assurance on Community
funds for the policy area. End 2006.
6. Examine the utility of management declarations
outside shared and indirect centralised management. Council and
the European Parliament should carefully examine the appropriateness
of internal control structures and procedures proposed in the
new legislative proposals. Permanent action.
7. Promote best practices for increasing cost-benefit
of audits at project level. Member States should actively participate
in enhancing the usability of independent audit results in the
chain of control and integrate this aspect in its guidance for
controlling EU-funds. 2006 and later on permanent concern.
8. Facilitate additional assurance from SAIs [Supreme
Audit Institutions]. Member States should invite their national
and regional Parliaments to ask their SAIs for audit and assurance
on EU-funding at their level. The conclusions of these reports
should also be made available to the Commission and the European
Court of Auditors. End 2006.
Single audit approach: sharing of results and
prioritising cost-benefit
9. Construct effective tools for the sharing of audit
and control results and promote the single audit approach. Member
States are called on to continue to cooperate actively with the
relevant Commission services in fixing audit strategies, audit
guidance, planning of audits and sharing of the results and their
follow-up. 2006 and later on permanent concern.
10. Conduct an initial estimation and analysis in
the costs of controls. Member States are asked to deliver data
on costs for the control of expenditure under shared and centralised
indirect management in good time and in a comparable format to
be defined by the Commission. By February 2007.
11. Initiate pilot projects on evaluating benefits.
Council and the European Parliament are asked to integrate the
results of these pilot studies in their reflections regarding
the risks to be tolerated in the underlying transactions. From
mid 2007 onwards.
Sector-specific gaps
12. Address the gaps identified by participating
services. Member States are called upon to cooperate with the
Commission services in the implementation of actions, and where
the actions involve changes to legislation the Council and the
European Parliament should be open to considering such amendments.
Permanent action.
13. Analyse the controls under Shared Management
(in particular Structural Funds) at regional level and the value
of existing statements. Member States should ensure that the relevant
information to be provided by the Authorities under Article 13
for Structural Funds, is delivered in accordance with the proposed
time table. June 2006. The issue of how Member States can provide
assurance to the Commission in the most efficient and effective
manner, will also be discussed during the bilateral annual meetings
with the Member States' auditors. End 2006.
14. Provide greater guidance for structural funds
on managing the risk of error. Support is requested from Member
States in developing and implementing the guidance for Structural
Funds where it is most needed, and in its distribution and dissemination.
End 2006. Dissemination: 2007.
15. Promote the "Contracts of Confidence"
initiative for Structural Funds. Member States should implement
for Structural Funds the "Contracts of Confidence" to
provide assurance for the current period, and also to lay the
groundwork for the next programming period. Those that do not
should reflect on how to provide comparable assurance on the present
period and how they will prepare their control systems for the
next programming period. September 2006.
16. Establish common guidelines per policy family.
As this is mainly an internal Commission measure, Council, European
Parliament and Court of Auditors should benefit from the progress
made in this domain through clearer and more coherent reporting
in the Annual Activity Reports of the services. From 2006 onwards.
43 Opinion No. 2/2004 - OJ C 107, 30.4.2004. Back
44
See (26652) 10326/05: HC 34-v (2005-06), para 43 (12 October 2005). Back
45
See (26994): HC 34-xv (2005-06), para 4 (18 January 2006). Back
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