13 Financial management
| (30423) 6145/09 COM(09) 43
| Commission Communication: Impact Report on the Commission action plan towards an integrated internal control framework
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| Legal base | — |
| Document originated | 4 February 2009
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| Deposited in Parliament | 6 February 2009
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| Department | HM Treasury |
| Basis of consideration | EM of 23 February 2009
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
13.1 In January 2006 the Commission adopted an Action plan
towards an integrated internal control framework. In response
to the situation that, for many years the European Court of Auditors
had 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 Commission
publicised its plan to remedy this situation with a programme
of 16 actions summarised 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. [57]
13.2 In its second progress report on the action
plan, in February 2008, the Commission reported that seven out
of the 16 original actions had been completed, six were substantively
complete and three could not be completed or were being taken
forward in other ways.[58]
The document
13.3 This Commission Communication is the next report
on the Action plan towards an integrated internal control framework,
described as an impact report. The Commission first describes
what it means by impact and how this can be measured saying that,
whilst the relevance of the action plan to activities shared with
Member States is limited, the plan is assessed using both quantitative
and qualitative indicators including error rates, evidence from
audit opinions and data collected from Commission services.
13.4 The Commission then discusses recent implementation
of the action plan under the four headings, saying:
Simplification and common control principles
- in relation to Action 1, concerned
with simplification of legislative drafts in the period 2007-13
legislation, such simplification has occurred through the introduction
of the Single Payment Scheme,[59]
the Common Agricultural Policy "health check",[60]
the use of flat rates for overheads in structural funds and amendments
to Council Regulations. The key indicator for this action is the
increase in the percentage of the budget executed through a simplified
approach — the percentage of funds executed through decoupled
direct aids has risen from 47% of total direct payments in the
agricultural sector in 2005 to 83% in 2008, with a targeted increase
to 93% by 2013 and beyond, so that around 25% of the Community
budget is executed through the simplified approach;
- Action 2, concerned with common internal control
principles, is not covered by the report as it has been cancelled;
- Action 3, concerned with control strategies and
evidence of reasonable assurance, is complete as indicated by
an improved evaluation by the European Court of Auditors of the
quality of Annual Activity Reports — in its 2007 annual
report the Court noted improvements in the Annual Activity Reports
for agriculture and cohesion. A peer review process supports this
view;
- Action 4 on tolerable risk is reported under
"the single audit approach", along with the related
issue of costs and benefits of control;
Management declarations and audit assurance
- Action 5, about national management
declarations, has been completed — all except one of the
annual summaries met the minimum requirements and the Commission
has revised its guidance to improve the quality of subsequent
summaries. The European Court of Auditors considers that the Commission
has adequately supervised the process of introducing annual summaries.
Additionally, all ex-ante declarations of assurance in
education and culture were received and the Commission supports
voluntary declarations of some Member States, which provide additional
information on internal control systems;
- Action 6, concerned with the utility of management
declarations, is not covered by the report as it has been cancelled;
- Action 7, concerned with increasing the cost-benefit
of audits, has been completed as indicated by the improved quality
of reporting by external auditors. In relation to external aid
an initial assessment indicates that agreed procedures increase
the consistency and reliability of reports, although the quality
and consistency could be enhanced, and in relation to research
it is too early to assess the improvement;
- Actions 8 and 8N,[61]
concerned with additional assurance from Supreme Audit Institutions
(SAIs), are complete as indicated by the number of SAIs in dialogue
with the Commission — five SAIs have requested additional
information and analysis from the Commission and ten have made
an overarching report on Community financial management;
Single audit approach: sharing results and prioritising
cost-benefit
- Actions 3N and 11N, concerning
improved assurance through sanctions and recoveries, are considered
complete as the European Court of Auditors noted improvements
in data on 2007 recoveries and the Commission has improved its
follow up of DAS errors. The Court however remarks that "the
notes to the financial statements do not yet contain complete
and reliable information on the financial correction activities
made by the Member States";
- Action 9, concerned with sharing audit results,
is complete as 5,000 audits have been recorded allowing better
coordination of audits and procedures are in place to ensure the
systematic exchange of results between the Structural Fund Directorates
Generals;
- Actions 4, 10 and 11, concerned with tolerable
risk and cost-benefit analysis of controls, are completed as the
Commission produced a Communication on this topic to stimulate
discussions on tolerable risk in the Council, the European Parliament
and the European Court of Auditors;[62]
Sector-specific gaps
- Actions 12 and 12N, concerned
with gaps identified by participating Commission services, have
been completed as Directorates-General are implementing the actions
in line with the "gap assessment" which asks for clear
descriptions of the control approach, coordinated audit and control
according to agreed standards. Completion of these actions is
evidenced by the European Court of Auditors' conclusion in its
2007 DAS that none of the supervisory and control systems are
ineffective; [63]
- Action 13, concerned with analysis of controls
under shared management at regional level and the value of existing
statements, has been completed as the Commission has improved
reporting in Annual Activity Reports and better control arrangements
are included in the 2007-13 legislation. This action is supported
by assessments of the quality of Member States' control systems
as shown in the Structural Funds Action Plan;[64]
- Action 14, concerned with greater guidance for
structural funds on managing the risk of error, is complete as
in 2008 the Commission published new guidance for managing and
certifying authorities and developed a tool to facilitate managing
authorities' self-assessments against regulatory benchmarks. The
tool has been modified following two pilot studies and its impact
is thus not yet discernible;
- Action 15, concerned with promoting "Contracts
of Confidence" for structural funds, is complete as seven
contracts have been signed and another two should be signed by
the end of February 2009. In addition, the concept of relying
on the work of National Audit Institutions has been included in
2007-13 legislation and Member State systems covered by Contracts
of Confidence are considered by the Commission to provide reasonable
assurance on the regularity of expenditure, so that the Commission
may reduce its own audit work; and
- Action 16, concerned with establishing common
guidelines for policy groupings, is complete as the Commission
has provided access to guidance and training on managing external
auditors, sampling and compliance with legislation. In addition,
the structural actions Directorates-General have developed closure
guidelines for 2000-06 programs, provided training and seminars
to Member States and finalised guidance for Member States for
2007-13 in the Structural Actions Audit Manual to be issued in
2009.
13.5 The Commission concludes that:
- progress in strengthening internal
control systems has been accelerated by the launch of the Action
Plan in 2006;
- further efforts are necessary and the Commission
will continue to pursue these and to call for the support of other
institutions; and
- it believes that progress in simplifying legislation,
setting appropriate targets for tolerable risk and attaching to
future legislative proposals a description of associated control
arrangements is necessary for further improvements in internal
control systems.
The Government's view
13.6 The Economic Secretary to the Treasury (Ian
Pearson) comments that the Government:
- was, during its Presidency
in 2005, instrumental in the formation of the Action Plan, having
taken forward the preceding Roadmap towards an Integrated Internal
Control Framework;[65]
- welcomes this Commission Communication as it
provides a useful update of the Commission's progress on the implementation
of the Action Plan;
- warmly welcomes, in particular, the Commission's
support of voluntary initiatives undertaken by Member States,
the ongoing communication between the European Court of Auditors
and Supreme Audit Institutions, the single audit approach taken
by the Commission and the emphasis the Commission places on the
importance of simplification of legislation — all of these
are priorities of the Government and continued progress on them
is being pursued in Council discussions;
- supports the Commission's conclusion that progress
in simplifying legislation is necessary to help reduce errors;
- agrees that it would be useful for future legislative
proposals to describe the associated control arrangements —
this should not, however, be an imposition of specific systems
or structures but a statement of principles which Member States
should apply;
- believes that before there are informed discussions
on the appropriate levels of tolerable risk, further simplification
of regulations must take place and the impact of simplification
be analysed. Once this has taken place, the level of inherent
risk will be clearer and a decision can then be taken on whether
to continue spending in areas with high risk. At this stage a
discussion on the appropriate level of tolerable risk should take
place for areas with high inherent risk; and
- welcomes the impact that the Action Plan should
have on strengthening internal control systems within the Commission
and Member States. Strong financial management of Community funds
is a key priority of the Government and action on this continues
in Council discussions and in the UK through the Consolidated
Statement on the use of such funds in the UK.[66]
Conclusion
13.7 This report gives a useful, and mildly encouraging,
summary of improvements to the Commission's financial controls,
which, whilst we are content to clear, we draw to the attention
of the House.
57 (27230) 5509/06 + ADD 1: see HC 34-xix (2005-06),
chapter 14 (15 February 2006). Back
58
(29510) 7207/08 + ADD 1: see HC 16-xx (2007-08), chapter 16 (30
April 2008). Back
59
See http://ec.europa.eu/agriculture/capreform/infosheets/pay_en.pdf.
Back
60
See http://ec.europa.eu/agriculture/healthcheck/index_en.htm.
Back
61
"N" indicates a refinement of the original action. Back
62
(30320) 17592/08 + ADD 1: see HC 19-viii (2008-09), chapter 8
(25 February 2009). Back
63
All comments by the European Court of Auditors cited by the Commission
are from the 2007 annual report - (30203): see HC 19-iii (2008-09),
chapter 3 (14 January 2009). Back
64
(29535) 7323/08: see HC 16-xviii (2007-08), chapter 8 (2 April
2008). Back
65
(26652) 10326/05: see HC 34-v (2005-06), chapter 43 (12 October
2005). Back
66
HC 619: see http://www.hm-treasury.gov.uk/d/statement_eufunds170708.pdf.
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