11 Financial management
| (30710)
11263/09
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| European Court of Auditors Special Report No. 5/2009 concerning the Commission's treasury management together with the Commission's replies
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| Legal base
| — |
| Deposited in Parliament
| 23 June 2009
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| Department
| HM Treasury
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| Basis of consideration
| EM of 7 July 2009
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| Previous Committee Report
| None |
| To be discussed in Council
| Not known
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| Committee's assessment
| Politically important
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| Committee's decision
| Cleared |
Background
11.1 The Commission, in implementing
the Community Budget, makes a considerable number of payments
to third parties each year — in 2007, for example, approximately
1.5 million payments which amounted to €114 billion (£97
billion). Financial resources are required to be readily available
to fund these payments and in outline the arrangements for availability
are:
· the largest category of income
is Own Resources, based on the calculation of value added tax
and Member States' gross national income and each Member States'
Own Resources contributions are paid monthly into a Commission
account held in that Member State;
· the Commission holds bank
accounts at central and commercial banks in order to execute payments
and collect receipts of the other income category, that is non-
Own Resources revenue;
· funds are transferred regularly
from the Own Resources accounts to the accounts used for payments
— sufficient funds are maintained in these payment accounts
to ensure uninterrupted funding of Community activities; and
· the Commission has systems
to manage its treasury operations, specifically cash flows (receipts
and payments), the opening and running of bank accounts, cash
forecasting and liquidity management.
11.2 The Commission's treasury activities
take place with in a legislative framework which:
· requires the Accounting Officer,
amongst other duties, to be responsible for treasury management;
· empowers the Accounting Officer
to manage cash and its equivalents;
· requires the Accounting Officer
to ensure that the Commission has at its disposal sufficient funds
to cover cash requirements arising from budgetary implementation
and to set up cash management systems enabling the drawing-up
of cash-flow forecasts; and
· in the context of Own Resources,
sets out the funding framework within which the Commission must
operate and defines the Commission's treasury management objectives.
Within the Commission two Directorates-General
perform treasury management — the Directorate-General for
the Budget, which is responsible for the entire budget managed
by the Commission and the European Development Fund and the Directorate-General
for Economic and Financial Affairs, which is responsible for other
non-budgetary items and the investment of Community funds.
The document
11.3 This document is a special report
from the European Court of Auditors on the Commission's treasury
management and the Commission's responses. The main objective
of the audit was to assess the quality of the Commission's treasury
management and in particular whether the Commission complied with
the rules and regulations applicable to treasury management and
whether it had established internal control systems that ensure
sound treasury management. The Court focused on the financial
years 2006 and 2007 and considered also developments in Commission
practices in the first half of 2008. Audit evidence was collected
through examination and assessment of existing rules and procedures,
reviews of documentation, testing of controls and transactions
and interviews.
11.4 The Court's main observations were
that:
· overall, the Commission complied
with the main provisions prescribed by the Own Resources Regulation
and the Implementing Rules of the Financial Regulation;
· prudent cash management forecast
procedures were in place to ensure availability of sufficient
funds to cover cash requirements arising from budgetary implementation;
· significant balances are
accumulated during the second half of the year because the Own
Resources Regulation stipulates the transfer of Own Resources
to the Commission's bank accounts on the basis of budget appropriations,
but as the Amending Budget procedure takes considerable time excess
funds are not released back to the Member States as quickly as
they could be;
· the internal control procedure
in place for execution of payments and bank accounts was effective
overall. However, unlike the Directorate-General for Economic
and Financial Affairs, the Directorate-General for the Budget
did not document evidence of active management and monitoring
of the risk arising from treasury activities nor were procedures
in place to assess all aspects of its performances;
· application of the Commission's
procedures to transfer funds between Member States' Own Resources
accounts and to determine the need in the first months of the
year for advanced call-ups of Own Resources to cover payments
was not sufficiently documented or updated;
· checks were not made to confirm
the accuracy of the estimates used to transfer funds between Member
States' Own Resources accounts;
· the Commission's decision
to split treasury management operations between the two Directorates-General
meant that there was no unit with overall responsibility for the
Commission's treasury management;
· there was a lack of coordination
between the two Directorates-General in areas that required a
common approach to issues, such as risk management and control.
This led to limits on accounts for holding funds with commercial
banks being established by Directorates-General without consideration
for the Commission's overall risk exposure with each commercial
bank;
· no clear rules for setting
up fiduciary accounts were established and neither was there an
overview of all the funds held by the financial institutions.
Optimisation of interest generated was therefore not assured;
and
· the value of the provisionally
collected fines held in commercial bank current accounts has more
than doubled over recent years to €5 billion (£4.3 billion).
This approach exposes the Commission to risk of loss in the event
of banking failure. An optimum approach to better managing the
risks relating to the holding of these amounts has not been established.
11.5 The Court recommended that the
Commission:
· analyse functioning of the
system of Own Resources accounts so as to reduce balances over
the second half of the year;
· improve documentation of
its cash flow forecasting procedures and check the accuracy of
estimates used for the transfers of Member States' Own Resources;
· establish procedures to improve
the oversight of its treasury management and enhance coordination
between the two Directorates-General concerned;
· improve the Directorate-General
for the Budget's documentation of its risk management and the
scope of its performance measurement;
· put in place a uniform policy
and adequate guidelines for opening of fiduciary accounts and
management of Commission funds held in these accounts; and
· conclude its search for a
lasting solution for the treatment of provisionally collected
fines as a matter of priority.
11.6 In response to the Court's observations
and recommendations the Commission said that:
· it is bound by the requirement
that Member States credit Own Resources to its accounts by means
of monthly twelfths;
· since 2005, however, it has
proposed a Preliminary Draft Amending Budget at the end of October
updating the budget relative to the forecast of revenue and expenditure,
which has resulted in year-end surpluses which reduce Member States'
Own Resources contributions;
· the Court acknowledged this
as good budgetary management in its 2007 annual audit report;[32]
· the procedure for transfers
between Member States' Own Resources accounts is formally documented
and is complemented by detailed "step by step" instructions;
· cash flow reporting and forecasting
procedures were redrafted at the end of 2008 with the aim of reviewing
related reporting tools with an updated version due to be adopted
from the end of March 2009;
· estimates used for the transfer
of funds between Member States are made with the best possible
accuracy and the current procedures have no significant impact
on either the overall treasury operations or the relevant legislation;
· as the legislation on the
Own Resources accounts and payments system has been revised with
no significant change this suggests Council satisfaction with
the functioning of the present system;
· its overview of the risks
related to its treasury operations provides a clear and comprehensive
summary of the risks it is exposed to, how such risks are managed,
and the measures in place to control, minimise or counter them;
· existing procedures that
contain measures to control or limit operational and financial
risks will be cross-referenced into a single formal document of
the Directorate-General for the Budget;
· it agreed to improve its
monitoring of the different treasury management activities performed
by the two Directorates-General, but the different nature of tasks
between them somewhat limits the need for extensive coordination;
· regular meetings will be
held between the Directorates-General to share information on
risks, and to exchange experiences and best practices regarding
treasury and asset management activities on a Commission-wide
level;
· given the varied purpose
of the funds held in trust accounts, which results in different
cash flow patterns and holding periods, it is operationally difficult
to optimise interest of funds held with one financial institution;
and
· the current systems for provisionally
collected fines were reviewed in 2008 with increased security
as the main objective and the Directorate-General for the Budget
issued a draft Commission Decision on the matter in early 2009.
The Government's view
11.7 The Economic Secretary to the Treasury
(Ian Pearson) says that the Government welcomes the Court's report,
which provides useful analysis and recommendations on how the
Commission's treasury is managed and is helpful in highlighting
areas for improvement in its management.
11.8 The Minister then comments that:
· the Commission's introduction
in recent years of an Amending Budget proposal to re-address levels
of expenditure and so reduce funding from Member States through
the Own Resource system is a welcome improvement;
· the timing, however, means
that the Amending Budget is not adopted in time for it to be introduced
in the current financial year and is therefore not implemented
until January, or even February, of the following year;
· the Government would, therefore,
like to see the annual Budget set a more realistic level of execution
at the outset, deploying the Amending Budget process to increase
expenditure levels during the financial year if necessary;
· failing this, the Commission
should examine expenditure execution levels earlier in the year
to ensure that any Amending Budget to reduce expenditure, and
Member States contributions, can be adopted and implemented in
the year in question;
· the Government, however,
fully acknowledges the Commission's effort in setting up systems
to manage its treasury; and
· it urges the Commission to
redouble its efforts in addressing areas identified by the Court
as needing urgent attention.
Conclusion
11.9 Any effort to improve management
of the Community's financial resources is to be welcomed. So,
whilst clearing this document, we draw it to the attention of
the House, as it shows both a degree of satisfactory performance
of the Commission's treasury function and the scope for its improvement.
32 (30203) -: see HC 19-iii (2008-09), chapter 3 (14
January 2009) and HC Deb, 20 January 2009, cols. 654-679. Back
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