4 2004 ANNUAL REPORTS OF THE EUROPEAN
COURT OF AUDITORS
(26994)
—
—
| European Court of Auditors — Annual reports concerning the financial year 2004
|
| Legal base | —
|
| Deposited in Parliament |
12 December 2005 |
| Department | HM Treasury
|
| Basis of consideration |
EM of 19 December 2006 |
| Previous Committee Report |
None |
| To be discussed in Council
| March 2006 |
| Committee's assessment | Politically important
|
| Committee's decision | For debate on the Floor of the House (together with the Commission's 2004 report on the fight against fraud and related documents)
|
Background
4.1 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, but
not always, report on these Special Reports. The Annual Report
includes the ECA's Statement of Assurance for the financial year
in question. It also covers (technically in a separate report)
the Sixth, Seventh, Eighth and Ninth European Development Funds
(EDFs) and has a Statement of Assurance in respect of them, as
these funds are separate from the General Budget.
4.2 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.
4.3 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
2004 Annual Report, Protection of the financial interests of
the Communities and fight against fraud, and related documents
in October and November 2005. We have recommended that those
documents should be debated on the Floor of the House, together
with this document, once available.[8]
The document
4.4 The document is the ECA's audit of the accounts
for 2004. It is over 300 pages long and in considering the document
we have been assisted by the Explanatory Memorandum of 19 December
2005 from the Economic Secretary to the Treasury (Mr Ivan Lewis).
As well as providing the Government's 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.
4.5 The first part of the document is a general introduction
to the audit of the General Budget in which the ECA notes:
- that 2004 was marked by the
accession of ten new Member States — the biggest enlargement
in Community history;
- consolidation of reform of the Commission's financial
management continued, the budget was implemented for the first
time under the new Activity Based Budgeting (ABB) format[9]
and ABB changes the way in which financial information is presented
with details in the budget shown by ABB policy area;
- the Commission's continued efforts to prepare
for the introduction of full accruals-based accounting, a fundamental
reform in the way that the accounts are kept and financial information
presented, for the 2005 financial year;
- that improvements have been made in the way in
which the Commission organises itself and manages the budget,
including in the area of controls undertaken on expenditure it
manages directly, since the reform process was initiated in 2000;
- that, however, significant effort is still required,
notably in areas of the budget where management is shared with
Member States — it is of critical importance that the Commission
work with Member States to identify weaknesses in the design and
operation of schemes, and introduce appropriate remedial action;
and
- it had issued an Opinion on the "single
audit" model in April 2004, which included a proposal for
a Community internal control framework which involved development
of the current system or of a new system to be applied at the
Commission and in Member States in a coordinated manner following
common principles and standards and redesign of control systems
to ensure an appropriate balance between the costs of controls
and benefits, in terms of managing the risk of irregularity. In
a positive response the Commission had proposed a roadmap to an
integrated internal control framework which would produce clearly
defined standards and objectives for internal control systems
giving an objective basis for audit.[10]
4.6 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 in detail 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 (that is revenue); each of the six main
categories of expenditure (agriculture, structural measures, internal
policies — including research, 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 28 Special Reports published
by the ECA in 2004.
4.7 The ECA's Statement of Assurance (sometimes referred
to as the DAS, from the French déclaration d'assurance)
for the General Budget is yet again qualified. It says of the
reliability of the accounts that, subject to one reservation,
they "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.
4.8 The ECA finds that the transactions underlying
the accounts, taken as a whole, were legal and regular in relation
to revenue, commitments, administrative expenditure and pre-accession
strategy. As for other payments, its sampling still found problems
in relation to agricultural guarantees, structural measures; internal
policies (including the research programmes) and external actions.
4.9 Other comments in this chapter include:
- the Integrated Administration
and Control System (IACS) for agricultural expenditure, where
properly applied, provides an effective system to limit the risk
of irregular expenditure;
- for pre-accession expenditure there are still
varying degrees of risk at the level of implementing organisations
in the candidate countries for all programmes and instruments;
- greater effort is needed to effectively implement
supervisory and control systems for agricultural expenditure,
structural measures, internal policies and external actions and
to address their weaknesses in order to improve the handling of
the attendant risks in areas where payments are still materially
affected by errors;
- the Commission's 2004 Synthesis Report of the
annual activity reports of Directors-General[11]
shows that improvements have been made but that further progress
is still required in order to justify the Commission's assertion
in the Synthesis Report that the situation in its services is
"globally satisfactory"; and
- improvements have been made to the annual activity
reports of the Directors-Generals. But further improvements can
be made for those indicators linked to legality and regularity,
common thresholds of materiality should be established and the
guidelines to determine significant weaknesses require further
clarification.
4.10 In the chapter on budgetary management the ECA
reports an overall budget surplus — that is, a net under-spend
— of €2.7 billion (£1.9 billion), which represents
a reduction compared to previous years of €5.5 billion (£3.7
billion), €7.4 billion (£5.1 billion) and €15 billion
(£10.2 billion) in 2003, 2002 and 2001 respectively. Much
of the reduction represents higher spending for structural operations
and improved management by the Commission.
4.11 In this chapter the ECA also observes that:
- last year it recommended that
more detailed information be given on the cumulative state of
the implementation of Community programmes. More information has
been received but better explanation and analysis of the data
and comparison of actual with expected performance could further
improve this;
- in the last two years it identified poor forecasting
of expenditure on structural measures by Member States. Estimates
have improved and the forecasting error rate fell from 50% in
2003 to 23% in 2004. However over-forecasting still remains high
at €6.5 billion (£4.4 billion). The Commission recognises
there is still scope for improvement on this;
- in 2004 the multi-annual expenditure programmes,
which cover a large proportion of the budget, largely reached
the planned annual level of spending involving the reimbursement
of claims from Member States for payments made to beneficiaries;
- total outstanding legal commitments for Structural
Funds were €136 billion (£92.8 billion), representing
nearly five years of payments at the 2004 spending rate. In order
to liquidate all the outstanding commitments arising from the
2000-06 programming period by the end of the payment period, that
is 2010, there will need to be a high level of spending and/or
significant de-commitments under the n+2 rule.[12]
Experience shows that spending rates fall towards the end of the
cycle and closure is problematic. There is therefore a risk that
spending will be delayed further into the next period, thus delaying
the start of the new programme; and
- the outturn for 2004 was satisfactory for Structural
Funds. But persistent problems still exist in budgetary commitments
and in the ability of Member States to absorb the funds within
projected timescales. This results in under spending and growing
levels of outstanding budgetary commitments.
4.12 In the chapter on Own Resources — that
is revenue consisting of Traditional Own Resources (customs duties,
agricultural duties and sugar levies), VAT-based contributions,
Gross National Income (GNI)-based contributions and miscellaneous
revenue — the ECA says the regular inspections of Member
States' supervisory and control systems was soundly based and
the documentation good. The Own Resources collection system was
generally satisfactory, but B accounts (amounts due but not yet
made available to the Commission) continued to be unreliable in
some Member States, including the UK (para 3.5). Further observations
by the ECA included:
- the amounts in B accounts fell
by 19.4% in 2004, largely due to the resolution of the case relating
to the import of New Zealand butter products;
- the system for calculating sugar levies was operated
in a generally satisfactory way despite certain ambiguities in
the calculation method that need to be resolved. Corrective action
is suggested in relation to a number of errors;
- there are 28 new reservations in respect of specific
elements of Member States' VAT statements with insufficient progress
in dealing giving a total of 107 unresolved reservations. These
reservations can cover several years and four date back more than
ten years;
- only a few Member States had complied with the
requirement to include estimates of illegal activities in inventories
related to GNI resources;
- the audit of the supervisory and control systems
for GNI calculations, in seven Member States including the UK,
showed significant differences in terms of risk analysis, inter-service
agreements, production of quality reports, documenting of checks
and performance of internal audits. Differences in the existence
and implementation of such systems could lead to varying degrees
of reliability, comparability and exhaustiveness of National Accounts;
and
- there was insufficient information in the annual
activity reports and declarations of the Directors-General for
the Budget and Eurostat in relation to monitoring VAT and GNI
resources.
4.13 In the chapter on financial instruments and
banking activities the ECA notes:
- audit of the Commission's monitoring
of its two shareholdings in the European Investment Fund (EIF)
and the European Bank for Reconstruction and Development (EBRD)
showed that in respect of the monitoring of the EBRD the level
of information available is more detailed than that for the EIF.
EBRD activities were in compliance with Community policies and
did not conflict with Community legislation. In order to have
the same level of assurance for the EIF monitoring and management
information for this institution should be improved;
- the Commission does not have a complete overview
of the existing assets held by financial institutions on its behalf
and such an overview would ensure that the assets are subject
to regular and adequate monitoring;
- the Guarantee Fund for External Actions was managed
in a satisfactory manner during 2004, although definition and
documentation of checks should be improved; and
- examination of the European Coal and Steel Community
in Liquidation (ECSCiL) an external auditor gave an unqualified
audit opinion. There was reasonable assurance as to the proper
implementation of the provisions governing ECSCiL. But the Commission
should fully comply with the multi-annual Financial Guidelines
regarding the maturity restrictions and rating limits for all
securities.
4.14 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 — including research, 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.
4.15 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:
- the first chapter, about implementation
of the funds, summarises the results of a limited review of the
Commission's financial management report for 2004, which was sent
to the ECA about five weeks after the deadline set by the Financial
Regulation;
- overall, that report lacked clarity and key items
of information were omitted;
- there was no indication to the action taken by
the Commission on the status of the Stabex[13]
inventory in the ACP States; and
- the final version of the financial management
report should be based on the definitive accounts and be published
as the same time as the EDF's annual accounts.
4.16 As for its Statement of Assurance concerning
the EDFs, the ECA says that, subject to three problems, it is
of the opinion that the reports on implementation for the financial
year 2004 and the financial statements at 31 December 2004 reliably
reflect the revenue and expenditure for the EDFs for the financial
year and the financial situation at the end of the year. The problems
are:
- receivables are understated;
- bad-debt provisions are understated; and
- unreliability of the inventory of Stabex funds.
4.17 As for the legality and regularity of the transactions
the ECA says that improvements have been made to the functioning
of the supervisory and control systems, but improvements were
still necessary in relation to risk management, a control framework,
internal control of the Commission's overseas Delegations and
the activity report of the Director general of EuropeAid. But
the ECA says these comments are not material to its opinion that,
taken as whole the revenue, the EDF allocations, the commitments
and the payments of the financial year are legal and regular.
4.18 In this part of the report the ECA also discusses
the follow-up to its previous observations about the EDFs and
the main observations in Special Reports on the EDFs it has published
since the conclusion of the last audit process.
The Government's view
4.19 In his Explanatory Memorandum the Minister says:
"The Government is aware of the negative
image created by the ECA's lack of a positive opinion, once again,
on the majority of payments made from the EC budget, but is pleased
that the ECA has made some positive comments this year. The ECA
recognises the Commission's efforts, following implementation
of substantial reforms, in improving controls of directly-managed
expenditure, although we also realise there is still much for
the Commission to do in order to gain a positive opinion in these
sectors. Member States have also clearly played their part in
the management of agriculture with the effective operation of
the IACS, where the ECA's evidence shows that controls are satisfactory
for the 59% of agricultural expenditure covered by this system.
With the usual positive opinion on the administrative sector of
the budget, and, for the second time, a positive opinion on pre-accession
aid, this means that the financial management of around 35% of
the total 2004 budget is now assured by the ECA, as opposed to
only 6% (just administration) of the 2003 budget. This is a dramatic
improvement, for which the Commission and the Member States should
take credit.
"The ECA audit of the EC accounts shows,
as usual, that they faithfully reflect the revenue and expenditure
of the Communities for the year, and their financial position
at the end. The Court makes its usual qualifications on the recording
of sundry debtors items and assets and liabilities, making the
point that the accounting system that existed in 2004 was not
designed to ensure the correct representation of these items.
The Commission introduced its accrual-based accounting system
on 1 January 2005 and we are hopeful that the Court's report on
2005 (to be published in November 2006) will give, for the first
time, an unqualified opinion on the accounts. The Court has some
misgivings about the effects of delays in introducing some aspects
of the new system; however the Commission believes it is on track.
"It is clear that more action must be taken
to improve financial management and control of the budget. During
the discharge process for the 2003 budget, the Council recommended
that the Commission set out a 'roadmap' to achieve a positive
Statement of Assurance. The Commission issued its Communication
'on a roadmap to an integrated internal control framework' on
15 June 2005. The UK Presidency worked closely with the Commission
in taking this forward, co-chairing a Panel of Experts from Member
States in September. From the discussions of the Panel of Experts,
draft conclusions were prepared and agreed at the ECOFIN Council
on 8 November. These conclusions contained many action points
for the Council, the Commission and the Court of Auditors. However,
one element that was not included in these conclusions was the
European Parliament's call for Member States to produce annual
declarations of assurance on their management of agricultural
and structural funds. This was rejected by the Council because
of legal and constitutional difficulties, in addition to an unacceptably
high administrative cost for those Member States organised on
a federal or regional basis. However, current legislation covering
the financial control of agricultural and structural funds, and
that already agreed (or about to be agreed) for the next financial
perspective already includes requirements for Member States to
provide annual reports and declarations, albeit not signed at
Finance Minister level. One of the major action points from the
ECOFIN conclusions concerns an assessment, by the Commission working
with the Member States, of the value of these existing controls,
statements and declarations, and the UK Presidency will work closely
with the succeeding Austrian and Finnish Presidencies to monitor
how this is carried out."
Conclusion
4.20 As in previous years, the European Court
of Auditors (ECA) identifies weaknesses in the procedures for
financial control and management, such that for the eleventh year
in succession it is unable to give positive Statements of Assurance.
The document identifies some positive developments in improving
management of the EU's financial resources and we note the Minister's
rather upbeat assessment of the situation. But the need for further
improvements in financial management and control is clear.
4.21 It is customary for the annual report of
the ECA to be recommended for debate together with the Commission's
annual report Protection of the financial interests of the
Communities and fight against fraud and related documents.
As mentioned in paragraph 4.3 above we have decided previously
to recommend that once this present document was available the
debate this year should be on the Floor of the House and we now
so recommend.
4.22 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; and
- to examine the Government's grounds for its
optimism about how these matters are developing.
8 (26727) 11216/05 (26740) 11452/05 + ADDs 1 and 2:
HC 34-vi (2005-06), para 2 (19 October 2005) and (26855) 12493/05
(26856) 12494/05 (26921) 12712/05 (26941) 13532/05: HC 34-x (2005-06),
para 1 (16 November 2005). Back
9
ABB is a system for making budget decisions which ensures allocations
more closely reflect pre-defined political priorities and objectives.
The system is designed to ensure that priority setting, planning,
monitoring and evaluation better inform the Community's budget
setting. Back
10
See (26652) 10326/05: HC 34-v (2005-06), para 43 (12 October 2005). Back
11
See COM (05) 256. Back
12
The n + 2 rule requires automatic de-commitment of a commitment
appropriation for structural measures which is not used by the
end of the second after the year in which the appropriation is
budgeted. Back
13
For stabilising export earnings of recipient countries. Back
|
