4 Financial management
| (a)
(27684)
11399/06
COM(06) 358
(b)
(27699)
11660/06
COM(06) 378
+ ADDs 1-2
(c)
(27874)
—
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Commission Communication: Report on progress at 31 March 2006 on modernising the Commission's accounting system
Protection of the Communities' financial interests: Fight against fraud: Annual report 2005
European Anti-Fraud Office Report: Sixth activity report, for the period 1 July 2004 to 31 December 2005
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| Legal base | — |
| Document originated | (a) 4 July 2006
(b) 12 July 2006
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| Deposited in Parliament | (a) 12 July 2006
(b) 18 July 2006
(c) 9 October 2006
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| Department | HM Treasury |
| Basis of consideration | (a) EM of 24 July 2006
(b) EM of 21 August 2006
(c) EM of 10 October 2006
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| Previous Committee Report | None
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| To be discussed in Council | (a) Not known
(b) November 2006
(c) Not known
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| Committee's assessment | Legally and politically important
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| Committee's decision | For debate in European Standing Committee, together with the 2005 Annual Report of the European Court of Auditors, once received
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Background
4.1 In 2002 the Commission announced its plans for modernisation
of the accounting system of the European Communities. The project
was to address three main issues:
- compliance with internationally-accepted accounting principles
for the public sector, especially regarding accrual accounting
(the recording of accounting events when they occur, not when
cash is received or paid or at the year end);
- integration of financial and accounting systems
held on different IT platforms; and
- meanwhile improving the performance of the IT
system SINCOM2, particularly concerning security and consistency
of data from different sources.[13]
4.2 The Commission has reported several times on
progress in implementing its proposals, most recently in March
2005, for the period up until 31 January 2005. That report dealt
with accounting issues, IT developments, implementation of the
modernised accounts within the Commission, including training,
implementation of accrual accounting by the other Community institutions
and future developments. The Commission summarised the then position
by saying:
- the legal requirement to produce
accrual accounts by 2005 was met when on 10 January 2005 the new
accounting system (referred to as ABAC) was opened on a full accrual
basis;
- it had successfully carried out its planned administrative
reform and modernisation of the accounting system, meaning that
the Communities' financial statements would now meet the highest
accounting standards;
- further improvements of the IT systems at central
and local level, of the integration of systems and of management
reporting would continue to be tested in the months and years
to come; but
- it should be noted the new accounting procedures
would take time to be fully established.[14]
4.3 The Commission is required by the Amsterdam Treaty
to report annually on protection of the Communities' financial
interests and on the fight against fraud. These reports are to
cover measures taken by Member States as well as by the Commission.
4.4 The European Anti-Fraud Office (OLAF)'s objective
is to reduce fraud, corruption and any other illegal activity
against the financial interests of the Community by conducting
investigations, strengthening anti-fraud issues and by developing
strategies to prevent fraud through better intelligence, training
and co-operation with Member States. The Director of OLAF is required
to make regular reports to the European Parliament, the Council,
the Commission and the European Court of Auditors.
The documents
4.5 The Report in document (a) is the latest by the
Commission about progress in implementing its modernisation of
the accounting system. It covers the period up until 31 March
2006. In it the Commission says that:
- the Commission's provisional
financial statements for 2005 were presented to the European Court
of Auditors on 31 March 2006. These accounts were the first prepared
on a full accruals basis and met the deadline set in the Financial
Regulation for the preparation of financial statements which comply
in all material respects with internationally accepted accounting
standards;
- the final set of statements is to be approved
by the Commission by 31 July 2006;
- considerable efforts were made by all the Directors-General
and services to prepare opening balances for the first year, to
check them and make the necessary corrections; and to estimate
the accrued expenditure at the beginning and end of the financial
year on a coherent and consistent basis;
- despite these efforts there were considerable
delays before the information was complete. The delays reflect
the difficulties of making the transition to accruals-based accounts
within a short-time frame and of providing IT tools and training
to all services in good time;
- the system of two Directors-General needs improving
before they can be validated, and one Director-General was asked
to present corrected figures after material errors were found;
- the risk of error has been exacerbated by the
inadequate number of qualified accounting staff in place to absorb
quickly such a large reform, by delays in some services, which
led to work being completed in a rush and by delays in developing
some accounting and reporting tools in the IT system and in updating
documentation and training courses;
- the Commission will address these issues by holding
external competitions to attract candidates with appropriate training
and experience and the number of courses offered to existing staff
will be increased;
- two accounting sub-projects (ABAC-European Development
Fund (EDF) and ABAC- Delegation) are still in progress —
these should be fully operational by the beginning of 2007 (ABAC-Delegations)
and the beginning of 2008 (ABAC-EDF);
- some agencies and smaller institutions have used
a version of the Commission's Si2 (database) system for their
budgetary accounts. The Commission will continue to make this
available in 2006, and to make all modules of ABAC available to
those entities, which wish to use them;
- the accounts of the EDF, which are not part of
the general budget, will need to be moved to a modernised system.
This will include preparing an updated chart of accounts and formulating
new accounting rules in compliance with the requirements of accrual-based
accounting. The modernising project will include replacing the
EDF's existing IT system for the EDF. Although the new IT support
is still being developed, the EDF annual accounts for 2005 were
nevertheless drawn up in compliance with accruals-based accounting
principles;
- the Commission's action plan has been updated
for 2006 and extended to 2007, with some IT developments being
rescheduled. The full ABAC IT systems should be in place by the
end of this year and further developments will relate to improving
user friendliness and the financial reporting functions. Work
will also be undertaken in order to achieve the longer-term aim
of closer integration of local systems and to provide further
tools for user support and financial management; and
- work will continue on the accounting framework
to focus on defining the roles and responsibilities of actors
in financial procedures to improve the quality of accounting data
and management reports and to monitor compliance with validation
criteria for local systems by all authorising officers.
4.6 Document (b) is the 2005 edition of the Commission's
annual report on protecting the Communities' financial interests
and fighting fraud. The report examines the action taken by national
authorities and the Commission to prevent and fight against economic
and financial crime. It is divided into five sections:
- an assessment of the 2001-05
overall strategic approach for protection of the Communities'
financial interest;
- results of the fight against fraud — statistics
concerning fraud and other irregularities reported by the Member
States under sectoral Regulations;
- measures taken by Member States and the Commission
in 2005;
- recovery; and
- procedures for certifying the accounts.
The report is supplemented by two detailed annexes:
- Annex 1: Statistical Evaluation
of Irregularities in 2005 — Agricultural, Structural and
Cohesion Funds, Own Resources and Pre-accession Funds; and
- Annex 2: Follow-up of the Commission action plan
2004-05 and measures taken by the Member States in 2005 pursuant
to Article 280 EC.
4.7 The major developments in 2005 discussed in the
first section of the report are:
- legislative anti-fraud policy
developments — the Commission adopted a second report on
the application by Member States of the 1995 Black List Regulation,
which concerns economic operators who present a risk to the Community
budget, Agricultural Guarantee section;
- a new culture of operational co-operation —
a co-operation agreement between the Community and China about
improving mutual assistance on customs matters entered into force
and OLAF launched a "permanent technical support infrastructure"
(POCU), which serves to provide better co-operation and support
for joint customs operations by Member States;
- preventing and combating corruption in the institutions
— OLAF and IDOC (the Investigation and Discipline Office)
continued to have frequent contact to enable them to coordinate
their activities;
- enhancement of the penal judicial dimension —
the Commission recalls its advocacy of a European Public Prosecutor.
It draws attention to its view of the consequences of a ruling
of the European Court of Justice on criminal law provisions concerning
the first and third pillars for criminal law protection of the
financial interests of the Communities.[15]
4.8 The second section of the report summarises the
analyses in Annex 1. Amongst the points noted are:
- the total number of cases of
fraud and other irregularities communicated in 2005 increased
in two areas (traditional own resources and structural funds)
but reduced in agriculture compared with the previous year. (The
UK had the second highest increase in the number of traditional
own resources cases reported — up by 102%.) The amounts
involved increased in both traditional own resources and agriculture
but decreased in structural funds — traditional own resources,
up 52% from €212
million to €322
million, agricultural guarantees up 24% from €82
million to €102
million and structural funds down 14% from €696
million to €601
million;
- there is a notable increase in the number of
cases of irregularities reported in PHARE[16]
and SAPARD[17] funds
compared to previous years. PHARE had the highest share of total
irregularities reported and the highest rate of suspected fraud
in 2005. The number of irregularities reported in ISPA[18]
has not changed —this could be due to the transformation
of ISPA into a Structural Fund for the new Member States upon
their accession. Fraud accounted for approximately 18% of the
irregularities notified and involved an amount of some €1.77
million, equivalent to 0.06% of the total appropriations for the
PHARE, SAPARD and ISPA — the estimate is based on the information
reported by the Member States, but must be treated with caution.
4.9 The third section of the report includes a selective
account of the measures taken by Member States' administrations
in 2005 in the fight against fraud. The account is drawn from
Annex 2 — the responses of Member States to a questionnaire
and relates to the important legislative instruments under the
headings of new horizontal measures, and new measures relating
to own resources, agricultural expenditure and structural measures.
The section also discusses other developments, notably:
- OLAF has taken steps to assess
incoming information more efficiently, following recommendations
from the European Court of Auditors;
- OLAF dealt with 257 cases in 2005 and closed
233 cases, of which 133 were sent for follow-up;
- progress was made in the ratification by Member
States of the 1995 convention on the protection of the European
Communities' financial interests and its protocols. Cyprus, Estonia
and Latvia deposited instruments for ratification, leaving two
old Member States and five new Member States still to ratify the
Convention;
- nearly all Member States have entered into the
ratification process of the convention on the use of information
technology for customs purposes and its protocol creating a Customs
File Identification base (FIDE); and
- the Philip Morris International Agreement —
nine Member States joined the Anti-Contraband and Anti-Counterfeit
agreement which was signed in 2004 between the Commission, ten
Member States and Philip Morris International and which improves
the exchange of information between parties about seizures of
cigarette consignments.
4.10 The fourth section of the report concerns measures
taken by Member States to improve recovery. Highlights include:
- the Recovery Task Force in
relation to agricultural guarantees audited 32 cases of amounts
exceeding €500,000
that had not been audited earlier; and
- adoption of the new Regulation (EC) No 1290/2005
has reformed the entire system of financial monitoring of irregularities
in agriculture funds, which will simplify the procedure for monitoring
recovery in future.
4.11 The fifth section of the report gives an account
of the measures taken by Member States on the certification of
their accounts, as related to the Community budget. It includes
a brief comparison of the control principles and standards and
of the certification systems (where they exist) applied by Member
States. It discusses an agreed action plan for the Commission,
Member States and the European Court of Auditors to work collectively
towards a positive statement of assurance from the Court by 2009.[19]
The section also discusses procedures for certifying proper implementation
of public expenditure in the Member States and the role of these
procedures in providing an additional degree of assurance by Member
States in demonstrating how they are managing and controlling
Community funds.
4.12 Document (c) is OLAF's report on its activities
and progress during 2005. This report is the first to be presented
on a calendar year basis. In addition to an introduction the report
has sections on:
- operational activities;
- operational support;
- follow-up activity;
- enlargement;
- cooperation with OLAF's partners in the fight
against fraud; and
- administration.
4.13 Amongst the points highlighted in the report
are:
- OLAF was investigating 452
cases at the end of 2005, 226 cases were in the initial assessment
process, while 233 were closed during the year;
- in 2005, for the first time, more cases were
closed with follow-up action than without follow-up action;
- the number of reported cases of suspected fraud
increased by 20% compared to the previous year, partly due to
the increase in information supplied by Commission staff and informants;
- the average duration of a case is somewhat under
two years;
- the OLAF investigation into the "EUROSTAT
affair" largely ended in 2005. Judicial procedures continue
in three Member States;
- at the end of 2005, the first full year after
the last enlargement, OLAF opened 24 new cases in the new Member
States and 23 in the acceding and candidate countries;
- financial recovery peaked in 2005 and totalled
€203 million recovered (£137 million);
- 40 internal investigations were opened in 2005,
giving a year-end total of 58 open cases and 30 cases in evaluation;
- the largest proportion of external aid cases
continued to relate to Africa;
- OLAF posted liaison officers in Bulgaria and
Romania; and
- further improvements were made to OLAF's Case
Management System (CMS) to widen its management applications,
particular in the area of judicial and disciplinary follow-up.
The Government's view
4.14 In relation to the Commission's progress report
on modernising its accounting system, document (a), the Economic
Secretary to the Treasury (Ed Balls) says that:
- the Government welcomes the
efforts made by the Commission to successfully meet the deadline
to implement accruals-based accounting in January 2005 —
an ambitious task to achieve within a demanding deadline;
- although the European Court of Auditors has been
unable for 11 successive years to give a positive Statement of
Assurance, the Government is hopeful that the move to full accruals
accounting in 2005 will, for the first time, allow the Court to
give an unqualified opinion on the accounts in their next annual
report; and
- the benefits of these changes will be seen in
the future. The Commission now needs to learn from the experience
from the past year and put into practice appropriate mechanisms.
The Commission also needs to ensure that a central IT system is
integrated with the ABAC system.
4.15 As for the annual report on protection of the
Communities' financial interests and the fight against fraud,
document (b), the Chief Secretary to the Treasury (Mr Stephen
Timms) says:
- the report is, as usual, comprehensive
and informative. It shows the Commission is taking seriously the
need to improve financial management of Community funds and is
taking preventative measures to reduce the amount of fraud and
irregularity;
- the Government supports the efforts of OLAF and
the co-operation of Member States in the detection of fraud and
welcomes many of the measures in the report;
- the increase in the number of cases of irregularities
and fraud in relation to own resources is due partially to new
Member States now becoming familiar with the database system on
which to communicate the information, so producing a notable increase
in the number of cases reported in that sector;
- the increase in the number of cases reported
in the UK can be attributed to new measures introduced by Revenue
and Customs to detect fraud and irregularity;
- improvements still need to be made by Member
States in compliance with the procedures to notify irregularities
and fraud as timely as possible. The number of irregularities
reported in a given year needs careful interpretation, as cases
reported are not necessarily correct for that particular year
and could relate to earlier years. Although there have been improvements,
it is important that data on irregularities reported by Member
States are as accurate and up to date as possible. The Commission
should therefore make every effort to ensure that Member States
are reporting this data on a consistent basis;
- the Government welcomes OLAF's work on the identification
of cases of actual or suspected fraud, and will encourage OLAF
to work towards producing fraud figures for all budget expenditure
sectors and revenue;
- it is good to see that the Commission is making
continuing progress on its strategic approach for the protection
of the Communities' financial interest, for instance with the
agreement with China on mutual assistance;
- the Government remains unconvinced that the establishment
of a European Public Prosecutor would be necessary or desirable;
- the Government is pleased with the efforts made
by the Commission to address the continued failure to obtain a
positive Statement of Assurance from the European Court of Auditors;
and
- the Government is consulting the National Audit
Office on how to take forward suggestions that the European Court
of Auditors should take into consideration certification of accounts
at national level.
4.16 Of the OLAF report for 2005, document (c), Mr
Balls says:
- the Government welcomes this
report;
- it shows that OLAF closed more cases in 2005
with follow-up action than ever before, and this is an important
element of its mandate. Its predecessor, UCLAF, was criticised
for its inability to follow-up the resolution of cases investigated;
- the number of reported cases increased and it
is noted that many of these were opened as a result of information
by Commission staff and other informants. This shows the confidence
that is being built up in the system;
- although the Government welcomes the renewed
appointment of Franz-Hermann Bruner as director of OLAF, it notes
that the appointment process took some considerable time and lacked
some transparency. The Government holds that OLAF needs to re-evaluate
and improve its recruitment process for the future; and
- the report notes that investigation into the
Eurostat affair has now concluded, which can now free up resources
and time of investigators. The Government understands that much
has been learned from this investigation and that measures have
been proposed to overcome the communication problems experienced.
Conclusion
4.17 We are grateful to the Ministers for their
comments on these documents. However we note one particular omission.
We were surprised that the Chief Secretary did not confirm to
us that the Government continues to share our concern about and
opposition to the Commission's view of the consequences of the
ruling of the European Court of Justice on criminal law provisions
concerning the first and third pillars for criminal law protection
of the financial interests of the Communities.
4.18 Customarily the Commission's Annual Report
on protecting the Communities' financial interests and fighting
fraud is recommended for debate in European Standing Committee,
together with the Annual Report of the European Court of Auditors
and other relevant documents. Accordingly we recommend that all
three of the current documents be debated in European Standing
Committee once we have reported on the 2005 Annual Report of the
European Court of Auditors. We expect to have that report before
us early in 2007.
4.19 Such a debate will allow Members to consider
issues of fraud and other irregularities against the Communities'
financial interests and to discuss existing and proposed preventative
measures. It will also allow the Government to confirm to Members
that it is maintaining vigorously its position in relation to
the criminal law issue.
13 (24144) 15872/02; see HC 63-x (2002-03), para 11
(29 January 2003) and Stg Co Deb, European Standing Committee
B, 26 February 2003, cols 3-24. Back
14
(26452) 7587/05; see HC 34-i (2005-06), para 52 (4 July 2005). Back
15
(27117) 15444/1/05 Rev 1; see HC 34-xvi (2005-06), para 4 (25
January 2006) and Stg Co Deb, European Standing Committee,
28 March 2006, cols 3-20. Back
16
Poland, Hungary aid for economic reconstruction. Back
17
Special accession programme for agriculture and rural development. Back
18
Instrument for structural policies for pre-accession. Back
19
(27230) 5509/06; see HC 34-xix (2005-06), para 14 (15 February
2006). Back
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